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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 203 added, 193 removed, 351 unchanged (53% of the section changed)

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In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank).

We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (the “Bank” or “CVCB”).

We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, El Dorado, Madera, Merced, Placer, Sacramento, Stanislaus, San Joaquin, and Tulare Counties of central California.

On October 10, 2023, the Company, entered into an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”) with Community West Bancshares, a California corporation (“Community West”), pursuant to which Community West will merge with and into the Company in an all stock merger (the “Merger”), with the Company as the surviving corporation.

Promptly following the completion of the Merger, Community West Bank, N.A.

a national banking association chartered by the Office of the Comptroller of the Currency and a wholly owned subsidiary of Community West (“CWB”) will merge with and into CVCB, with CVCB as the surviving entity (the “Bank Merger”) and will continue the commercial banking operations of the combined bank following the bank merger.

Effective with the Merger and the Bank Merger the Company and CVCB will be rebranded and change their names to “Community West Bancshares” and “Community West Bank”, respectively.

Upon consummation of the Merger, each share of Community West common stock, no par value per share, outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive 0.79 of a share of the Company’s common stock, no par value (the “per share exchange ratio”).

Any fractional shares will be paid in cash equal to the product of (i) such fraction, multiplied by the closing price of the Company’s common stock reported on NASDAQ on the last trading day preceding the closing date.

Based on the closing price of the Company’s common stock on October 10, 2023, the aggregate merger consideration would be approximately $99.4 million, or $11.15 per share of Community West common stock, assuming 8,851,380 shares of Community West Common Stock and 601,503 Community West stock options outstanding.

The completion of the Merger is subject to certain customary conditions and the transaction is expected to close in the second quarter of 2024.

Dividend Declared

On July 19, 2023, the Board of Directors declared a $0.12 per share cash dividend payable on August 18, 2023 to shareholders of record as of August 4, 2023.

On October 18, 2023, the Board of Directors declared a $0.12 per share cash dividend payable on November 17, 2023 to shareholders of record as of November 3, 2023.

Critical Accounting Policies and Estimates

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Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolios, as well as the prevailing economic conditions and forecasts utilized.

Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

Material changes to these and other relevant factors may result in greater volatility to the reserve for

credit losses, and therefore, greater volatility to our reported earnings.

See Note 1 to the Consolidated Financial Statements and the “ Allowance for Credit Losses on Loans ” section below.

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Financial Highlights

The significant highlights for the Company as of or for the period ended June 30, 2023 included the following:

• Net income for the second quarter of 2023 decreased to $6,282,000 or $0.54 per diluted common share, compared to $6,970,000 and $0.59, respectively, in the first quarter of 2023.

• Net loans decreased $5.3 million or 0.42%, and total assets increased $67.3 million or 2.78% at June 30, 2023 compared to December 31, 2022.

• Total deposits increased 4.79% to $2.20 billion at June 30, 2023 compared to December 31, 2022.

• Total cost of deposits increased to 0.88% for the quarter ended June 30, 2023 compared to 0.20% for the quarter ended March 31, 2023.

• Average non-interest bearing demand deposit accounts as a percentage of total average deposits was 43.53% and 43.92% for the quarters ended June 30, 2023 and 2022, respectively.

• Net interest margin decreased to 3.46% for the quarter ended June 30, 2023, from 3.81% for the quarter ended March 31, 2023.

• There were no non-performing assets for the quarter ended June 30, 2023.

Additionally, net loan recoveries were $22,000 and loans delinquent more than 30 days were $252,000.

• Capital positions remain strong at June 30, 2023 with a 8.51% Tier 1 Leverage Ratio;

The significant highlights for the Company as of or for the period ended September 30, 2023 included the following:

• Net income for the third quarter of 2023 increased to $6,390,000 or $0.54 per diluted common share, compared to $6,282,000 and $0.54, respectively, in the second quarter of 2023.

• Net loans increased $14.4 million or 1.16%, and total assets increased $12.8 million or 0.53% at September 30, 2023 compared to December 31, 2022.

During the quarter, net loans increased $19.7 million or 1.59%.

• Total deposits increased 2.34% to $2.15 billion at September 30, 2023 compared to December 31, 2022.

• Total cost of deposits increased to 0.90% for the quarter ended September 30, 2023 compared to 0.88% for the quarter ended June 30, 2023.

• Average non-interest bearing demand deposit accounts as a percentage of total average deposits was 44.54% and 50.42% for the quarters ended September 30, 2023 and December 31, 2022, respectively.

• Net interest margin increased to 3.47% for the quarter ended September 30, 2023, from 3.46% for the quarter ended June 30, 2023.

• There were no non-performing assets for the quarter ended September 30, 2023.

Additionally, net loan charge-offs were $194,000 and loans delinquent more than 30 days were $236,000.

• Capital positions remain strong at September 30, 2023 with a 8.70% Tier 1 Leverage Ratio;

a 12.51% Common Equity Tier 1 Ratio;

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and a 15.81% Total Risk-Based Capital Ratio.

• The Company declared a $0.12 per common share cash dividend, payable on August 18, 2023 to shareholders of record as of August 4, 2023.

• The Company declared a $0.12 per common share cash dividend, payable on November 17, 2023 to shareholders of record as of November 3, 2023.

The following is management’s discussion and analysis of the Company’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.

RESULTS OF OPERATIONS

For the Three Months Ended For the Six Months Ended

June 30, March 31, June 30, June 30, June 30,

For the Three Months Ended For the Nine Months Ended

September 30, June 30, September 30, September 30, September 30,

(In thousands, except share and per-share amounts) 2023 2023 2022 2023 2022

Net interest income before (credit) provision for credit losses $ 20,527 $ 20,205 $ 20,164 $ 62,313 $ 57,571

(Credit) provision for credit losses (343) 518 — 290 —

Provision (credit) for credit losses 186 (343) 495 476 495

Net interest income after (credit) provision for credit losses 20,341 20,548 19,669 61,837 57,076

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Net income $ 6,390 $ 6,282 $ 6,384 $ 19,642 $ 19,012

Net income decreased to $6,282,000 for the three months ended June 30, 2023 compared to $6,542,000 for the three months ended June 30, 2022.

Basic and diluted earnings per share for the quarter ended June 30, 2023 were $0.54.

Net income increased to $6,390,000 for the three months ended September 30, 2023 compared to $6,384,000 for the three months ended September 30, 2022.

Basic and diluted earnings per share for the quarter ended September 30, 2023 were $0.54.

Basic and diluted earnings per share for the same period in 2022 were $0.55.

Net income for the period was impacted by an increase in total non-interest expenses of $1,722,000, primarily driven by the increase in costs for salaries and employee benefits and non-recurring one-time expenses in professional services, and an increase in the provision for income taxes of $100,000, partially offset by an increase in net interest income before provision for credit losses of $395,000 and an increase in non-interest income of $824,000.

During the quarter ended June 30, 2023, the Company recorded a $343,000 credit for credit losses, compared to no provision during the quarter ended June 30, 2022.

Net income increased to $13,252,000 for the six months ended June 30, 2023 compared to $12,628,000 for the six months ended June 30, 2022.

Basic and diluted earnings per share for the six months ended June 30, 2023 were $1.13.

Basic and diluted earnings per share for the same period in 2022 were $1.08 and $1.07, respectively.

Annualized return on average equity (“ROAE”) was 14.44% for the six months ended June 30, 2023 compared to 12.35% for the six months ended June 30, 2022.

Annualized return on average assets (“ROAA”) for the six months ended June 30, 2023 and 2022 was 1.08% and 1.03%, respectively.

The increase in net income for the six months ended June 30, 2023 compared to the same period in 2022 was primarily driven by an increase of $11,483,000 in total interest income, offset by an increase in total interest expense of $7,104,000.

Additionally, the six month period saw an increase in non-interest income of $565,000 and an increase in non-interest expense of $3,482,000.

During the six months ended June 30, 2023, the Company recorded a $290,000 provision for credit losses, compared to no provision during the six months ended June 30, 2022.

The provision for credit loses resulted from our assessment of the overall adequacy of the allowance for credit losses on HTM debt securities and loans, including unfunded commitments.

Net income for the period was impacted by an increase in total non-interest expenses of $633,000, primarily driven by the increase in non-recurring expenses in professional services and regulatory assessment expense, and an increase in the provision for income taxes of $136,000, partially offset by an increase in net interest income before provision for credit losses of $363,000 and an increase in non-interest income of

During the quarter ended September 30, 2023, the Company recorded a $186,000 provision for credit losses, compared to $495,000 provision during the quarter ended September 30, 2022.

Net income increased to $19,642,000 for the nine months ended September 30, 2023 compared to $19,012,000 for the nine months ended September 30, 2022.

Basic and diluted earnings per share for the nine months ended September 30, 2023 were $1.67.

Basic and diluted earnings per share for the same period in 2022 were $1.62.

Annualized return on average equity (“ROAE”) was 14.16% for the nine months ended September 30, 2023 compared to 12.98% for the nine months ended September 30, 2022.

Annualized return on average assets (“ROAA”) for the nine months ended September 30, 2023 and 2022 was 1.06% and 1.04%, respectively.

The increase in net income for the nine months ended September 30, 2023 compared to the same period in 2022 was primarily driven by an increase of $16,957,000 in total interest income, offset by an increase in total interest expense of $12,215,000.

Additionally, the nine month period saw an increase in non-interest income of $668,000 and an increase in non-interest expense of $4,115,000.

During the nine months ended September 30, 2023, the Company recorded a $476,000 provision for credit losses, compared to $495,000 provision during the nine months ended September 30, 2022.

The provision for credit loses resulted from our assessment of the overall adequacy of the allowance for credit losses on loan, HTM debt securities, and unfunded commitments.

Net Interest Income and Net Interest Margin

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For the Three Months Ended

June 30, 2023 For the Three Months Ended

June 30, 2022

September 30, 2023 For the Three Months Ended

September 30, 2022

(Dollars in thousands) Average

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Net interest income and net interest margin (4) $ 20,898 3.47 % $ 20,650 3.57 %

(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $374 and $499 at June 30, 2023 and June 30, 2022, respectively.

(2) Loan interest income includes loan fees of $26 and $226 at June 30, 2023 and June 30, 2022, respectively.

(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $371 and $486 at September 30, 2023 and September 30, 2022, respectively.

(2) Loan interest income includes loan costs of $8 and $80 at September 30, 2023 and September 30, 2022, respectively.

(3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans.

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SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

For the Six Months Ended

June 30, 2023 For the Six Months Ended

June 30, 2022

For the Nine Months Ended

September 30, 2023 For the Nine Months Ended

September 30, 2022

(Dollars in thousands) Average

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Net interest income and net interest margin (4) $ 63,431 3.59 % $ 58,939 3.42 %

(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $747 and $882 at June 30, 2023 and June 30, 2022, respectively.

(2) Loan interest income includes loan fees of $36 and $490 at June 30, 2023 and June 30, 2022, respectively.

(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,118 and $1,368 at September 30, 2023 and September 30, 2022, respectively.

(2) Loan interest income includes loan fees of $27 and $410 at September 30, 2023 and September 30, 2022, respectively.

(3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans.

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Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

Changes in Volume/Rate For the Three Months Ended June 30, 2023 and 2022 For the Six Months Ended June 30, 2023 and 2022

Changes in Volume/Rate For the Three Months Ended September 30, 2023 and 2022 For the Nine Months Ended September 30, 2023 and 2022

(In thousands) Volume Rate Net Volume Rate Net

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(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Comparison of the quarter ended June 30, 2023 and June 30, 2022

The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, decreased 2 basis points to 3.46% for the second quarter of 2023, from 3.48% for the second quarter of 2022.

Average interest earning assets were $2,387,046,000 for the three months ended June 30, 2023 compared to $2,338,381,000 for the three months ended June 30, 2022.

The $48,665,000 increase in average earning assets was attributed to the $172,097,000 or 15.85% increase in average loans, partially offset by the $123,432,000 decrease in average total securities and interest-earning deposits.

For the three months ended June 30, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 60 basis points.

Comparison of the quarter ended September 30, 2023 and September 30, 2022

The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, decreased 10 basis points to 3.47% for the third quarter of 2023, from 3.57% for the third quarter of 2022.

Average interest earning assets were $2,386,913,000 for the three months ended September 30, 2023 compared to $2,291,728,000 for the three months ended September 30, 2022.

The $95,185,000 increase in average earning assets was attributed to the $76,534,000 or 6.43% increase in average loans, a $103,007,000 increase in interest-earning deposits, partially offset by a $84,356,000 decrease in investment securities.

For the three months ended September 30, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 80 basis points.

The effective yield on loans increased 64 basis points.

Average interest bearing liabilities increased 2.38% to $1,319,141,000 for the three months ended June 30, 2023, compared to $1,288,451,000 for the same period in 2022.

Interest and fee income from loans increased $4,499,000 or 34.92% for the three months ended June 30, 2023 compared to the same period in 2022.

Net interest income during the three months ended June 30, 2023 was impacted by an increase in average total loans of $172,097,000 or 15.85% to $1,257,984,000 compared to $1,085,887,000 for the same period in 2022.

The yield on average loans, excluding nonaccrual loans, was 5.54% for the three months ended June 30, 2023 compared to 4.76% for the same period in 2022.

Net interest income for the period ending June 30, 2023 was benefited by approximately $40,000 in nonrecurring income from prepayment penalties, compared to $184,000 recorded in the same period in 2022.

The impact to interest income from the accretion of the loan marks on acquired loans was $72,000 and $102,000 for the three months ended June 30, 2023 and 2022, respectively.

Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) increased $1,023,000 in the three months ended June 30, 2023 to $8,605,000 compared to $7,582,000 for the same period in 2022.

The yield on average total investments (total securities and interest-earning deposits) increased 60 basis points to 3.18% for the three month period ended June 30, 2023

compared to 2.58% for the same period in 2022.

Average total securities and interest-earning deposits for the three month period ended June 30, 2023 decreased $123,432,000 or 9.85% to $1,129,062,000 compared to $1,252,494,000 for the same period in 2022.

Total interest income on a non-tax equivalent basis for the three months ended June 30, 2023 increased $5,522,000 or 26.98% to $25,987,000 compared to $20,465,000 for the three months ended June 30, 2022.

The yield on interest earning assets increased 83 basis points to 4.43% on a fully tax equivalent basis for the three months ended June 30, 2023 from 3.60% for the period ended June 30, 2022.

Average interest bearing liabilities increased 11.07% to $1,295,863,000 for the three months ended September 30, 2023, compared to $1,166,728,000 for the same period in 2022.

Interest and fee income from loans increased $2,984,000 or 20.29% for the three months ended September 30, 2023 compared to the same period in 2022.

The yield on average loans, excluding nonaccrual loans, was 5.54% for the three months ended September 30, 2023 compared to 4.90% for the same period in 2022.

Interest income from interest-earning deposits in other banks increased $1,433,000 in the three months ended September 30, 2023 to $1,481,000 compared to $48,000 for the same period in 2022.

The yield on average interest-earning deposits increased 232 basis points to 5.42% for the three month period ended September 30, 2023 compared to 3.10% for the same period in 2022.

Average interest-earning deposits for the three month period ended September 30, 2023 increased $103,007,000 or 1,663.55% to $109,199,000 compared to $6,192,000 for the same period in 2022.

Interest income from total investment securities increased $942,000 in the three months ended September 30, 2023 to $7,664,000 compared to $6,722,000 for the same period in 2022.

The yield on average total investment securities increased 58 basis points to 3.03% for the three month period ended September 30, 2023 compared to 2.45% for the same period in 2022.

Average total investment securities for the three month period ended September 30, 2023 decreased $84,356,000 or 7.70% to $1,011,418,000 compared to $1,095,774,000 for the same period in 2022.

Total interest income for the three months ended September 30, 2023 increased $5,474,000 or 26.08% to $26,466,000 compared to $20,992,000 for the three months ended September 30, 2022.

The yield on interest earning assets increased 74 basis points to 4.46% on a fully tax equivalent basis for the three months ended September 30, 2023 from 3.72% for the period ended September 30, 2022.

The increase was the result of yield changes, increase in interest rates, and asset mix changes.

Average interest earning assets increased to $2,387,046,000 for the three months ended June 30, 2023 compared to $2,338,381,000 for the three months ended June 30, 2022.

Interest expense on deposits for the three months ended June 30, 2023 and 2022 was $4,871,000 and $231,000, respectively.

The average interest rate on interest bearing deposits increased to 1.56% for the three months ended June 30, 2023 compared to 0.08% for the same period ended June 30, 2022.

Average interest-bearing deposits increased 3.26% or $39,472,000 to $1,249,488,000 for the three months ended June 30, 2023 compared to $1,210,016,000 for the same period ended June 30, 2022.

Average other borrowed funds were $69,653,000 with an effective rate of 5.23% for the three months ended June 30, 2023 compared to $78,435,000 with an effective rate of 2.16% for the three months ended June 30, 2022.

Total interest expense on other borrowed funds was $911,000 for the three months ended June 30, 2023 and $424,000 for the three months ended June 30, 2022.

The cost of interest-bearing liabilities increased 156 basis points to 1.76% for the three month period ended June 30, 2023 compared to 0.20% for the same period in 2022.

The cost of total deposits increased to 0.88% compared to 0.04% for the three month periods ended June 30, 2023 and 2022, respectively.

Average non-interest bearing demand deposits increased 1.62% to $963,104,000 for the three month period ended June 30, 2023 compared to $947,724,000 for the same period in 2022.

The ratio of average non-interest bearing demand deposits to average total deposits decreased to 43.53% in the three month period ended June 30, 2023 compared to 43.92% for the same period in 2022.

Net interest income before the provision for credit losses for the three months ended June 30, 2023 increased by $395,000 or 1.99% to $20,205,000 compared to $19,810,000 for the same period in 2022.

The increase was a result of yield changes, asset mix changes, a credit to the provision for credit losses, and an increase in average earning assets, offset by an increase in interest expense on average interest bearing liabilities.

Comparison of the six months ended June 30, 2023 and June 30, 2022

The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, increased 31 basis points to 3.65% for the six months ended June 30, 2023, from 3.34% for the same period of 2022.

Average interest earning assets were $2,347,965,000 for the six months ended June 30, 2023 compared to $2,311,916,000 for the six months ended June 30, 2022.

The $36,049,000 increase in average earning assets was attributed to the $207,303,000 or 19.71% increase in average loans, partially offset by the $171,254,000 decrease in average total securities and interest-earning deposits.

For the six months ended June 30, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 77 basis points.

Average interest earning assets increased to $2,386,913,000 for the three months ended September 30, 2023 compared to $2,291,728,000 for the three months ended September 30, 2022.

Interest expense on deposits for the three months ended September 30, 2023 and 2022 was $5,015,000 and $231,000, respectively.

The average interest rate on interest bearing deposits increased to 1.62% for the three months ended September 30, 2023 compared to 0.08% for the same period ended September 30, 2022.

Average interest-bearing deposits increased 10.87% or $120,238,000 to $1,226,172,000 for the three months ended September 30, 2023 compared to $1,105,934,000 for the same period ended September 30, 2022.

Average other borrowed funds were $69,691,000 with an effective rate of 5.30% for the three months ended September 30, 2023 compared to $60,794,000 with an effective rate of 3.93% for the three months ended September 30, 2022.

Total interest expense on other borrowed funds was $924,000 for the three months ended September 30, 2023 and $597,000 for the three months ended September 30, 2022.

The cost of interest-bearing liabilities increased 154 basis points to 1.82% for the three month period ended September 30, 2023 compared to 0.28% for the same period in 2022.

The cost of total deposits increased to 0.90% compared to 0.04% for the three month periods ended September 30, 2023 and 2022, respectively.

Average non-interest bearing demand deposits decreased 5.45% to $984,912,000 for the three month period ended September 30, 2023 compared to $1,041,698,000 for the same period in 2022.

The ratio of average non-interest bearing demand deposits to average total deposits decreased to 44.54% in the three month period ended September 30, 2023 compared to 48.50% for the same period in 2022.

Net interest income before the provision for credit losses for the three months ended September 30, 2023 increased by $363,000 or 1.80% to $20,527,000 compared to $20,164,000 for the same period in 2022.

The increase was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in interest expense on average interest bearing liabilities.

Comparison of the nine months ended September 30, 2023 and September 30, 2022

The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, increased 17 basis points to 3.59% for the nine months ended September 30, 2023, from 3.42% for the same period of 2022.

Average interest earning assets were $2,361,091,000 for the nine months ended September 30, 2023 compared to $2,305,113,000 for the nine months ended September 30, 2022.

The $55,978,000 increase in average earning assets was attributed to the $163,235,000 or 14.86% increase in average loans and a $18,855,000 increase in interest-earning deposits, partially offset by the $126,112,000 decrease in average total investment securities.

For the nine months ended September 30, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 79 basis points.

The effective yield on loans increased 66 basis points.

Average interest bearing liabilities decreased 1.17% to $1,253,697,000 for the six months ended June 30, 2023, compared to $1,268,492,000 for the same period in 2022.

Interest and fee income from loans increased $9,115,000 or 36.40% for the six months ended June 30, 2023 compared to the same period in 2022.

Net interest income during the first six months of 2023 was impacted by an increase in average total loans of $207,303,000 or 19.71% to $1,259,075,000 compared to $1,051,772,000 for the same period in 2022.

The yield on average loans, excluding nonaccrual loans, was 5.47% for the six months ended June 30, 2023 compared to 4.80% for the same period in 2022.

Net interest income for the six months ending June 30, 2023 was benefited by approximately $42,000 in nonrecurring income from prepayment penalties, compared to $470,000 recorded in the same period in 2022.

The impact to interest income from the accretion of the loan marks on acquired loans was $139,000 and $342,000 for the six months ended June 30, 2023 and 2022, respectively.

The remaining balance of accretable loan marks on acquired loans as of June 30, 2023 was $1,133,000.

Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) increased $2,368,000 in the first six months of 2023 to $15,971,000 compared to $13,603,000 for the same period in 2022.

The yield on average total investments (total securities and

interest-earning deposits) increased 77 basis points to 3.07% for the six months period ended June 30, 2023 compared to 2.30% for the same period in 2022.

Average total securities and interest-earning deposits for the first six months of 2023 decreased $171,254,000 or 13.59% to $1,088,890,000 compared to $1,260,144,000 for the same period in 2022.

Income from these investments represents 38.22% of net interest income for the first six months of 2023 compared to 36.36% for the same period in 2022.

Total interest income on a non-tax equivalent basis for the six months ended June 30, 2023 increased $11,483,000 or 29.71% to $50,130,000 compared to $38,647,000 for the six months ended June 30, 2022.

The yield on interest earning assets increased 92 basis points to 4.37% on a fully tax equivalent basis for the six months ended June 30, 2023 from 3.45% for the six months ended June 30, 2022.

Average interest bearing liabilities increased 2.73% to $1,267,907,000 for the nine months ended September 30, 2023, compared to $1,234,199,000 for the same period in 2022.

Interest and fee income from loans increased $12,099,000 or 30.44% for the nine months ended September 30, 2023 compared to the same period in 2022.

The yield on average loans, excluding nonaccrual loans, was 5.50% for the nine months ended September 30, 2023 compared to 4.84% for the same period in 2022.

Net interest income for the nine months ending September 30, 2023 was benefited by approximately $87,000 in nonrecurring income from prepayment penalties, compared to $562,000 recorded in the same period in 2022.

The impact to interest income from the accretion of the loan marks on acquired loans was $209,000 and $445,000 for the nine months ended September 30, 2023 and 2022, respectively.

The remaining balance of accretable loan marks on acquired loans as of September 30, 2023 was $1,063,000.

Interest income from interest-earning deposits in other banks increased $2,773,000 in the nine months ended September 30, 2023 to $2,930,000 compared to $157,000 for the same period in 2022.

The yield on average interest-earning deposits increased 485 basis points to 5.22% for the nine month period ended September 30, 2023 compared to 0.37% for the same period in 2022.

The increases period-to-period were impacted by the Federal Reserve Bank's rate hikes since the first quarter of 2022, in which rates have increased by 525 basis points, from 0.25% to 5.50%.

These have also impacted the increase in the

cost of deposits are this is primarily attributed to volume and rate increases in the money market and time deposit portfolios.

Average interest-earning deposits for the nine month period ended September 30, 2023 increased $18,855,000 or 33.71% to $74,780,000 compared to $55,925,000 for the same period in 2022.

Interest income from total investment securities increased $1,835,000 in the nine months ended September 30, 2023 to $22,933,000 compared to $21,098,000 for the same period in 2022.

The yield on average total investment securities increased 54 basis points to 2.98% for the nine month period ended September 30, 2023 compared to 2.44% for the same period in 2022.

Average total investment securities for the nine month period ended September 30, 2023 decreased $126,112,000 or 10.96% to $1,024,802,000 compared to $1,150,914,000 for the same period in 2022.

Total interest income for the nine months ended September 30, 2023 increased $16,957,000 or 28.43% to $76,596,000 compared to $59,639,000 for the nine months ended September 30, 2022.

The yield on interest earning assets increased 86 basis points to 4.40% on a fully tax equivalent basis for the nine months ended September 30, 2023 from 3.54% for the nine months ended September 30, 2022.

The increase was the result of yield changes, increase in interest rates, and asset mix changes.

Average interest earning assets increased to $2,347,965,000 for the six months ended June 30, 2023 compared to $2,311,916,000 for the six months ended June 30, 2022.

Interest expense on deposits for the six months ended June 30, 2023 and 2022 was $5,876,000 and $483,000, respectively.

The average interest rate on interest bearing deposits increased to 1.02% for the six months ended June 30, 2023 compared to 0.08% for the same period ended June 30, 2022.

Average interest-bearing deposits decreased 4.35% or $52,648,000 to $1,156,782,000 for the six months ended June 30, 2023 compared to $1,209,430,000 for the same period ended June 30, 2022.

Average other borrowed funds were $96,915,000 with an effective rate of 5.09% for the six months ended June 30, 2023 compared to $59,062,000 with an effective rate of 2.56% for the six months ended June 30, 2022.

Total interest expense on other borrowed funds was $2,468,000 for the six months ended June 30, 2023 and $757,000 for the six months ended June 30, 2022.

Average interest earning assets increased to $2,361,091,000 for the nine months ended September 30, 2023 compared to $2,305,113,000 for the nine months ended September 30, 2022.

Interest expense on deposits for the nine months ended September 30, 2023 and 2022 was $10,890,000 and $714,000, respectively.

The average interest rate on interest bearing deposits increased to 1.23% for the nine months ended September 30, 2023 compared to 0.08% for the same period ended September 30, 2022.

Average interest-bearing deposits increased 0.48% or $5,613,000 to $1,180,166,000 for the nine months ended September 30, 2023 compared to $1,174,553,000 for the same period ended September 30, 2022.

Average other borrowed funds were $87,741,000 with an effective rate of 5.16% for the nine months ended September 30, 2023 compared to $59,646,000 with an effective rate of 3.03% for the nine months ended September 30, 2022.

Total interest expense on other borrowed funds was $3,393,000 for the nine months ended September 30, 2023 and $1,354,000 for the nine months ended September 30, 2022.

Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1 st , subordinated debt, senior debt, advances on lines of credit, advances from the Federal Home Loan Bank (“FHLB”) , and overnight borrowings.

The cost of interest-bearing liabilities increased 114 basis points to 1.34% for the six months ended June 30, 2023 compared to 0.20% for the same period in 2022.

The cost of total deposits increased to 0.55% compared to 0.05% for the six months ended June 30, 2023 and 2022, respectively.

Average non-interest bearing demand deposits increased 4.89% to $990,505,000 for the six months ended June 30, 2023 compared to $944,362,000 for the same period in 2022.

The ratio of average non-interest bearing demand deposits to average total deposits increased to 46.13% in the six months ended June 30, 2023 compared to 43.85% for the same period in 2022.

Net interest income before the provision for credit losses for the six months ended June 30, 2023 increased by $4,379,000 or 11.71% to $41,786,000 compared to $37,407,000 for the same period in 2022.

The cost of interest-bearing liabilities increased 129 basis points to 1.51% for the nine months ended September 30, 2023 compared to 0.22% for the same period in 2022.

The cost of total deposits increased to 0.67% compared to 0.04% for the nine months ended September 30, 2023 and 2022, respectively.

Average non-interest bearing demand deposits increased 1.17% to $988,620,000 for the nine months ended September 30, 2023 compared to $977,164,000 for the same period in 2022.

The ratio of average non-interest bearing demand deposits to average total deposits increased to 45.58% in the nine months ended September 30, 2023 compared to 45.41% for the same period in 2022.

Net interest income before the provision for credit losses for the nine months ended September 30, 2023 increased by $4,742,000 or 8.24% to $62,313,000 compared to $57,571,000 for the same period in 2022.

The increase was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in interest expense on average interest bearing liabilities.

2 unchanged sentences

For the Three Months

Ended June 30, For the Six Months

Ended June 30,

Ended September 30, For the Nine Months

Ended September 30,

(Dollars in thousands) 2023 2022 2023 2022

7 unchanged sentences

Managing high-risk credits includes developing a business strategy with the customer to mitigate our potential losses.

Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent,

additional provisions may be necessary.

Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.

Management believes that the level of allowance for credit losses has been adjusted accordingly.

During the three and six month periods ended June 30, 2023, the Company recorded a $184,000 and $702,000 provision for credit losses on loans, respectively, compared to no provisi on durin g the three and six month periods ended June 30, 2022.

The Company had net recoveries totaling $22,000 and $9,000 for the three months ended June 30, 2023 and 2022, respectively, and net recoveries totaling $3,000 and $273,000 for the six months ended June 30, 2023 and 2022, respectively.

During the three and nine month periods ended September 30, 2023, the Company recorded a $265,000 and $967,000 provision for credit losses on loans, respectively, compared to $495,000 provisi on durin g the three and nine month periods ended September 30, 2022.

The Company had net charge-offs totaling $194,000 and $7,000 for the three months ended September 30, 2023 and 2022, respectively, and net charge-offs of $191,000 for the nine months ended September 30, 2023.

The Company had net recoveries totaling $266,000 for the nine months ended September 30, 2022.

The Company has been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses.

As of June 30, 2023, there were $25,435,000 in classified loans of which $1,339,000 related to commercial and industrial loans, $1,160,000 to agricultural production, $2,142,000 to owner occupied real estate, $16,603,000 to real estate construction and other land loans, $2,378,000 to non-owner occupied real estate, $1,766,000 to farmland, and $47,000 to consumer.

As of September 30, 2023, there were $24,740,000 in classified loans of which $279,000 related to commercial and industrial loans, $1,366,000 to agricultural production, $2,126,000 to owner occupied real estate, $18,380,000 to real estate construction and other land loans, $2,362,000 to non-owner occupied real estate, $196,000 to farmland, and $31,000 to consumer.

This compares to $27,783,000 in classified loans of which $1,655,000 related to commercial and industrial loans, $5,399,000 to agricultural production, $2,169,000 to owner occupied real estate, $15,024,000 to real estate construction and other land loans, $2,412,000 to non-owner occupied real estate, $824,000 to farmland, $266,000 to 1-4 family revolving, and $34,000 to consumer as of December 31, 2022.

1 unchanged sentence

Non-interest income is comprised of customer service charges, loan placement fees, net gains/losses on sales and calls of investment securities, appreciation in cash surrender value of bank-owned life insurance, FHLB dividends, and other income.

Non-interest income was $1,594,000 for the three months ended June 30, 2023 compared to $770,000 for the same period in 2022.

The $824,000 or 107.01% increase in non-interest income during the three months ended June 30, 2023 was primarily driven by a positive change of $930,000 in net realized loss on sales and calls of investment securities from $969,000 at June 30, 2022 to $39,000 at June 30, 2023 and an increase of $154,000 in other income.

Non-interest income was $1,583,000 for the three months ended September 30, 2023 compared to $1,480,000 for the same period in 2022.

The $103,000 or 6.96% increase in non-interest income during the three months ended September 30, 2023 was primarily driven by an increase of $191,000 in other income.

The increase in other income was the result of increased miscellaneous fee activity.

These increases were partially offset by decreases in loan placement fees of $36,000 and a decrease in service charge income of $99,000.

Non-interest income was $3,169,000 for the six months ended June 30, 2023 compared to $2,604,000 for the same period in 2022.

The $565,000 or 21.70% increase in non-interest income during the six months ended June 30, 2023 was primarily driven by a positive change of $506,000 in net realized loss on sales and calls of investment securities from $763,000 at June 30, 2022 to $257,000 at June 30, 2023 and an increase of $611,000 in other income.

Non-interest income was $4,752,000 for the nine months ended September 30, 2023 compared to $4,084,000 for the same period in 2022.

The $668,000 or 16.36% increase in non-interest income during the nine months ended September 30, 2023 was primarily driven by a positive change of $481,000 in net realized losses on sales and calls of investment securities from $777,000 at September 30, 2022 to $296,000 at September 30, 2023 and an increase of $801,000 in other income.

The increase in other income was primarily the result of less loss on equity investments recognized during the periods.

These increases were partially offset by decreases in loan placement fees of $307,000 and a decrease in service charge income of $426,000.

1 unchanged sentence

We currently hold $7,136,000 in FHLB stock.

We received dividends totaling $106,000 and $215,000 in the three and six months ended June 30, 2023, respectively, compared to $82,000 and $167,000 for the three and six months ended June 30, 2022, respectively.

We received dividends totaling $134,000 and $349,000 in the three and nine months ended September 30, 2023, respectively, compared to $91,000 and $258,000 for the three and nine months ended September 30, 2022, respectively.

The following table shows significant components of other non-interest income for the periods indicated:

For the Three Months

Ended June 30, For the Six Months

Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

7 unchanged sentences

Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, internet banking, and data processing are the major categories of non-interest expenses.

Non-interest expenses increased $1,722,000 or 14.25% to $13,805,000 for the three months ended June 30, 2023, compared to $12,083,000 for the three months ended June 30, 2022.

The net increase for the three months ended June 30, 2023 was primarily the result of increases in salaries and employee benefits of $919,000, professional services of $419,000, regulatory assessments of $162,000, information technology of $107,000, and directors’ expenses of $103,000, partially offset by a decrease of the amortization of core deposit intangibles of $106,000 and occupancy and equipment expense of $80,000.

Non-interest expenses increased $3,482,000 or 14.80% to $27,010,000 for the six months ended June 30, 2023, compared to $23,528,000 for the six months ended June 30, 2022.

The net increase for the six month period was primarily the result of increases in salaries and employee benefits of $2,009,000, professional services of $397,000, directors’ expenses of $221,000, and information technology of $196,000, partially offset by a decrease of the amortization of core deposit intangible of $212,000.

Salaries and employee benefits increased $2,009,000 or 14.35% to $16,010,000 for the first six months of 2023 compared to $14,001,000 for the six months ended June 30, 2022.

Non-interest expenses increased $633,000 or 4.94% to $13,436,000 for the three months ended September 30, 2023, compared to $12,803,000 for the three months ended September 30, 2022.

The net increase for the three months ended September 30, 2023 was primarily the result increases in professional services of $229,000, regulatory assessments of $134,000, information technology of $36,000, and directors’ expenses of $59,000, partially offset by a decrease of the amortization of core deposit intangibles of $139,000 and occupancy and equipment expense of $127,000.

Non-interest expenses increased $4,115,000 or 11.33% to $40,446,000 for the nine months ended September 30, 2023, compared to $36,331,000 for the nine months ended September 30, 2022.

The net increase for the nine month period was primarily the result of increases in salaries and employee benefits of $1,982,000, professional services of $625,000, directors’ expenses of $280,000, and information technology of $232,000, partially offset by a decrease of the amortization of core deposit intangible of $351,000.

Salaries and employee benefits increased $1,982,000 or 9.22% to $23,483,000 for the first nine months of 2023 compared to $21,501,000 for the nine months ended September 30, 2022.

The increase in salaries and benefits and director expenses was primarily due to credits in post-retirement costs recorded in the prior year, a result of changes in the discount rate compared to expense in the current period.

Additionally, increases in salaries and benefits were a reflection of salary adjustments due to market conditions.

Full time equivalent employees were 246 for the six months ended June 30, 2023, compared to 244 for the six months ended June 30, 2022.

The following table shows significant components of other non-interest expense for the periods indicated:

For the Three Months

Ended June 30, For the Six Months

Ended June 30,

Full time equivalent employees were 248 for the nine months ended September 30, 2023, compared to 249 for the nine months ended September 30, 2022.

The following table shows significant components of non-interest expense for the periods indicated:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Regulatory assessments $ 356 $ 194 $ 162 83.5 % $ 566 $ 416 $ 150 36.1 %

Salaries and employee benefits $ 7,474 $ 7,500 (26) (0.3) % $ 23,483 $ 21,501 1,982 9.2 %

Occupancy and equipment 1,490 1,363 127 9.3 % 4,012 3,869 143 3.7 %

Information technology 915 879 36 4.1 % 2,697 2,465 232 9.4 %

Professional Services 842 613 229 37.4 % 2,076 1,451 625 43.1 %

Data processing expense 680 560 120 21.4 % 1,949 1,649 300 18.2 %

Regulatory assessments 358 224 134 59.8 % 924 640 284 44.4 %

ATM/Debit card expenses 192 176 16 9.1 % 569 588 (19) (3.2) %

Internet banking 47 48 (1) (2.1) % 82 69 13 18.8 %

Advertising 124 138 (14) (10.1) % 249 278 (29) (10.4) %

Professional Services 883 464 419 90.3 % 1,235 838 397 47.4 %

Information technology 935 828 107 12.9 % 1,782 1,586 196 12.4 %

Directors’ expenses 150 91 59 64.8 % 464 184 280 152.2 %

Advertising 133 138 (5) (3.6) % 382 416 (34) (8.2) %

Loan related expenses 106 156 (50) (32.1) % 393 349 44 12.6 %

Personnel other 51 57 (6) (10.5) % 373 219 154 70.3 %

Internet banking 40 29 11 37.9 % 121 98 23 23.5 %

Amortization of core deposit intangibles — 139 (139) (100.0) % 68 419 (351) (83.8) %

Other 1,005 878 127 14.5 % 2,935 2,483 452 18.2 %

Total other non-interest expense $ 4,565 $ 3,682 $ 883 24.0 % $ 8,479 $ 7,021 $ 1,458 20.8 %

Total non-interest expense $ 13,436 $ 12,803 $ 633 4.9 % $ 40,446 $ 36,331 $ 4,115 11.3 %

Provision for Income Taxes

Our effective income tax rate was 24.65% and 24.94% and for the three and six month periods ended June 30, 2023, respectively, compared to 23.01% and 23.39% for the three and six month periods ended June 30, 2022, respectively.

The Company reported an income tax provision of $2,055,000 and $4,403,000 for the three and six month periods ended June 30, 2023, respectively, compared to $1,955,000 and $3,855,000 for the three and six month periods ended June 30, 2022, respectively.

The effective tax rate was affected by the change in tax-exempt interest.

Our effective income tax rate was 24.72% and 24.87% and for the three and nine month periods ended September 30, 2023, respectively, compared to 23.51% and 23.43% for the three and nine month periods ended September 30, 2022, respectively.

The Company reported an income tax provision of $2,098,000 and $6,501,000 for the three and nine month periods ended September 30, 2023, respectively, compared to $1,962,000 and $5,817,000 for the three and nine month periods ended September 30, 2022, respectively.

The effective tax rate was affected by a decrease in the amount of tax-exempt interest recognized during the three and nine month periods ended September 30, 2023.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income.

If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the

amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria.

As of June 30, 2023 and December 31, 2022, there was no reserve for uncertain tax positions.

If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria.

As of September 30, 2023 and December 31, 2022, there was no reserve for uncertain tax positions.

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

Total assets were $2,489,807,000 as of June 30, 2023, compared to $2,422,519,000 at December 31, 2022, an increase of 2.78% or $67,288,000.

Total gross loans were $1,255,658,000 at June 30, 2023, compared to $1,256,304,000 at December 31, 2022, an decrease of $646,000 or 0.05%.

Total cash and cash equivalents increased 312.76% or $97,488,000 to $128,658,000 at June 30, 2023 compared to $31,170,000 at December 31, 2022.

The investment portfolio decreased 1.75% or $30,297,000 to $930,193,000 at June 30, 2023 compared to $960,490,000 at December 31, 2022.

Total deposits increased 4.79% or $100,645,000 to $2,200,294,000 at June 30, 2023, compared to $2,099,649,000 at December 31, 2022.

Shareholders’ equity increased $12,700,000 or 7.27% to $187,360,000 at June 30, 2023, compared to $174,660,000 at December 31, 2022.

The increase in shareholders’ equity was driven by the change in the unrealized losses on investment securities and the retention of e arnings, partially offset by dividends paid.

Accrued interest payable and other liabilities was $32,482,000 at June 30, 2023, compared to $32,611,000 at December 31, 2022, an decrease of $129,000.

Our investment portfolio consists primarily of U.S.

Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity.

As of June 30, 2023, investment securities with a fair value of $340,310,000, or 36.84% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.

Total assets were $2,435,359,000 as of September 30, 2023, compared to $2,422,519,000 at December 31, 2022, an increase of 0.53% or $12,840,000.

Total gross loans were $1,275,411,000 at September 30, 2023, compared to $1,256,304,000 at December 31, 2022, an increase of $19,107,000 or 1.52%.

Total cash and cash equivalents increased 139.25% or $43,405,000 to $74,575,000 at September 30, 2023 compared to $31,170,000 at December 31, 2022.

The investment portfolio decreased 3.30% or $57,255,000 to $903,235,000 at September 30, 2023 compared to $960,490,000 at December 31, 2022.

Total deposits increased 2.34% or $49,193,000 to $2,148,842,000 at September 30, 2023, compared to $2,099,649,000 at December 31, 2022.

Shareholders’ equity increased $6,990,000 or 4.00% to $181,650,000 at September 30, 2023, compared to $174,660,000 at December 31, 2022.

The increase in shareholders’ equity was driven by the retention of e arnings, issuance of common stock, partially offset by the change in unrealized loss and dividends paid.

Accrued interest payable and other liabilities was $35,159,000 at September 30, 2023, compared to $32,611,000 at December 31, 2022, an increase of $2,548,000.

Our investment portfolio consists primarily of private label mortgage, U.S.

Government sponsored entities and agencies collateralized by residential mortgage backed obligations, asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity.

As of September 30, 2023, investment securities with a fair value of $328,700,000, or 36.65% of our investment

securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.

The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio.

Our loan-to-deposit ratio at June 30, 2023 was 57.07% compared to 59.83% at December 31, 2022 and 53.94% at June 30, 2022.

The total investment portfolio decreased 1.75% or $30,297,000 to $930,193,000 at June 30, 2023 compared to $960,490,000 at December 31, 2022.

The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $85,234,000 at June 30, 2023, compared to net unrealized losses of $91,643,000 at December 31, 2022 and $80,011,000 at June 30, 2022.

Our loan-to-deposit ratio at September 30, 2023 was 59.35% compared to 59.83% at December 31, 2022 and 53.94% at September 30, 2022.

The total investment portfolio decreased 3.30% or $57,255,000 to $903,235,000 at September 30, 2023 compared to $960,490,000 at December 31, 2022.

The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $101,302,000 at September 30, 2023, compared to net unrealized losses of $91,643,000 at December 31, 2022 and $80,011,000 at September 30, 2022.

See Note 2 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio.

Total gross loans decreased $646,000 or 0.05% to $1,255,658,000 as of June 30, 2023, compared to $1,256,304,000 as of December 31, 2022.

Total gross loans increased $19,107,000 or 1.52% to $1,275,411,000 as of September 30, 2023, compared to $1,256,304,000 as of December 31, 2022.

The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:

Loan Type (Dollars in thousands) June 30, 2023 % of Total

Loan Type (Dollars in thousands) September 30, 2023 % of Total

Loans December 31, 2022 % of Total

16 unchanged sentences

Total loans $ 1,259,877 $ 1,245,456

As of June 30, 2023, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.1% of total loans.

This level of concentration of commercial loans and loans collateralized by real estate is consistent with 96.8% of total loans at December 31, 2022.

As of September 30, 2023, in management’s judgment, a concentration of loans existed in loans commercial real estate representing approximately 63.2% of total loans.

This level of concentration of commercial real estate is consistent with 61.4% of total loans at December 31, 2022.

Although management believes the loans within this concentration have no more than the normal risk of collectability, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The Company does not engage in any sub-prime mortgage lending activities.

At June 30, 2023, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $67,523,000, of which $1,788,000 were commercial loans, $61,225,000 were real estate loans, and $4,510,000 were consumer loans.

At December 31, 2022, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $73,456,000, of which $2,049,000 were commercial loans, $66,583,000 were real estate loans, and $4,824,000 were consumer loans.

At September 30, 2023, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $63,155,000, of which $1,701,000 were commercial loans, $57,187,000 were real estate loans, and $4,267,000 were consumer loans.

At December 31, 2022, loans acquired in the FLB, SVB and VCB acquisitions

had a balance of $73,456,000, of which $2,049,000 were commercial loans, $66,583,000 were real estate loans, and $4,824,000 were consumer loans.

We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels.

8 unchanged sentences

or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.

At June 30, 2023 and December 31, 2022 there were no nonperforming assets.

At September 30, 2023 and December 31, 2022 there were no nonperforming assets.

Allowance for Credit Losses on Loans

2 unchanged sentences

The following table summarizes the allocation for the allowance for credit losses by loan type as of the dates indicated (in thousands):

Loan Type June 30, 2023 December 31, 2022

Loan Type September 30, 2023 December 31, 2022

Commercial and industrial $ 915 $ 1,583

12 unchanged sentences

Total allowance for credit losses $ 15,534 $ 10,848

As of June 30, 2023, the balance in the allowance for credit losses (ACL) on loans was $15,463,000, or 1.23% of total gross loans, compared to $10,848,000, or 0.86% of total gross loans, as of December 31, 2022.

As of September 30, 2023, the balance in the allowance for credit losses (ACL) on loans was $15,534,000, or 1.22% of total gross loans, compared to $10,848,000, or 0.86% of total gross loans, as of December 31, 2022.

The increase is attributed to the impact of the adoption of ASU 2016-13 and increases in the balance of the Company’s loan portfolio.

The balance of unfunded commitments to extend credit on construction and other loans and letters of credit was $266,410,000 as of June 30, 2023, compared to $288,141,000 as of December 31, 2022.

At June 30, 2023 and December 31, 2022, the balance of the reserve for unfunded commitments was $629,000 and $110,000, respectively.

The balance of unfunded commitments to extend credit on construction and other loans and letters of credit was $271,215,000 as of September 30, 2023, compared to $288,141,000 as of December 31, 2022.

At September 30, 2023 and December 31, 2022, the balance of the reserve for unfunded commitments was $725,000 and $110,000, respectively.

The reserve for unfunded commitments is calculated by management using appropriate, systematic, and consistently applied processes.

While related to credit losses, this allocation is not a part of the ACL and is considered separately as a liability for accounting and regulatory reporting purposes.

While related to credit losses, this allocation is not a part of the ACL on loans and is considered separately as a liability for accounting and regulatory reporting purposes.

The following table illustrates and sets forth additional analysis which portrays the trends that are occurring in the loan portfolio.

June 30, 2023 December 31, 2022 June 30, 2022

September 30, 2023 December 31, 2022 September 30, 2022

(Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans

Past due loans 254 0.02 % 5,895 0.47 % 207 0.02 %

Past due loans greater than 30 days 236 0.02 % 5,895 0.47 % 207 0.02 %

Nonaccrual loans — — % — — % 271 0.02 %

1 unchanged sentence

All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, are insured by the FDIC up to standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.

Total deposits increased $100,645,000 or 4.79% to $2,200,294,000 as of June 30, 2023, compared to $2,099,649,000 as of December 31, 2022.

Interest-bearing deposits increased $200,124,000 or 19.19% to $1,243,206,000 as of June 30, 2023, compared to $1,043,082,000 as of December 31, 2022.

Non-interest bearing deposits decreased $99,479,000 or 9.42% to $957,088,000 as of June 30, 2023, compared to $1,056,567,000 as of December 31, 2022.

Average non-interest bearing

deposits to average total deposits was 46.13% for the six months ended June 30, 2023 compared to 43.85% for the same period in 2022.

The composition of the deposits and year-to-date average effective rates at June 30, 2023 and December 31, 2022 is summarized in the table below.

(Dollars in thousands) June 30, 2023 % of

Deposits Average Effective

Total deposits increased $49,193,000 or 2.34% to $2,148,842,000 as of September 30, 2023, compared to $2,099,649,000 as of December 31, 2022.

Interest-bearing deposits increased $115,252,000 or 11.05% to $1,158,334,000 as of September 30, 2023, compared to $1,043,082,000 as of December 31, 2022.

Non-interest bearing deposits decreased $66,059,000 or 6.25% to $990,508,000 as of September 30, 2023, compared to $1,056,567,000 as of December 31, 2022.

Average non-interest bearing deposits to average total deposits was 45.58% for the nine months ended September 30, 2023 compared to 45.41% for the same period in 2022.

The composition of the deposits and year-to-date average interest rates at September 30, 2023 and December 31, 2022 is summarized in the table below.

(Dollars in thousands) September 30, 2023 % of

Deposits Average Interest

Rate December 31, 2022 % of

Deposits Average Effective

Deposits Average Interest

NOW accounts $ 257,267 12.0 % 0.13 % $ 324,089 15.4 % 0.06 %

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Total deposits $ 2,148,842 100.0 % $ 2,099,649 100.0 %

As of June 30, 2023 there was $776,137,000 in uninsured deposits or 35.27% of total deposits, compared to $900,123,000 and 42.87% as of December 31, 2022.

As of September 30, 2023 there was $883,505,000 in uninsured deposits or 41.12% of total deposits, compared to $975,791,000 and 46.47% as of December 31, 2022.

Other Borrowings

As of June 30, 2023 the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances.

As of September 30, 2023 the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances.

At December 31, 2022 the Company had $46,000,000 in FHLB advances.

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The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.

Our shareholders’ equity was $187,360,000 at June 30, 2023, compared to $174,660,000 at December 31, 2022.

The increase from December 31, 2022 in shareholders’ equity is the result of a decrease in accumulated other comprehensive loss of $5,359,000, an increase in retained earnings from net income of $13,252,000, stock issued under the employee stock purchase plan of $123,000, the effect of share-based compensation expense of $298,000, and stock awarded to employees of $221,000, offset by common stock cash dividends of $2,821,000 and the adoption of ASU 2016-13 of $3,731,000.

During the first six months of 2023, the Company declared and paid $2,821,000 in cash dividends ($0.24 per common share) to holders of common stock.

The Company declared and paid $2,824,000 in cash dividends ($0.24 per common share) to holders of common stock during the six months ended June 30, 2022 .

The following table presents the Company’s regulatory capital r atios as of June 30, 2023 and December 31, 2022.

Our shareholders’ equity was $181,650,000 at September 30, 2023, compared to $174,660,000 at December 31, 2022.

The increase from December 31, 2022 in shareholders’ equity is the result of an increase in retained earnings from net income of $19,642,000, stock issued under the employee stock purchase plan of $163,000, and the effect of share-based compensation expense of $689,000, offset by common stock cash dividends of $4,238,000, an increase in accumulated other comprehensive loss of $5,534,000, and the adoption of ASU 2016-13 of $3,731,000.

During the first nine months of 2023, the Company declared and paid $4,238,000 in cash dividends ($0.36 per common share) to holders of common stock.

The Company declared and paid $4,231,000 in cash dividends ($0.36 per common share) to holders of common stock during the nine months ended September 30, 2022 .

The following table presents the Company’s regulatory capital r atios as of September 30, 2023 and December 31, 2022.

(Dollars in thousands)

June 30, 2023 Amount Ratio

September 30, 2023 Amount Ratio

Tier 1 Leverage Ratio $ 217,797 8.70 %

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Total Risk-Based Capital Ratio $ 268,890 15.81 %

December 31, 2022

December 31, 2022 Amount Ratio

Tier 1 Leverage Ratio $ 205,154 8.37 %

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Total Risk-Based Capital Ratio $ 250,556 14.92 %

The following table presents the Bank’s regulatory capital ratios as of June 30, 2023 and December 31, 2022.

The following table presents the Bank’s regulatory capital ratios as of September 30, 2023 and December 31, 2022.

(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ”

June 30, 2023 Amount Ratio Amount Ratio Amount Ratio

September 30, 2023 Amount Ratio Amount Ratio Amount Ratio

Tier 1 Leverage Ratio $ 280,627 11.21 % $ 100,095 4.00 % $ 125,119 5.00 %

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Total Risk-Based Capital Ratio $ 297,167 17.47 % $ 136,072 10.50 % $ 170,090 10.00 %

December 31, 2022

December 31, 2022 Amount Ratio Amount Ratio Amount Ratio

Tier 1 Leverage Ratio $ 266,373 10.86 % $ 98,075 4.00 % $ 122,594 5.00 %

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These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities.

As of June 30, 2023, the Company had unpledged securities totaling $589,883,000 available as a secondary source of liquidity and total cash and cash equivalents of $128,658,000.

Cash and cash equivalents at June 30, 2023 increased 312.76% compared to $31,170,000 at December 31, 2022.

As of September 30, 2023, the Company had unpledged securities totaling $574,535,000 available as a secondary source of liquidity and total cash and cash equivalents of $74,575,000.

Cash and cash equivalents at September 30, 2023 increased 139.25% compared to $31,170,000 at December 31, 2022.

Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses.

As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks.

At June 30, 2023, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent

banks, $347,510,000 in unused FHLB secured advances, a $4,583,000 secured credit line at the Federal Reserve Bank, and $37,968,000 available under the Federal Reserve’s Bank Term Loan Funding Program.

At September 30, 2023, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $340,197,000 in unused FHLB secured advances, a $4,242,000 secured credit line at the Federal Reserve Bank, and $37,245,000 available under the Federal Reserve’s Bank Term Loan Funding Program.

We believe our liquidity sources to be stable and adequate.

At June 30, 2023, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at June 30, 2023 and December 31, 2022:

Credit Lines (In thousands) June 30, 2023 December 31, 2022

At September 30, 2023, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at September 30, 2023 and December 31, 2022:

Credit Lines (In thousands) September 30, 2023 December 31, 2022

Unsecured Credit Lines

22 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