What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-14 · 226 added, 211 removed, 562 unchanged (44% 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, 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;

● 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;

● changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

● the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto;

● the effects of any federal government shutdown;

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

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

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

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

● our net interest margin and funding sources;

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

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

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

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

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Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.

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 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.

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

At June 30, 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.

At September 30, 2023, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $2.0 billion in total loans, $2.2 billion in total deposits and $307.3 million in shareholders’ equity.

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

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.

At September 30, 2023, our $2.0 billion total loan portfolio included $426.6 million, or 21.7 %, 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 78.3%, 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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We generate interest income from interest and fees received on interest earning assets, including loans and investment securities and dividends on Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) stock we own.

We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits and borrowings.

We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits and

To evaluate net interest income, we measure and monitor:

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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 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.

Since March 2022 through the quarter ended September 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 525 basis points, including 100 basis points during the first nine months of 2023, to a range of 5.25% to 5.50%.

The increase in the average yield on interest-earning assets during the three and nine months ended September 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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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.

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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on the consolidated balance sheets.

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

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

on the consolidated balance sheets.

The "Provision for credit losses"

on the consolidated statements of

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

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.

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

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

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

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

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

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

correspond to federal regulatory reporting codes (i.e, Call codes), with PCD assets pooled separately by similar loan pools to evaluate and measure the allowance for credit loss:

● Loans secured by real estate:

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● Changes in the nature and volume of the loan portfolio

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

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

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

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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 June 30, 2023 and December 31, 2022

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

Total assets.

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

Total assets increased $61.1 million, or 2.4%, to $2.6 billion at September 30, 2023, from December 31, 2022.

The increase primarily was due to cash and cash equivalents increasing $125.1 million, or 70.8%, partially offset by decreases in loans receivable, net, of $53.2 million or 2.7% and investment securities available-for-sale of $8.2 million or 5.3%.

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%.

In addition, interest receivable and other assets increased $2.0 million or 4.5%, equity securities decreased $2.1 million or 15.4%, and loans held for sale decreased $1.1 million or 46.5%.

Cash and cash equivalents.

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.

Cash and cash equivalents increased $125.1 million, or 70.8%, to $301.9 million, at September 30, 2023, from $176.8 million at December 31, 2022.

The increase primarily was due to a $121.7 million increase in federal funds sold and interest bearing balances in banks during the nine months ended September 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.

Investment securities available-for-sale decreased $8.2 million, or 5.3%, to $145.8 million at September 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 $8.0 million as a result of fair value adjustments and the routine amortization and repayment of investment principal balances, and securities called and matured of $6.3 million, partially offset by the purchase of $6.4 million of investment securities during the nine months ended September 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.

Equity securities decreased $2.1 million, or 15.4%, to $11.6 million at September 30, 2023 from $13.8 million at December 31, 2022, primarily due to a $2.1 million mark-to-market downward adjustment recorded during the nine months ended September 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 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.

Loans receivable, net decreased $53.2 million, or 2.7%, to $1.9 billion at September 30, 2023 from December 31, 2022.

The decrease was due to $180.0 million of loan repayments, including $6.7 million in Paycheck Protection Program (“PPP”) loans, and $7.2 million in loan sales, partially offset by $135.0 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 .

September 30,

(Dollars in thousands)

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Allowance for credit losses (2)

(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:

(1) Includes $4.3 million and $11.1 million of PPP loans as of September 30, 2023 and December 31, 2022, respectively.

(2) Allowance for credit losses at September 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 September 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)

June 30, 2023

September 30, 2023

Commercial and industrial

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(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.

(2) Includes loans located in Sacramento and Northern California counties totaling $98.0 million at September 30, 2023, and loans located in Los Angeles and Orange counties totaling $524.5 million at September 30, 2023.

At December 31, 2022, loans in Sacramento and Northern California counties and loans in Los Angeles and Orange counties totaled $102.1 million and $539.6 million, respectively.

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

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

At September 30, 2023, loans in Colorado, New Mexico and Washington totaled $87.9 million, $45.3 million and $104.1 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 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.

Nonperforming assets decreased $923,000, or 6.1%, to $14.3 million, or 0.56% of total assets at September 30, 2023 from $15.2 million, or 0.61% of total assets at December 31, 2022.

The decrease in nonperforming assets 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, the charge-off of six nonaccrual loans totaling $356,000 during the nine months ended September 30, 2023, and the payoff during the current quarter of one $774,000 performing (accruing) modified loan to a borrower experiencing financial difficulty, partially offset by three new nonaccrual real estate loans totaling $500,000 and one new commercial nonaccrual loan totaling $1.0 million during the current quarter of 2023.

There were no accruing loans 90 days or more past due or OREO at September 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 $14.3 million, or 0.73% of total loans, at September 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.

At September 30, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.

Not included in nonperforming loans at December 31, 2022, was $759,000 of performing (accruing) modified loans to borrowers experiencing financial difficulty.

At September 30, 2023 and December 31, 2022, nonaccrual loans included $2.3 million and $2.5 million of loans 30-89 days past due, and $2.6 million and $4.0 million of loans less than 30 days past due, respectively.

At September 30, 2023, the $2.6 million of nonaccrual 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.

During the quarter ended September 30, 2023, the Company determined that a certificate of deposit-secured line of credit loan made to a revocable living trust (the “Trust” or the “Borrower”) with an outstanding balance of approximately $1.0 million as of September 30, 2023 was impaired and placed on nonaccrual as a result of the sole trustee and beneficiary of the Trust filing for personal bankruptcy in July 2023.

At June 30, 2023, the loan had an outstanding balance of $5.0 million and was secured by a $4.0 million certificate of deposit held at the Bank.

An additional $1.0 million in cash collateral securing the loan had previously been released by the Bank into a third-party escrow account at the request of the Borrower to be used as a refundable retainer in connection with a separate transaction by the Borrower.

The loan matured on July 16, 2023, and the Bank received notification that the sole trustee and beneficiary of the Trust filed for personal bankruptcy on July 18, 2023.

After receiving this notification, the Bank used the $4.0 million certificate of deposit held at the Bank to offset amounts owed on the loan and contacted the third-party escrow agent for the return of the additional $1.0 million of collateral.

The Bank was advised by the escrow agent that the previously escrowed funds had been released by the escrow agent, which was done without the Bank’s consent and contrary to the written escrow instructions.

The Bank has initiated legal action against the Borrower, the Borrower’s related parties and the escrow agent to recover the previously escrowed collateral.

The results of the legal action and the Bank’s ability to recover the previously escrowed collateral are currently uncertain.

The loan was fully reserved for at September 30, 2023.

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

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

Generally, as time goes on, the effects of

loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early.

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

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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 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.

Loan modifications to borrowers experiencing financial difficulty as of September 30, 2023 totaled $5.2 million, of which none 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 $296,000 and $393,000 at June 30, 2023 and December 31, 2022, respectively.

The related allowance for credit losses on individually evaluated modified loans totaled $342,000 and $393,000 at September 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:

September 30,

(Dollars in thousands)

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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.

Interest foregone on nonaccrual loans was approximately $173,000 and $593,000 for the three and nine months ended September 30, 2023, and $230,000 and $388,000 for the three and nine month ended September 30, 2022, respectively, none of which was included in interest income.

Allowance for credit losses for loans and unfunded commitments.

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

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

It is our estimate of credit losses inherent in our

loan portfolio at each balance sheet date.

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

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

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

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

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

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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 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.

The Company adopted the CECL standard as of December 15, 2022, which resulted in a one-time 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 on January 1, 2023.

At September 30, 2023, the Company’s allowance for credit losses for loans was $19.8 million under the CECL framework, or 1.01% 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 $201,000 reversal of the allowance for credit losses for loans was recorded for the nine months ended September 30, 2023, compared to $7,000 provision for loan losses for the nine months ended September 30, 2022.

The reversal of the allowance for credit losses for loans primarily resulted from $399,000 in net charge-offs for the nine months ended September 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, partially offset by an overall increase in reserves for individually evaluated loans, and increase in qualitative reserves.

We recorded net charge-offs of $24,000 and $399,000 for the three and nine months ended September 30, 2023, and $944,000 and $3.5 million for the three and nine months ended September 30, 2022, respectively.

The calculation of the allowance for credit losses for loans at September 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 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.

As of September 30, 2023 , acquired loans net of their discount totaled $224.4 million and the remaining net discount on these acquired loans was $419,000, 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 on 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:

At and for the six months ended June 30,

At and for the nine months ended September 30,

(Dollars in thousands)

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Total average loans outstanding

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 September 30, 2023, the Company individually evaluated $14.3 million in loans, inclusive of $9.6 million of nonperforming loans.

Of these individually evaluated loans, $4.8 million had a specific allowance of $1.9 million as of September 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.

Of these individually evaluated loans, $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 September 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, 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.

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, 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 $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.

Total deposits increased $74.0 million, or 3.5%, to $2.2 billion at September 30, 2023 from December 31, 2022.

At September 30, 2023, noninterest bearing demand deposits totaled $667.3 million, or 30.9% of total deposits, compared to $773.3 million, or 37.1% of total deposits, at December 31, 2022 .

At September 30, 2023, uninsured deposits totaled $991.6 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.

We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits.

We also offer an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insurance limits.

At September 30, 2023, our average deposit account size (excluding public funds), calculated by dividing period-end deposits by the population of accounts with balances, was approximately $59,000.

See Note 18 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our top ten depositors.

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

September 30,

(Dollars in thousands)

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

At 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.

At September 30, 2023 and December 31, 2022, we had the ability to borrow up to $597.6 million and $473.6 million, respectively, from the FHLB of San Francisco.

At both September 30, 2023 and December 31, 2022, there were no FHLB advances outstanding.

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

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.

At both September 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 September 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 September 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 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.

At September 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 $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.

Shareholders’ equity decreased $9.9, to $307.3 million at September 30, 2023 from $317.1 million at December 31, 2022.

The decrease in shareholders’ equity primarily was due to the repurchase of $21.7 million of Company common stock, cash dividends paid or accrued payable totaling $3.6 million, and a $5.7 million increase in accumulated other comprehensive loss, net of taxes, partially offset by $21.0 million of net income earned during the first nine 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 and Six Months Ended June 30, 2023 and 2022

During the three months ended September 30, 2023, the Company repurchased a total of 239,649 shares of its common stock at a total cost of $4.5 million, or $18.86 per share.

During the nine months ended September 30, 2023, the Company repurchased a total of 1,206,481 shares of its common stock at a total cost of $21.7 million, or $17.96 per share.

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

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

Earnings summary.

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.

Net income was $6.6 million for the three months ended September 30, 2023, compared to $7.0 million for the three months ended September 30, 2022, a decrease of $340,000 or 4.9%.

The decrease was the result of a $728,000 decrease in noninterest income and a $423,000 increase in noninterest expense, partially offset by a $520,000 decrease in provision for credit losses, a $84,000 increase in net interest income and a $207,000 decrease in provision for income taxes.

Diluted earnings per share were $0.56 for the three months ended September 30, 2023, compared to $0.52 for the three months ended September 30, 2022.

Net income was $21.0 million for the nine months ended September 30, 2023, compared to $16.1 million for the nine months ended September 30, 2022, an increase of $4.9 million or 30.6%.

The increase was primarily the result of a $4.1 million increase in net interest income, a $4.1 million decrease in provision for credit losses, reflecting a $311,000 reversal of the allowance for credit losses for the nine months ended September 30, 2023, compared to a $3.8 million provision for credit losses for the same period in 2022, partially offset by a $891,000 decrease in noninterest income and a $2.4 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 62.42% and 63.07% for the three and nine months ended September 30, 2023, compared to 59.38% and 65.78% for the three and nine months ended September 30, 2022, respectively.

The higher efficiency ratio during the three months ended September 30, 2023 compared to the same period in 2022 was due to lower noninterest income and higher noninterest expenses.

The improvement in the efficiency ratio during the nine months ended September 30, 2023 compared to the same period in 2022 was due to higher revenues, while total noninterest expenses remained relatively unchanged.

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 $3.7 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%.

Interest income for the three months ended September 30, 2023 was $32.8 million, compared to $27.1 million for the three months ended September 30, 2022, an increase of $5.7 million or 21.0%.

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 fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income.

Interest income on loans, including fees, increased $3.2 million, or 13.4%, to $27.2 million for the three months ended September 30, 2023, compared to $24.0 million for the three months ended September 30, 2022, due to a 69 basis point increase in the average loan yield, partially offset by a $24.2 million decrease 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 September 30, 2023, was 5.42%, compared to 4.73% for the three months ended September 30, 2022.

Interest income on loans for three months ended September 30, 2023 and 2022 included $372,000 and $63,000, 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 $419,000 and $480,000 at September 30, 2023 and September 30, 2022, respectively.

Interest income on loans for three months ended September 30, 2023, included minimal fees earned related to PPP loans, compared to $161,000 in fees earned related to PPP loans during the three months ended September 30, 2022.

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

Interest income on loans for the three months ended September 30, 2023 and 2022, included $142,000 and $195,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $149,000, or 9.6%, to $1.7 million for the three months ended September 30, 2023, compared to $1.6 million for the three months ended September 30, 2022, due to a 74 basis point increase in the average yield earned on investment securities, partially offset by a $20.1 million decrease in the average balance of investment securities.

The average yield on investment securities was 4.01% for the three months ended September 30, 2023 compared to 3.27% for the three months ended September 30, 2022.

Interest income on federal funds sold and interest-bearing balances in banks increased $2.2 million, or 173.8%, to $3.5 million for the three months ended September 30, 2023, compared to $1.3 million for the three months ended September 30, 2022.

The increase was due to a 320 basis point increase in the average yield earned on federal funds sold and, to a lesser extent, a $25.0 million increase 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 5.38% for the three months ended September 30, 2023 compared to 2.18% for the three months ended September 30, 2022.

In addition, during the third quarter of 2023, we received $376,000 in cash dividends on our FRB and FHLB stock, up 31.9% from $285,000 in the third quarter of 2022.

Interest income for the nine months ended September 30, 2023 was $94.1 million, compared to $77.6 million for the nine months ended September 30, 2022, an increase of $10.2 million or 14.6%.

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 federal 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 $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 income on loans, including fees, increased $10.2 million, or 14.6%, to $80.2 million for the nine months ended September 30, 2023, compared to $69.9 million for the nine months ended September 30, 2022.

The increase was primarily due to a 57 basis point increase in the average loan yield and, to a lesser extent, a $46.2 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 nine months ended September 30, 2023, was 5.31%, compared to 4.74% for the same period in 2022.

Interest income on loans for nine months ended September 30, 2023 and 2022 included $474,000 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 nine months ended September 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 nine months ended September 30, 2023 and 2022, included $458,000 and $916,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $554,000, or 12.4%, to $5.0 million for the nine months ended September 30, 2023, compared to $4.5 million for the nine months ended September 30, 2022, due to a 76 basis point increase in the average yield earned on investment securities, partially offset by a $17.0 million decrease in the average

balance of investment securities.

The average yield on investment securities available-for-sale was 3.97% for the nine months ended September 30, 2023 compared to 3.21% for the nine months ended September 30, 2022.

Interest income on federal funds sold and interest-bearing balances in banks increased $5.6 million, or 243.5%, to $7.9 million for the nine months ended September 30, 2023, compared to $2.3 million for the nine months ended September 30, 2022, due to a 418 basis point increase in the average yield earned on federal funds sold and interest-bearing balances in banks, partially offset by a $129.8 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 5.09% for the nine months ended September 30, 2023 compared to 0.91% for the nine months ended September 30, 2022.

Interest expense.

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.

Interest expense increased $5.6 million, or 232.5%, to $8.0 million for the three months ended September 30, 2023, compared to $2.4 million for the three months ended September 30, 2022, reflecting higher funding costs primarily related to increased market rates of interest payable on our deposits.

The average rate paid on interest-bearing liabilities for three months ended September 30, 2023 was 2.04% compared to 0.66% for three months ended September 30, 2022.

Total average interest-bearing liabilities increased $116.0 million, or 8.05%, to $1.6 billion for the three months ended September 30, 2023, compared to $1.4 billion for the three months ended September 30, 2022.

Interest expense on deposits increased $5.5 million, or 398.1%, to $6.9 million for the three months ended September 30, 2023 compared to $1.4 million for the three months ended September 30, 2022.

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

The average rate paid on interest bearing deposits increased by 145 basis points to 1.85% for the three months ended September 30, 2023, compared to 0.40% for the three months ended September 30, 2022.

The overall average cost of deposits for the three months ended September 30, 2023 and 2022 was 1.27% and 0.25%, respectively.

The average balance of interest-bearing deposits totaled $1.5 billion for the three months ended September 30, 2023, compared to $1.4 billion for the three months ended September 30, 2022.

The increase primarily was due to an increase in the average balance of time deposits, partially offset by slight decreases in the average balances of savings, NOW and money market accounts.

The average balance of noninterest bearing deposits decreased $127.1 million, or 15.8%, to $674.8 million for the three months ended September 30, 2023 compared to $801.9 million for the same period in 2022.

Interest expense on borrowings increased $88,000, or 8.44%, to $1.1 million for the three months ended September 30, 2023, compared to $1.0 million for the three months ended September 30, 2022, due to a 401 basis point increase in the average rate paid on junior subordinated debentures.

The average cost of total borrowings increased to 6.09% for the three months ended September 30, 2023, compared to 5.64% for the three months ended September 30, 2022.

The average balance of borrowings increased $341,000 to $72.4 million during the three months ended September 30, 2023, compared to $72.1 million during the three months ended September 30, 2022.

Interest expense increased $12.5 million, or 170.6%, to $19.8 million for the nine months ended September 30, 2023 compared to $7.3 million for the nine months ended September 30, 2022, reflecting higher funding costs related to increased rates of interest payable on our deposits and junior subordinated debentures.

The average rate paid on interest bearing liabilities for nine months ended September 30, 2023 was 1.75% compared to 0.64% for nine months ended September 30, 2022.

Total average interest-bearing liabilities decreased $14.6 million, or 0.96%, to $1.5 billion for the nine months ended September 30, 2023, compared to $1.5 billion for the nine months ended September 30, 2022.

Interest expense on deposits increased $12.2 million, or 282.6%, to $16.5 million for the nine months ended September 30, 2023 compared to $4.3 million for the nine months ended September 30, 2022.

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

The average rate paid on interest bearing deposits increased by 113 basis points to 1.53% for the nine months ended September 30, 2023, compared to 0.40% for the nine months ended September 30, 2022.

The overall average cost of deposits for the nine months ended September 30, 2023 and 2022 was 1.03% and 0.26%, respectively.

The average balance of interest-bearing deposits totaled $1.4 billion for the nine months ended September 30, 2023, relatively unchanged compared to 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 time deposits.

The average balance of noninterest bearing deposits decreased $85.4 million, or 10.9%, to $697.9 million for the nine months ended September 30, 2023 compared to $783.3 million for the same period in 2022.

Interest expense on borrowings increased $303,000, or 95.3%, to $3.3 million for the nine months ended September 30, 2023, compared to $3.0 million for the nine months ended September 30, 2022, due to a 472 basis point increase in the average rate paid on junior subordinated debentures.

The average cost of total borrowings increased to 6.10% for the nine months ended September 30, 2023, compared to 5.58% for the nine months ended September 30, 2022.

The average balance of borrowings increased $518,000 to $72.6 million during the nine months ended September 30, 2023, compared to $72.0 million during the nine months ended September 30, 2022.

Net interest income and net interest margin.

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.

Net interest income increased $84,000, or 0.3%, to $24.8 million for the three months ended September 30, 2023, compared to $24.7 million for the three months ended September 30, 2022.

The increase in net interest income primarily was due to increases in interest income on loans, federal funds sold and interest-bearing balances in banks and, to a lesser extent, investment securities, including dividends on Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stock, partially offset by higher funding costs related to our deposits and junior subordinated debentures due to higher market rates.

The average yield (annualized) on interest earning assets for the three months ended September 30, 2023 increased to 5.34%, a 96 basis point increase from 4.38% for the three months ended September 30, 2022, while the average cost of interest bearing liabilities was 2.04% and 0.66% for the three months ended September 30, 2023 and 2022, respectively.

The average yield (annualized) on interest earning assets for the nine months ended September 30, 2023 increased 109 basis points to 5.21%, from 4.12% for the nine months ended September 30, 2022, while the average cost of interest bearing liabilities for the nine months ended September 30, 2023 increased to 1.75%, or 111 basis points, from 0.64% for the nine months ended September 30, 2022.

The increases in average yields on interest-earning assets and average rates paid on interest-bearing liabilities during the three and nine months ended September 30, 2023, compare to the same periods in 2022, were due to increases in the target range for federal funds since March 2022, including a 100 basis point increase during the first nine months of 2023, to a range of 5.25% to 5.50%.

The annualized net interest margin for the three and nine months ended September 30, 2023 was 4.03% and 4.12%, compared to 3.99% and 3.73% for the three and nine months ended September 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 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 average yield on PPP loans for the three and nine months ended September 30, 2023 was 1.00% and 3.11%, including the recognition of deferred fees, resulting in a negative impact of eight basis points and five basis points to the net interest margin during the three and nine months ended September 30 2023, respectively, compared to an average yield of 2.28% and 3.93%, including the recognition of deferred fees, resulting in a positive impact of three basis points and 10 basis points during three and nine months ended September 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 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.

Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased net interest margin eight basis points during the three months ended September 30, 2023 and increased net interest margin by four basis points during the nine months ended September 30, 2023 compared to one and eight basis points during the three and nine months ended September 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 June 30,

Three months ended September 30,

(Dollars in thousands)

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Junior subordinated debentures, net

Other borrowings

Total interest bearing liabilities

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

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

2023 compared to 2022

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Provision for credit losses.

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.

We recorded a $674,000 provision for credit losses and a $311,000 reversal of the allowance for credit losses for the three and nine months ended September 30, 2023, compared to a $1.2 million and a $3.8 million provision for loan losses for the three and nine months ended September 30, 2022, respectively.

The provision for credit losses for loans in the third quarter of 2023 was primarily due to $1.2 million increase in reserves for individually evaluated loans, which included the loan to the Trust discussed above which was placed on nonaccrual during the quarter, and an increase in qualitative reserves, partially offset by 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 $24,000 in net charge-offs during the third quarter of 2023.

The reversal of the allowance for credit losses primarily resulted from $399,000 in net charge-offs for the nine months ended September 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, partially offset by an overall increase in reserves for individually evaluated loans, and increase in qualitative reserves.

Noninterest income.

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.

Noninterest income decreased $728,000, or 30.6%, to $1.7 million for the three months ended September 30, 2023 compared to $2.4 million for the three months ended September 30, 2022.

The decrease was primarily due to a $1.3 million decrease in gain on sale of loans due to a decrease in the volume of and premiums observed on SBA loans (guaranteed portion) sold and a $57,000 decrease in loan servicing fees and other fees, partially offset by a $288,000 increase in income from our investment in a Small Business Investment Company (“SBIC”) fund, a $156,000 increase in service charges and other fees, a $88,000 decrease in loss on equity securities and a $47,000 increase in other income and fees.

Noninterest income decreased $891,000, or 17.2%, to $4.3 million for the nine months ended September 30, 2023 compared to $5.2 million for the nine months ended September 30, 2022.

The decrease was primarily due to a $1.7 million

bargain purchase gain in 2022 with no similar activity in 2023, a $2.2 million 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 $236,000 decrease in loan servicing fees and other fees, partially offset by a $1.9 million improvement in fair value adjustments on equity securities, a $784,000 increase in income on investment in a Small Business Investment Company (“SBIC”) fund and a $575,000 increase in service charges and other fees.

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

Three months ended June 30,

Three months ended September 30,

2022 (As Restated)

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Total noninterest income

Six months ended June 30,

Nine months ended September 30,

2022 (As Restated)

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Noninterest expense.

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.

Noninterest expense increased $423,000, or 2.6%, to $16.5 million for the three months ended September 30, 2023 compared to $16.1 million for the three months ended September 30, 2022.

The increase primarily was due to a $212,000 increase in data processing expense due to annual price increases that became effective in the third quarter of 2023 and increased data project expense, a $120,000 increase in salaries and employee benefits expense due to wage increases and an increase in full-time equivalent employees, and a $90,000 increase in occupancy and equipment expense due to higher depreciation and property maintenance expense.

Noninterest expense was $49.6 million for both the nine months ended September 30, 2023 and the nine months ended September 30, 2022.

The changes in noninterest expense included a $1.4 million decrease in other noninterest expenses due primarily to $3.1 million in total PEB acquisition-related expenses in 2022 with no similar expenses in 2023, a $647,000 decrease in data processing expense due to $1.1 million in PEB acquisition-related expenses incurred in 2022 with none in 2023 and vendor data processing invoice credits in 2023, partially offset by increased data processing volume and prices, and data processing project expense in 2023 and a $254,000 decrease in occupancy and equipment expense due to $375,000 of PEB acquisition-related expenses incurred in 2022 partially offset by increased depreciation and property maintenance expense, offset by a $2.3 million increase in salaries and employee benefits expense due to wage increase and an increase in full-time equivalent employees.

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

Three months ended June 30,

Three months ended September 30,

(Dollars in thousands)

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Total noninterest expense

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

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Income taxes.

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.

The provision for income taxes decreased $207,000, or 7.3%, to $2.6 million the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022 due to lower taxable income.

For the nine months ended September 30, 2022, the provision for income taxes increased $2.4 million, or 41.6%, to $8.3 million, compared to $5.9 million for the nine months ended September 30, 2022 due to higher taxable income.

The Company’s effective tax rate was 28.5% and 28.4% for three and nine months ended September 30, 2023 compared to 29.0% and 28.3% for the three and nine months ended September 30, 2022.

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

The effective tax rate during the nine months ended September 30, 2022, was positively impacted by the non-taxable bargain purchase gain in the first quarter of 2022.

Liquidity and Capital Resources

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

During the three months ended June 30, 2023, the Bank sold $6.9 million in loans and loan participation interests and received $65.1 million in principal loan repayments.

During the three months ended September 30, 2023, the Bank sold $300,000 in loans and loan participation interests and received $58.6 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 $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.

Deposits increased $61.1 million to $2.2 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities, increased $116.5 million to $449.5 million at September 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 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.

Securities purchased during the three and nine months ended September 30, 2023, totaled $3.9 million and $6.4 million, respectively, and securities repayments, maturities and sales in those periods were $3.4 million and $6.3 million, respectively.

Certificates of deposit scheduled to mature in one year or less at September 30, 2023, totaled $349.9 million.

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

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

As of 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 June 30, 2023 and December 31, 2022.

As of September 30, 2023, the Bank had an available borrowing capacity of $597.6 million with the FHLB of San Francisco, with no borrowings outstanding at that date or at December 31, 2022.

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 September 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 $87.1 million, including $3.4 million of undisbursed construction and development loan commitments, at June 30, 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 $79.6 million, including $1.5 million of undisbursed construction and development loan commitments, at September 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 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.

Net cash provided by operating activities for the nine months ended September 30, 2023 was $22.4 million, compared to $23.8 million provided by operating activities for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, net cash provided by investing activities was $52.9 million, which consisted primarily of net change in loans receivable, compared to $82.6 million of cash provided by investing activities for the nine months ended September 30, 2022.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $49.8 million, which was comprised primarily of net change in deposits, compared to $261.4 million used in financing activities during the nine months ended September 30, 2022.

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

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

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

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

At September 30, 2023, BayCom Corp had liquid assets of $13.9 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 junior subordinated debentures and subordinated notes.

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

On 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.

On August 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 October 13, 2023 to shareholders of record as of the close of business on September 15, 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 $1.2 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.

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.

In August 2023, our Board of Directors announced a new stock repurchase program, to commence following completion of the existing stock repurchase program (which was completed during the quarter ended September 30, 2023), for the repurchase of up to 588,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one year period.

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

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

factors deemed appropriate.

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.

As of September 30, 2023, there remained 482,311 shares available for repurchase under the Company’s existing stock repurchase program.

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

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

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

Regulatory Capital

The Bank, as a state-chartered, federally insured commercial bank, and member of the Board of Governors of the Federal Reserve System, is subject to capital requirements established by the Federal Reserve.

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 Federal Reserve requires the Bank to maintain levels of capital adequacy that generally parallel 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 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 June 30, 2023 and December 31, 2022, the Bank was considered Well Capitalized.

Based on capital levels at September 30, 2023 and December 31, 2022, the Bank was considered Well Capitalized at both of those dates.

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

At June 30, 2023

At September 30, 2023

At December 31, 2022

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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 June 30, 2023, the Company would have exceeded all regulatory capital requirements.

At September 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 bank(s) to be Well Capitalized under the prompt corrective action regulations.

If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2023, the Company would have exceeded all regulatory capital requirements.

For additional information, see “Item 1.

2 unchanged sentences

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