What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-14 compared with 2024-03-15 · 165 added, 178 removed, 569 unchanged (38% of the section changed)

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

The Company’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services primarily to businesses and business owners, as well as individuals, through its network of 35 full-service branches at December 31, 2023, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado.

At December 31, 2024, the Bank had 35 full-service branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado.

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

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Looking forward, we expect to continue pursuing strategic acquisitions, believing our targeted market areas present us with many and varied acquisition opportunities.

We are also committed to organic growth, leveraging the potential within metropolitan and community markets where we currently operate.

We are also committed to organic growth, leveraging the potential within metropolitan and community markets where we

currently operate.

These markets offer significant opportunities to expand our commercial client base, increase interest-earning assets, and enhance market share.

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

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

We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California;

Seattle, Washington;

Denver, Colorado;

and Las Vegas, Nevada, and community markets including Albuquerque, New Mexico and Custer, Delta and Grand counties, Colorado, provides us access to low cost, stable core deposits that we can use to fund commercial loan growth.

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

At December 31, 2024, the Company, on a consolidated basis, had assets of $2.7 billion, loans receivable, net of $1.9 billion, deposits of $2.2 billion and shareholders’ equity of $324.4 million.

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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.

During 2023, in response to inflationary pressures, the FOMC of the Federal Reserve increased the target range for the federal funds rate 100 basis points to a range of 5.25% to 5.50% as of December 31, 2023.

The substantial increase in interest rates during 2023 had a more significant impact on our interest-earning assets than on our interest-bearing liabilities, resulting in an increase in our net interest margin to 4.05% for the year ended December 31, 2023, compared to 3.90% for the previous year.

This is primarily the result of increased yields on average interest-earning assets, which reflects variable-rate interest-earning assets beginning to reprice higher, outpacing rising costs on average interest-bearing liabilities.

We believe our balance sheet is well-positioned to improve our net interest margin if interest rates continue to rise.

Between March 2022 and July 2023, in response to elevated inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve increased interest rates by a total of 525 basis points, bringing the target range to 5.25% to 5.50%.

On September 18, 2024, the FOMC reduced the target range to 4.75% to 5.00%, marking the first rate cut since March 2020.

This was followed by additional reductions of 25 basis points in both November and December 2024, bringing the target range down to 4.25% to 4.50% as of year-end.

These rate cuts were implemented in response to signs of economic softening, including a cooling labor market and moderating inflation.

Net interest margin decreased to 3.74% for the year ended December 31, 2024, compared to 4.05% for the previous year and was negatively impacted by increased funding costs, due to shifts towards higher costing deposits, which outpaced, on a percentage basis, increased yields on interest-earning assets, due to the lagging benefit of variable rate interest-earning assets repricing higher.

We believe our balance sheet is well-positioned to improve our net interest margin if interest rates hold.

Conversely, a decline in interest rates would likely negatively impact our net interest income.

The provision for credit losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio, as well as prevailing economic and market conditions.

We recorded a $2.0 million provision for credit losses for the year ended December 31, 2023, primarily due to a $3.3 million increase in reserves for individually evaluated loans, $550,000 of net loan charge-offs during the year and an additional reserve taken on a loan to a borrower who declared bankruptcy during the year.

The increase in specific reserves included one commercial real estate loan and one multifamily loan.

Based on updated appraisals received during the fourth quarter of 2023, the underlying collateral values of these loans experienced declines due to property specific factors and conditions .

estimate credit losses over the next four quarters, as compared to those used in estimating the allowance for credit losses on loans at adoption, and to a lesser extent a decrease in outstanding loan balances.

There was an adjustment to the determined risk level for the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the portfolio qualitative factor during the year ended December 31, 2023.

We recorded a $1.3 million provision for credit losses for the year ended December 31, 2024, primarily driven by the replenishment of the allowance due to charge-offs and an increase in provision for credit losses for unfunded commitments.

Net charge-offs totaled $5.0 million for the year ended December 31, 2024, of which $3.2 million was specifically reserved for.

The quantitative reserve was impacted by declines in forecasted economic conditions for national gross domestic product and increasing forecasted national unemployment, both key indicators used to estimate credit losses.

The reserve for individually evaluated loans decreased during the year primarily due to $3.2 million in charge-offs, as the associated collateral shortfalls were deemed uncollectable.

No changes were made to the qualitative risk factor conclusions during the year ended December 31, 2024.

The increase in the provision for credit loss for unfunded commitments of $375,000 for the year ended December 31, 2024 was primarily due to a new $9.5 million construction commitment and increased quantitative loss rates.

Our net income is also affected by noninterest income and noninterest expenses.

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and (iii) gain (loss) on equity securities and (iv) other noninterest income.

Our noninterest income increased $877,000 during the year ended December 31, 2023, as compared to 2022, primarily attributable to a decrease in loss on equity securities of $3.4 million, partially offset by a decrease in gain on sale of loans of $2.2 million.

Noninterest expense includes, among other things:

Our noninterest income decreased $600,000 during the year ended December 31, 2024, as compared to 2023.

Noninterest expense consists of, among other things:

(i) salaries and related benefits;

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and (vii) other general and administrative expenses.

Our noninterest expenses decreased $1.3 million during the year ended December 31, 2023, as compared to 2022.

The decrease was primarily attributable to a $1.2 million decrease in other expense as a result of an decrease in professional fees and core deposit premium amortization.

Noninterest income and noninterest expenses are impacted by the growth of our banking operations and growth in the number of loan and deposit accounts.

Our noninterest expenses

decreased $545,000 during the year ended December 31, 2024, as compared to 2023.

Noninterest income and noninterest expenses are impacted by the growth of our banking operations and growth in the amounts of loans and deposits.

Business Strategy

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We continue to centralize the back-office functions of our acquired banks as well as realize cost savings using third-party vendors and technology to take advantage of economies of scale as we continue to grow.

We intend to focus on initiatives that we believe will provide opportunities to enhance earnings, including the continued rationalization of our

retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.

We intend to focus on initiatives that we believe will provide opportunities to enhance earnings, including the continued rationalization of our retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.

● Focus on Lending Growth in Our Metropolitan Markets While Increasing Deposits in Our Community Markets.

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

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

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

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

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

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

One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-

down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis.

See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

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

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

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

Loans that do not share the same risk characteristics as pooled loans are evaluated individually for credit loss and generally include all nonaccrual loans, collateral dependent loans, and certain modified loans to borrowers experiencing financial difficulties.

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

By definition, any loan that management has placed on non-accrual is required to be individually evaluated, however, not all individually evaluated loans need to be placed on non-accrual.

By definition, any loan that management has placed on non-accrual is required to be individually evaluated;

however, not all individually evaluated loans need to be placed on non-accrual.

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

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

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

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

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

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

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

The regression models developed correlate macroeconomic variables to historical credit performance based on call report data over a 64 quarter

(16-year) period which captures a full economic cycle from 2004 to 2019.

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

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

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

The peers utilized in the allowance for credit losses are segment specific.

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Total assets increased $112.5 million, or 4.4%, to $2.7 billion at December 31, 2024 from $2.6 billion at December 31, 2023.

The increase was primarily due to cash and cash equivalents increasing $130.7 million, or 73.9%, and investment securities available-for-sale increasing $9.1 million, or 5.9%, partially offset by a decrease in loans receivable, net of $96.4 million or 4.8%.

The increase was primarily due to increases in cash and cash equivalents of $56.5 million or 18.4%, investment securities available-for-sale of $30.2 million or 18.5%, and loans receivable, net of $29.2 million or 1.5%.

Cash and cash equivalents.

Cash and cash equivalents increased $56.5 million, or 18.4%, to $364.0 million at December 31, 2024 from $307.5 million at December 31, 2023.

The increase primarily was due to $139.8 million increase in federal funds sold and interest-bearing balances in banks, due to net change in loans and the managed run-off of higher cost time deposits.

The increase primarily was due to a $51.3 million increase

in federal funds sold and interest-bearing balances in banks, reflecting excess deposit that were not deployed for loan growth and the purchase of investment securities.

Investment securities.

Investment securities, all of which are classified as available-for-sale, increased $30.2 million, or 18.5%, to $193.3 million at December 31, 2024 from $163.2 million at December 31, 2023.

The increase primarily was due to purchase of $25.3 million of investment securities during the year ended December 31, 2023, partially offset by $11.6 million in routine amortization and repayment of investment principal balances and securities called and matured, and a $4.3 million fair value adjustment related to unrealized losses on investment securities available-for-sale.

The increase primarily was due to purchases of $49.9 million of investment securities during the year ended December 31, 2024, partially offset by $21.9 million in routine amortization, principal repayments and maturities or calls of securities A $2.3 million fair value adjustment related to unrealized gains on investment securities available-for-sale also contributed to the increase.

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

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(Dollars in thousands)

Government Agencies

Municipal securities

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Equity securities.

Equity securities decreased $1.2 million, or 8.5% to $12.6 million at December 31, 2023 from $13.8 million at December 31, 2022.

The decrease was primarily due to a $1.1 million loss on equity securities resulting from an adjustment to the fair value of equity securities during the year ended December 31, 2023.

Equity securities increased $535,000, or 4.3% to $13.1 million at December 31, 2024 from $12.6 million at December 31, 2023.

The increase was primarily due to a $463,000 gain on equity securities resulting from an adjustment to the fair value of equity securities during the year ended December 31, 2024.

We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans.

Loans receivable, net of allowance for credit losses, decreased $96.4 million, or 4.8%, to $1.9 billion at December 31, 2023, from $2.0 billion at December 31, 2022.

The decrease was primarily due to $196.7 million of loan repayments, including $7.3 million in PPP loans, and $7.2 million in loan sales, partially offset by $110.6 million of new loan originations and purchases.

Loans receivable, net of allowance for credit losses, increased $29.2 million, or 1.5%, to $1.9 billion at December 31, 2024, from $1.9 billion at December 31, 2023.

The increase was due to $253.8 million of new loan originations and $86.1 million of loan purchases, partially offset by $299.9 million of loan repayments and $12.8 million of loans sold.

Loan originations in 2024 were concentrated in California markets, primarily Los Angeles, Irvine/Southern California, San Francisco Bay Area and Sacramento/Northern California, with commercial and multifamily real estate secured loans accounting for the majority of the originations.

Loan purchases were concentrated in New Mexico and Colorado.

The following table provides information about our loan portfolio by type of loan, with PCD loans presented as a separate balance, at the dates presented.

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Allowance for credit losses

(1) Includes $3.8 million and $11.1 million of PPP loans as of December 31, 2023 and 2022, respectively .

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

The following table presents at December 31, 2024, the geographic distribution of our loan portfolio in dollar amounts and percentages.

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

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

At December 31, 2024, loans in Colorado, New Mexico, Washington and other states totaled $134.9 million, $62.9 million, $84.6 million and $485.8 million, respectively.

The following table provides information about our loan portfolio segregated by legacy and acquired loans with a remaining discount, net of their discounts at the dates presented.

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Acquired loans.

Acquired PCD loans are loans acquired from a business combination with evidence of more than insignificant credit deterioration and are accounted for under ASC Topic 326.

Acquired non-PCD loans represent loans acquired from a business combination without more than insignificant evidence of credit deterioration and are accounted for under ASC Topic 310-20.

Acquired PCD loans are loans acquired through a business combination with evidence of more than insignificant credit deterioration and are accounted for under ASC Topic 326.

Acquired non-PCD loans represent loans acquired through a business combination without more than insignificant evidence of credit deterioration and are accounted for under ASC Topic 310-20.

As of December 31, 2024, acquired non-PCD loans totaled $140.6 million with a remaining net premium of $1.8 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 both 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 December 31, 2023 acquired PCD loans totaled $27.5 million with a remaining net non-credit discount of $1.8 million, compared to $31.1 million with a remaining net non-credit discount of $2.0 million as of December 31, 2022.

premium for acquired non-PCD loans includes both 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 December 31, 2024, the unpaid principal balance of acquired PCD loans totaled $24.0 million with a remaining net non-credit discount of $1.5 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 nonaccrual loans.

Nonperforming assets generally consist of nonaccrual loans, accruing loans more than 90 days delinquent and other real estate owned (“OREO”).

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

Nonperforming assets decreased $3.5 million to $9.5 million, or 0.48% of total loans, at December 31, 2024 compared to $13.0 million, or 0.67% of total loans, at December 31, 2023.

The decrease in nonperforming assets was primarily due to the renewal of one accruing loan 90 days or more past due and in the process of collection totaling $934,000 at December 31, 2022.

Additionally, during the year ended December 31 2023, we charged-off seven nonaccrual loans totaling $484,000 and received pay-offs of one $774,000 performing (accruing) modified loan to a borrower experiencing financial difficulty and three nonaccrual loans, consisting of two loans to one borrower totaling $1.2 million and a third loan totaling $247,000.

These decreases were partially offset by 12 previously performing loans totaling $2.2 million being placed on nonaccrual status during the year, consisting of three real estate loans totaling $530,000, one commercial loan totaling $1.0 million discussed below, and eight commercial

loans totaling $640,000.

At December 31, 2023 and 2022, $740,000 and $839,000 of the Company’s nonperforming loans were guaranteed by governmental agencies, respectively.

There was no OREO at December 31, 2023, compared to $21,000 of OREO at December 31, 2022.

During the quarter ended September 30, 2023, the Company determined that a certificate of deposit-secured line of credit loan made to a revocable living trust (the “Trust” or the “Borrower”) with an outstanding balance of approximately $1.0 million as of December 31, 2023 was placed on nonaccrual as a result of the sole trustee and beneficiary of the Trust filing for personal bankruptcy in July 2023.

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

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

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

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

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

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

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

The loan was fully reserved for at December 31, 2023.

There was no OREO at December 31, 2024 and 2023.

The decrease in nonperforming loans was primarily due to the sale of three nonaccrual loans totaling $8.1 million in the third quarter of 2024, the complete charge-off of a $1.0 million nonaccrual loan in the same period, and the payoff of two nonaccrual loans totaling $460,000.

Additionally, a $283,000 nonaccrual loan was paid off in the fourth quarter of 2024.

These reductions were partially offset by two new loans totaling $3.5 million placed on nonaccrual in the third quarter, two additional loans totaling $35,000 placed on nonaccrual in the fourth quarter, and $220,000 in accruing loans that were 90 days or more past due and in the process of collection.

Accruing loans past due 30 to 89 days totaled $6.7 million at December 31, 2024, compared to $4.8 million at December 31, 2023.

At December 31, 2023 and December 31, 2022, nonaccrual loans included $927,000 and $2.5 million of loans 30-89 days past due, and $2.1 million and $4.0 million of loans less than 30 days past due, respectively.

At December 31, 2024 and 2023, nonaccrual loans included $643,000 and $4.4 million of loans 30-89 days past due, and $4.4 million and $2.1 million of loans less than 30 days past due, respectively.

At December 31, 2024, the $4.4 million of loans less than 30 days past due was comprised of 15 loans all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

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

Loan modifications to borrowers experiencing financial difficulty as of December 31, 2023 totaled $4.3 million, of which none were accruing, compared to $6.3 million, of which $759,000 were accruing and performing according to their modified terms, at December 31, 2022.

Modified loans that are accruing and performing according to their modified

terms are not considered nonperforming loans.

The related allowance for credit losses on individually evaluated modified loans totaled $1.3 million and $393,000 at December 31, 2023 and December 31, 2022, respectively.

Loan modifications to borrowers experiencing financial difficulty as of December 31, 2024 totaled $2.7 million compared to $4.3 million at December 31, 2023.

All modified loans were classified as nonaccrual at both dates.

Modified loans that are accruing and performing according to their modified terms are not considered nonperforming.

The related allowance for credit losses on individually evaluated modified loans totaled $24,000 and $1.3 million at December 31, 2024 and December 31, 2023, respectively.

The following table sets forth the nonperforming loans, nonperforming assets and modified loans to borrowers experiencing financial difficulty as of the dates indicated:

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PCD loans are considered performing and are not included in nonperforming assets in the table above.

At December 31, 2023 and December 31, 2022, we had no PCD loans that were 90 days past due and still accruing.

At December 31, 2024 and 2023, we had no PCD loans that were 90 days or more past due and still accruing.

Allowance for credit losses.

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The Company adopted the CECL standard on January 1, 2023, which resulted in a one-time adjustment to the allowance for credit losses for loans of $1.5 million (which included the reclassification of the net credit discount on acquired PCD loans totaling $845,000) and an allowance for unfunded loan commitments of $45,000, as well as an after-tax decrease to opening retained earnings of $491,000 on January 1, 2023.

At December 31, 2023, the Company’s allowance for credit losses for loans was $22.0 million under the CECL framework, or 1.14% of total loans, compared to an allowance for loan losses of $18.9 million under the allowance for loan losses incurred loss framework, or 0.94% of total loans, at December 31, 2022.

In addition to the CECL adjustment

on January 1, 2023, a $2.2 million provision for credit losses for loans was recorded for the year ended December 31, 2023, compared to a $4.4 million provision for loan losses for the year ended December 31, 2022.

The provision for credit losses for the year ended December 31, 2023 was primarily due to a $3.3 million increase in reserves for individually evaluated loans, $550,000 of net loan charge-offs during the year, and an additional reserve taken on a loan to a Trust, a discussed above.

The increase in specific reserves included one commercial real estate loan and one multifamily loan.

Based on updated appraisals received during the fourth quarter of 2023, the underlying collateral values of these loans experienced declines due to property specific factors and conditions.

The change in the provision was partially offset by a decrease in the quantitative reserve primarily due to improvements in forecasted economic conditions, specifically, national gross domestic product and national unemployment indicators utilized to estimate credit losses over the next four quarters, as compared to those used in estimating the allowance for credit losses on loans at adoption, and to a lesser extent a decrease in outstanding loan balances.

We recorded net charge-offs of $550,000 for the year ended December 31, 2023 compared to $3.2 million for the year ended December 31, 2022.

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

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

At December 31, 2024, the Company’s allowance for credit losses for loans was $17.9 million, or 0.92% of total loans, compared to $22.0 million, or 1.14% of total loans, at December 31, 2023.

A $1.3 million provision for credit losses was recorded for the year ended December 31, 2024.

In addition to the CECL adjustment on January 1, 2023, a $2.2 million provision for credit losses for loans was recorded for the year ended December 31, 2023.

The $1.3 million provision for credit losses for the year ended December 31, 2024 was primarily driven by the replenishment of the allowance due to charge-offs and an increase in provision for credit losses for unfunded commitments.

Net charge-offs totaled $5.0 million for the year ended December 31, 2024, of which $3.2 million was specifically reserved for.

The reserve for individually evaluated loans decreased during the year primarily due to $3.2 million in charge-offs, as the associated collateral shortfalls were deemed uncollectable.

No changes were made to the qualitative risk factor conclusions during the year ended December 31, 2024.

We recorded net charge-offs of $5.0 million for the year ended December 31, 2024 compared to $550,000 for the year ended December 31, 2023.

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

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Construction and land:

Net recoveries

Net charge-offs

Average loans outstanding

Commercial estate:

Net (recoveries)/charge-offs

Commercial real estate:

Net charge-offs/(recoveries)

Average loans outstanding

Net charge-offs

Net (recoveries)/charge-offs

Average loans outstanding

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Total real estate

As of December 31, 2023, the Company individually evaluated $13.0 million of 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.

As of December 31, 2022, the Company individually evaluated $15.0 million in loans, inclusive of $14.3 million of nonaccrual loans and $759,000 of performing (accruing) modified loans to borrowers experiencing financial difficulty.

As of December 31, 2024, the Company individually evaluated $17.4 million of loans, inclusive of the $9.2 million of nonaccrual loans as of that date.

Of these individually evaluated loans, $2.7 million had a specific allowance of $392,000 as of December 31, 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.

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The Company recognizes operating leases on the Consolidated Balance Sheet as ROU assets and lease liabilities based on the value of the discounted future lease payments.

ROU assets decreased $2.6 million, or 15.9%, to $13.9 million at December 31, 2023 from $16.6 million at December 31, 2022.

Lease liabilities decreased $2.4 million, or 13.9%, to $14.8 million at December 31, 2023 from $17.2 million at December 31, 2022.

The decrease in right-of-use assets and lease liabilities was due to normal amortization and depreciation expenses associated with these assets.

ROU assets decreased $556,000, or 4.0%, to $13.4 million at December 31, 2024 from $13.9 million at December 31, 2023.

Lease liabilities decreased $369,000, or 2.5%, to $14.4 million at December 31, 2024 from $14.8 million at December 31, 2023.

The decrease in right-of-use assets and lease liabilities was due to normal depreciation and amortization, respectively, partially offset by changes in the ROU asset and liabilities resulting from lease extensions.

Premises and Equipment.

Premises and equipment increased $456,000, or 3.4%, to $13.7 million at December 31, 2023 from $13.3 million at December 31, 2022.

This increase in premises and equipment was driven by purchases of equipment during the year, partially offset by normal amortization and depreciation expenses associated with these assets.

Deposits are our primary source of funding and consists of core deposits from the communities served by our branch and office locations.

Premises and equipment decreased $348,000, or 2.5%, to $13.4 million at December 31, 2024 from $13.7 million at December 31, 2023, driven by normal depreciation expenses associated with these assets.

Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations.

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

Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts.

Deposits include interest bearing and noninterest bearing demand accounts,

savings, money market, certificates of deposit and individual retirement accounts.

These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives.

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

Total deposits increased $47.3 million, or 2.3%, to $2.1 billion at December 31, 2023 compared to the year ended December 31, 2022.

Total deposits increased $101.3 million, or 4.7%, to $2.2 billion at December 31, 2024 compared to December 31, 2023.

Noninterest bearing deposits totaled $689.0 million, or 30.8% of total deposits, at December 31, 2024 compared to $646.3 million, or 30.3% of total deposits, at December 31, 2023.

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Time deposits

(1) Noninterest bearing.

The following table shows a summary of our average deposit amounts and average rates paid during the years indicated:

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Total interest bearing deposits

Noninterest bearing deposits

Demand deposits (1)

Total deposits

(1) Noninterest bearing.

The following table shows time deposits by maturity and rate as of December 31, 2024.

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

In addition, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco based on PPP loans pledged as collateral.

This line was closed during 2023, with no FRB borrowings outstanding at December 31, 2023.

The Bank did not participate in the FRB of San Francisco Bank Term Funding Program.

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 December 31, 2024, we had the ability to borrow up to $41.9 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.

The Bank also has uncommitted Federal Funds lines with four corresponding banks.

Cumulative available commitments totaled $65.0 million at both December 31, 2024 and December 31, 2023.

There are no amounts outstanding under these facilities at both December 31, 2023 and 2022.

At December 31, 2023 and 2022, the Company had outstanding junior subordinated debt, net of marked-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.6 million and $8.5 million, respectively.

For additional information, see “Note 13 — Junior Subordinated Deferrable Interest Debentures” in the Notes to the Consolidated Financial Statements contained in “Item 8.

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

At December 31, 2024 and 2023, the Company had outstanding junior subordinated debt, net of marked-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.6 million.

For additional information, see “Note 13 — Junior Subordinated Deferrable Interest Debentures”

in the Notes to the Consolidated Financial Statements contained in “Item 8.

Financial Statements and Supplementary Data” of this Form 10-K.

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

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

At December 31, 2024 and 2023, the FHLB of San Francisco had issued letter of credits on behalf of the Bank totaling $41.1 million and $40.6 million, respectively, as collateral for local agency deposits.

Shareholders’ equit y.

Shareholders’ equity decreased $4.3 million, or 1.3%, to $312.9 million at December 31, 2023 from $317.1 million at December 31, 2022.

The decrease in shareholders’ equity was primarily due to the repurchase of $24.1 million of our common stock during 2023 and cash dividends of $4.8 million, partially offset by $27.4 million of net income.

In addition, shareholder’s equity was adversely impacted by increased unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $3.0 million increase in accumulated other comprehensive loss, net of tax for the year ended December 31, 2023.

Shareholders’ equity increased $11.5 million, or 3.7%, to $324.4 million at December 31, 2024 from $312.9 million at December 31, 2023.

The increase was due to $23.6 million of net income, a $1.6 million decrease in accumulated other comprehensive loss, net of taxes, reflecting the increase in market interest rates during the year and $588,000 in stock based compensation related to the grant of equity awards, partially offset by the repurchase of $9.3 million of our common stock and the $5.0 million in cash dividends paid or accrued during 2024.

During the year ended December 31, 2024, the Company repurchased a total of 455,654 shares of its common stock at a total cost of $20.31 per share.

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Earnings summary.

We reported net income of $27.4 million for the year ended December 31, 2023, compared to $23.7 million for the year ended December 31, 2022, an increase of $3.7 million, or 15.6%.

Net income for the year ended December 31, 2023 reflects a $1.2 million increase in net interest income, a $2.4 million decrease in provision for credit losses, an $876,000 increase in noninterest income and a $1.3 million decrease in noninterest expenses, partially offset by a $2.0 million increase in provision for income taxes.

Diluted earnings per share were $2.27 for the year ended December 31, 2023, an increase of $0.46 from diluted earnings per share of $1.81 for the year ended December 31, 2022.

We reported net income of $23.6 million for the year ended December 31, 2024, compared to $27.4 million for the year ended December 31, 2023, a decrease of $3.8 million or 13.9%.

Net income for the year ended December 31, 2024 reflects a $6.7 million decrease in net interest income, a $750,000 decrease in the provision for credit losses and an $600,000 decrease in noninterest income, partially offset by a $545,000 decrease in noninterest expense and a $2.2 million decrease in the provision for income taxes.

Diluted earnings per share were $2.10 for the year ended December 31, 2024, a decrease of $0.17 from diluted earnings per share of $2.27 for the year ended December 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 65.77% for the year ended December 31, 2024, compared to 61.69% for the year ended December 31, 2023.

The improvement in the efficiency ratio during the year ended December 31, 2023 was primarily due to higher revenues, coupled with a slight decrease in total noninterest expenses.

The deterioration in the efficiency ratio during the year ended December 31, 2024 was primarily due to lower revenues, partially offset by a slight decrease in total noninterest expenses.

Interest income.

Interest income for the year ended December 31, 2024 was $131.7 million, compared to $126.3 million for the year ended December 31, 2023, an increase of $5.4 million or 4.3%.

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

Increased yields earned on interest-earning assets, along with an increase in the average balance of fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income.

Interest income on loans, including fees increased $10.6 million , or 14.6%, to $106.3 million for the year ended December 31, 2023, compared to $95.7 million for the year ended December 31, 2022.

The increase was primarily due to a 48 basis point increase in the average loan yield and, to a lesser extent, a $20.7 million increase in the average balance of loans.

The average yield earned on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the year ended December 31, 2023 was 5.32%, compared to 4.84% for the year ended December 31, 2022.

Interest income included $92,000 in fees earned related to PPP loans during the year ended December 31, 2023, compared to $2.0 million in same period a year ago.

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

Interest income on loans for the year ended December 31, 2023 and 2022, included $486,000 and $1.3 million respectively, in fees related to prepayment penalties.

Interest income on loans for the year ended December 31, 2023 and December 31, 2022 included $44,000 in amortization and $2.3 million in accretion respectively, of the net discount on acquired loans and revenue from PCD loans in excess of discounts.

Increased average yields on interest-earning assets, along with an increase in the average balance of fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income.

Interest income on loans, including fees, decreased $2.3 million , or 2.1%, to $104.1 million for the year ended December 31, 2024, compared to $106.3 million for the year ended December 31, 2023.

The decrease was primarily due to a $103.0 million decrease in the average balance of loans, partially offset by a 17 basis point increase in the average loan yield.

The average yield earned on loans, including the accretion of the net discount and deferred loan fees recognized, was 5.49% for the year ended December 31, 2024, compared to 5.32% for the year ended December 31, 2023.

Interest income on loans for the year ended December 31, 2024 and 2023, included $523,000 and $486,000 respectively, in fees related to prepayment penalties.

Interest income on loans for the years ended December 31, 2024 and 2023, also included $158,000 and $44,000, respectively, in accretion and amortization of the net discount on acquired loans, as well as revenue from PCD loans in excess of discounts.

The remaining net discount on these acquired loans was $326,000 and $395,000 at December 31, 2024 and 2023, respectively.

Interest income on investment securities, excluding FRB and FHLB stock, increased $908,000, or 14.9%, to $7.0 million for the year ended December 31, 2023 from $6.1 million for the year ended December 31, 2022.

The increase was due to an 80 basis point increase in the yield on investment securities to 4.05% for the year ended December 31, 2023 from 3.25% for the year ended December 31, 2022, partially offset by a $14.4 million decrease in the average balance of investment securities.

Interest income on investment securities, excluding FRB and FHLB stock, increased $2.0 million, or 28.4%, to $9.0 million for the year ended December 31, 2024 from $7.0 million for the year ended December 31, 2023.

The increase was due to a 46 basis point increase in the yield on investment securities to 4.51% for the year ended December 31, 2024 from 4.05% for the year ended December 31, 2023, and a $26.6 million increase in the average balance of investment securities.

Dividends on FHLB and FRB stock totaled $1.6 million and $1.4 million for the years ended December 31, 2024 and 2023, respectively.

Interest income on fed funds sold and interest-bearing balances in banks increased $5.5 million, or 47.4% to $17.1 million for the year ended December 31, 2024 from $11.6 million for the year ended December 31, 2023.

The increase was due to a 385 basis point increase in the yield on fed funds sold and interest-bearing balance in banks to 5.20% for the year ended December 31, 2023 from 1.35% for the year ended December 31, 2022, partially offset by a $74.6 million decrease in the average balance of federal funds sold and interest-bearing balances in banks for the year ended December 31, 2023 compared to the same period in 2022.

The increase was primarily due to a $99.6 million increase in the average balance of federal funds sold and interest-bearing balances in banks for the year ended December 31, 2024 compared to the year ended December 31, 2023.

A 10 basis point increase in the yield on fed funds sold and interest-bearing balance in banks to 5.30% for the year ended December 31, 2024 from 1.20% for the year ended December 31, 2023 also contributed to the increase.

Interest expense.

Interest expense increased $18.1 million, or 175.0%, to $28.5 million for the year ended December 31, 2023 from $10.4 million for the year ended December 31, 2022, reflecting higher funding costs related to increased rates of interest payable on our money market and time deposits and junior subordinated debentures .

Interest expense increased $12.1 million, or 42.5%, to $40.6 million for the year ended December 31, 2024 from $28.5 million for the year ended December 31, 2023, reflecting higher funding costs primarily related to increased rates of interest payable on our money market and time deposits .

The average rate paid on interest bearing liabilities for the year ended December 31, 2024 was 2.54% compared to 1.87% for year ended December 31, 2023.

The total average balance of interest-bearing liabilities increased $37.9 million, or 2.55%, to

$1.5 billion for the year ended December 31, 2023, from the year ended December 31, 2022, primarily due to an increase in interest-bearing time deposits.

The total average balance of interest-bearing liabilities increased $78.1 million, or 5.13%, to $1.6 billion for the year ended December 31, 2024, from the year ended December 31, 2023, primarily due to an increase in interest-bearing time deposits.

Interest expense on deposits increased $12.1 million, or 50.3%, to $36.1 million for the year ended December 31, 2024 from $24.0 million for the year ended December 31, 2023, primarily due to increases in the average rate paid on money market and accounts and time deposits, and an increase in the average balance of time deposits.

The average rate paid on interest bearing deposits increased to 2.37% for the year ended December 31, 2024, from 1.66% for the year ended December 31, 2023, with the average rate paid on money market deposits increasing 72 basis points to 2.36% during 2024 compared to 1.64% during 2023, and the average rate paid on time deposits increasing 77 basis points to 3.99% during 2024 compared to 3.22% during 2023.

The average balance of time deposits increased $98.1 million, or 23.6%, to $513.5 million during 2024, compared to $415.3 million during 2023.

The overall average cost of deposits, which includes noninterest-bearing deposits, for the year ended December 31, 2024 increased to 1.68%, compared to 1.13% for the year ended December 31, 2023.

The average balance of noninterest bearing deposits decreased $63.5 million, or 9.24%, to $623.8 million for the year ended December 31, 2024 compared to $687.3 million for the year ended December 31, 2023.

The increase in the cost of interest bearing deposits between the years was driven by market and competitive factors following increases in the target Fed Funds Rate.

Interest expense on borrowing, which consisted solely of subordinated debt and junior subordinated debentures, increased $345,000, or 8.5%, to $4.4 million for the year ended December 31, 2023, from $4.1 million for the year ended December 31, 2022 due to higher overall interest rates.

The average balance of borrowings outstanding increased $451,000 to $72.5 million for the year ended December 31, 202 3, compared to $72.1 million for the year ended December 31, 2022.

The average cost of borrowings increased 45 basis points to 6.10% for the year ended December 31, 2023, from 5.66% for the year ended December 31, 2022.

Interest expense on borrowings, which consisted solely of subordinated debt and junior subordinated debentures, remained relatively unchanged between 2024 and 2023.

The average balance of borrowings outstanding decreased $218,000, or 0.3%, to $72.3 million for the year ended December 31, 202 4, compared to 2023.

At the same time, t he average cost of borrowings increased three basis points to 6.13% for the year ended December 31, 2024, from 6.10% for 2023.

Net interest income and net interest margin.

Net interest income increased $1.2 million, or 1.2%, to $97.9 million for the year ended December 31, 2023 compared to $96.7 million for the year ended December 31, 2022.

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

Net interest margin for the year ended December 31, 2023 was 4.05%, a 15 basis point increase from 3.90% for the year ended December 31, 2022.

The increase in net interest margin reflects the increased net interest income resulting from variable-rate interest-earning assets beginning to reprice higher, outpacing rising costs on average interest-bearing liabilities, and a lower average balance of interest earning assets.

The average yield on PPP loans for the year ended December 31, 2023 was 2.71%, including the recognition of deferred fees, resulting in a negative impact of one basis points to the net interest margin during the year ended December 31, 2023, compared to an average yield of 4.88%, including the recognition of deferred fees, resulting in a positive impact of eight basis points during the year ended December 31, 2022, respectively.

The impact of PPP loans on net interest margin in the future is expected to be negligeable, given that a significant portion of these loans in the portfolio have been repaid.

Accretion of acquisition accounting discounts on loans and the recognition of revenue from PCD loans in excess of discounts increased our net interest margin by three basis points and 11 basis points for the years ended December 31, 2023 and 2022, respectively.

The average yield on interest earning assets for the year ended December 31, 2023 was 5.23%, a 92 basis point increase from 4.31% for the year ended December 31, 2022, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the year ended December 31, 2022 was 1.87%, a 117 basis point increase from 0.70% for the year ended December 31, 2022.

Net interest income decreased $6.7 million, or 6.9%, to $91.1 million for the year ended December 31, 2024 compared to $97.9 million for the year ended December 31, 2023.

The decrease in net interest income primarily was due to decreases in interest income on loans, and higher funding costs related to our deposits, partially offset by increases in interest income on federal funds sold and interest-bearing balances in banks and, to a lesser extent, investment securities, including dividends on FRB and FHLB stock.

Net interest margin for the year ended December 31, 2024 was 3.74%, a 31 basis point decrease from 4.05% for the year ended December 31, 2023.

The decrease in net interest margin reflects increased funding costs, which outpaced, on a percentage basis, increasing yields on loans and investment securities.

The average yield on interest earning assets for the year ended December 31, 2024 was 5.40%, a 17 basis point increase from 5.23% for the year ended December 31, 2023, primarily due to higher market interest rates, while the average

cost of interest bearing liabilities for the year ended December 31, 2024 was 2.54%, a 67 basis point increase from 1.87% for the year ended December 31, 2023.

Average Balances, Interest and Average Yields/Cost.

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Yields have been calculated on a pre-tax basis.

Loan yields include the effect of amortization or accretion of deferred loan

fees/costs and purchase accounting premiums/ discounts to interest and fees on loans.

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.

Non-accrual loans are included in the average balance.

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Investments securities

Total loans (1)

Total interest earning assets

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Ratio of average interest earning assets to average interest bearing liabilities

(1) Average balances are average daily balances.

(1) Loan average balances are net of deferred origination fees and costs.

Non-accrual loans are included in the average balances.

Interest income on non-accruing loans is reflected in the period that it is collected, to the extent it is not applied to principal.

(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 earning assets.

(4) Average balances are average daily balances.

Rate/Volume Analysis.

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Provision for credit losses.

W e recorded a $2.0 million provision for credit losses for the year ended December 31, 2023, compared to a $4.4 million provision for loan losses for the year ended December 31, 2022, respectively.

As previously discussed, f or the year ended December 31, 2023, the provision for credit losses was primarily due to a $3.3 million increase in reserves for individually evaluated loans, $550,000 of net loan charge-offs during the year and an additional reserve taken on a loan to a Trust.

The increase in specific reserves included one commercial real estate loan and one multifamily loan.

Based on updated appraisals received during the fourth quarter of 2023, the underlying collateral values of these loans experienced declines due to property specific factors and conditions .

We recorded net charge-offs of $550,000 for the year ended December 31, 2023 compared to $3.2 million for the year ended December 31, 2022.

W e recorded a $1.3 million provision for credit losses for the year ended December 31, 2024, compared to a $2.0 million provision for credit losses for the year ended December 31, 2023.

As previously discussed, the provision for credit losses for the year ended December 31, 2024 was primarily driven by the replenishment of the allowance due to charge-offs and an increase in provision for credit losses for unfunded commitments.

Net charge-offs totaled $5.0 million for the year ended December 31, 2024, of which $3.2 million was specifically reserved for, compared to net charge-offs of $550,000 in 2023.

The reserve for individually evaluated loans decreased during the year primarily due to $3.2 million in charge-offs, as the associated collateral shortfalls were deemed uncollectable.

No changes were made to the qualitative risk factor conclusions during the year ended December 31, 2024.

Noninterest income.

Noninterest income increased $877,000, or 14.4%, to $7.0 million for the year ended December 31, 2023 compared to $6.1 million for the year ended December 31, 2022.

The increase was primarily due to a $3.4 million decrease in loss on equity securities and a $1.2 million increase in income on investment in a SBIC fund, partially offset by a $2.2 million decrease in gain on sale of loans as a result of a decrease in the volume of loans sold.

In addition, we recorded a $1.7 million bargain purchase gain related to the PEB merger in 2022, which did not recur in 2023.

During the year ended December 31, 2023, the Company sold $7.2 million of SBA loans (the guaranteed portion), which

generated a gain on sale of $508,000, compared to the sale of $34.0 million of SBA loans (the guaranteed portion) with a gain on sale of $2.7 million for the year ended December 31, 2022 .

Noninterest income decreased $600,000, or 8.6%, to $6.4 million for the year ended December 31, 2024 compared to $7.0 million for the year ended December 31, 2023.

The decrease was primarily due to a $500,000 loss on investment in a Small Business Investment Company (“SBIC”) fund in 2024 resulting from losses in the underlying fund, compared to a $1.1 million gain reported in 2023.

Additionally, decreases in loan servicing fees and other fees, gain on sale of loans, and service charges and other fees further contributed to the decline.

During the year ended December 31, 2024, the Company sold $3.6 million of SBA loans (the guaranteed portion), which generated a gain on sale of $287,000, compared to the sale of $7.2 million of SBA loans (the guaranteed portion) with a gain on sale of $508,000 for the year ended December 31, 2023 .

Offsetting these decreases was a $1.6 million increase in gain on equity securities resulting from positive fair value adjustments on these securities due to changes in market conditions.

The following table presents the key components of noninterest income for the years ended December 31, 2024 and 2023.

2022 (As Restated)

(Dollars in thousands)

Gain on sale of loans

Loss on equity securities

Gain (loss) on equity securities

Service charges and other fees

Loan servicing and other loan fees

Income on investment in SBIC fund

Bargain purchase gain

(Loss) income on investment in SBIC fund

Other income and fees

Total noninterest income

N/M - Not meaningful

Noninterest expense.

Noninterest expense decreased $1.3 million, or 1.9%, to $64.7 million for the year ended December 31, 2023 compared to $65.9 million for the year ended December 31, 2022 .

The changes in noninterest expense included a $1.2 million decrease in other noninterest expenses due primarily to $3.1 million in PEB acquisition-related expenses in 2022 with no similar expenses in 2023, and a $347,000 decrease in data processing expense due to $1.1 million in PEB acquisition-related expenses incurred in 2022 (absent in 2023) and vendor data processing invoice credits in 2023, partially offset by increased data processing volume, annual price increases, and data processing project expense in 2023.

There was also a $226,000 decrease in occupancy and equipment expense due to $375,000 of PEB acquisition-related expenses incurred in 2022 (absent in 2023), partially offset by increased depreciation and property maintenance expense.

Salaries and employee benefits increased $521,000 due to annual wage increases and an increase in full-time equivalent employees, partially offset by decreased incentive compensation expenses due to lower financial and operational performance of the Company.

Noninterest expense decreased $545,000, or 0.8%, to $64.1 million for the year ended December 31, 2024 compared to $64.7 million for the year ended December 31, 2023 .

The changes in noninterest expense included a $2.1 million decrease in salaries and employee benefits expense due to annual wage increases, partially offset by a $652,000 increase in data processing expense due to newly implemented services in the current year, a $517,000 increase in occupancy and equipment due to higher depreciation and property maintenance expense and $381,000 increase in other expense due to increased legal costs.

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

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Income taxes.

Income tax expense increased $2.0 million, or 23.3%, to $10.7 million for the year ended December 31, 2023 from $8.7 million for the year ended December 31, 2022, reflecting an increase in pre-tax income for the period ended December 31, 2023.

Income tax expense decreased $2.2 million, or 20.7%, to $8.5 million for the year ended December 31, 2024 from $10.7 million for the year ended December 31, 2023, reflecting an decrease in pre-tax income for the period ended December 31, 2024.

The Company’s effective tax rate was 26.5% for the year ended December 31, 2024 compared to 28.1% for 2023.

The effective tax rate for the year ended December 31, 2022 was positively impacted by the non-taxable bargain purchase gain in 2022.

Comparison of Operating Results for the Years Ended December 31, 2023 and 2022

For a discussion of the Company’s 2022 results compared to 2021, refer to Part I, Item 7 of our Annual Report on Form 10-K/A for the year ended December 31, 2022, which was filed with the SEC on July 25, 2023.

For a discussion of the Company’s 2023 results compared to 2022, refer to Part I, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on March 15, 2024.

Liquidity and Capital Resources

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

During the years ended December 31, 2023, 2022 and 2021, the Bank sold $9.6 million, $42.5 million and $45.8 million in loans and loan participation interests, and received $196.7 million, $469.6 million and $490.3 million in principal repayments, respectively.

During the years ended December 31, 2024, 2023 and 2022, the Bank sold $14.0 million , $9.6 million and

$42.5 million in loans and loan participation interests, and received $299.9 million, $196.7 million and $469.6 million in principal repayments, respectively.

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

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Liquid assets in the form of cash and cash equivalents, time deposit in banks and investment securities available-for-sale increased to $557.6 million at December 31, 2024 from $471.9 million at December 31, 2023.

Further, Management believes that our security portfolio is of high quality, ensuring marketability.

Further, management believes that our security portfolio is of high quality, helping to ensure marketability.

Securities purchased during the years ended December 31, 2024 and 2023, excluding FHLB and FRB stock, totaled $49.9 million and $25.3 million, while securities repayments, maturities and sales in those periods were $21.9 million, and $11.6 million, respectively.

Certificates of deposit scheduled to mature in one year or less at December 31, 2024, totaled $485.2 million.

It is management’s policy to manage deposit rates that are competitive with other local financial institutions and, as a result of this strategy, we believe that a significant portion of our maturing certificates of deposit will be retained.

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

As a result of this strategy, we believe that a significant portion of our maturing certificates of deposit will be retained.

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

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

In addition, 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 December 31, 2024, we had the ability to borrow up to $41.9 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.

Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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

Loan commitments and letters of credit were $77.4 million and $97.5 million, including $133,000 and $5.3 million of undisbursed construction and development loan commitments, at December 31, 2023 and 2022, respectively.

Loan commitments and letters of credit were $73.4 million and $77.4 million, including $9.6 million and $133,000 of undisbursed construction and development loan commitments, at December 31, 2024 and 2023, respectively.

For information regarding our commitments, see “Note 16 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in “Item 8.

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Net cash provided by operating activities was $31.5 million and $30.8 million for the years ended December 31, 2024 and 2023, respectively.

During the year ended December 31, 2023 and December 31, 2022, net cash provided by investing activities, which consisted primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $80.4 million and $53.9 million, respectively.

Financing activities, comprised primarily of net change in deposit, provided net cash of $19.5 million during the year ended December 31, 2023, compared to $296.4 million of net cash used in financing activities for the year ended December 31, 2022.

We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our

During the year ended December 31, 2024, net cash used in investing activities, which consisted primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $62.2 million compared to $80.4 million of net cash provided in investing activities for the year ended December 31, 2023.

Financing activities, comprised primarily of net change in deposits, provided net cash of $87.1 million and $19.5 million for the years ended December 31, 2024 and 2023, respectively.

We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment.

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The Bank utilizes funds to acquire, upgrade, and maintain its equipment, IT infrastructure and operating locations, with the investment intended to provide longer-term utility to the Company’s business.

Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises, IT infrastructure and equipment during the year ending December 31, 2024 that would materially impact liquidity.

Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises, IT infrastructure and equipment

during the year ending December 31, 2025 that would materially impact liquidity.

We also have purchase obligations, generally with remaining terms of less than three years and contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor.

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As of December 31, 2024, we project that our future commitments will include $14.4 million of operating lease payments.

There are $4.2 million of scheduled interest payments due on Notes and junior subordinate debentures in 2023 (excluding any other borrowings that may be made after December 31, 2023).

As of December 31, 2024, there were $4.1 million of scheduled interest payments due on subordinated notes and junior subordinated debentures (excluding any other borrowings that may be made after December 31, 2024).

In addition, at December 31, 2024, there were other future obligations and accrued expenses of $14.0 million.

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At December 31, 2024, the Company, on an unconsolidated basis, had liquid assets of $9.7 million.

In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, funds paid out for Company stock repurchases, and payments on trust-preferred securities and the Notes held at the Company level.

The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

During 2023, the Company declared $4.8 million of cash dividends on its common stock, of with $1.2 million remained to be paid on January 12, 2024.

During 2024, the Company declared $5.0 million of cash dividends on its common stock, of with $1.7 million remained to be paid subsequent to year-end.

The Company expects to continue to pay quarterly cash dividends on its common stock, subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason without prior notice.

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Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

In April 2023, the Company’s Board of Directors approved its seventh stock repurchase program, which was completed in August 2023, authorizing the Company to repurchase up to five percent of the Company’s common stock, or approximately 619,000 shares.

In August 2023, the Company’s Board of Directors approved its eighth stock repurchase program, authorizing the Company to repurchase up to five percent of the Company’s common stock, or approximately 588,000 shares, of which 359,752 shares remained available for repurchase at December 31, 2023.

In May 2024, the Company announced that its Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to five percent of BayCom’s common stock, or approximately 560,000 shares.

The repurchase program will expire on April 21, 2025, unless sooner completed.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis