What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-10 · 271 added, 179 removed, 408 unchanged (52% 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, Nevada, 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, as well as supply chain disruptions;

● 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;

● adverse impacts to economic conditions in general and in California, Nevada, Colorado, New Mexico and Washington specifically, as well as other markets where the Company has lending relationships;

● effects of employment levels, labor shortages, inflation, a recession, or slowed economic growth;

● changes in the interest rate environment, including past increases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and the duration of such increased levels, 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 inflation and the Federal Reserve’s monetary policy decisions;

● the effects of any federal government shutdown;

● 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;

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

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

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

● unexpected outflows of uninsured deposits, which may require us to sell investment securities at a loss;

● our net interest margin and funding sources;

● fluctuations in the demand for loans and the number of unsold homes, land and other properties;

● fluctuations in the demand for loans, unsold homes, land and other properties;

● fluctuations in real estate values in our market areas;

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● challenges arising from attempts to expand into new geographic markets, products, or services;

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

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

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

● goodwill impairment;

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

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

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

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

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

● our ability to attract and retain deposits;

● our ability to control operating costs and expenses;

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

● use of estimates in determining the fair value of certain of our assets and liabilities, which may prove incorrect;

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

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

● staffing fluctuations in response to product demand or corporate implementation strategies;

● the effectiveness of our risk management framework;

● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;

● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on those of our third-party vendors;

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

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

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

● our ability to implement our business strategies, including expectations regarding key growth initiatives and strategic priorities;

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

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

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

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

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

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

● environmental, social and governance goals;

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

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

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We do not undertake and specifically disclaim any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

These risks could cause our actual results for the remainder of 2024 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.

These risks could cause our actual results for the remainder of 2024 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 results of operations as well as our stock price performance.

Executive Overview

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BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 35 full-service branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado.

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

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

The Company’s business activities generally are

limited to passive investment activities and oversight of its investment in the Bank.

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

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

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

At March 31, 2024, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $1.9 billion in total loans, $2.1 billion in total deposits and $314.2 million in shareholders’ equity.

At June 30, 2024, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $1.9 billion in total loans, $2.2 billion in total deposits and $315.3 million in shareholders’ equity.

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

At March 31, 2024, our $1.9 billion total loan portfolio included $370.8 million, or 19.7 %, 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 80.3%, consisted of loans we originated.

At June 30, 2024, our $1.9 billion total loan portfolio included $343.5 million, or 18.4 %, 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 81.6%, 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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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 January 1, 2023 through the quarter ended March 31, 2024, 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 100 basis points to a

range of 5.25% to 5.50%.

The increase in the average yield on interest-earning assets during the three months ended March 31, 2024 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.

Since March 2022, through July 2023, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points to a range of 5.25% to 5.50%, where it remained as of June 30, 2024.

The increase in the average yield on interest-earning assets during the six months ended June 30, 2024 reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher.

Noninterest income.

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and (iv) other noninterest income.

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

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

Provision for credit losses.

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Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry.

To prepare financial statements and interim

financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information.

To prepare financial statements and interim financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information.

These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes;

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These critical accounting policies and estimates include determining the allowance for credit losses and related provision.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments.

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K.

For a detailed discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2023 Form 10-K filed with the SEC on March 15, 2024.

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

Comparison of Financial Condition at June 30, 2024 and December 31, 2023

Total assets.

Total assets increased $8.7 million, or 0.3%, to $2.6 billion at March 31, 2024, from December 31, 2023.

Total assets increased $42.0 million, or 1.6%, to $2.6 billion at June 30, 2024, from December 31, 2023.

The increase primarily was due to cash and cash equivalents increasing $83.7 million or 27.2% and investment securities available-for-sale increasing $20.5 million or 12.6%, partially offset by decreases in loans receivable, net of $63.7 million or 3.3%.

In addition, interest receivable and other assets decreased $848,000 or 1.8%, equity securities increased $573,000 or 4.6%, and loans held for sale increased $1.7 million.

Cash and cash equivalents.

Cash and cash equivalents increased $40.8 million, or 13.3%, to $348.3 million, at March 31, 2024, from $307.5 million at December 31, 2023.

The increase primarily was due to a $38.3 million increase in federal funds sold and interest bearing balances in banks due to repayment on loans coupled with decline in loan demand.

Cash and cash equivalents increased $83.7 million, or 27.2%, to $391.2 million, at June 30, 2024, from $307.5 million at December 31, 2023.

The increase primarily was due to a $78.3 million increase in federal funds sold and interest bearing balances in banks due to repayment on loans coupled with a decline in loan demand.

Investment securities available-for-sale .

Investment securities available-for-sale increased $4.8 million, or 2.9%, to $167.9 million at March 31, 2024 from $163.2 million at December 31, 2024.

The increase primarily was due to the purchase of $7.1 million of investment securities and unrealized gains on investment securities available-for-sa le of $696,000 as a result of fair value adjustments, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured of $3.0 million during the three months ended March 31, 2024.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as of March 31, 2024.

Investment securities available-for-sale increased $20.5 million, or 12.6%, to $183.6 million at June 30, 2024 from $163.2 million at December 31, 2024.

The increase primarily was due to the purchase of $26.6 million of investment securities and unrealized gains on investment securities available-for-sale of $1.4 million as a result of fair value adjustments, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured of $7.4 million during the six months ended June 30, 2024.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as of June 30, 2024.

Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

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Equity securities.

Equity securities increased $573,000, or 0.6%, to $13.2 million at March 31, 2024 from $12.6 million at December 31, 2023, primarily due to a $573,000 mark-to-market upward adjustment recorded during the three months ended March 31, 2024.

Equity securities increased $252,000, or 2.0%, to $12.8 million at June 30, 2024 from $12.6 million at December 31, 2023, primarily due to a mark-to-market upward adjustment recorded during the six months ended June 30, 2024.

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 $38.0 million, or 2.0%, to $1.9 billion at March 31, 2024 from December 31, 2023.

The decrease was due to $72.4 million of loan repayments, partially offset by $32.0 million of new loan originations.

Total loans decreased $63.6 million, or 3.3% to $1.8 billion at June 30, 2024 from $1.9 billion at December 31, 2023.

The decrease was due to $136.8 million of loan repayments and $4.7 million in loans sold, partially offset by $50.0 million of new loan originations and $27.6 million of loan purchases.

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

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Allowance for credit losses

(1) Includes $2.9 million and $3.8 million of Paycheck Protection Program (“PPP”) loans as of March 31, 2024 and December 31, 2023, respectively.

The following table shows as of March 31, 2024, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:

(1) Includes $2.3 million and $3.8 million of Paycheck Protection Program (“PPP”) loans as of June 30, 2024 and December 31, 2023, respectively.

The following table shows as of June 30, 2024, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:

San Francisco Bay

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(Dollars in thousands)

March 31, 2024

June 30, 2024

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 $94.7 million and loans located in Los Angeles and Orange counties totaling $488.9 million at March 31, 2024.

(2) Includes loans located in Sacramento and Northern California counties totaling $94.0 million and loans located in Los Angeles and Orange counties totaling $467.3 million at June 30, 2024.

At December 31, 2023, loans in Sacramento and Northern California counties and loans in Los Angeles and Orange counties totaled $95.6 million and $506.6 million, respectively.

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

At March 31, 2024, loans in Colorado, New Mexico and Washington totaled $80.4 million, $47.9 million and $102.6 million, respectively.

At June 30, 2024, loans in Colorado, New Mexico and Washington totaled $110.4 million, $47.3 million and $92.3 million, respectively.

At December 31, 2023, loans in Colorado, New Mexico and Washington totaled $87.1 million, $43.9 million and $103.8 million, respectively.

Acquired loans.

As of March 31, 2024, acquired non-PCD loans totaled $173.3 million with a remaining net premium of $2.1 million, compared to $187.7 million with a remaining net premium of $2.1 million as of December 31, 2023.

As of June 30, 2024, acquired non-PCD loans totaled $159.5 million with a remaining net premium of $2.2 million, compared to $187.7 million with a remaining net premium of $2.1 million as of December 31, 2023.

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

As of March 31, 2024 acquired PCD loans totaled $27.1 million with a remaining net non-credit discount of $1.7 million, compared to $27.5 million with a remaining net non-credit discount of $1.8 million as of December 31, 2023.

As of June 30, 2024 acquired PCD loans totaled $27.1 million with a remaining net non-credit discount of $1.7 million, compared to $27.5 million with a remaining net non-credit discount of $1.8 million as of December 31, 2023.

Nonperforming assets and loans.

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

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

There were no accruing loans 90 days or more past due or other real estate owned (“OREO”) at both March 31, 2024 and December 31, 2023.

Nonperforming loans, consisting solely of non-accrual loans, totaled $16.5 million, or 0.87% of total loans, at March 31, 2024, compared to $13.0 million, or 0.67% of total loans, at December 31, 2023.

The increase in nonperforming loans was primarily due to six new loans placed on non-accrual during the current quarter totaling $7.3 million, partially offset by partial charge-offs of two non-accrual loans totaling $2.9 million, charge-offs of five non-accrual loans totaling $435,000 and, to a lesser extent, pay-offs of five non-accrual loans totaling $305,000.

At March 31, 2024, nonperforming loans totaling $2.2 million were guaranteed by governmental agencies, compared to $740,000 at December 31, 2023.

March 31, 2024 and December 31, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.

At March 31, 2024 and December 31, 2023, nonaccrual loans included $4.0 million and $927,000 of loans 30-89 days past due, and $1.1 million and $2.1 million of loans less than 30 days past due, respectively.

At March 31, 2024, the $1.1 million of nonaccrual loans less than 30 days past due was comprised of 14 loans, all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

Nonperforming assets generally consists of nonperforming loans and other real estate owned (“OREO”).

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

There were no accruing loans 90 days or more past due or other real estate owned (“OREO”) at both June 30, 2024 and December 31, 2023.

Nonperforming loans, consisting solely of nonaccrual loans, totaled $16.1 million, or 0.87% of total loans, at June 30, 2024, compared to $13.0 million, or 0.67% of total loans, at December 31, 2023.

The increase in nonperforming loans was primarily due to the placement of six new loans on nonaccrual totaling $7.3 million, partially offset by partial charge-offs of two nonaccrual loans totaling $2.9 million, charge-offs of five nonaccrual loans totaling $435,000 and, to a lesser extent, pay-offs of five nonaccrual loans totaling $305,000, all of which occurred during the first quarter of 2024.

At June 30, 2024, nonperforming loans totaling $2.1 million were guaranteed by governmental agencies, compared to $740,000 at December 31, 2023.

At June 30, 2024 and December 31, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.

At June 30, 2024 and December 31, 2023, nonaccrual loans included $3.2 million and $927,000 of loans 30-89 days past due, and $6.3 million and $2.1 million of loans less than 30 days past due, respectively.

At June 30, 2024, the $6.3 million of nonaccrual loans less than 30 days past due was comprised of 19 loans, all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

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

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

A nonaccrual loan is restored to an accrual basis when principal and interest payments are paid current, and full payment of principal and interest is probable.

A nonaccrual loan is restored to an accrual basis when principal and interest payments are brought current, and full payment of principal and interest is probable.

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

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

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

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

Loan modifications to borrowers experiencing financial difficulty as of March 31, 2024 totaled $3.0 million, of which none were accruing and performing according to their modified terms, compared to $4.3 million, of which none were accruing and performing according to their modified terms, at December 31, 2023.

Upon the Company’s subsequent determination that a modified loan (or a portion thereof) is uncollectible, the loan (or portion thereof) is charged off.

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, 2024 totaled $2.9 million, of which none were accruing and performing according to their modified terms, compared to $4.3 million, of which none were accruing and performing according to their modified terms, at December 31, 2023.

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 $42,000 and $1.3 million at March 31, 2024 and December 31, 2023, respectively.

The related allowance for credit losses on individually evaluated modified loans totaled $27,000 and $1.3 million at June 30, 2024 and December 31, 2023, respectively.

This change in the ACL was due to one full charge-off and one partial charge-off totaling $1.3 million during the first quarter of 2024, all of which was specifically reserved for at December 31, 2023.

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

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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 $483,000 and $235,000 for the three months ended March 31, 2024 and 2023, respectively, none of which was included in interest income.

Interest income recognized on nonaccrual loans was approximately $7,200 and $65,000 for the three months ended March 31, 2024 and 2023, respectively.

Interest foregone on nonaccrual loans was approximately $226,000 and $709,000 for the three and six months ended June 30, 2024 compared to $185,000 and $631,000 for the three and six months ended June 30, 2023.

Interest income recognized on nonaccrual loans was approximately $79,000 and $86,000 for the three and six months ended June 30, 2024 and $16,000 and $81,000 for the three and six months ended June 30, 2023, respectively.

Allowance for credit losses for loans.

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The computation includes elements of judgment and high levels of subjectivity.

At March 31, 2024, the Company’s allowance for credit losses for loans was $18.9 million, or 1.00% of total loans, compared to $22.0 million, or 1.14% of total loans, at December 31, 2023.

Based on the current conditions of the loan portfolio, management believes that the $18.9 million allowance for credit losses at March 31, 2024 is adequate to absorb expected credit losses inherent in the Company’s loan portfolio.

At June 30, 2024, the Company’s allowance for credit losses for loans was $19.0 million, or 1.02% of total loans, compared to $22.0 million, or 1.14% of total loans, at December 31, 2023.

Management currently believes that the $19.0

million allowance for credit losses at June 30, 2024 is adequate to absorb expected credit losses inherent in the Company’s loan portfolio.

No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

We recorded net charge-offs of $3.4 million and $315,000 for the three months ended March 31, 2024 and 2023, respectively.

The calculation of the allowance for credit losses for loans at March 31, 2024 and December 31, 2023, excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA.

The increase in activity in net charge-offs during the first quarter of 2024 involved partial charge-offs of two non-accrual loans totaling $2.9 million, as well as complete write-offs of five non-accrual loans totaling $435,000.

At December 31, 2023, $3.2 million of the nonaccrual loan charge-offs were specifically reserved for.

These actions were taken due to collateral shortfalls deemed uncollectable.

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

We recorded net charge-offs of $76,000 and $3.5 million for the three and six months ended June 30, 2024, compared to net charge-offs of $60,000 and $375,000 for the three and six months ended June 30, 2023, respectively.

Net charge-offs during the first six months of 2024 consisted primarily of charge-offs of six nonaccrual loans totaling $595,000 and partial charge-offs of two nonaccrual loans totaling $2.9 million, of which $3.2 million of were specifically reserved for, partially offset by the recovery of $97,000 on one nonaccrual loan.

These charge-offs were due to collateral shortfall amounts being deemed uncollectable.

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

Three months ended March 31,

At and for the six months ended June 30,

(Dollars in thousands)

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Commercial estate:

Net charge-offs

Net charge-offs/(recoveries)

Average loans outstanding

Net charge-offs

Net (recoveries)/charge-offs

Average loans outstanding

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Total average loans outstanding

As of March 31, 2024, the Company individually evaluated $20.2 million in loans, inclusive of $16.5 million of nonperforming loans.

Of these individually evaluated loans, $6.8 million had a specific allowance of $1.4 million as of March 31, 2024.

As of June 30, 2024, the Company individually evaluated $21.9 million in loans, inclusive of the $16.1 million of nonperforming loans as of that date.

Of these individually evaluated loans, $7.4 million had a specific allowance of $1.5 million as of June 30, 2024.

As of December 31, 2023, the Company individually evaluated $13.0 million in loans, all of which were on nonaccrual status.

Of these individually evaluated loans, $9.7 million had a specific allowance of $4.4 million as of December 31, 2023.

Management considers the allowance for credit losses for loans at March 31, 2024 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio.

Management considers the allowance for credit losses for loans at June 30, 2024 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 due to employment levels, labor shortages, the effects of inflation, a potential recession, slowed economic growth or otherwise, 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.

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 their 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 generally consist of core deposits from the communities served by our branch and office locations.

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

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

Total deposits increased $10.2 million, or 0.5%, to $2.1 billion at March 31, 2024 from December 31, 2023.

At March 31, 2024, noninterest bearing demand deposits totaled $630.0 million, or 29.4% of total deposits, compared to $646.3 million, or 30.3% of total deposits, at December 31, 2023 .

At March 31, 2023, uninsured deposits totaled $949.3 million, or 44.3% of total deposits, compared to $969.2 million, or 45.5% of total deposits at December 31, 2023.

Estimated uninsured deposits, excluding collateralized public deposits and affiliate deposits, were approximately 41.4% and 42.1% of total deposits at March 31, 2024 and December 31, 2023, respectively.

Total deposits increased $42.3 million, or 2.0%, to $2.2 billion at June 30, 2024 from $2.1 billion at December 31, 2023.

At June 30, 2024, noninterest bearing demand deposits totaled $618.6 million, or 28.4% of total deposits, compared to $646.3 million, or 30.3% of total deposits, at December 31, 2023 .

At June 30, 2024, uninsured deposits totaled $979.9 million, or 45.1% of total deposits, compared to $969.2 million, or 45.5% of total deposits at December 31, 2023.

Estimated uninsured deposits, excluding collateralized public deposits and affiliate deposits, were approximately 43.9% and 42.1% of total deposits at June 30, 2024 and December 31, 2023, respectively.

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

1 unchanged sentence

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

At March 31, 2024, our average deposit account size (excluding public funds), calculated by dividing period-end deposits by the population of accounts with balances, was approximately $58,000.

At June 30, 2024, 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 17 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our top ten depositors.

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

At March 31, 2024 and December 31, 2023, we had the ability to borrow up to $508.2 million and $576.9 million, respectively, from the FHLB of San Francisco.

At both March 31, 2024 and December 31, 2023, there were no FHLB advances outstanding.

At June 30, 2024 and December 31, 2023, we had the ability to borrow up to $514.1 million and $576.9 million, respectively, from the FHLB of San Francisco.

At both June 30, 2024 and December 31, 2023, there were no FHLB advances outstanding.

During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans.

At March 31, 2024, we had the ability to borrow up to $46.7 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.

At June 30, 2024, we had the ability to borrow up to $43.8 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.

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

At both March 31, 2024 and December 31, 2023, we had a total of $65.0 million in federal funds line available from third-party financial institutions and no balances outstanding at these dates.

At both March 31, 2024 and December 31, 2023, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, assumed in connection with its previous acquisitions totaling $8.6 million.

At March 31, 2024, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.9 million at December 31, 2023.

At both June 30, 2024 and December 31, 2023, we had a total of $65.0 million in federal funds lines available from third-party financial institutions and no balances outstanding at these dates.

At both June 30, 2024 and December 31, 2023, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, assumed in connection with its previous acquisitions totaling $8.6 million.

At June 30, 2024, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.7 million compared to $63.9 million at December 31, 2023.

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

At both March 31, 2024 and December 31, 2023, the FHLB of San Francisco had issued letters of credit on behalf of the Bank totaling $40.6 million, as collateral for local agency deposits.

At both June 30, 2024 and December 31, 2023, the FHLB of San Francisco had issued letters of credit on behalf of the Bank totaling $40.6 million, as collateral for local agency deposits.

Shareholders’ equity.

Shareholders’ equity increased $1.4 million, to $314.2 million at March 31, 2024 from $312.9 million at December 31, 2023.

The increase in shareholders’ equity primarily was due to $5.9 million of net income earned and a $484,000 decrease in accumulated other comprehensive loss, net of taxes, partially offset by the repurchase of $4.0 million of Company common stock and cash dividends paid or accrued payable totaling $1.2 million, during the first three months of 2024.

During the three months ended March 31, 2024, the Company repurchased a total of 198,120 shares of its common stock at a total cost of $4.0 million, or $20.20 per share, leaving 161,632 shares available for future purchases under the current stock repurchase plan.

Shareholders’ equity increased $2.4 million, to $315.3 million at June 30, 2024 from $312.9 million at December 31, 2023.

The increase in shareholders’ equity primarily was due to $11.5 million of net income earned and a $990,000 decrease in accumulated other comprehensive loss, net of taxes, partially offset by the repurchase of $8.1 million of Company common stock and cash dividend s paid or accrued payable totaling $2.3 million, during the first six months of 2024.

During the six months ended June 30, 2024, the Company repurchased a total of 402,914 shares of its common stock at a total cost of $8.1 million, or $20.19 per share, leaving 516,838 shares available for future purchases under the current stock repurchase plan.

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

Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023

Earnings summary.

Net income was $5.9 million for the three months ended March 31, 2024, compared to $7.2 million for the three months ended March 31, 2023, a decrease of $1.3 million or 18.3%.

The decrease was the result of a $2.9 million decrease in net interest income, partially offset by a $501,000 increase in noninterest income, a $458,000 decrease in noninterest expenses, and a $554,000 decrease in provision for income taxes.

Diluted earnings per share were $0.51 for the three months ended March 31, 2024, compared to $0.57 for the three months ended March 31, 2023.

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 65.68% and 61.63% for the three months ended March 31, 2024 and 2023, respectively.

The deterioration in the efficiency ratio during the three months ended March 31, 2024 compared to the same period in 2023 was primarily due to lower overall revenues.

Net income was $5.6 million for the three months ended June 30, 2024, compared to $7.2 million for the three months ended June 30, 2023, a decrease of $1.6 million or 22.3%.

The decrease was the result of a $2.0 million decrease in net interest income and a $1.4 million increase in the provision for credit losses, resulting from a $171,000 provision for credit losses for the current quarter compared to a $1.3 million reversal of credit losses in the same quarter a year ago, partially offset by a $397,000 increase in noninterest income, a $545,000 decrease in noninterest expenses, and a $869,000 decrease in provision for income taxes.

Basic and diluted earnings per share were $0.50 for the three months ended June 30, 2024, compared to $0.59 for the three months ended June 30, 2023.

Net income was $11.5 million for the six months ended June 30, 2024, compared to $14.4 million for the six months ended June 30, 2023, a decrease of $2.9 million or 20.3%.

The decrease was the result of a $4.8 million decrease in net interest income and a $1.4 million increase in the provision for credit losses, resulting from a $423,000 provision for credit losses for the six months ended June 30, 2024 compared to a $985,000 reversal of credit losses in the same period a year ago, partially offset by a $898,000 increase in noninterest income, a $1.0 million decrease in noninterest expense and a $1.4 million decrease in provision for income taxes.

Basic and diluted earnings per share were $1.01 for the six months ended June 30, 2024, compared to $1.16 for the six months ended June 30, 2023.

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 67.34% and 66.49% for the three and six months ended June 30, 2024, compared to 65.27% and 63.40% for the three and six months ended June 30, 2023, respectively.

The deterioration in the efficiency ratio during the three months and six months June 30, 2024 as compared to the same periods in 2023 was primarily due to lower overall revenues, partially offset by lower noninterest expenses.

Interest income.

Interest income for the three months ended March 31, 2024 was $31.7 million, compared to $30.1 million for the three months ended March 31, 2023, an increase of $1.6 million or 5.6%.

Interest income for the three months ended June 30, 2024 was $32.4 million, compared to $31.3 million for the three months ended June 30, 2023, an increase of $1.1 million or 3.7%.

The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, except loans.

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, partially offset by a decrease in the average balance of loans.

Interest income on loans, including fees, decreased $998,000, or 3.8%, to $25.3 million for the three months ended March 31, 2024, compared to $26.3 million for the three months ended March 31, 2023, due a $121.5 million decrease in the average balance of loans, partially offset by an eight basis point increase in the average loan yield.

The average balance of loans was $1.9 billion for the first quarter of 2024, compared to $2.0 billion for the first quarter of 2023.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended March 31, 2024, was 5.32%, compared to 5.24% for the three months ended March 31, 2023.

The increase in the average yield on loans from the first quarter of 2023 was due to the impact of increased rates on variable rate loans as well as new loans being originated at higher market interest rates.

Interest income on loans for three months ended March 31, 2024 and 2023 included $98,000 and $97,000 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 $392,000 and $371,000 at March 31, 2024 and 2023, respectively.

Interest income on loans for the three months ended March 31, 2024 and 2023, included $176,000 and $269,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $316,000, or 19.3%, to $2.0 million for the three months ended March 31, 2024, compared to $1.6 million for the three months ended March 31, 2023, due to a 72 basis point increase in the average yield earned on investment securities, partially offset by a $3.3 million decrease in the average balance of investment securities.

The average yield on investment securities was 4.24% for the three months ended March 31, 2024 compared to 3.52% for the three months ended March 31, 2023.

In addition, during the first quarter of 2024, we received $416,000 in cash dividends on our FRB and FHLB stock, up 25.3% from $332,000 received in the first quarter of 2023.

Interest income on federal funds sold and interest-bearing balances in banks increased $2.3 million, or 125.0%, to $4.1 million for the three months ended March 31, 2024, compared to $1.8 million for the three months ended March 31, 2023.

The increase was due to a 92 basis point increase in the average yield earned on federal funds sold and, to a lesser extent, a $139.3 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 5.48% for the three months ended March 31, 2024 compared to 4.56% for the three months ended March 31, 2023.

Increased yields earned on interest-earning assets, along with an increase in the average balances of investment securities and fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income, partially offset by a decrease in the average balance of loans.

Interest income on loans, including fees, decreased $1.7 million, or 6.2%, to $25.0 million for the three months ended June 30, 2024 from $26.7 million for three months ended June 30, 2023, primarily due to a $168.5 million decrease in the average balance of loans, partially offset by a 13 basis point increase in the average loan yield.

The average balance of loans was $1.9 billion for the second quarter of 2024, compared to $2.0 billion for the second quarter of 2023.

The average yield on loans was 5.41% for the three months ended June 30, 2024, compared to 5.28% for the three months ended June 30, 2023.

The increase in the average yield on loans from the second quarter of 2023 was due to the impact of increased rates on variable rate loans as well as new loans being originated at higher market interest rates.

Interest income on loans for the three months ended June 30, 2024 and 2023 included $124,000 and $5,000 in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts.

The balance of the remaining net discounts on these acquired loans totaled $540,000 and $331,000 at June 30, 2024 and 2023, respectively.

Interest income on loans for the three months ended June 30, 2024 and 2023, included $70,000 and $48,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $488,000, or 28.8%, to $2.2 million for the three months ended June 30, 2024, compared to $1.7 million for the three months ended June 30, 2023, as a result of increases in the average yield and average balance.

The average yield on investment securities increased 51 basis points to 4.50% for the three months ended June 30, 2024, compared to 3.99% for the three months ended June 30, 2023.

The increase in average yield was due to higher market interest rates on newly purchased securities.

The average balance of investment securities totaled $195.1 million for the three months ended June 30, 2024, compared to $170.1 million for the three months ended June 30, 2023.

In addition, during the second quarter of 2024, we received $392,000 in cash dividends on our FRB and FHLB stock up 16.2% from $340,000 received in the second quarter of 2023.

Interest income on federal funds sold and interest-bearing balances in banks increased $2.3 million, or 88.2%, to $4.8 million for the three months ended June 30, 2024, compared to $2.6 million for the three months ended June 30, 2023, as a result of increases in the average yield and average balance.

The average yield increased 33 basis points to 5.47% for the three months ended June 30, 2024, compared to 5.14% for the three months ended June 30, 2023, reflecting higher market rates.

The average balance totaled $354.3 million for the three months ended June 30, 2024, compared to $199.9 million for the three months ended June 30, 2023.

The increase in average balance during the current quarter compared to the same quarter one year ago was due to higher retained cash balances resulting from lower new loan production.

Interest income for the six months ended June 30, 2024 was $64.2 million, compared to $61.3 million for the six months ended June 30, 2023, an increase of $2.8 million or 4.6%.

The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, except loans.

Interest income on loans, including fees, decreased $2.7 million, or 5.0%, to $50.3 million for the six months ended June 30, 2024 from $52.9 million for six months ended June 30, 2023, primarily due to a $144.9 million decrease in the average balance of loans, partially offset by a 10 basis point increase in the average loan yield.

The average balance of loans was $1.9 billion for the six months ended June 30 2024, compared to $2.0 billion for the six months ended June 30, 2023.

The average yield on loans was 5.36% for the six months ended June 30, 2024, compared to 5.26% for the six months ended June 30, 2023.

The increase in the average yield on loans from the same period 2023 was due to the impact of increased rates on variable rate loans as well as new loans being originated at higher market interest rates.

Interest income on loans for the six months ended June 30, 2024 and 2023 included $222,000 and $102,000 in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts.

Interest income on loans for the six months ended June 30, 2024 and 2023, included $246,000 and $317,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities increased $804,000, or 24.1%, to $4.1 million for the six months ended June 30, 2024, compared to $3.3 million for the six months ended June 30, 2023.

The average yield on investment securities increased 43 basis points to 4.37% for the six months ended June 30, 2024, compared to 3.94% for the six months ended June 30, 2023.

The increase in average yield was due to higher market interest rates on newly purchased securities.

The average balance of investment securities totaled $190.4 million for the six months ended June 30, 2024, compared to $170.4 million for the six months ended June 30, 2023.

In addition, during the six months ended June 30, 2024, we received $808,000 in cash dividends on our FRB and FHLB stock, up 20.2% from $672,000 received during the six months ended June 30, 2023.

Interest income on federal funds sold and interest-bearing balances in banks increased $4.5 million, or 103.5%, to $8.9 million for the six months ended June 30, 2024, compared to $4.4 million for the six months ended June 30, 2023, as a result of changes in the average yield and average balance.

The average yield increased 59 basis points to 5.47% for the six months ended June 30, 2024, compared to 4.88% for the six months ended June 30, 2023, reflecting higher market rates.

The average balance totaled $328.2 million for the six months ended June 30, 2024, compared to $181.5 million for the six months ended June 30, 2023.

The increase in average balance during the current year compared to the same period one year ago was due to higher retained cash balances resulting from lower new loan production.

Interest expense.

Interest expense increased $4.5 million, or 94.6%, to $9.3 million for the three months ended March 31, 2024, compared to $4.8 million for the three months ended March 31, 2023, reflecting higher funding costs primarily related to increased market rates of interest payable on money market and time deposits.

The average rate paid on interest-bearing liabilities for three months ended March 31, 2024 was 2.40% compared to 1.35% for three months ended March 31, 2023.

Total average interest-bearing liabilities increased $126.2 million, or 1.05%, to $1.6 billion for the three months ended March 31, 2024, compared to $1.4 billion for the three months ended March 31, 2023.

Interest expense on deposits increased $4.5 million, or 122.4%, to $8.2 million for the three months ended March 31, 2024 compared to $3.7 million for the three months ended March 31, 2023.

Interest expense increased $3.1 million, or 44.9%, to $10.1 million for the three months ended June 30, 2024, compared to $7.0 million for the three months ended June 30, 2023, reflecting higher funding costs primarily related to increased market rates of interest payable on money market and time deposits.

The average rate paid on interest-bearing liabilities for three months ended June 30, 2024 was 2.54%, compared to 1.82% for three months ended June 30, 2023.

Total average interest-bearing liabilities increased $63.9 million, or 0.72%, to $1.6 billion for the three months ended June 30, 2024, compared to $1.5 billion for the three months ended June 30, 2023.

Interest expense on deposits increased $3.1 million, or 53.1%, to $9.0 million for the three months ended June 30, 2024 compared to $5.9 million for the three months ended June 30, 2023.

The increase was driven by higher rates paid on money market accounts and time deposits and, to a lesser extent, an increase in the average balance of time deposits.

Specifically, rates on money market accounts and time deposits increased by 103 basis points and 159 basis points, respectively, during the three months ended March 31, 2024, compared to the same period in 2023.

The average balance of time deposits also increased, rising by $163.5 million, or 50.3%, to $488.7 million during the three months ended March 31, 2024, compared to $325.3 million during the same period in 2023.

The average rate paid on all interest-bearing deposits increased by 112 basis points to 2.22% for the three months ended March 31, 2024, compared to 1.10% for the three months ended March 31, 2023.

The average balance of interest-bearing deposits totaled $1.5 billion for the three months ended March 31, 2024, compared to $1.4 billion for the three months ended March 31, 2023.

The overall average cost of deposits for the three months ended March 31, 2024 and 2023 was 1.55% and 0.71%, respectively.

Meanwhile, t he average balance of noninterest-bearing deposits decreased $102.3 million, or 13.8%, to $639.7 million for the three months ended March 31, 2024 compared to $742.0 million for the same period in 2022.

Interest expense on borrowings increased $11,000, or 1.00%, to $1.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, due to a 98 basis point increase in the average rate paid on junior subordinated debentures.

The average cost of total borrowings increased to 6.18% for the three months ended March 31, 2024, compared to 6.05% for the three months ended March 31, 2023.

The average balance of borrowings decreased $654,000 to $72.3 million during the three months ended March 31, 2024, compared to $72.9 million during the three months ended March 31, 2023.

Specifically, rates on money market accounts and time deposits increased by 79 basis points and 89 basis points, respectively, during the three months ended June 30, 2024, compared to the same period in 2023 .

The average balance of time deposits also increased, rising by $82.6 million, or 52.6%, to $518.1 million during the three months ended June 30 , 2024, compared to $435.4 million during the same period in 2023.

The overall average cost of deposits for the three months ended June 30, 2024 and 2023 was 1.69% and 1.10%, respectively.

The average rate paid on all interest-bearing deposits increased by 76 basis points to 2.37% for the three months ended June 30, 2024, compared to 1.61% for the three months ended June 30, 2023.

The average balance of interest-bearing deposits totaled $1.5 billion for both the three months ended June 30, 2024 and 2023.

Meanwhile, t he average balance of noninterest-bearing deposits decreased $57.1 million, or 8.4%, to $620.5 million for the three months ended June 30, 2024 compared to $677.5 million for the three months ended June 30, 3023 as customers sought to place excess funds in higher yielding deposit accounts.

Interest expense on borrowings remained relatively flat, increasing $11,000, or 1.00%, to $1.1 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, due to a nine basis point increase in the average rate paid on junior subordinated debentures.

The average cost of total borrowings increased to 6.18% for the three months ended June 30, 2024, compared to 6.09% for the three months ended June 30, 2023.

The average balance of borrowings decreased $20,000 to $72.3 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Interest expense increased $7.7 million, or 65.1%, to $19.4 million for the six months ended June 30, 2024, compared to $11.8 million for the six months ended June 30, 2023, reflecting higher funding costs primarily related to increased market rates of interest payable on money market and time deposits, as well as an increase in the average balance of time deposits.

The average rate paid on interest-bearing liabilities for six months ended June 30, 2024 was 2.47%, compared to 1.60% for six months ended June 30, 2023.

Total average interest-bearing liabilities increased $94.8 million, or 6.4%, to $1.6 billion for the six months ended June 30, 2024, compared to $1.5 billion for the six months ended June 30, 2023.

Interest expense on deposits increased $7.7 million, or 79.8%, to $17.2 million for the six months ended June 30, 2024, compared to $9.6 million for the six months ended June 30, 2023.

The increase was driven by higher rates paid on money market accounts and time deposits and, to a lesser extent, an increase in the average balance of time deposits.

Specifically, rates on money market accounts and time deposits increased by 91 basis points and 118 basis points, respectively, during the six months ended June 30, 2024, compared to the same period in 2023 .

The average balance of time deposits also increased, rising by $122.7 million, or 32.2%, to $503.4 million during the six months ended June 30 , 2024, compared to $380.7 million during the same period in 2023.

The overall average cost of deposits for the six months ended June 30, 2024 and 2023 was 1.62% and 0.91%, respectively.

The average rate paid on all interest-bearing deposits increased by 92 basis points to 2.30% for the six months ended June 30, 2024, compared to 1.37% for the six months ended June 30, 2023.

The average balance of interest-bearing deposits totaled $1.5 billion for the six months ended June 30, 2024, compared to $1.4 billion during the same period in 2023.

Meanwhile, t he average balance of noninterest-bearing deposits decreased $79.5 million, or 11.2%, to $630.0 million for the six months ended June 30, 2024 compared to $709.6 million for the six months ended June 30, 3023.

Interest expense on borrowings increased $23,000, or 1.00%, to $2.2 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to a five basis point increase in the average rate paid on junior subordinated debentures.

The average cost of total borrowings increased to 6.18% for the six months ended June 30, 2024, compared to 6.11% for the six months ended June 30, 2023.

The average balance of borrowings decreased $335,000 to $72.3 million during the six months ended June 30, 2024, compared to $72.6 million during the three months ended June 30, 2023.

Net interest income and net interest margin.

Net interest income decreased $2.9 million, or 11.3%, to $22.4 million for the three months ended March 31, 2024, compared to $25.3 million for the three months ended March 31, 2023.

Net interest income decreased $2.0 million, or 8.1%, to $22.3 million for the three months ended June 30, 2024, compared to $24.3 million for the three months ended June 30, 2023.

The decrease in net interest income primarily was due to an increase in interest expense on deposits and a decrease in interest income on loans, partially offset by increases in interest income on federal funds sold and interest-bearing balances in banks, interest income on investment securities and dividends on FHLB stock.

The average yield (annualized) on interest earning assets for the three months ended March 31, 2024 increased to 5.28%, a 21 basis point increase from 5.07% for the three months ended March 31, 2023, while the average cost of interest bearing liabilities increased 105 basis points to 2.40% for the three months ended March 31, 2024, compared to 1.35% for the three months ended March 31, 2023.

The increases in average yields on interest-earning assets and

average rates paid on interest-bearing liabilities during the three months ended March 31, 2024, compare to the same periods in 2023, were due to higher market interest rates generally.

The annualized net interest margin was 3.72% and 4.26%, for the three months ended March 31, 2024 and 2023, respectively.

Net interest margin in the first quarter of 2024 as compared to the first quarter of 2023 was negatively impacted by increasing funding costs, due to shifts towards higher yielding deposits, which outpaced, on a percentage basis, increasing yields on interest-earning assets.

The average yield (annualized) on interest earning assets for the three months ended June 30, 2024 was 5.37%, a 19 basis point increase from 5.18% for the three months ended June 30, 2023, while the average cost of interest bearing liabilities increased 72 basis points to 2.54% for the three months ended June 30, 2024, compared to 1.82% for the three months ended June 30, 2023.

The increases in average yields on interest-earning assets and average rates paid on interest-bearing liabilities during the three months ended June 30, 2024, compared to the same periods in 2023, were due to higher market interest rates generally.

The annualized net interest margin was 3.69% and 4.02%, for the three months ended June 30, 2024 and 2023, respectively.

Net interest margin in the second quarter 2024 as compared to the second quarter 2023 was negatively impacted by increasing funding costs, due to shifts towards higher yielding deposits, which outpaced, on a percentage basis, increasing yields on interest-earning assets.

Net interest income decreased $4.8 million, or 9.8%, to $44.7 million for the six months ended June 30, 2024, compared to $49.5 million for the six months ended June 30, 2023.

The average yield (annualized) on interest earning assets for the six months ended June 30, 2024 was 5.32%, a 17 basis point increase from 5.15% for the six months ended June 30, 2023, while the average cost of interest bearing liabilities increased 87 basis points to 2.47% for the six months ended June 30, 2024, compared to 1.60% for the six months ended June 30, 2023.

The increases in average yields on interest-earning assets and average rates paid on interest-bearing liabilities during the six months ended June 30, 2024, compared to the same period in 2023, were due to higher market interest rates generally.

The annualized net interest margin was 3.71% and 4.16%, for the six months ended June 30, 2024 and 2023, respectively.

Net interest margin for the six months ended June 30, 2024 as compared to the same period in 2023 was negatively impacted by increasing funding costs, due to shifts towards higher yielding deposits, which outpaced, on a percentage basis, increasing yields on interest-earning assets.

Average Balances, Interest and Average Yields/Cost.

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

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

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

5 unchanged sentences

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

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

Interest earning assets

Fed Funds sold and interest bearing balances in banks

Investments securities

Total interest earning assets

Noninterest earning assets

Total average assets

Interest bearing liabilities

Time deposits

Total interest bearing deposit accounts

Subordinated debt, net

Junior subordinated debentures, net

Other borrowings

Total interest bearing liabilities

Noninterest bearing deposits

Other noninterest bearing liabilities

Noninterest bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Interest rate spread (2)

Net interest margin (3)

Ratio of average interest earning assets to average interest bearing liabilities

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

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

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

Six months ended June 30,

(Dollars in thousands)

Interest earning assets

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

2024 compared to 2023

Increase/(Decrease)

Attributable to

(Dollars in thousands)

Interest earning assets

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Provision for credit losses.

We recorded a $262,000 and a $315,000 provision for credit losses for loans for the three months ended March 31, 2024 and 2023, respectively.

The provision for credit losses for loans in the first quarter of 2024 was mainly driven by a replenishment of the allowance due to net charge-offs during the period, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves.

Net chares-offs totaled $3.4 million during the first quarter of 2024, of which $3.2 million was specifically reserved for at December 31, 2023.

No changes were made to the qualitative risk factor conclusions during the first quarter of 2024.

We recorded provisions for credit losses for loans of $171,000 and $423,000 for the three and six months ended June 30, 2024, compared to reversals of the allowance for credit losses for loans of $1.3 million and $985,000 for the three and six months ended June 30, 2023.

The provisions for credit losses during the three and six months ended June 30, 2024 were primarily driven by replenishments of the allowance during the periods, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves.

Net charge-offs totaled $3.5 million for the six months ended June 30, 2024, of which $3.2 million was specifically reserved for at December 31, 2023.

No changes were made to the qualitative risk factor conclusions during the six months ended June 30, 2024.

The quantitative reserve was impacted by improvement in forecasted economic conditions, specifically, national unemployment and national gross domestic product, both of which are key indicators utilized to estimate credit losses.

The reversals of the allowance for credit losses during the three and six months ended June 30, 2023 were 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, decreases in outstanding loan balances and $60,000 and $375,000 in net charge-offs during the three and six months ended June 30, 2023, respectively.

Noninterest income.

Noninterest income increased $501,000, or 32.1%, to $2.1 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023.

The increase was primarily due to a $1.5 million increase in gain on equity securities, partially offset by a $519,000 decrease in income on an investment in a Small Business Investment Company (“SBIC”) fund and a $412,000 decrease in gain on sale of loans.

Noninterest income increased $397,000, or 36.6%, to $1.5 million for three months ended June 30, 2024 compared to $1.1 million for the three months ended June 30, 2023.

The increase in noninterest income was primarily due to a $596,000 increase in gain on equity securities and a $219,000 increase in gain on sale of loans, partially offset by a $154,000 decrease in income on an investment in SBIC fund, a $152,000 decrease in loan servicing fees and other fees due to lower loan origination volume and a $148,000 decrease in service charges and other fees primarily due to fewer customer deposits placed in Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) money market product services via the IntraFi Network.

Noninterest income increased $898,000, or 33.9%, to $3.5 million for six months ended June 30, 2024, compared to $2.6 million for the six months ended June 30, 2023.

The increase in noninterest income was primarily due to a $252,000 gain on equity securities in the current year period compared to a $1.8 million loss on equity securities in the prior year period, partially offset by a $673,000 decrease in income on an investment in an SBIC fund, a $193,000 decrease in gain on sale of loans, a $170,000 decrease in loan servicing fees and other fees due to lower loan origination volume and a $194,000 decrease in service charges and other fees primarily due to fewer customer deposits placed in CDARS and ICS money market product services via the IntraFi Network.

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

Three months ended March 31,

2023 (As Restated)

Three months ended June 30,

(Dollars in thousands)

Gain on sale of loans

Loss on equity securities

Service charges and other fees

Loan servicing and other loan fees

Income on investment in SBIC fund

Other income and fees

Total noninterest income

Six months ended June 30,

(Dollars in thousands)

Gain on sale of loans

Gain (loss) on equity securities

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Loan servicing and other loan fees

(Loss) income on investment in SBIC fund

Income on investment in SBIC fund

Other income and fees

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Noninterest expense.

Noninterest expense decreased $458,000, or 2.8%, to $16.1 million for the three months ended March 31, 2024 compared to $16.5 million for the three months ended March 31, 2023.

The decrease primarily was due to a $1.0 million decrease in salaries and employee benefits as a result of a $675,000 decrease in bonus accrual, a decrease in full-time equivalent employees, and a reduction in deferred loan origination expenses, partially offset by wage increases during 2024.

This decrease was partially offset by a $288,000 increase in data processing expense due to decline in pricing credits offered and expenses relating to enhancements to the Bank’s network, a $127,000 increase in other expense due to increased FDIC insurance costs and professional fees, and a $127,000 increase in occupancy and equipment expense.

Noninterest expense decreased $545,000, or 3.3%, to $16.0 million for the three months ended June 30, 2024 compared to $16.6 million for the three months ended June 30, 2023.

The decrease in noninterest expense was primarily due to a $1.1 million decrease in salaries and employee benefits as a result of a $485,000 decrease in bonus accrual and decrease in full-time equivalent employees, partially offset by a $365,000 increase in other expense due to increased legal costs, professional fees, FDIC insurance costs, and fraudulent check losses, and a $159,000 increase in occupancy and equipment expense.

Noninterest expense decreased $1.0 million, or 3.0%, to $32.1 million for the six months June 30, 2024 compared to $33.1 million for the six months ended June 30, 2023.

The decrease in noninterest expense was primarily due to a $2.1 million decrease in salaries and employee benefits as a result of a $1.3 million decrease in bonus accrual and decrease in full-time equivalent employees, partially offset by a $492,000 increase in other expense due to increased legal costs, professional fees, FDIC insurance costs, and fraudulent check losses, and a $286,000 increase in occupancy and equipment expense.

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

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

Salaries and related benefits

Occupancy and equipment

Data processing

Total noninterest expense

Six months ended June 30,

(Dollars in thousands)

Salaries and employee benefits

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Income taxes.

The provision for income taxes decreased $554,000, or 19.6%, to $2.3 million the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023 due to lower taxable income.

The Company’s effective tax rate was 27.9% and 28.2% for three months ended March 31, 2024 and 2023, respectively.

The effective tax rate was lower for the three months ended March 31, 2024, compared to the same period in 2023, due to higher low income housing tax credits .

The provision for income taxes decreased $869,000, or 30.3%, to $2.0 million for the three months ended June 30, 2024 compared to $2.9 million for the three months ended June 30, 2023 due to lower taxable income.

The provision for income taxes decreased $1.4 million, or 25.0%, to $4.3 million for the six months ended June 30, 2024 compared to $5.7 million for the six months ended June 30, 2023 due to lower taxable income.

The Company’s effective tax rate was 26.3% and 27.09% for three and six months ended June 30, 2024 and 28.4% and 28.3% for the six months ended June 30, 2023, respectively.

The effective tax rate was lower for the three months and six months ended June 30, 2024, compared to the same periods in 2023, due to higher low income housing tax credits .

Liquidity and Capital Resources

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Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business.

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

We rely on multiple sources to meet our potential liquidity demands.

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

During the three months ended March 31, 2024, the Bank sold no loans or loan participation interests and received $72.4 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 $15.1 million to $2.1 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities, increased $165.0 million to $517.2 million at March 31, 2024 from December

During the six months ended June 30, 2024, the Bank sold $3.1 million in loan participation interests and received $136.8 million in principal loan repayments.

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

Deposits increased $42.3 million to $2.2 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities, increased $103.7 million to $575.6 million at June 30, 2024 from December 31, 2023.

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

Securities purchased during the three months ended March 31, 2024, totaled $7.1 million and securities repayments, maturities and sales during the period were $3.0 million.

Certificates of deposit scheduled to mature in one year or less at March 31, 2024, totaled $266.5 million.

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

Securities purchased during the six months ended June 30, 2024 totaled $26.6 million and securities repayments, maturities and sales during the six months ended June 30, 2024 were $7.4 million.

Certificates of deposit scheduled to mature in one year or less at June 30, 2024, totaled $302.2 million.

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

Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.

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

As of March 31, 2024, the Bank had an available borrowing capacity of $508.2 million with the FHLB of San Francisco, with no borrowings outstanding at that date or at December 31, 2023.

As of June 30, 2024, the Bank had an available borrowing capacity of $514.1 million with

the FHLB of San Francisco, with no borrowings outstanding at that date or at December 31, 2023.

During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans.

At March 31, 2024, we had the ability to borrow up to $46.7 million, from the FRB of San Francisco, with no borrowings outstanding at that date.

At June 30, 2024, we had the ability to borrow up to $43.8 million from the FRB of San Francisco, with no borrowings outstanding at that date.

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

There were no amounts outstanding under these facilities at March 31, 2024 and December 31, 2023.

There were no amounts outstanding under these facilities at June 30, 2024 and December 31, 2023.

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 $73.8 million, including $48,000 of undisbursed construction and development loan commitments, at March 31, 2024.

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

Loan commitments and letters of credit were $68.5 million, including $163,000 of undisbursed construction and development loan commitments, at June 30, 2024.

For information regarding our commitments, see “Note 17 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1.

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

Net cash provided by operating activities for the three months ended March 31, 2024 was $5.1 million, compared to $8.2 million provided by operating activities for the three months ended March 31, 2023.

During the three months ended March 31, 2024, net cash provided by investing activities was $31.0 million, which consisted primarily of net decrease in loans receivable, compared to $21.0 million of cash used in investing activities for the three months ended March 31, 2023.

Net cash provided by financing activities for the three months ended March 31, 2024 was $4.7 million, which was comprised primarily of net increase in deposits, compared to $33.6 million provided by financing activities during the three months ended March 31, 2023.

Net cash provided by operating activities for the six months ended June 30, 2024 was $12.8 million, compared to $19.8 million for the six months ended June 30, 2023.

During the six months ended June 30, 2024, net cash provided by investing activities was $39.4 million, which consisted primarily of net decrease in loans receivable, compared to $10.4 million for the six months ended June 30, 2023.

Net cash provided by financing activities for the six months ended June 30, 2024 was $31.5 million, which was comprised primarily of net increase in deposits, compared to $43.4 million during the six months ended June 30, 2023.

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

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

At March 31, 2024, BayCom Corp had liquid assets of $18.8 million.

At June 30, 2024, BayCom Corp had liquid assets of $13.1 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 March 6, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share on the Company’s outstanding common stock, payable on April 12, 2024 to shareholders of record as of the close of business on March 16, 2024.

On May 24, 2024, 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, which was paid on July 11, 2024 to shareholders of record as of the close of business on June 13, 2024.

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 March 31, 2024.

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 $1.1 million based on the number of our outstanding shares at June 30, 2024.

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 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.

In May 2024, 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 June 30, 2024), for the repurchase of up to 560,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one- year period.

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

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

The repurchase programs may be suspended, terminated, or modified at any time for any reason, including market

conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

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

As of March 31, 2024, there remained 161,632 shares available for repurchase under the Company’s existing stock repurchase program.

As of June 30, 2024, there remained 516,838 shares available for repurchase under the Company’s existing stock repurchase program.

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

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

Based on capital levels at March 31, 2024 and December 31, 2023, the Bank was considered Well Capitalized at both of those dates.

Based on capital levels at June 30, 2024 and December 31, 2023, 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 March 31, 2024

At June 30, 2024

At December 31, 2023

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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 March 31, 2024, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

At June 30, 2024, 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.

If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2024, 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