What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-10 · 351 added, 400 removed, 322 unchanged (70% of the section changed)

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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;

● potential adverse impacts to economic conditions in general and in California, Colorado, New Mexico and Washington specifically, 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, the failure of the U.S.

● 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;

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

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

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

● the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest rate benchmarks;

● 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 credit losses and provision for credit losses;

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

● the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;

● the transition away from London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks;

● our net interest margin and funding sources;

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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 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 credit 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;

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● our ability to control operating costs and expenses;

● the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;

● the use of estimates in determining the fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;

● difficulties in reducing risk associated with the loans and securities on our balance sheet;

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● an inability to keep pace with the rate of technological advances;

● our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;

● risks associated with dependence on our Chief Executive Officer and senior management team and our ability to attract, motivate and retain qualified personnel;

● costs and effects of litigation, including settlements and judgments;

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

● statements with respect to our intentions regarding disclosure and other changes resulting from the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”);

● 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;

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

● other risks described elsewhere in this Form 10-Q and other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”).

● risks described in other reports filed with and furnished to the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”) and this Form 10-Q.

In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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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 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.

At March 31, 2023, the Company had approximately $2.5 billion in total assets, $2.0 billion in total loans, $2.1 billion in total deposits and $313.5 million in shareholders’ equity.

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

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.

At March 31, 2023, our $2.0 billion total loan portfolio included $497.4 million, or 24.3 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.5 billion, or 75.7%, consisted of loans we originated.

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

Our net income is also affected by other factors, including the provision for credit losses on loans, noninterest income and noninterest expense.

On February 1, 2022, the Company completed its acquisition of Pacific Enterprise Bancorp (“PEB”), which was headquartered in Irvine, California.

Pursuant to an Agreement and Plan of Merger, dated September 7, 2021 (the “Merger Agreement”), by and between BayCom and PEB.

On February 1, 2022, the Company completed its acquisition of PEB, which was headquartered in Irvine, California.

Under the terms of the merger agreement, PEB merged with and into BayCom (the “Merger”), with BayCom as the surviving corporation in the Merger.

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

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

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

Financial Information” of Part I this report.

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(iii) our net interest margin;

and (iv) the regulatory risk weighting associated with the assets.

and (iv) the regulatory risk weighting associated with our assets.

Net interest margin is calculated as the annualized net interest income divided by average interest earning assets.

Because noninterest bearing sources of funds, such as noninterest bearing deposits and

shareholders’ equity, also fund interest earning assets, net interest margin includes the benefit of these noninterest bearing sources.

Because noninterest bearing sources of funds, such as noninterest bearing deposits and shareholders’ equity, also fund interest earning assets, net interest margin reflects the benefit of these noninterest bearing sources.

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.

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.

Since March 2022 through the quarter ended March 31, 2023, 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 475 basis points, including 50 basis points during the first quarter of 2023, to a range of 4.75% to 5.00%.

Subsequent to March 31, 2023, the FOMC further increased the target range for the federal funds rate by an additional 25 basis points.

The increase in the average yield on interest-earning assets during the first quarter of 2023 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.

Noninterest income.

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

Provision for loan losses.

We established an allowance for loan losses by charging amounts to loan provision at a level required to reflect estimated credit losses in the loan portfolio.

Management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors.

See “Critical Accounting Policies and Estimates - Allowance for loan loss” for a description of the manner in which the provision for loan losses is established.

Provision for credit losses.

We established an allowance for credit losses by charging amounts to provision for credit losses at a level required to reflect estimated credit losses in the loan and available-for sale investment securities portfolios.

For loans, management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors.

See “Critical Accounting Policies and Estimates - Allowance for Credit Losses” for a description of the manner in which the provision for credit losses is established.

For investments, the Company evaluates investment available-for-sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors.

Such situations may result from either a decline in the financial condition of the issuing entity or in the case of fixed interest rate investments, from rising interest rates.

In making this assessment, management considers the length of time and the extent to which fair value is less than amortized cost, the nature of the security, the underlying collateral, and the financial condition and prospects of the issuer, among other factors.

This assessment also includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses.

If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis.

Any impairment that has not been recorded through an allowance for available-for-sale securities is recognized in other comprehensive income.

Changes in the allowance for available-for-sale securities are recorded as provision for (or reversal of) credit loss.

Losses are charged against the allowance for available-for-sale securities, with a corresponding adjustment to the security's amortized cost basis, when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.

Noninterest expense.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies.

We have elected to take advantage of this extended transition period, which means that the condensed consolidated financial statements included in this Form 10-Q report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

The following represent our critical accounting policies:

Allowance for loan losses .

The allowance for loan losses is evaluated on a regular basis by management.

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.

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

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

In addition, regulatory examiners may require additional allowances based on their judgments of the information regarding problem loans and credit risk available to them at the time of their examinations.

Generally, the allowance for loan losses consists of various components including a component for specifically identified weaknesses as a result of individual loans being impaired, a component for general non- specific weakness related to historical experience, economic conditions and other factors that indicate probable loss in the loan portfolio.

Loans determined to be impaired are individually evaluated by management for specific risk of loss.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR.

We measure any loss on the TDR in accordance with the guidance concerning impaired loans set forth above.

Additionally, TDRs are generally placed on nonaccrual status at the time of restructuring and included in impaired loans.

These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.

Estimated expected cash flows related to purchased credit impaired loans .

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

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

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

The cash flows expected over the life of the PCI loan or pool are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events.

Assumptions as to default rates, loss severity and prepayment speeds are utilized to calculate the expected cash flows.

Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amounts of the future cash flows of the pool are reasonably estimable.

Subsequent to the acquisition date, any increase in cash flow over those expected at purchase date in excess of fair value is recorded as interest income prospectively.

Any subsequent decreases in cash flow over those expected at purchase date are recognized by recording an allowance for loan losses.

Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the loan pool at the carrying amount.

Business combinations .

We apply the acquisition method of accounting for business combinations.

Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values.

Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values.

Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized.

Acquisition related costs are expensed as incurred unless they are directly attributable to the issuance of the Company’s common stock in a business combination.

Loan sales and servicing of financial assets .

Periodically, we sell loans and retain the servicing rights.

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.

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.

Income taxes .

Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements.

A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized.

Realization of tax benefits of deductible temporary differences and operating loss carry forwards depends on having sufficient taxable income of an appropriate character within the carry forward periods.

We recognize that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities.

Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

Goodwill, which has resulted from a number of our acquisitions, is reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit being below its carrying amount.

We make a qualitative assessment whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount.

Such indicators may include, among others:

a significant adverse change in legal factors or in the general business climate;

significant decline in the Company’s stock price and market capitalization;

unanticipated competition;

and an adverse action or assessment by a regulator.

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 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 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 September 30, 2022 and December 31, 2021

Our consolidated financial statements are prepared in accordance with GAAP.

In doing so, we have to make estimates and assumptions.

Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Accordingly, actual results could differ materially from our estimates.

We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

Our critical accounting estimates are described in detail in the Critical Accounting Estimates section of our 2022 Annual Report.

There have been no significant changes to our critical accounting estimates since December 31, 2022, except for the following:

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (ASC 326):

Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss methodology that is referred to as the current expected credit loss (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases.

In addition, ASC 326 made changes to the accounting for available for sale debt securities.

One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis.

Allowance for credit loan losses for investment securities available-for-sale.

The Company evaluates investment available-for-sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

Impairment may result from either a decline in the financial condition of the issuing entity or in the case of fixed interest rate investments, from rising interest rates.

This assessment also includes a determination of whether the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses.

Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes.

Credit-related impairment is recognized as an allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.

Changes in the allowance for available-for-sale securities are recorded as provision for (or reversal of) credit loss.

However, if the uncollectibility of an available-for-sale security is confirmed or if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis.

Allowance for credit losses for loans .

The allowance for credit losses (“ACL”) for loans is the combination of the allowance for credit losses for loans and the reserve for unfunded loan commitments.

The allowance for credit losses for loans is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "Interest payable and other liabilities"

on the consolidated balance sheets.

The amortized cost basis of loans does not include accrued interest receivable, which is included in "Interest receivable and other assets"

on the consolidated balance sheets.

The "Provision for credit losses"

on the consolidated statements of income (loss) is a combination of the provision for credit losses for loans, the provision for unfunded loan commitments, and the provision for investment securities available-for-sale.

Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including

information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances.

Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates.

The CECL methodology could result in significant changes to both the timing and amounts of provision for credit losses and the allowance as compared to historical periods.

Loans that are deemed to be uncollectable are charged off and deducted from the allowance.

The provision for credit losses and recoveries on loans previously charged off are added to the allowance.

Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate.

The allowance for credit losses for loans is comprised of an individually evaluated component for loans that no longer share similar risk characteristics with other loans and a pooled loans component for loans that share similar risk characteristics.

A loan with an outstanding balance greater than $100,000 is individually evaluated for expected credit loss when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement.

We select loans for individual assessment on an ongoing basis using certain criteria such as payment performance, borrower reported and forecasted financial results, and other external factors when appropriate.

Loans that do not share the same risk characteristics as pooled loans are evaluated individually for credit loss and generally include all non-accrual loans, collateral dependent loans, and certain troubled debt restructured loans.

We measure the current expected credit loss of an individually evaluated loan based upon the fair value of the underlying collateral, adjusted for costs to sell when applicable, or if the loan is not collateral-dependent we utilize the present value of expected future cash flows, discounted at the effective interest rate.

A loan for which the terms have been modified resulting in a concession, and where the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring (TDR).

The ACL on a TDR is measured using the same method as individually evaluated loans.

When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan.

To the extent a loan balance exceeds the estimated collectable value, a reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent.

Our CECL methodology for the pooled loans component includes both quantitative and qualitative loss factors which are applied to our population of loans and assessed at a pool level.

The quantitative CECL model estimates credit losses by applying pool-specific probability of default ("PD") and loss given default ("LGD") rates to the expected exposure at default ("EAD") over the contractual life of loans.

The qualitative component considers internal and external risk factors that may not be adequately assessed in the quantitative model.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments and curtailments, when appropriate.

The pooled loans' contractual loan terms exclude extensions, renewals, and modifications.

To estimate future prepayments by loan pool, we use our actual historical loan prepayment experience over a trailing time period, adjusted for forecasted economic conditions, to estimate future prepayments by loan pool.

To estimate curtailment by loan pool we use our actual historical loan curtailment experience over a trailing time period, adjusted for forecasted economic conditions.

Where observations in either case may be insufficient, the global rate, which is simply the aggregate performance of all loan segments of the Bank, is used.

The ACL model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes (i.e, Call codes), with PCD assets pooled separately by similar loan pools to evaluate and measure the allowance for credit loss:

● Loans secured by real estate:

o 1-4 family residential construction loans and other construction loans and all land development and other land loans

o Secured by farmland and finance agricultural production and other loans to farmers

o Revolving, open-end loans secured by 1-4 family residential properties extended under lines of credit and closed-end loans secured by 1-4 family residential properties, secured by junior liens

o Closed-end loans secured by 1-4 family residential properties, secured by first liens

o Commercial real estate loans secured by owner-occupied non-farm nonresidential properties

o Commercial real estate loans secured by other non-farm nonresidential properties and

o Secured by multifamily (5 or more units) residential properties

● Commercial and industrial loans

● Loans to individuals for household, family and other personal expenditures (i.e., consumer loans)

● Paycheck Protection Program loans (which are fully government guaranteed)

In determining the PD for each pooled segment, the Bank utilized regression analyses to identify certain economic drivers that were considered highly correlated to historical Bank or peer loan default experience.

The regression models developed correlates macroeconomic variables to historical credit performance based on call report data over a 64 quarter (16-year) period which captures a full economic cycle from 2004 to 2019.

We elected to exclude historical data from 2020 - 2021 to assess the quantitative expected credit losses because we believe said period is an outlier and did not represent normal economic behavior considering the Covid-19 pandemic lockdown with changes in macroeconomic variables and the significant levels of government relief programs in place during that period.

For all segments, the Company's actual loss history was not statistically relevant, thus the loss history of peers, defined as commercial financial institutions with asset size of one to five billion, domiciled in California, with similar concentrations of lending were utilized to determine loss rates.

The peers utilized in the ACL are segment specific.

Additionally, management chose the national unemployment rate and U.S.

gross domestic product as the primary economic forecast drivers for all segments.

A third party provides LGD estimates for each segment based on a banking industry Frye-Jacobs Risk Index approach.

In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets.

The quantitative CECL model applies the projected rates based on the economic forecasts for the four quarter (one-year) reasonable and supportable forecast horizon to EAD to estimate defaulted loans.

The economic data is updated quarterly, which is based on Federal Reserve Economic Data (“FRED”) forecasts.

Historical LGD rates are applied to estimated defaulted loans to determine estimated credit losses.

For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over 8 quarters (two-year) period.

Subsequent to the reversion period for the remaining contractual life of loans and leases, the PD, LGD, and prepayment rates are based on historical experience during a full economic cycle.

Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.

Qualitative internal and external risk factors include, but are not limited to, the following:

● Changes in the nature and volume of the loan portfolio

● Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans

● Changes in lending policies and procedures, including changes in underwriting standards and collection

● Changes in economic and business conditions, and developments that affect the collectability of the portfolio

● Changes in the experience, ability, and depth of credit management and lending staff

● Changes in the quality of our systematic loan review processes

● Changes in the value of underlying collateral, where applicable

● Changes in concentration of credit

● The effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the portfolio

PCD assets are assets acquired at a discount that is due, in part, to credit quality deterioration since origination which may be determined through observation of missed payments, downgrade in risk rating, deterioration of a borrower's financial trends or other observable factors including subjectivity utilized by management.

PCD assets are initially recorded at fair value, by taking the sum of the present value of expected future cash flows and an allowance for credit losses, at acquisition.

The allowance for credit losses for PCD assets is recorded through a gross-up of reserves on

the consolidated balance sheets, while the allowance for acquired non-PCD assets, such as loans, is recorded through the provision for credit losses on the consolidated statements of income, consistent with originated loans.

Subsequent to acquisition, the allowance for credit losses for PCD loans will generally follow the same forward-looking estimation, provision, and charge-off process as non-PCD acquired and originated loans.

The estimated credit losses associated with unfunded lending commitments are calculated using the same models and methodologies noted above and incorporate utilization assumptions at the estimated time of default.

While the provision for credit losses associated with unfunded commitments is included in "provision for credit losses"

on the consolidated statement of income, the reserve for unfunded commitments is maintained on the consolidated balance sheet in "Interest payable and other liabilities".

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets.

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%.

Total assets increased $34.7 million, or 1.4%, to $2.5 billion at March 31, 2023, from December 31, 2022.

The increase primarily was due to loans receivable, net, increasing $21.9 million as a result of the new loan originations, partially offset by loan repayments and sales during the period.

In addition, cash and cash equivalents increased $20.7 million, or 11.7%, partially offset by decreases in investment securities available-for-sale of $2.5 million or 1.5%, loans held for sale of $2.4 million or 100.0%, and other assets of $1.7 million or 3.7%.

Cash and cash equivalents.

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.

Cash and cash equivalents increased $20.7 million, or 11.7%, to $197.5 million, at March 31, 2023, from $176.8 million at December 31, 2022.

The increase primarily was due to $18.9 million increase in federal funds sold and interest bearing balances in banks during three months ended March 31, 2023.

Investment securities, all of which are classified as available-for-sale, decreased $2.5 million, or 1.5%, to $165.3 million at March 31, 2023 from $167.8 million at December 31, 2022.

The decrease primarily was due to an increase in unrealized losses on investment securities available-for-sale of $1.5 million due to fair value adjustments, a $1.1 million allowance for credit losses on investment securities available-for-sale as discussed below, and the routine amortization and repayment of investment principal balances and securities called and matured, partially offset by the purchase of $1.5 million of investment securities during the three months ended March 31, 2023.

At March 31, 2023, a $1.1 million allowance for credit losses on investment securities available-for-sale was recorded through the provision for credit losses on investment securities available-for-sale as management fully reserved for one security due to reasons of credit quality at March 31, 2023.

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 $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,

Loans receivable, net increased $21.9 million, or 1.1%, to $2.0 billion at March 31, 2023 from December 31, 2022.

The increase was due to $85.1 million of new loan originations, partially offset by $56.3 million of loan repayments, including $5.1 million in Paycheck Protection Program (“PPP”) loan repayments, and $6.3 million in loan sales.

The following table provides information about our loan portfolio by type of loan, with purchase credit deteriorated (“PCD”) loans presented as a separate balance, at the dates presented .

(Dollars in thousands)

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Net deferred loan fees

Allowance for loan losses

(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:

Allowance for credit losses (2)

(1) Includes $5.9 million and $11.1 million of PPP loans as of March 31, 2023 and December 31, 2022, respectively.

(2) Allowance for credit losses at March 31, 2023 is estimated under CECL whereas at December 31, 2022, the allowance for loan losses is estimated under the incurred loss methodology.

The following table shows as of March 31, 2023, 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)

September 30, 2022

March 31, 2023

Commercial and industrial

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

(2) Includes loans located in Sacramento and Northern California counties totaling $492.7 million and loans located in Los Angeles and Orange counties totaling $183.8 million.

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

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

At March 31, 2023, loans in Colorado, New Mexico and Washington totaled $95.2 million, $47.9 million and $94.0 million, respectively.

At December 31, 2022, loans in Colorado, New Mexico and Washington totaled $97.2 million, $51.3 million and $87.4 million, respectively.

Nonperforming assets and nonaccrual loans.

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 $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.

Nonperforming assets and loans.

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

Nonperforming loans generally consists of nonaccrual loans and accruing loans that are 90 days or more past due.

Nonperforming assets decreased $2.1 million, or 14.0%, to $13.1 million, or 0.51% of total assets at March 31, 2023 from $15.2 million, or 0.61% of total assets at December 31, 2022.

The decrease in nonperforming assets from December 31, 2022 was primarily due to the renewal of one loan during the current quarter totaling $934,000 that was 90 days or more past due and in the process of collection at December 31, 2022, and the charge-off of five non-accrual loans totaling $330,000 during the current quarter.

There were no accruing loans 90 days or more past due and $21,000 of OREO at March 31, 2023, compared to $934,000 of accruing loans 90 days or more past due and $21,000 of OREO at December 31, 2022.

Nonperforming loans totaled $13.1 million, or 0.64% of total loans, of which $818,000 were guaranteed by governmental agencies at March 31, 2023, compared to $15.2 million or 0.75% of total loans, of which $839,000 were guaranteed by governmental agencies at December 31, 2022.

Included in nonperforming loans at March 31, 2023 and December 31, 2022, were $768,000 and $759,000, respectively, of TDR loans.

At March 31, 2023 and December 31, 2022, nonaccrual loans included $483,000 and $2.5 million of loans 30-89 days past due and $3.9 million and $4.0 million of loans less than 30 days past due, respectively.

At March 31, 2023, the $3.9 million of loans less than 30 days past due was comprised of 14 loans all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

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

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

Such loans are categorized as performing nonaccrual loans and are reflected in nonperforming assets.

Interest received on such loans is recognized as interest income when received.

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Loans that are well secured and in the process of collection will remain on accrual status .

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date, without a carryover of the related allowance for loan and lease losses.

These acquired loans are segregated into three types:

pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality, and impaired loans with evidence of significant credit deterioration .

● Pass rated loans (typically performing loans) are accounted for in accordance with ASC Topic 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

● Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if they display at least some level of credit deterioration since origination.

● Impaired loans (typically substandard loans on nonaccrual status) are accounted for in accordance with ASC Topic 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.

In accordance with ASC Topic 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference.

Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows .

Troubled debt restructured loans.

Troubled debt restructured loans, or TDR loans, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.

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 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 $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,

Loans may be acquired at a premium or discount to par value, in which case the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan.

Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early.

Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income;

as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.

Troubled Loan Modifications.

Occasionally, the Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or any combination of these.

When principal forgiveness is provided, the amount of the forgiveness is charged-off against the allowance for credit losses for loans.

Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses for loans is adjusted by the same amount.

Loan modifications to borrowers experiencing financial difficulty as of March 31, 2023 totaled $6.1 million, of which $768,000 were accruing and performing according to their modified terms, compared to $6.3 million, of which $759,000 were accruing and performing according to their modified terms at December 31, 2022.

Modified loans that are accruing and performing according to their modified terms are not considered nonperforming loans as they continue to accrue interest despite their modified status.

The related allowance for credit losses on individually evaluated modified loans totaled $298,000 and $393,000 at March 31, 2023 and December 31, 2022, respectively.

The following table provides information regarding nonperforming loans, nonperforming assets and modified loans as of the dates indicated:

(Dollars in thousands)

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Nonperforming loans to total loans (1)

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.

(2) PCI and performing TDR loans are neither included in nonperforming loans above nor are they included in the numerators used to calculate this ratio.

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

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.

The allowance for loan losses is maintained to cover losses that are estimated in accordance with GAAP.

It is our estimate of loan losses inherent in our loan portfolio at each balance sheet date.

Our methodology for analyzing the allowance for loan losses consists of general and specific components.

Performing TDRs are neither included in nonperforming loans above nor are they included in the numerators used to calculate these ratios.

Interest foregone on nonaccrual loans was approximately $446,000 and $84,600 for the three months ended March 31, 203 and March 31, 2022, respectively, none of which was included in interest income.

Allowance for credit losses for loans and unfunded commitments.

The allowance for credit losses for loans is maintained to cover losses that are estimated in accordance with GAAP.

It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date.

Our methodology for analyzing the allowance for credit losses for loans consists of general and specific components.

For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio.

We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations.

Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios.

Management and the Board of Directors sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios.

Management and the Board of Directors also considers credit quality and trends relating to delinquency, nonperforming and classified loans within our loan portfolio when evaluating qualitative loss factors.

Additionally, management and the Board of Directors adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy, capitalization rates, commodity prices and other pertinent economic data specific to our primary market area and lending portfolios.

For the specific component, the allowance for loan losses is established for impaired loans.

Management and the Board of Directors set and adjust qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios.

Management and the Board of Directors also consider credit quality and trends relating to delinquency, nonperforming and classified loans within our loan portfolio when evaluating qualitative loss factors.

Additionally, management and the Board of Directors adjust qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy rates, capitalization rates, commodity prices and other pertinent economic data specific to our primary market area and lending portfolios.

For the specific component, the allowance for credit losses for loans is established for individually evaluated loans.

Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt.

If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment.

If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due.

For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected.

Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses.

Subsequent recoveries are credited to the allowance for loan losses.

If an individually evaluated loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment.

If an individually evaluated loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted

cash flows and the loan amount due.

For individually evaluated loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected.

Impairment losses are reflected in the allowance for credit losses for loans through a charge to the provision for credit losses.

Subsequent recoveries are credited to the allowance for credit losses for loans.

Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement.

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

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 .

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

Estimated credit losses for unfunded loan commitments are calculated using the same models and methodologies noted above and incorporate utilization assumptions at the estimated time of default.

While the provision for credit losses for unfunded loan commitments is included in "provision for (reversal of) credit losses"

on the consolidated statement of income, the reserve for unfunded loan commitments is maintained on the consolidated balance sheet in interest payable and other liabilities.

The Company adopted the Current Expected Credit Losses ("CECL") standard as of December 15, 2022, which resulted in a one-time day one 2023 adjustment to the allowance for credit losses for loans of $1.5 million (which included the reclassification of the net credit discount on acquired PCD loans totaling $845,000) and an allowance for unfunded credit commitments of $45,000, as well as an after-tax decrease to opening retained earnings of $491,000.

At March 31, 2023, the Company’s allowance for credit losses for loans was $20.4 million under the CECL framework, or 1.0% of total loans, compared to $18.9 million under the ALLL framework, or 0.94% of total loans, at December 31, 2022.

In addition to the CECL adjustment at the beginning of the current quarter, a $275,000 provision for credit losses for loans was recorded for the three months ended March 31, 2023, compared to $7,000 provision for the three months ended March 31, 2022.

The provision for credit losses for loans for the three months ended March 31, 2023, primarily resulted from $315,000 in net charge-offs for the three months ended March 31, 2023, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate credit losses.

We recorded net charge-offs of $315,000 and $7,000 for the three months ended March 31, 2023 and 2022, respectively.

The calculation of the allowance for credit losses for loans at both March 31, 2023 and December 31, 2022 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA.

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.

Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date.

However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred.

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

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.

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

Nine months ended September 30,

Credit discounts are included in the determination of fair value and as a result, no allowance for credit losses for loans is recorded for acquired loans at the acquisition date.

However, the allowance for credit loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the credit loss provision in the period that the deterioration occurred.

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

As of March 31, 2023 , acquired loans net of their discount, totaled $247.9 million and the remaining net discount on these acquired loans was $371,000, compared to $257.4 million of acquired loans and $522,000 of net discounts at December 31 , 2022 .

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

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

For the Three months ended March 31,

(Dollars in thousands)

Allowance for loan losses as a percentage of total loans outstanding at period end

Allowance for loan losses

Allowance for credit losses as a percentage of total loans outstanding at period end

Allowance for credit losses

Total loans outstanding

Non-accrual loans as a percentage of total loans outstanding at period end

Total non-accrual loans

Nonaccrual loans as a percentage of total loans outstanding at period end

Total nonaccrual loans

Total loans outstanding

Allowance for loan losses as a percentage of non-accrual loans at period end

Allowance for loan losses

Total non-accrual loans

Allowance for credit losses as a percentage of nonaccrual loans at period end

Allowance for credit losses

Total nonaccrual loans

Net charge-offs/(recoveries) during period to average loans outstanding:

Commercial and industrial:

Net charge-offs

Net charge-offs/(recoveries)

Average loans outstanding

Construction and land:

Net recoveries

Net charge-offs

Average loans outstanding

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Average loans outstanding

Net charge-offs

Net (recoveries)/charge-offs

Average loans outstanding

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Total average loans outstanding

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 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 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.

As of March 31, 2023, the Company individually evaluated $13.9 million in loans, inclusive of $13.1 million of nonperforming loans and $768,000 of performing (accruing) TDR loans.

Of the individually evaluated loans, only $1.4 million had a specific allowance, of $817,000, as of March 31, 2023.

As of December 31, 2022, the Company individually evaluated $15.0 million in loans, inclusive of $14.3 million of nonperforming loans and $759,000 of performing (accruing) TDR loans.

Of these nonperforming loans, only $1.4 million had a specific allowance, of $1.2 million, as of December 31, 2022.

Management considers the allowance for credit losses for loans at March 31, 2023 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 credit losses for loans or that any increased allowance for credit losses for loans that may be required will not adversely impact our financial condition and results of operations.

A further decline in national and local economic conditions as a result of unemployment levels, labor shortages and the effects of inflation, a potential recession, the failure of the U.S.

Congress to increase the debt ceiling, or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to recent bank failures or new COVID- 19 variants, among other factors, could result in a material increase in the allowance for credit losses for loans and may adversely affect the Company’s financial condition and results of operations.

In addition, the determination of the amount of our allowance for credit losses for loans is subject to review by

bank regulators, as part of the routine examination process, which may result in additions to our provision for credit 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.

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.

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

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,

Total deposits increased $42.3 million, or 2.0%, to $2.1 billion at March 31, 2023 from December 31, 2022.

At March 31, 2023, noninterest bearing demand deposits totaled $705.9 million, or 33.2% of total deposits, compared to $773.3 million, or 37.1% of total deposits, at December 31, 2022 .

At March 31, 2023, uninsured deposits totaled $1.0 billion, compared to $1.1 billion at December 31, 2022.

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

(Dollars in thousands)

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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 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.

At March 31, 2023 and December 31, 2022, we had the ability to borrow up to $506.2 million and $473.6 million, respectively, from the FHLB of San Francisco.

At both March 31, 2023 and December 31, 2022, 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 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.

At both March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, the Company had outstanding junior subordinated debt, net of mark-to-market adjustments, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.5 million.

At March 31, 2023, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.8 million compared to $63.7 million at December 31, 2022.

We are required to provide collateral for certain 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.

At both March 31, 2023 and December 31, 2022, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $42.6 million and $40.6 million, respectively, as collateral for local agency deposits.

Shareholders’ equity.

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.

Shareholders’ equity decreased $3.7 million, to $313.5 million at March 31, 2023 from $317.1 million at December 31, 2022.

The decrease in shareholders’ equity primarily was due to the repurchase of $8.1 million of Company common stock and $1.3 million of accrued cash dividends payable for the quarter.

In addition, shareholder’s equity was impacted by the adoption of CECL in the first quarter of 2023, which as of January 1, 2023, resulted in an after-tax decrease to opening retained earnings of $491,000.

In addition, shareholder’s equity was adversely impacted by increased unrealized losses on available for sale securities reflecting the increase in market interest rates during the current quarter, resulting in a $1.2 million increase in accumulated other comprehensive loss, net of tax.

During the three months ended March 31, 2023, the Company repurchased a total of 422,877 shares of its common stock at a total cost of $8.1 million, or $19.08 per share, leaving 58,915 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 Nine Months Ended September 30, 2022 and 2021

Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022

Earnings summary.

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.

Net income was $7.0 million for the three months ended March 31, 2023, compared to $6.5 million for the three months ended March 31, 2022, an increase of $558,000 or 8.6%.

The increase was the result of a $2.9 million increase in net interest income and $1.8 million decrease in noninterest expense, partially offset by a $1.4 million increase in provision for credit losses, a $1.9 million decrease in noninterest income and a $828,000 increase in provision for income taxes.

Diluted earnings per share were $0.55 for the three months ended March 31, 2023, compared to diluted earnings per share of $0.51 for the three months ended March 31, 2022.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for credit losses and noninterest income, was 59.64% for the three months ended March 31, 2023, compared to 68.48% for the three months ended March 31, 2022.

The improvement in the efficiency ratio during the three months ended March 31, 2023 compared to the same period in 2022 was due to lower noninterest expenses and higher revenues.

Interest income.

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 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 income for the three months ended March 31, 2023 was $30.1 million, compared to $24.8 million for the three months ended March 31, 2022, an increase of $5.3 million or 21.2%.

The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, with the largest increases from loans, fed funds sold and interest bearing balances in banks and, to a lesser extent, investment securities available-for-sale.

Increased yields earned on these portfolios, along with an increase in the average balance of loans, were the primary drivers for the increase in interest income.

The increase in interest income was partially offset by lower recognition of deferred loan fee income on the repayment of PPP loans.

Interest income on loans, including fees, increased $3.3 million, or 14.5%, to $26.3 million for the three months ended March 31, 2023, compared to $22.9 million for the three months ended March 31, 2022, primarily due to a $132.8 million increase in the average loan balance and a 35 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 three months ended March 31, 2023 was 5.24%, compared to 4.89% for the same period in 2022.

Interest income on loans for three months ended March 31, 2023 and 2022 included $97,000 and $1.3 million, respectively, in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts.

The remaining net discount on acquired loans was $371,000 and $603,000 at March 31, 2023 and March 31, 2022, respectively.

Interest income on loans for three months ended March 31, 2023 and 2022 included $3,000 and $735,000, respectively, in fees earned related to PPP loans.

As of March 31, 2023, there was a minimal amount of unrecognized deferred fees and costs.

Interest income on loans for the three months ended March 31, 2023 and 2022, included $269,000 and $235,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities available-for-sale increased $243,000, or 17.4%, to $1.6 million for the three months ended March 31, 2023, compared to $1.4 million for the three months ended March 31, 2022, due to a 37 basis point increase in the average yield earned on and a $9.1 million increase in the average balance of investment securities available-for-sale.

The average yield on investment securities available-for-sale was 3.15% for the three months ended March 31, 2023 compared to 3.15% for the three months ended March 31, 2022.

Interest income on federal funds sold and interest-bearing balances in banks increased $1.6 million, or 766.7%, to $1.8 million for the three months ended March 31, 2023, compared to $211,000 for the three months ended March 31, 2022, due to a 434 basis point increase in the average yield earned on federal funds sold and interest-bearing balances in

banks, partially offset by a $233.8 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 was 4.56% for the three months ended March 31, 2023 compared to 0.22% for the three months ended March 31, 2022.

In addition, during the first quarter of 2023, we received $332,000 in cash dividends on our FRB and FHLB stock, up 23.0% from $270,000 in the first quarter of 2022.

Interest expense.

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 $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 $1.4 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.

Interest expense increased $2.3 million, or 95.7%, to $4.8 million for the three months ended March 31, 2023 compared to $2.5 million for the three months ended March 31, 2022, primarily as a result of an increase in the average cost of deposits.

Total average interest-bearing liabilities decreased $106.2 million, or 6.9%, to $1.4 billion for the three months ended March 31, 2023, compared to $1.5 billion for the three months ended March 31, 2022.

The average rate paid on interest-bearing liabilities for three months ended March 31, 2023 was 1.35% compared to 0.64% for three months ended March 31, 2022.

Interest expense on deposits increased $2.2 million, or 151.68%, to $3.7 million for the three months ended March 31, 2023 compared to $1.5 million for the three months ended March 31, 2022.

The increase primarily was due to an increase in the average cost of deposits.

The average rate paid on interest bearing deposits increased by 69 basis points to 1.10% for the three months ended March 31, 2023, compared to 0.41% for the three months ended March 31, 2022.

The overall average cost of deposits for the three months ended March 31, 2023 and 2022 was 0.71% and 0.27%, respectively.

The average balance of deposits totaled $2.1 billion for the three months ended March 31, 2023, compared to $2.2 billion for the same period in 2022.

The average balance of noninterest bearing deposits decreased $16.6 million, or 2.2%, to $742.0 million for the three months ended March 31, 2023 compared to $2.3 million for the same period in 2022.

Interest expense on borrowings increased $117,000, or 11.9%, to $1.1 million for the three months ended March 31, 2023, compared to $982,000 for the three months ended March 31, 2022.

The average balance of borrowings increased $972,000 to $72.9 million during the three months ended March 31, 2023, compared to $72.0 million during the three months ended March 31, 2022.

The average cost of borrowings increased to 6.05% for the three months ended March 31, 2023, compared to 5.53% for the three months ended March 31, 2022.

Net interest income and net interest margin.

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 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.

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

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

The average yield on PPP loans 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 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.

Net interest income increased $2.9 million, or 13.0%, to $25.3 million for the three months ended March 31, 2023, compared to $22.4 million for the three months ended March 31, 2022.

The increase in net interest income primarily was due to increases in interest income on loans, cash and cash equivalents and, to a lesser extent, investment securities, including dividends on FRB and FHLB stock, partially offset by higher funding costs related to increase market rates of interest on our deposits and junior subordinated debt.

The average yield (annualized) on interest earning assets for the three months ended March 31, 2023 was 5.07%, a 104 basis point increase from 4.03% for the three months ended March 31, 2022, primarily due to higher market interest rates, while the average cost of interest bearing liabilities was 1.35% and 0.64% for the three months ended March 31, 2023 and 2022, respectively.

The annualized net interest margin for the three months ended March 31, 2023 was 4.26%, compared to 3.63% for the three months ended March 31, 2022.

The increase in net interest margin reflects the increased net interest income resulting from an improved mix of interest-earning assets, including increased balances of higher yielding loans and investment securities available for sale, and a lower average balance of interest earning assets.

The average yield on PPP loans for the three months ended March 31, 2023 was 1.17%, including the recognition of deferred fees, resulting in no impact to the net interest margin during the first quarter of 2023, compared to an average yield of 5.89% with a positive impact to the net interest margin of eight basis points during the same quarter in 2022.

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 met, 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 seven basis points during the three months ended March 31, 2023 and 29 basis points during the three months ended March 31, 2022, respectively.

Average Balances, Interest and Average Yields/Cost.

The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields;

(ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average yields;

(ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average costs;

(iii) net interest income;

1 unchanged sentence

and (v) the net interest margin.

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

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

Yields have been calculated on a pre-tax basis.

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 September 30,

Three months ended March 31,

(Dollars in thousands)

Interest earning assets

Federal funds sold and interest bearing balances in banks

Fed Funds sold and interest bearing balances in banks

Investments securities available-for-sale

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Junior subordinated debentures, net

Total interest bearing liabilities

Noninterest bearing deposits

Other noninterest bearing liabilities

Noninterest bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Interest rate spread (2)

Net interest margin (3)

Ratio of average interest earning assets to average interest bearing liabilities

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

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

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

Nine months ended September 30,

(Dollars in thousands)

Interest earning assets

Federal funds sold and interest bearing balances in banks

Investments securities available-for-sale

Total interest earning assets

Noninterest earning assets

Total average assets

Interest bearing liabilities

Time deposits

Total deposit accounts

Subordinated debt, net

Junior subordinated debentures, net

Other borrowings

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

Three months ended September 30,

Nine months ended September 30,

2022 compared to 2021

Three months ended March 31,

2023 compared to 2022

Increase/(Decrease)

Attributable to

(Dollars in thousands)

Interest earning assets

Federal funds sold and interest bearing balances in banks

Fed funds sold and interest bearing balances in banks

Investments available-for-sale

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Junior subordinated debentures, net

Other borrowings

Total interest expense

Net interest income

Provision for loan losses.

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.

Provision for credit losses.

We recorded a $275,000 provision for credit losses for loans for the three months ended March 31, 2023, compared to a $7,000 provision for credit losses for the three months ended March 31, 2022.

The provision for credit losses for loans in the first quarter of 2023 was primarily due to new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate credit losses and $315,000 in net charge-offs during the first quarter of 2023.

In addition, a provision for credit losses for investment securities available-for-sale of $1.1 million was recorded in the current quarter as management fully reserved for a preferred equity security with credit quality concerns at March 31, 2023, compared to none in the same quarter of 2022.

Noninterest income.

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.

Noninterest income decreased $1.9 million, or 44.2%, to $2.5 million for the three months ended March 31, 2023 compared to $4.4 million for the three months ended March 31, 2022.

The decrease in noninterest income was primarily due to the recognition of $1.6 million in bargain purchase gain in the first quarter of 2022 with no similar activity in the current quarter 2023, a $725,000 decrease in gain on sale of loans due to a decrease in the volume and premiums observed on SBA loans (guaranteed portion) sold, and a $164,000 decrease in income from an investment in a Small Business Investment Company (“SBIC”) fund, partially offset by a $255,000 increase in servicing charges and other fees.

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

Three months ended September 30,

(Dollars in thousands)

Gain on sale of loans

Service charges and other fees

Loan servicing and other loan fees

(Loss) income on investment in SBIC fund

Other income and fees

Total noninterest income

Nine months ended September 30,

Three months ended March 31,

(Dollars in thousands)

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Total noninterest income

N/M - Not meaningful

Noninterest expense.

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.

Noninterest expense decreased $1.8 million, or 10.0%, to $16.5 million for the three months ended March 31, 2023 compared to $18.3 million for the three months ended March 31, 2022.

The decrease primarily was due to the absence of $3.1 million of nonrecurring expenses related to our acquisition of PEB and its bank subsidiary, Pacific Enterprise Bank, in February, 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 expense, and $347,000 in other expenses.

Excluding the acquisition-related expenses, noninterest expenses for the first quarter of 2023 increased $1.2 million, compared to the first quarter of 2022.

The increase was comprised of higher salaries and employee benefits of $1.3 million and higher data processing expenses of $265,000, partially offset by decreases in miscellaneous expense of $280,000.

Salaries and employee benefits for the first quarter of 2023 increased compared to the same quarter in 2022 primarily due an increase in the number of full-time equivalent employees, reflecting our acquisition of PEB, coupled with retention incentives and salary adjustments due to upward market pressure on wages in 2022.

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

Three months ended September 30,

(Dollars in thousands)

Salaries and related benefits

Occupancy and equipment

Data processing

Total noninterest expense

Nine months ended September 30,

Three months ended March 31,

(Dollars in thousands)

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Income taxes.

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.

The provision for income taxes increased $828,000, or 42.8%, to $2.8 million the three months ended March 31, 2023 compared to $1.9 million for the three months ended March 31, 2022.

The Company’s effective tax rate was 28.2% for the three months ended March 31, 2023 compared to 23.0% for the three months ended March 31, 2022.

The effective tax rate was higher for the first quarter of 2023 compared to the same quarter a year ago due to non-taxable bargain purchase gain in the first quarter of 2022.

Liquidity and Capital Resources

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We rely on a number of different sources in order to meet our potential liquidity demands.

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 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.

Our primary sources of funds are deposits, escrow and custodial deposits, principal and

interest payments on loans and proceeds from sale of loans.

During the three months ended March 31, 2023, the Bank sold $6.4 million in loans and loan participation interests and received $56.3 million in principal loan repayments.

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

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

During the 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 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.

Deposits increased $42.3 million to $2.1 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities available-for-sale, increased $18.2 million to $365.0 million at March 31, 2023 from December 31, 2022.

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

Securities purchased during the three months ended March 31, 2023, totaled $1.5 million and securities repayments, maturities and sales in the period were $1.2 million.

Certificates of deposit scheduled to mature in one year or less at March 31, 2023, totaled $307.9 million.

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

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

As of 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 September 30, 2022 and December 31, 2021 .

As of March 31, 2023, the Bank had an available borrowing capacity of $506.2 million with the FHLB of San Francisco, with no borrowings outstanding at that date.

The Bank also had, as of that date, federal funds lines with available commitments totaling $65.0 million with four correspondent banks.

There were no amounts outstanding under these facilities at March 31, 2023 and December 31, 2022.

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 $102.7 million, including $7.9 million of undisbursed construction and development loan commitments, at September 30, 2022.

Loan commitments and letters of credit were $86.4 million, including $4.5 million of undisbursed construction and development loan commitments, at March 31, 2023.

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

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

Net cash provided by operating activities for the 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.

Net cash provided by operating activities for the three months ended March 31, 2023 was $7.5 million, compared to $2.8 million provided by operating activities for the three months ended March 31, 2022 .

During the three months ended March 31, 2023, net cash used in investing activities was $21.0 million, which consisted primarily of net change in loans receivable, compared to $77.5 million of cash provided by investing activities for the three months ended March 31, 2022.

Net cash provided by financing activities for the three months ended March 31, 2023 was $34.2 million, which was comprised primarily of net change in deposits, compared to $32.8 million used in financing activities during the three months ended March 31, 2022.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements.

There has not been a material change in our liquidity and capital resources since the information disclosed in our 2022 Annual Report other than set forth above.

We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

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

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.

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.

Assuming continued payment of the cash dividend at this rate of $0.05 per share, our average total dividend paid each quarter would be approximately $658,000 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

The dividends, if any, we may pay may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I.

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

At March 31, 2023, BayCom Corp had liquid assets of $22.9 million.

In addition to its operating expenses, BayCom Corp is responsible for paying to its shareholders any dividends that have been declared, funding stock repurchases, and making payments on its trust-preferred securities and subordinated notes.

BayCom Corp can receive dividends and other capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends and make other capital distributions.

On February 23, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share on the Company’s outstanding common stock, payable on April 14, 2023 to shareholders of record as of the close of business on March 10, 2023.

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

without prior notice.

Assuming continued payment of the cash dividend at this rate of $0.10 per share, our average total dividend paid each quarter would be approximately $1.3 million based on the number of our outstanding shares at March 31, 2023.

The dividends we pay if any, may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I.

Business” of the 2022 Annual Report.

From time to time, our Board of Directors has authorized stock repurchase plans.

In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

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 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.

From time to time, our Board of Directors has authorized stock repurchase programs.

In general, stock repurchases allow us to proactively manage our capital position and return excess capital to shareholders.

Stock repurchases also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

As of March 31, 2023, there remained 58,915 shares available for repurchase under the Company’s existing stock repurchase program.

In April 2023, our Board of Directors announced a new stock repurchase program, to commence following completion of the existing stock repurchase program, for the repurchase of up to 619,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one year period.

Purchases under the Company’s stock repurchase programs may be made through open market purchases, privately negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934.

The repurchase programs 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 Company’s stock repurchase programs do not obligate the Company to purchase any particular number of shares.

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

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

Based on capital levels at March 31, 2023 and December 31, 2022, 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 September 30, 2022

At March 31, 2023

At December 31, 2022

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

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

At March 31, 2023, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

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

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

If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2023, the Company would have exceeded all regulatory capital requirements.

For additional information, see “Item 1.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis