What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-15 · 217 added, 224 removed, 505 unchanged (47% of the section changed)

6 unchanged sentences

Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward- looking statements as a result of a wide variety or range of factors including, but not limited to:

● potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus disease 2019 (“COVID-19”) pandemic, including the possibility of new COVID-19 variants;

● expected revenues, cost savings, synergies and other benefits from our recent acquisition of Pacific Enterprise Bancorp (the “PEB Merger”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to client and employee retention, might be greater than expected;

● potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the novel coronavirus disease 2019 (“COVID-19”) pandemic and any governmental or societal responses thereto;

● 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;

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● secondary market conditions for loans and our ability to sell loans in the secondary market;

● results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;

● results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;

● risks related to our acquisition strategy, including our ability to identify future suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;

1 unchanged sentence

● future goodwill impairment due to changes in our business, market conditions, or other factors;

● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and including changes as a result of COVID-19;

● our ability to attract and retain deposits;

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● the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

● adverse changes in the securities markets;

● our ability to pay dividends on our common stock;

● the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;

● inability of key third-party providers to perform their obligations to us;

1 unchanged sentence

● changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;

● the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

● other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

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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 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.

At September 30, 2022, the Company had approximately $2.5 billion in total assets, $2.0 billion in total loans, $2.1 billion in total deposits and $314.4 million in shareholders’ equity.

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

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.

At September 30, 2022, our $2.0 billion total loan portfolio included $299.4 million, or 15.0 %, 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 85.0%, 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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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.

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.

Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022.

In November 2022, the FOMC increased the target range for the federal funds rate another 75 basis points to a range of 3.75% to 4.00%.

The increase in the average yield on interest-earning assets during the current year 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.

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Periodically, we charge current earnings with provisions for estimated probable losses of loans receivable.

The provision or adjustment takes into consideration the adequacy of the total allowance for loan losses giving due consideration to specifically identified problem loans, the financial condition of the borrowers, fair value of the underlying collateral, recourse provisions, prevailing economic conditions, and other factors.

The provision

or adjustment takes into consideration the adequacy of the total allowance for loan losses giving due consideration to specifically identified problem loans, the financial condition of the borrowers, fair value of the underlying collateral, recourse provisions, prevailing economic conditions, and other factors.

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

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The gain or loss on sale of loans depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer.

All servicing assets and liabilities are initially measured at fair value.

servicing assets and liabilities are initially measured at fair value.

In addition, we amortize servicing rights in proportion to and over the period of the estimated net servicing income or loss and assess the rights for impairment.

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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 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.

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

As of September 30, 2022, all Bank branches were open with normal hours.

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 June 30, 2022 and December 31, 2021

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

Total assets.

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, 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%.

Total assets increased $183.8 million, or 7.8%, to $2.5 billion at September 30, 2022, from $2.4 billion at December 31, 2021.

The increase primarily was due to loans receivable, net, increasing $329.7 million as a result of the PEB Merger and new loan originations, partially offset by loan repayments and sales during the period.

In addition, other assets increased $13.4 million or 44.8% and right-of-use assets (“ROU”) increased $3.7 million or 30.9%, partially offset by cash and cash equivalent decreasing $155.0 million or 40.8% and investment securities available-for-sale decreasing $7.2 million, or 4.1%.

Cash and cash equivalents.

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.

Cash and cash equivalents decreased $155.0 million, or 40.8%, to $224.7 million, at September 30, 2022, from $379.7 million at December 31, 2021.

The decrease primarily was due to $166.0 million decrease in federal funds sold and interest bearing balances in banks during nine months ended September 30, 2022, which was used to fund new loan originations and the managed run-off of higher cost time deposits.

Investment securities, all of which are classified as available-for-sale, decreased $7.2 million, or 4.1%, to $167.2 million at September 30, 2022 from $174.4 million at December 31, 2021.

The decrease primarily was due to fair value adjustments related to unrealized losses on investment securities available-for-sale of $23.2 million and the routine amortization and repayment of investment principal balances and securities called and matured, partially offset by the purchase of $25.7 million of investment securities during the nine months ended September 30, 2022.

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 $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.

Loans receivable, net of allowance for loan losses, increased $329.7 million, or 20.0%, to $2.0 billion at September 30, 2022 from $1.7 billion at December 31, 2021.

The increase was due to $412.9 million of net loans acquired from PEB and $364.0 million of new loan originations, partially offset by $409.2 million of loan repayments, including $130.8 million in Paycheck Protection Program (“PPP”) loan repayments, and $33.4 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 .

September 30,

(Dollars in thousands)

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Allowance for loan losses

(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:

(1) Includes $35.4 million and $69.6 million of PPP loans as of September 30, 2022 and December 31, 2021, respectively.

The following table shows as of September 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)

June 30, 2022

September 30, 2022

Commercial and industrial

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

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

At September 30, 2022, loans in Colorado, New Mexico and Washington totaled $94.5 million, $53.1 million and $88.4 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 $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 $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.

Nonperforming assets increased $12.8 million, or 185.2%, to $19.7 million at September 30, 2022 from $6.9 million at December 31, 2021, primarily due to a $9.5 million increase in nonaccrual loans and $3.3 million increase in accruing loans 90 days and more past due.

The increase in nonperforming loans was primarily due to a $5.1 million multi-family real estate loan which was placed on nonaccrual status during the current quarter, a $1.7 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 and $3.3 million in accruing SBA guaranteed PPP loans which were 90 days or more past due and in the process of forgiveness at September 30, 2022.

At September 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.

Subsequent to quarter-end the $1.7 million participation interest in the shared national credit was repaid with no additional charge-offs required.

The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling $19.7 million, or 0.99% of total loans, of which $862,000 were guaranteed by governmental agencies at September 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 September 30, 2022 and December 31, 2021, were $7.2 million and $1.6 million, respectively, of TDR loans.

At September 30, 2022 and December 31, 2021, nonaccrual loans included $19,000 and $113,000 of loans 30-89 days past due and $7.0 million and $2.5 million of loans less than 30 days past due, respectively.

At September 30, 2022, the $7.0 million of loans less than 30 days past due was comprised of 20 loans all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

There were 21 loans totaling $3.3 million in accruing SBA guaranteed PPP loans which matured, are 90 days or more past due, and are in the process of forgiveness at September 30, 2022.

There were no other loans that were 90 days or more past due and still accruing 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.

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

TDR loans as of September 30, 2022 totaled $8.0 million, of which $759,000 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 $279,000 and $259,000 at June 30, 2022 and December 31, 2021, respectively.

The related allowance for loan losses on TDR loans totaled $282,000 and $259,000 at September 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:

September 30,

(Dollars in thousands)

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Nonperforming loans to total loans (2)

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

Includes $7.2 million and $1.6 million of nonaccrual TDR loans at September 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 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.

At September 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 $230,000 and $388,000 for the three and nine months ended September 30, 2022 and $61,000 and $157,500 for the three and nine months ended September 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 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 .

At September 30, 2022, the Company’s allowance for loan losses was $18.1 million, or 0.90% 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 September 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 September 30, 2022, the Company recorded a provision for loan losses of $3.8 million for the nine months ended September 30, 2022, compared to $30,000 reversal of provision for the nine months ended September 30, 2021.

The provision for loan losses for the nine months ended September 30, 2022 primarily was due to $3.5 million in net charge-offs during the nine months ended September 30, 2022, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan losses.

We recorded net charge-offs of $944,000 and $3.5 million for the three and nine months ended September 30, 2022, respectively, compared to $177,000 and $170,000 net charge-off for the three months and nine months ended September 30, 2021, respectively.

The Company, based on information received from the lead lender during the current quarter with respect to the expected sale price of collateral securing a $4.5 million participation interest in the national shared credit discussed above, charged off $3.2 million which accounted for the bulk of the charge-offs during the nine months ended September 30, 2022.

Subsequent to quarter-end the collateral was sold and the Company received final settlement from the lead lender, with no additional charge-offs required by the Company.

The calculation of the allowance for loan losses at September 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 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 .

As of September 30, 2022 , acquired loans net of their discount, totaled $229.4 million and the remaining net discount on these acquired loans was $480,000, 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 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 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:

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

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Commercial and industrial:

Net charge-offs/(recoveries)

Net charge-offs

Average loans outstanding

Construction and land:

Net charge-offs

Net recoveries

Average loans outstanding

Commercial estate:

Net charge-offs/(recoveries)

Net charge-offs

Average loans outstanding

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Average loans outstanding

Net charge-offs/(recoveries)

Total net charge-offs

Total average loans outstanding

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 September 30, 2022, the Company identified $20.5 million in impaired loans, inclusive of $19.7 million of nonperforming loans and $759,000 of performing (accruing) TDR loans.

Of these impaired loans, only $1.2 million had a specific allowance of $998,000 as of September 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 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.

Management considers the allowance for loan losses at September 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.

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.

A further decline in national and local economic conditions as a result the effects of inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the COVID- 19 pandemic, among 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.

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.

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 $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.

Total deposits increased $130.2 million, or 6.6%, to $2.1 billion at September 30, 2022 from $2.0 billion at December 31, 2021.

The increase in deposits was primarily attributable to the $376.7 million of deposits acquired in the PEB Merger.

At September 30, 2022, noninterest bearing demand deposits totaled $813.5 million or 38.5% 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.

September 30,

(Dollars in thousands)

7 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 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.

At September 30, 2022 and December 31, 2021, we had the ability to borrow up to $484.6 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 $35.4 million and $135.6 million as of September 30, 2022 and December 31, 2021, respectively, based on loans that qualify as collateral for the FRB line of credit.

At both September 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.

At both September 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 September 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 totaling $8.5 million and $8.4 million, respectively.

At September 30, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.7 million compared to $63.5 million at December 31, 2021.

We are required to provide collateral for certain 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.

At both September 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 $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.

Shareholders’ equity increased $51.8 million, to $314.4 million at September 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 $13.5 million of common stock and $2.0 million of cash dividends.

In addition, shareholder’s equity was adversely impacted by increasing unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $16.5 million increase in accumulated other comprehensive loss, net of tax from December 31, 2021.

During the nine months ended September 30, 2022, the Company repurchased a total of 668,755 shares of its common stock at a total cost of $13.5 million, or $19.15 per share, leaving 73,777 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 and Six Months Ended June 30, 2022 and 2021

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

Earnings summary.

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.

Net income was $7.2 million for the three months ended September 30, 2022, compared to $5.4 million for the three months ended September 30, 2021, an increase of $1.8 million or 33.6%.

The increase was the result of a $7.0 million increase in net interest income, partially offset by a $717,000 increase in provision for loan losses, a $1.3 million decrease in noninterest income, a $2.2 million increase in noninterest expense and a $970,000 increase in provision for income taxes.

Diluted earnings per share were $0.54 for the three months ended September 30, 2022, compared to diluted earnings per share of $0.51 for the three months ended September 30, 2021.

Net income was $18.9 million for the nine months ended September 30, 2022, compared to $15.3 million for the nine months ended September 30, 2021, an increase of $3.7 million, or 24.1%, primarily as a result of a $16.6 million increase in net interest income and $466,000 increase in noninterest income, partially offset by a $3.9 million increase in provision for loan losses, a $8.3 million increase in noninterest expense and a $1.3 million increase in provision for income taxes.

Diluted earnings per share were $1.44 for the nine months ended September 30, 2022, compared to diluted earnings per share of $1.39 for the nine months ended September 30, 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 58.60% and 62.49% for the three and nine months ended September 30, 2022, compared to 63.82% and 66.40% for the three and nine months ended September 30, 2021.

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

Interest income.

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 $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%.

Interest income for the three months ended September 30, 2022 was $27.1 million, compared to $20.0 million for the three months ended September 30, 2021, an increase of $7.2 million or 35.9%.

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 balances of and yields earned on 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 $5.6 million, or 30.1%, to $24.0 million for the three months ended September 30, 2022, compared to $18.5 million for the three months ended September 30, 2021, primarily due to a $388.8 million increase in average loan balance and a 23 basis point increase 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 September 30, 2022 was 4.73%, compared to 4.50% for the same period in 2021.

Interest income on loans for three months ended September 30, 2022 and 2021 included $63,000 and $338,000, 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 $480,000 and $2.3 million at September 30, 2022 and September 30, 2021, respectively.

Interest income on loans for three months ended September 30, 2022 and 2021 included $161,000 and $1.1 million, respectively, in fees earned related to PPP loans.

As of September 30, 2022, total unrecognized fees on PPP loans were $227,000.

Interest income on loans for the three months ended September 30, 2022 and 2021, included $195,000 and $57,000, respectively, in fees related to prepayment penalties.

For the three months ended September 30, 2022, average PPP loans were $50.1 million and the average yield, including fees, was 2.28%.

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 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 income on investment securities available-for-sale increased $478,000, or 44.3%, to $1.6 million during the three months ended September 30, 2022, compared to $1.1 million for the three months ended September 30, 2021, primarily due to higher average yields earned on investment securities available-for-sale and by a $53.0 million increase in the average balance of investment securities available-for-sale.

The average yield on investment securities available-for-sale increased 12 basis point to 3.27% for the three months ended September 30, 2022 compared to 3.15% for the three months ended September 30, 2021.

Interest income on federal funds sold and interest-bearing balances in banks increased $1.1 million, or 550.2%, to $1.3 million during the three months ended September 30, 2022, compared to $198,000 for the three months ended September 30, 2021, primarily due to higher average yields earned on federal funds sold and interest-bearing balances in banks, partially offset by a $206.8 million decrease in the average balance of federal funds sold and interest-bearing balances in banks.

The average yield on federal funds sold and interest-bearing balances in banks increased 200 basis point to 2.18% for the three months ended September 30, 2022 compared to 0.18% for the three months ended September 30, 2021.

Interest income for the nine months ended September 30, 2022 was $77.6 million, compared to $60.2 million for the nine months ended September 30, 2021, an increase of $17.3 million or 28.8%.

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 and federal funds sold and interest bearing balances in banks due to increases in the average balance of and yields earned on loans and investment securities available-for-sale, as well as an increase in the yield earned on federal funds sold and interest bearing balances in banks, 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 $13.6 million, or 24.1%, as a result of a $356.2 million increase in the average loan balance and a seven basis point increase in the average loan yield.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the nine months ended September 30, 2022 was 4.74%, compared to 4.67% for the nine months ended September 30, 2021.

Interest income on loans for the nine ended September 30, 2022 and 2021 included $1.5 million and $1.4 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 nine months ended September 30, 2022 included $1.7 million in fees earned related to PPP loans compared to $2.1 million during the same period in 2021.

Interest income on loans for the nine months ended September 30, 2022 and 2021, included $916,000 and $771,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities available-for-sale increased $1.8 million, or 65.2%, to $4.5 million during the nine months ended September 30, 2022, compared to $2.7 million for the nine months ended September 30, 2021, primarily due a $66.1 million increase in the average balance of investment securities available-for-sale, as well as a higher average yields earned on investment securities available-for-sale.

The average yield on investment securities available-for-sale increased 20 basis point to 3.21% for the nine months ended September 30, 2022 compared to 3.01% for the nine months ended September 30, 2021.

Interest income on federal funds sold and interest-bearing balances in banks increased $1.8 million, or 380.7%, to $2.3 million during the nine months ended September 30, 2022, compared to $479,000 for the nine months ended September 30, 2021, primarily due to higher average yields earned on federal funds sold and interest-bearing balances in banks, partially offset by a $74.2 million decrease in the average balance of federal funds sold and interest-bearing balances in banks.

The average yield on interest-bearing deposits in banks increased 75 basis point to 0.91% for the nine months ended September 30, 2022 compared to 0.16% for the nine months ended September 30, 2021.

Interest expense.

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.

Interest expense increased $191,000, or 8.6%, to $2.4 million for the three months ended September 30, 2022 compared to $2.2 million for the three months ended September 30, 2021.

The increase was due to the $98.1 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.

Total average interest bearing liabilities increased $98.4 million, or 7.32%, to $1.4 billion for the three months ended September 30, 2022, compared to $1.3 billion for the three months ended September 30, 2021.

The average rate paid on interest bearing liabilities for both three months ended September 30, 2022, and 2021 was 0.66%.

Interest expense on deposits increased $147,000, or 11.9%, to $1.4 million for the three months ended September 30, 2022 compared to $1.2 million for the three months ended September 30, 2021.

The increase primarily was due to a $98.1 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.

The average balance of deposits totaled $1.4 billion for the three months ended September 30, 2022, compared to $1.3 billion for the same quarter a year ago, respectively.

The average rate paid on interest bearing deposits decreased by one basis point to 0.40% for the three months ended September 30, 2022, compared to 0.39% for the three months ended September 30, 2021.

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

The average balance of noninterest bearing deposits increased $67.2 million, or 9.2%, to $801.9 million for the three months ended September 30, 2022 compared to $734.6 million for the same period in 2021.

Interest expense on borrowings increased $43,000 or 2.0%, to $1.0 million for the three months ended September 30, 2022, compared to $981,000 for the three months ended September 30, 2021.

The average balance of borrowings outstanding increased $252,000 to $72.1 million during the three months ended September 30, 2022, compared to $71.8 million during the three months ended September 30, 2021.

The average cost of borrowings increased to 5.64% for the three months ended September 30, 2022, compared to 5.42% for the three months ended September 30, 2021.

Interest expense increased $695,000, or 10.5%, to $7.3 million for the nine months ended September 30, 2022 compared to $6.6 million for the nine months ended September 30, 2021.

The increase primarily was due to a $225.6 million increase in the average balance of interest bearing deposits.

Total average interest bearing liabilities increased $223.5 million, or 17.2%, to $1.5 billion for the nine months ended September 30, 2022, compared to $1.3 billion for the nine months ended September 30, 2021.

The average rate paid on interest bearing liabilities decreased by four basis points to 0.64% for the nine months ended September 30, 2022, compared to 0.68% for the nine months ended September 30, 2021.

Interest expense on deposits increased $636,000, or 17.3%, to $4.3 million for the nine months ended September 30, 2022 compared to $3.7 million for the nine months ended September 30, 2021.

The increase primarily was due to a $132.3 million increase in the average balance of and a six basis point increase in the cost of money market accounts.

The average balance of interest bearing deposits increased $225.6 million, with the average balance increasing in all interest bearing deposit categories.

The average rate paid on interest bearing deposits remained unchanged at 0.40% for both the nine months ended September 30, 2022 and September 30, 2021, primarily reflecting a 21 basis point decline in the average rate paid on time deposits to 0.75% during the nine months ended September 30, 2022 compared to 0.96% during the nine months ended September 30, 2021 offset by the increase in the rate paid on money market accounts.

The average balance of noninterest bearing deposits increased $62.3 million, or 8.6%, to $783.3 million for the nine months ended September 30, 2022 compared to $721.0 million for the same period in 2021.

Interest expense on borrowings was $3.0 million for both the nine months ended September 30, 2022 and 2021.

The average balance of borrowings outstanding decreased $2.1 million to $72.0 million for the nine months ended September 30, 2022, compared to $74.1 million for the nine months ended September 30, 2021.

The average cost of borrowings increased to 5.58% for the nine months ended September 30, 2022, compared to 5.32% for the nine months ended September 30, 2021.

Net interest income and 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.

Net interest income increased $7.0 million, or 39.4%, to $24.7 million for the three months ended September 30, 2022, compared to $17.7 million for the three months ended September 30, 2021 and increased $16.6 million, or 31.0%, to $70.2 million for the nine months ended September 30, 2022, compared to $53.6 million for the nine months ended September 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 average yield on interest earning assets for the three months ended September 30, 2022 was 4.38%, an 81 basis point increase from 3.57% for the three months ended September 30, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities was 0.66% for both the three months ended September 30, 2022 and 2021.

The average yield on interest earning assets for the nine months ended September 30, 2022 was 4.12%, a 40 basis point increase from 3.72% for the nine months ended September 30, 2021, primarily due to higher market

interest rates, while the average cost of interest bearing liabilities for the nine months ended September 30, 2022 decreased to 0.64%, or three four points, from 0.68% for the nine months ended September 30, 2021.

The annualized net interest margin for the three and nine months ended September 30, 2022 was 3.99% and 3.73%, compared to 3.17% and 3.31% for three and nine months ended September 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.

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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 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 average yield on PPP loans for the three and nine months ended September 30, 2022 was 2.28% and 3.93%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of three basis points and 10 basis points during the three and nine months ended September 30, 2022, respectively, compared to 4.52% with a positive impact of 20 basis points and 4.90% with 21 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 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.

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 one and eight basis points during the three and nine months ended September 30, 2022 and 12 and 19 basis points during the three and nine months ended September 30, 2021, respectively.

Average Balances, Interest and Average Yields/Cost.

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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,

Three months ended September 30,

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

Federal funds sold and interest bearing balances in banks

Investments securities available-for-sale

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Junior subordinated debentures, net

Other borrowings

Total interest bearing liabilities

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

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

Federal funds sold and interest bearing balances in banks

Investments securities available-for-sale

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

2022 compared to 2021

7 unchanged sentences

Interest earning assets

Interest bearing deposits in banks

Federal funds sold and interest bearing balances in banks

Investments available-for-sale

10 unchanged sentences

Provision for loan losses.

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.

We recorded a $1.2 million and $3.8 million provision for loan losses for the three and nine months ended September 30, 2022, respectively, compared to a $477,000 provision for loan losses and $30,000 reversal of the provision for loan losses for the three and nine months ended September 30, 2021, respectively.

We had net charge-offs on loans of $944,000 and $3.5 million for the three and nine months ended September 30, 2022, compared to $177,000 and $170,000 net charge-offs on loans for the three and nine months ended September 30, 2021, respectively.

The provision for loan losses in the third quarter of 2022 was primarily due to $944,000 in net charge-offs during the current quarter, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan losses.

The Company, based on information received from the lead lender during the current quarter with respect to the expected sale price of collateral securing a $4.5 million participation interest in a national shared credit, charged off $750,000, which was in addition to the $2.4 million charged off on this same national shared credit in the prior quarter.

Subsequent to quarter-end the collateral was sold and the Company received final settlement from the lead lender, with no additional charge-offs required.

Noninterest income.

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.

Noninterest income decreased $1.3 million, or 31.5%, to $2.7 million for the three months ended September 30, 2022 compared to $4.0 million for the three months ended September 30, 2021.

The decrease in noninterest income primarily was due to a $898,000 decrease in gain on sale of loans due to a decrease in the volume and premiums on SBA loans (guaranteed portion) sold and a $589,000 decrease in income from our investment in a Small Business Investment Company (“SBIC”) fund.

During the three months ended September 30, 2022, the Company sold $18.3 million of SBA loans (guaranteed portion), resulting in a gain on sale of $1.3 million, compared to the sale of $20.3 million of SBA loans (guaranteed portion) resulting in a gain on sale of $2.2 million during the three months ended September 30, 2021.

Partially offsetting these decreases in noninterest income was a $206,000 increase in service charges and other loan fees.

Noninterest income increased $466,000, or 5.4%, to $9.2 million for the nine months ended September 30, 2022 compared to $8.7 million for the nine months ended September 30, 2021.

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 $346,000 in service charges and other fees, $247,000 in loan servicing and other loan fees and $65,000 in other income and fees.

These increases were partially offset by a $991,000 decrease in gain on sale of loans due to a decrease in the volume of loans sold and decrease in premiums realized and a $866,000 decrease in income from our investment in a SBIC fund.

During the nine months ended September 30, 2022, the Company sold $33.4 million of SBA loans (guaranteed portion), resulting in a gain on sale of $2.7 million, compared to the sale of $36.0 million of SBA loans (guaranteed portion) resulting in a gain on sale of $3.8 million during the nine months ended September 30, 2021.

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

Three months ended June 30,

Three months ended September 30,

(Dollars in thousands)

2 unchanged sentences

Loan servicing and other loan fees

Income on investment in SBIC fund

(Loss) income on investment in SBIC fund

Other income and fees

Total noninterest income

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

2 unchanged sentences

Loan servicing and other loan fees

Gain on sale of premises

Income on investment in SBIC fund

Gain on sale of OREO

Bargain purchase gain

2 unchanged sentences

Noninterest 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.

Noninterest expense increased $2.2 million, or 16.0%, to $16.1 million for the three months ended September 30, 2022 compared to $13.9 million for the three months ended September 30, 2021.

The increase primarily was due to a $2.0 million increase in salaries and employee benefits as a result of an increase in the number of full-time equivalent employees, primarily reflecting the recent acquisition of PEB in February, 2022, and to a lesser extent, increases in occupancy and equipment expense of $98,000 as a result of revaluing the right-of-use asset for the renewal of two lease agreements and increased utilities and lease related expenses , increases in data processing fees of $80,000 and other noninterest expenses of $37,000.

Noninterest expense for the nine months ended September 30, 2022 increased $8.3 million, or 19.9%, to $49.6 million from $41.4 million in the same period in 2021.

Noninterest expense for the nine months ended September 30, 2022 included $3.1 million of nonrecurring acquisition-related expenses associated with the PEB Merger recorded in the first quarter of 2022, which were comprised of $556,000 in salary and employee benefits, $1.1 million in data processing expenses, $724,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 other expenses.

Excluding acquisition-related expense, noninterest expense for the nine months ended September 30, 2022 increased $5.2 million compared to the nine months ended September 30, 2021 primarily as a result of a $4.0 million increase in salary and employee benefits due to increase in the number of full-time equivalent employees due to the PEB Merger and open positions that were filled this quarter, as well as increases in salaries and wages due to upward market pressure on wages.

In addition, occupancy costs increased $403,000 primarily due to the PEB Merger, revaluing the right-of-use asset for the renewal of two lease agreements and increased utilities and lease related expenses.

D ata processing expenses increased $194,000 due to higher transaction activity, and other noninterest expense increased $544,000 reflecting increased operating expenses as businesses reopened from COVID-19 related closures.

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

Three months ended June 30,

Three months ended September 30,

(Dollars in thousands)

3 unchanged sentences

Total noninterest expense

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

4 unchanged sentences

Income taxes.

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.

The provision for income taxes increased $970,000, or 49.0%, to $3.0 million for the three months ended September 30, 2022 compared to $2.0 million for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, income tax expense increased $1.3 million, or 23.0%, to $7.0 million, compared to $5.7 million for the nine months ended September 30, 2021.

The Company’s effective tax rate was 29.0% and 27.1% for three and nine months ended September 30, 2022 compared to 26.8% and 27.2% for the three and nine months ended September 30, 2021, respectively.

The effective tax rate was higher for the third quarter of 2022 compared to the same quarter a year ago due to accrual for non-deductible compensation expenses that were not present in 2021.

The effective tax rate was lower for the nine months ended September 30, 2022 compared to the same period 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 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.

During the nine months ended September 30, 2022, the Bank sold $33.4 million in loans and loan participation interests and received $409.2 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 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.

During the nine months ended September 30, 2022, deposits increased by $130.2 million, primarily due to the closing of the PEB Merger.

Liquid assets in the form of cash and cash equivalents, time deposits in banks, and investment securities available for sale totaled $394.4 million at September 30, 2022.

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

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.

Securities purchased during the three and nine months ended September 30, 2022, totaled $1.0 million and $25.7 million, respectively, and securities repayments, maturities and sales in the period were $3.7 million and $9.2 million, respectively.

Certificates of deposit scheduled to mature in one year or less at September 30, 2022, totaled $158.9 million.

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

1 unchanged sentence

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

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.

As of September 30, 2022 , the Bank had an available borrowing capacity of $ 484.6 million with the FHLB of San Francisco and $35.4 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 June 30, 2022 and December 31, 2021.

There were no amounts outstanding under these facilities at September 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 $105.2 million, including $3.4 million of undisbursed construction and development loan commitments, at June 30, 2022.

Loan commitments and letters of credit were $102.7 million, including $7.9 million of undisbursed construction and development loan commitments, at September 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.

2 unchanged sentences

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

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.

Net cash provided by operating activities for the nine months ended September 30, 2022 was $23.8 million, compared to $5.4 million provided by operating activities for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, net cash provided by investing activities was $82.6 million, which consisted primarily of net change in loans receivable, compared to $13.2 million of cash used in investing activities for the nine months ended September 30, 2021.

Net cash used in financing activities for the nine months ended September 30, 2022 was $261.4 million, which was comprised primarily of net change in deposits, compared to $152.9 million provided by financing activities during the nine months ended September 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 June 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $21.3 million.

At September 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $25.5 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 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.

On August 18, 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 October 14, 2022 to shareholders of record as of the close of business on September 16, 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.

5 unchanged sentences

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 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.

For additional information on the Company’s stock repurchases, see "Item 2.

In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company was authorized to repurchase up to 747,000 shares, or approximately 7.0%, of its outstanding common stock, of which 73,777 shares remained available for repurchase at September 30, 2022.

In October 2022, our Board of

Directors approved a sixth stock repurchase program to commence following completion of the fifth stock repurchase program for the repurchase of up to 645,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one year period through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934.

This 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 sixth stock repurchase program does not obligate the Company to purchase any particular number of shares.

For additional information on the Company’s stock repurchases, see “Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.

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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 June 30, 2022 and December 31, 2021, the Bank was considered to be Well Capitalized.

Based on capital levels at September 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 June 30, 2022

At September 30, 2022

At December 31, 2021

1 unchanged sentence

Leverage Ratio

Minimum requirement for "Well Capitalized"