What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 296 added, 196 removed, 477 unchanged (51% 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 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.

● higher inflation and current and future monetary policies of the Federal Reserve in response thereto;

● 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;

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● 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;

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

● our net interest margin and funding sources;

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

● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry;

● the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

● review of the Company’s accounting, accounting policies and internal control over financial reporting;

● risks and uncertainties related to the recent restatement of certain of our historical consolidated financial statements;

● the subsequent discovery of additional adjustments to the Company’s previously issued financial statements;

● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry;

● our ability to attract and retain deposits;

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

● staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

● staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

● the effectiveness of our risk management framework;

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● our ability to implement our business strategies and manage our growth;

● liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

● liquidity issues, including our ability to borrow funds or raise additional capital, if necessary or desired;

● the loss of our large loan and deposit relationships;

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

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

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

● 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;

● 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.

● risks described in other reports filed with or furnished to the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K/A 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 do not undertake and specifically disclaim any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

These risks could cause our actual results for 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.

These risks could cause our actual results for the remainder of 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.

Executive Overview

BayCom is a bank holding company headquartered in Walnut Creek, California.

BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 34 full-service branches, with 16 locations in California, two in Washington, five in Central New Mexico and 11 in Colorado.

The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

Accordingly, the information set forth in this report, including consolidated financial statements and related data, relate primarily to the Bank.

Accordingly, the information set forth in this report, including the consolidated financial statements and related data, relate primarily to the Bank.

Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth.

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We are also focused on continuing to grow organically and believe the metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share.

We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, Colorado, provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth.

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

At March 31, 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.

At June 30, 2023, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $2.0 billion in total loans, $2.1 billion in total deposits and $307.0 million in shareholders’ equity.

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

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.

At June 30, 2023, our $2.0 billion total loan portfolio included $461.5 million, or 22.9 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.6 billion, or 77.1%, 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.

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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.

Financial Information” of Part I of this report.

Set forth below is a discussion of the primary factors affecting our results of operations:

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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 reflects 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 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.

Since March 2022 through the quarter ended June 30, 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 500 basis points, including 75 basis points during the first six months of 2023, to a range of 5.00% to 5.25%.

Subsequent to June 30, 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 three and six months ended June 30, 2023 reflects the lagging benefit of variable rate interest-earning 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.

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(ii) gain on sale of loans;

and (iii) other noninterest income.

and (iii) gain (loss) on equity securities;

and (iv) other noninterest income.

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

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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.

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

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

Losses are charged against the allowance for credit losses 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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(v) outside and professional services;

(vi) other general and administrative expenses, including amortization of intangible assets.

and (vi) other general and administrative expenses, including amortization of intangible assets.

Salaries and related benefits include compensation, employee benefits and employment tax expenses for our personnel.

Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses.

Data processing expense includes data fees paid to our third-party data processing system provider and other data service providers.

Occupancy and equipment expense includes depreciation expense on our owned properties and equipment, lease expense on our leased properties and other occupancy-related expenses.

Data processing expense includes fees paid to our third-party data processing system provider and other data service providers.

FDIC and state assessments expense represents the assessments that we pay to the FDIC for deposit insurance and other regulatory costs to various states.

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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.

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, that would have a material impact on our financial condition or results of operations.

Accordingly, actual results could differ materially from our estimates.

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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.

Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss methodology with 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.

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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.

The Company evaluates investment securities available-for-sale 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.

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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.

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 expected 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.

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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.

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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.

A loan for which the terms have been modified resulting in a concession, and where the borrower is experiencing financial difficulties, is considered a modified loan to a borrower experiencing financial difficulty.

The ACL on modified loans to borrowers experiencing financial difficulty 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.

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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.

The regression models developed correlate 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 that 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.

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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.

For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over an eight-quarter (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.

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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.

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.

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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

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total assets.

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%.

Total assets increased $54.2 million, or 2.2%, to $2.6 billion at June 30, 2023, from December 31, 2022.

The increase primarily was due to cash and cash equivalents, increasing $73.4 million, or 41.5%, partially offset by decreases in loans receivable, net, of $8.0 million or 0.4% and investment securities available for sale of $7.5 million or 4.9%.

In addition, interest receivable and other assets increased $2.0 million or 2.2%, equity securities decreased $1.8 million or 13.4%, and loan held for sale decreased $2.4 million or 100.0%.

Cash and cash equivalents.

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.

Cash and cash equivalents increased $73.4 million, or 41.5%, to $250.2 million, at June 30, 2023, from $176.8 million at December 31, 2022.

The increase primarily was due to a $63.7 million increase in federal funds sold and interest bearing balances in banks during six months ended June 30, 2023, consistent with management’s strategy to increase liquidity following the recent turmoil in the banking industry resulting from several recent high profile bank failures.

Investment securities available-for-sale.

Investment securities available-for-sale, decreased $7.5 million, or 4.9%, to $146.5 million at June 30, 2023 from $154.0 million at December 31, 2022.

The decrease primarily was due to unrealized losses on investment securities available-for-sale of $6.8 million as a result of fair value adjustments and the routine amortization and repayment of investment principal balances and securities called and matured of $2.9 million, partially offset by the purchase of $2.5 million of investment securities during the six months ended June 30, 2023.

Equity securities.

Equity securities decreased $1.8 million, or 13.4% to $11.9 million at June 30, 2023 from $13.8 million at December 31, 2022, primarily due to a $1.8 million mark-to-market downward adjustment recorded during the six months ended June 30, 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 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.

Loans receivable, net decreased $8.0 million, or 0.4%, to $2.0 billion at June 30, 2023 from December 31, 2022.

The decrease was due to $65.1 million of loan repayments, including $997,000 in Paycheck Protection Program (“PPP”) loans, and $6.9 million in loan sales, partially offset by $34.3 million of new loan originations.

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 .

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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:

(1) Includes $4.9 million and $11.1 million of PPP loans as of June 30, 2023 and December 31, 2022, respectively.

(2) Allowance for credit losses at June 30, 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 June 30, 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)

March 31, 2023

June 30, 2023

Commercial and industrial

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Total real estate

(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.

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

(2) Includes loans located in Sacramento and Northern California counties totaling $99.9 million at June 30, 2023, and loans located in Los Angeles and Orange counties totaling $531.9 million at June 30, 2023.

At December 31, 2022, loans in Sacramento and Northern California counties and loans in Los Angeles and Orange counties totaled $507.7 million and $189.6 million, respectively.

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

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

At June 30, 2023, loans in Colorado, New Mexico and Washington totaled $93.6 million, $47.7 million and $111.7 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.

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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.

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

Nonperforming assets decreased $2.4 million, or 15.8%, to $12.8 million, or 0.50% of total assets at June 30, 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 accruing loan 90 days or more past due and in the process of collection totaling $934,000 at December 31, 2022, and the charge-off of five nonaccrual loans totaling $330,000 during the current quarter.

There were no accruing loans 90 days or more past due or OREO at June 30, 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 $12.8 million, or 0.64% of total loans, at June 30, 2023, of which $801,000 were guaranteed by governmental agencies, compared to $15.2 million, or 0.75% of total loans, at December 31, 2022, of which $839,000 were guaranteed by governmental agencies.

Not included in nonperforming loans at June 30, 2023 and December 31, 2022, were $774,000 and $759,000 of performing (accruing) modified loans to borrowers experiencing financial difficulty, respectively.

At June 30, 2023 and December 31, 2022, nonaccrual loans included $1.1 million and $2.5 million of loans 30-89 days past due, and $2.8 million and $4.0 million of loans less than 30 days past due, respectively.

At June 30, 2023, the $2.8 million of loans less than 30 days past due was comprised of 15 loans, all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

See Note 19 Subsequent Events in the Notes to the Condensed Consolidated Financial Statements.

Subsequent to June 30, 2023, the Company determined that a certificate of deposit-secured line of credit loan made to the Borrower with an outstanding balance of approximately $5.0 million as of June 30, 2023 was impaired as a result of the sole trustee and beneficiary of the Trust filing for bankruptcy in July 2023.

After utilizing the $4.0 million certificate of deposit held at the Bank to offset amounts owed on the loan, the Company expects to place the $1.0 million outstanding balance on nonaccrual and record a $1.0 million reserve for the unsecured portion of the loan during the third quarter of 2023.

For additional information on, see Note 19 Subsequent Events in the Notes to the Condensed Consolidated Financial Statements.

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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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.

Loan modifications to borrowers experiencing financial difficulty as of June 30, 2023 totaled $6.0 million, of which $774,000 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 related allowance for credit losses on individually evaluated modified loans totaled $296,000 and $393,000 at June 30, 2023 and December 31, 2022, respectively.

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

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Total nonperforming assets (1)

Troubled debt restructurings – performing

Modified loans to borrowers experiencing financial difficulty – performing

Nonperforming assets to total assets (1)

Nonperforming loans to total loans (1)

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.

Performing modified loans to borrowers experiencing financial difficulty 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 $185,000 and $631,000 for the three and six months ended June 30, 2023 and $72,700 and $157,000 for the three and six month ended June 30, 2022, respectively, none of which was included in interest income.

Allowance for credit losses for loans and unfunded commitments.

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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 loan portfolio.

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 loan portfolio.

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.

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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.

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.

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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.

The Company adopted the 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 June 30, 2023, the Company’s allowance for credit losses for loans was $19.1 million under the CECL framework, or 0.95% of total loans, compared to an allowance for loan losses of $18.9 million under the allowance for loan losses incurred loss framework, or 0.94% of total loans, at December 31, 2022.

In addition to the CECL adjustment on January 1, 2023, a $985,000 reversal of the allowance for credit losses for loans was recorded for the six months ended June 30, 2023, compared to $2.6 million provision for loan losses for the six months ended June 30, 2022.

The reversal of the allowance for credit losses for loans primarily resulted from $375,000 in net charge-offs for the six months ended June 30, 2023, coupled with improvements in forecasted economic conditions, specifically, national gross domestic product and national unemployment, indicators utilized to estimate credit losses and, to a lesser extent, a decrease in outstanding loan balances.

We recorded net charge-offs of $60,000 and $375,000 for the three and six months ended June 30, 2023, and $2.5 million and $2.5 million for the three and six months ended June 30, 2022, respectively.

The calculation of the allowance for credit losses for loans at June 30, 2023 and the allowance for loan losses at 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.

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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 .

As of June 30, 2023 , acquired loans net of their discount totaled $234.7 million and the remaining net discount on these acquired loans was $331,000, 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,

At and for the six months ended June 30,

(Dollars in thousands)

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

Allowance for credit losses

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

Allowance for credit losses on loans

Total loans outstanding

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Total loans outstanding

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

Allowance for credit losses

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

Allowance for credit losses on loans

Total nonaccrual loans

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Commercial and industrial:

Net charge-offs/(recoveries)

Net charge-offs

Average loans outstanding

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Commercial estate:

Net charge-offs

Net (recoveries)/charge-offs

Average loans outstanding

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Total average loans outstanding

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.

As of June 30, 2023, the Company individually evaluated $13.6 million in loans, inclusive of $12.8 million of nonperforming loans and $774,000 of performing (accruing) modified loans to borrowers experiencing financial difficulty .

Of the individually evaluated loans, only $1.2 million had a specific allowance, of $694,000, as of June 30, 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) modified loans to borrowers experiencing financial difficulty .

Of the 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 June 30, 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.

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, or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as supply chain disruptions, 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.

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

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.

Total deposits increased $61.6 million, or 3.0%, to $2.1 billion at June 30, 2023 from December 31, 2022.

At June 30, 2023, noninterest bearing demand deposits totaled $664.1 million, or 30.9% of total deposits, compared to $773.3 million, or 37.1% of total deposits, at December 31, 2022 .

At June 30, 2023, uninsured deposits totaled $992.2 million, compared to $1.1 billion at December 31, 2022.

The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements.

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

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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 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.

At June 30, 2023 and December 31, 2022, we had the ability to borrow up to $499.1 million and $473.6 million, respectively, from the FHLB of San Francisco.

At both June 30, 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 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.

At both June 30, 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 June 30, 2023 and December 31, 2022, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, assumed in connection with its previous acquisitions totaling $8.5 million.

At June 30, 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 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.

At June 30, 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 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.

Shareholders’ equity decreased $10.1 million, to $307.0 million at June 30, 2023 from $317.1 million at December 31, 2022.

The decrease in shareholders’ equity primarily was due to the repurchase of $17.2 million of Company common stock, accrued cash dividends payable of $2.5 million, and a $4.9 million increase in accumulated other comprehensive loss, net of taxes, partially offset by $14.4 million of net income earned during the first six months of 2023.

In addition, shareholder’s equity was negatively 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.

During the six months ended June 30, 2023, the Company repurchased a total of 543,955 shares of its common stock at a total cost of $9.1 million, or $16.71 per share, leaving 133,960 shares available for future purchases under the current stock repurchase plan.

During the six months ended June 30, 2022, the Company repurchased a total of 262,221 shares of its common stock at a total cost of $5.7 million, or $21.69 per share.

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

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

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022

Earnings summary.

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.

Net income was $7.2 million for the three months ended June 30, 2023, compared to $3.9 million for the three months ended June 30, 2022, an increase of $3.3 million or 84.4%.

The increase was the result of a $1.1 million increase in net interest income, a $3.9 million decrease in provision for credit losses and a $906,000 increase in noninterest income, partially offset by a $1.3 million increase in noninterest expense and a $1.3 million increase in provision for income taxes.

Diluted earnings per share were $0.59 for the three months ended June 30, 2023, compared to $0.29 for the three months ended June 30, 2022.

Net income was $14.4 million for the six months ended June 30, 2023, compared to $9.1 million for the six months ended June 30, 2022, an increase of $5.3 million, or 57.6%, The increase was primarily the result of a $4.0 million increase in net interest income, a $3.6 million decrease in provision for credit losses, reflecting a $985,000 reversal of the allowance for credit losses for the six months ended June 30, 2023, compared to a $2.6 million provision for credit losses for the same period in 2022, and a $445,000 decrease in noninterest expense, partially offset by a $164,000 decrease in noninterest income and a $2.7 million increase in provision for income taxes.

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 65.27% and 63.40% for the three and six months ended June 30, 2023, compared to 65.15% and 69.38% for the three and six months ended June 30, 2022, respectively.

The efficiency ratio for the three months ended June 30, 2023 remained relatively unchanged as compared to the same period in 2022.

The improvement in the efficiency ratio during the six months ended June 30, 2023 compared to the same period in 2022 primarily was due to higher revenues and, to a lesser extent, lower noninterest expenses.

Interest income.

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.

Interest income for the three months ended June 30, 2023 was $31.3 million, compared to $25.6 million for the three months ended June 30, 2022, an increase of $5.6 million or 22.0%.

The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, with the largest increases from loans and fed funds sold and interest bearing balances in banks.

Increased yields earned on interest-earning assets, 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 income on loans, including fees, increased $3.7 million, or 16.0%, to $26.7 million for the three months ended June 30, 2023, compared to $23.0 million for the three months ended June 30, 2022, primarily due to a 66 basis point increase in the average loan yield and, to a lesser extent, a $31.7 million increase in the average balance of loans.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended June 30, 2023 was 5.28%, compared to 4.62% for the same period in 2022.

Interest income on loans for three months ended June 30, 2023 and 2022 included $5,000 and $198,000, 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 $331,000 and $481,000 at June 30, 2023 and June 30, 2022, respectively.

Interest income on loans for three months ended June 30, 2023, included $0 fees earned related to PPP loans, compared to $351,000 in fees earned related to PPP loans

during the three months ended June 30, 2022.

As of June 30, 2023, there was a minimal amount of unrecognized deferred fees and costs.

Interest income on loans for the three months ended June 30, 2023 and 2022, included $48,000 and $269,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $162,000, or 10.6%, to $1.7 million for the three months ended June 30, 2023, compared to $1.5 million for the three months ended June 30, 2022, due to a 78 basis point increase in the average yield earned on, partially offset by a $21.6 million decrease in the average balance of, investment securities.

The average yield on investment securities was 3.99% for the three months ended June 30, 2023 compared to 3.21% for the three months ended June 30, 2022.

Interest income on federal funds sold and interest-bearing balances in banks increased $1.8 million, or 217.7%, to $2.6 million for the three months ended June 30, 2023, compared to $806,000 for the three months ended June 30, 2022, due to a 430 basis point increase in the average yield earned on federal funds sold and interest-bearing balances in banks, partially offset by a $183.9 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 5.14% for the three months ended June 30, 2023 compared to 0.84% for the three months ended June 30, 2022.

In addition, during the second quarter of 2023, we received $340,000 in cash dividends on our FRB and FHLB stock, up 25.9% from $270,000 in the second quarter of 2022.

Interest income for the six months ended June 30, 2023 was $61.3 million, compared to $50.4 million for the six months ended June 30, 2022, an increase of $10.9 million or 21.6%.

Increased yields earned on interest-earning assets, 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 $7.0 million, or 15.3%, to $52.9 million for the six months ended June 30, 2023, compared to $45.9 million for the six months ended June 30, 2022, primarily due to a 51 basis point increase in the average loan yield and, to a lesser extent, an $82.0 million increase in the average balance of loans.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the six months ended June 30, 2023 was 5.26%, compared to 4.75% for the same period in 2022.

Interest income on loans for six months ended June 30, 2023 and 2022 included $102,000 and $1.5 million, respectively, in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts.

Interest income on loans for six months ended June 30, 2023 and 2022 included $92,000 and $1.7 million in fees earned related to PPP loans, respectively.

Interest income on loans for the six months ended June 30, 2023 and 2022, included $317,000 and $722,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $405,000, or 13.8%, to $3.3 million for the six months ended June 30, 2023, compared to $2.9 million for the six months ended June 30, 2022, due to a 76 basis point increase in the average yield earned on, partially offset by a $15.4 million decrease in the average balance of investment securities.

The average yield on investment securities available-for-sale was 3.94% for the six months ended June 30, 2023 compared to 3.18% for the six months ended June 30, 2022.

Interest income on federal funds sold and interest-bearing balances in banks increased $3.4 million, or 331.6%, to $4.4 million for the six months ended June 30, 2023, compared to $1.0 million for the six months ended June 30, 2022, due to a 436 basis point increase in the average yield earned on federal funds sold and interest-bearing balances in banks, partially offset by a $208.6 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 4.88% for the six months ended June 30, 2023 compared to 0.52% for the six months ended June 30, 2022.

Interest expense.

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.

Interest expense increased $4.5 million, or 184.6%, to $7.0 million for the three months ended June 30, 2023, compared to $2.5 million for the three months ended June 30, 2022, reflecting higher funding costs related to increased rates of interest payable on our deposits and junior subordinated debentures.

Total average interest-bearing liabilities decreased $56.4 million, or 3.7%, to $1.4 billion for the three months ended June 30, 2023, compared to $1.5

billion for the three months ended June 30, 2022.

The average rate paid on interest-bearing liabilities for three months ended June 30, 2023 was 1.82% compared to 0.62% for three months ended June 30, 2022.

Interest expense on deposits increased $4.4 million, or 304.7%, to $5.9 million for the three months ended June 30, 2023 compared to $1.5 million for the three months ended June 30, 2022.

The increase primarily was due to an increase in the average cost of deposits, specifically, money market accounts and certificates of deposit.

The average rate paid on interest bearing deposits increased by 123 basis points to 1.61% for the three months ended June 30, 2023, compared to 0.38% for the three months ended June 30, 2022.

The overall average cost of deposits for the three months ended June 30, 2023 and 2022 was 1.10% and 0.25%, respectively.

The average balance of deposits totaled $1.5 billion for both the three months ended June 30, 2023 and the three months ended June 30, 2022, with decreases in the average balances of savings, NOW and money market accounts being offset by an increase in the average balance of certificates of deposit.

The average balance of noninterest bearing deposits decreased $111.4 million, or 14.13%, to $677.5 million for the three months ended June 30, 2023 compared to $816.9 million for the same period in 2022.

Interest expense on borrowings increased $100,000, or 9.96%, to $1.1 million for the three months ended June 30, 2023, compared to $999,000 for the three months ended June 30, 2022.

The average balance of borrowings increased $251,000 to $72.3 million during the three months ended June 30, 2023, compared to $72.0 million during the three months ended June 30, 2022.

The average cost of borrowings increased to 6.09% for the three months ended June 30, 2023, compared to 5.56% for the three months ended June 30, 2022.

Interest expense increased $6.9 million, or 140.2%, to $11.8 million for the six months ended June 30, 2023 compared to $4.9 million for the six months ended June 30, 2022, reflecting higher funding costs related to increased rates of interest payable on our deposits and junior subordinated debentures.

Total average interest-bearing liabilities decreased $81.6 million, or 5.5%, to $1.5 billion for the six months ended June 30, 2023, compared to $1.6 billion for the six months ended June 30, 2022.

The average rate paid on interest-bearing liabilities for six months ended June 30, 2023 was 1.60% compared to 0.63% for six months ended June 30, 2022.

Interest expense on deposits increased $6.7 million, or 227.8%, to $9.6 million for the six months ended June 30, 2023 compared to $2.9 million for the six months ended June 30, 2022.

The increase primarily was due to an increase in the average cost of deposits, specifically, money market accounts and certificates of deposit.

The average rate paid on interest bearing deposits increased by 98 basis points to 1.37% for the six months ended June 30, 2023, compared to 0.39% for the six months ended June 30, 2022.

The overall average cost of deposits for the six months ended June 30, 2023 and 2022 was 0.91% and 0.26%, respectively.

The average balance of deposits totaled $1.4 billion for the six months ended June 30, 2023, compared to $1.5 billion for the same period in 2022, with decreases in the average balances of savings, NOW and money market accounts being offset by an increase in the average balance of certificates of deposit.

The average balance of noninterest bearing deposits decreased $64.3 million, or 8.30%, to $709.6 million for the six months ended June 30, 2023 compared to $773.9 million for the same period in 2022.

Interest expense on borrowings increased $216,000, or 10.90%, to $2.2 million for the six months ended June 30, 2023, compared to $2.0 million for the six months ended June 30, 2022.

The average balance of borrowings increased $609,000 to $72.6 million during the six months ended June 30, 2023, compared to $72.0 million during the six months ended June 30, 2022.

The average cost of borrowings increased to 6.11% for the six months ended June 30, 2023, compared to 5.55% for the six months ended June 30, 2022.

Net interest income and net interest margin.

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.

Net interest income increased $1.1 million, or 4.8%, to $24.3 million for the three months ended June 30, 2023, compared to $23.2 million for the three months ended June 30, 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 increased rates of interest payable on our deposits and junior subordinated debentures.

The average yield (annualized) on interest earning assets for the three months ended June 30, 2023 increased to 5.18%, a 121 basis point increase from 3.97% for the three months ended June 30, 2022, while the average cost of interest bearing liabilities was 1.82% and 0.62% for the three months ended June 30, 2023 and 2022, respectively.

The average yield (annualized) on interest earning assets for the six months ended June 30, 2023 increased to 5.15%, a 115 basis point increase from 4.00% for the six months ended June 30, 2022, while the average cost of interest bearing

liabilities for the six months ended June 30, 2023 increased to 1.60%, or three basis points, from 0.63% for the six months ended June 30, 2022.

The increases in average yields on interest-earning assets and average rates paid on interest-bearing liabilities during the three and six months ended June 30, 2023, compare to the same periods in 2022, was due to increases in the target range for federal funds since March 2022, including a 75 basis point increase during the first six months of 2023, to a range of 5.00% to 5.25%.

The annualized net interest margin for the three and six months ended June 30, 2023 was 4.02% and 4.16%, compared to 3.59% and 3.61% for the three and six months ended June 30, 2022, respectively.

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 average yield on PPP loans for the three and six months ended June 30, 2023 was 1.00% and 3.89%, including the recognition of deferred fees, resulting in no impact and a positive impact of four basis points to the net interest margin during the three and six months ended June 30 2023, respectively, compared to an average yield of 2.55% and 4.35%, including the recognition of deferred fees, resulting in a positive impact of seven basis points and 10 basis points during three and six months ended June 30, 2022, 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 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.

Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts did not affect the net interest margin for the three months ended June 30, 2023 and increased our net interest margin by three basis points during the six months ended June 30, 2023 compared to six and 16 basis points during the three and six months ended June 30, 2022, respectively.

Average Balances, Interest and Average Yields/Cost.

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

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

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Fed Funds sold and interest bearing balances in banks

Investments securities available-for-sale

Investments securities

Total interest earning assets

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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.

Six months ended June 30,

(Dollars in thousands)

Interest earning assets

Fed Funds sold and interest-bearing balances in banks

Investments securities

Total interest earning assets

Noninterest earning assets

Total average assets

Interest bearing liabilities

Time deposits

Total interest bearing 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 March 31,

Three months ended June 30,

Six months ended June 30,

2023 compared to 2022

Increase/(Decrease)

Attributable to

(Dollars in thousands)

Interest earning assets

Fed funds sold and interest bearing balances in banks

Investments available-for-sale

Investments securities

FHLB stock and FRB stock

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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.

We recorded a $1.3 million and $985,000 reversal of the allowance for credit losses for loans for the three and six months ended June 30, 2023, compared to a $2.6 million provision for loan losses for both the three and six months ended June 30, 2022.

The reversal of the allowance for credit losses during the three and six months ended June 30, 2023 was primarily due to improvements in forecasted economic conditions, specifically, national gross domestic product and national unemployment, indicators utilized to estimate credit losses and, to a lesser extent, a decrease in outstanding loan balances and $60,000 and $375,000 in net charge-offs during the three and six months ended June 30, 2023, respectively.

Noninterest income.

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.

Noninterest income increased $906,000, or 503.3%, to $1.1 million for the three months ended June 30, 2023 compared to $180,000 for the three months ended June 30, 2022.

The increase in noninterest income was primarily due to a $924,000 improvement in fair value adjustments on equity securities, a $204,000 increase in loan servicing fees and other fees and a $164,000 increase in service charges and other fees, partially offset by a $231,000 decrease in gain on sale of loans due to a decrease in the volume of premiums observed on SBA loans (guaranteed portion) sold and a $141,000 decrease in other income and fees.

Noninterest income decreased $164,000, or 5.8%, to $2.6 million for the six months ended June 30, 2023 compared to $2.8 million for the six months ended June 30, 2022.

The decrease in noninterest income was primarily due to a $1.7 million bargain purchase gain in 2022 with no similar activity in 2023, a $956,000 decrease in gain on sale of loans due to a decrease in the volume of premiums observed on SBA loans (guaranteed portion) sold and a $178,000 decrease in loan servicing fees and other fees, partially offset by a $1.8 million improvement in fair value adjustments on equity securities, a $496,000 increase in income on investment in a Small Business Investment Company (“SBIC”) fund and a $419,000 increase in service charges and other fees.

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

Three months ended March 31,

Three months ended June 30,

2022 (As Restated)

(Dollars in thousands)

Gain on sale of loans

Loss on equity securities

Service charges and other fees

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Income on investment in SBIC fund

Other income and fees

Total noninterest income

Six months ended June 30,

2022 (As Restated)

(Dollars in thousands)

Gain on sale of loans

Loss on equity securities

Service charges and other fees

Loan servicing and other loan fees

Income on investment in SBIC fund

Bargain purchase gain

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Noninterest expense.

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.

Noninterest expense increased $1.4 million, or 8.9%, to $16.6 million for the three months ended June 30, 2023 compared to $15.2 million for the three months ended June 30, 2022.

The increase primarily was due to a $1.5 million increase in salary and employee benefits expense due to a reduction in deferred loan origination expenses and higher salary expenses due to wage increases and increases in full-time equivalent employees and a $54,000 increase in occupancy and equipment expense, partially offset by a $125,000 decrease in other noninterest expense due to lower deposit intangible amortization and a $50,000 decrease in data processing expense due to lower core systems costs.

Noninterest expense for the six months ended June 30, 2023 decreased $445,000, or 1.3%, to $33.1 million compared to $33.5 million in the same period in 2022, primarily due to nonrecurring acquisition-related expenses incurred in the first quarter of 2022 in connection with the PEB Merger with no similar expenses recorded during the first half of 2023 and a decrease in other expenses, partially offset by an increase in salary and employee benefits.

During the first half of 2023, compared to the same period in 2022, data processing expenses decreased $858,000, occupancy and equipment expense decreased $345,000, and other expense decreased $1.4 million, partially offset by a $2.2 million increase in salaries and employment benefits expense.

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

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

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

Salaries and related benefits

Occupancy and equipment

Data processing

Total noninterest expense

Six months ended June 30,

(Dollars in thousands)

Salaries and employee benefits

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Income taxes.

The provision for income taxes increased $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.

The provision for income taxes increased $1.3 million, or 78.2%, to $2.9 million the three months ended June 30, 2023 compared to $1.6 million for the three months ended June 30, 2022.

For the six months ended June 30, 2022, the provision for income taxes increased $2.7 million, or 87.4%, to $5.7 million, compared to $3.0 million for the six months ended June 30, 2022.

The Company’s effective tax rate was 28.4% and 28.3% for three and six months ended June 30, 2023 compared to 29.1% and 24.9% for the three and six months ended June 30, 2022.

The effective tax rate was lower for the three months ended June 30, 2023, compared to the same period in 2022, due to slightly lower permanent differences.

The effective tax rate was higher for the six months ended June 30, 2023, compared to the same period in 2022, due to a 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 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.

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 June 30, 2023, the Bank sold $6.9 million in loans and loan participation interests and received $65.1 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.

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.

Deposits increased $61.6 million to $2.1 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities, increased $65.6 million to $398.7 million at June 30, 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.

Securities purchased during the three and six months ended June 30, 2023, totaled $1.0 million and $2.5 million, respectively, and securities repayments, maturities and sales in those periods were $1.7 million and $2.9 million, respectively.

Certificates of deposit scheduled to mature in one year or less at June 30, 2023, totaled $380.0 million.

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

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

As of March 31, 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.

As of June 30, 2023, the Bank had an available borrowing capacity of $499.1 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.

There were no amounts outstanding under these facilities at June 30, 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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agency securities.

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

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 $87.1 million, including $3.4 million of undisbursed construction and development loan commitments, at June 30, 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 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.

Net cash provided by operating activities for the six months ended June 30, 2023 was $18.5 million, compared to $10.8 million provided by operating activities for the six months ended June 30, 2022.

During the six months ended June 30, 2023, net cash provided by investing activities was $10.4 million, which consisted primarily of net change in loans receivable, compared to $76.8 million of cash provided by investing activities for the six months ended June 30, 2022.

Net cash provided by financing activities for the six months ended June 30, 2023 was $44.4 million, which was comprised primarily of net change in deposits, compared to $112.8 million used in financing activities during the six months ended June 30, 2022.

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

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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.

At June 30, 2023, BayCom Corp had liquid assets of $21.7 million.

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.

On May 18, 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 July 14, 2023 to shareholders of record as of the close of business on June 16, 2023.

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 $1.2 million based on the number of our outstanding shares at June 30, 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.

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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.

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

As of June 30, 2023, there remained 133,960 shares available for repurchase under the Company’s existing stock repurchase program.

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

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The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements.

The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital.

The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and

ratios of capital.

The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets.

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

Based on capital levels at March 31, 2023 and December 31, 2022, the Bank was considered to be Well Capitalized.

Based on capital levels at June 30, 2023 and December 31, 2022, the Bank was considered Well Capitalized.

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

At March 31, 2023

At June 30, 2023

At December 31, 2022

(As Restated)

(Dollars in thousands)

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Minimum regulatory requirement

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

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

In addition to the minimum capital ratios, the Bank must 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 June 30, 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 March 31, 2023, the Company would have exceeded all regulatory capital requirements.

If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 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