BayCom Corp

Previous wording

General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 35 full-service branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado. The Company’s business activities generally are

Current wording

General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 35 full-service branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado. BayCom’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related data, relates primarily to the Bank.

Previous wording

Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. Since 2010, we have expanded our geographic footprint through 10 strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share. We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Las Vegas, Nevada, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, Colorado, provides us with access to low cost, stable core deposits that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. At June 30, 2024, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $1.9 billion in total loans, $2.2 billion in total deposits and $315.3 million in shareholders’ equity.

Current wording

Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. Since 2010, we have expanded our geographic footprint through ten strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share. We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Las Vegas, Nevada, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, Colorado, provides us with access to low cost, stable core deposits that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. At September 30, 2024, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $1.9 billion in total loans, $2.1 billion in total deposits and $321.7 million in shareholders’ equity.

Previous wording

We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At June 30, 2024, our $1.9 billion total loan portfolio included $343.5 million, or 18.4%, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.5 billion, or 81.6%, consisted of loans we originated.

Current wording

We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At September 30, 2024, our$1.9 billion total loan portfolio included $319.4 million, or 16.7%, of loans acquired through business combinations (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.6 billion, or 83.3%, consisted of loans we originated or purchased not as part of a business combination.

Previous wording

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, through July 2023, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points to a range of 5.25% to 5.50%, where it remained as of June 30, 2024. The increase in the average yield on interest-earning assets during the six months ended June 30, 2024 reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher.

Current wording

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. From March 2022 through July 2023, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve increased the target range for the federal funds rate by 525 basis points. This was followed by a 50-basis point reduction in September 2024 to a range of 4.75% to 5.00%, where it remained as of September 30, 2024. The increase in the average yield on interest-earning assets during the nine months ended September 30, 2024 reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher.

Previous wording

Noninterest income. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) gain (loss) on equity securities; and (iv) other noninterest income. Gain on sale

Current wording

Noninterest income. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; (iii) gain (loss) on equity securities; and (iv) other noninterest income. Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of Small Business Administration (“SBA”) loans, capitalized loan servicing rights and other related income.

Previous wording

Provision for credit losses. We established an allowance for credit losses by charging amounts to provision for credit losses at a level required to reflect estimated credit losses in the loan and available-for sale investment securities portfolios. For loans, management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors. See “Critical Accounting Policies and Estimates - Allowance for Credit Losses” for a description of the manner in which the provision for credit losses is established.

Current wording

Provision for credit losses. We have established an allowance for credit losses by charging amounts to provision for credit losses at a level required to reflect estimated credit losses in the loan and available-for sale investment securities portfolios. For loans, management considers many factors, including, among others, historical loss experience, types and amounts of loans in the portfolio and adverse situations that may affect borrowers’ ability to repay. See “Critical Accounting Policies and Estimates - Allowance for Credit Losses” for a description of the manner in which the provision for credit losses is established.

Previous wording

For investments, the Company evaluates investment available-for-sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Such situations may result from either a decline in the financial condition of the issuing entity or in the case of fixed interest rate investments, from rising interest rates. In making this assessment, management considers the length of time and the extent to which fair value is less than amortized cost, the nature of the security, the underlying collateral, and the financial condition and prospects of the issuer, among other factors. This assessment also includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for credit losses for available-for-sale securities is recognized in other comprehensive income. Changes in the allowance for credit losses for available-for-sale securities are recorded as provision for (or reversal of) credit loss. Losses are charged against the allowance for credit losses for available-for-sale securities, with a corresponding adjustment to the security's amortized cost basis, when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.

Current wording

For investments, the Company evaluates available-for-sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Such situations may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. In making this assessment, management considers the length of time and the extent to which fair value is less than amortized cost, the nature of the security, the underlying collateral, and the financial condition and prospects of the issuer, among other factors. This assessment also includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If the present value of the cash flows expected to be collected from the security is less than the amortized cost basis of the security, a credit loss exists and an allowance for credit losses for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for credit losses for available-for-sale securities is recognized in other comprehensive income. Changes in the allowance for credit losses for available-for-sale securities are recorded as provision for (or reversal of) credit loss. Losses are charged against the allowance for credit losses for available-for-sale securities, with a corresponding adjustment to the security's amortized cost basis, when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.

Previous wording

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. To prepare financial statements and interim financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes; and are based on information available as of the date of the financial statements. As this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

Current wording

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. To prepare financial statements and interim financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes and are based on information available as of the dates of the financial statements. As this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

Previous wording

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K. For a detailed discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2023 Form 10-K filed with the SEC on March 15, 2024.

Current wording

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Annual Report. For a detailed discussion, refer to “Management’s Discussion and

Previous wording

Total assets. Total assets increased $42.0 million, or 1.6%, to $2.6 billion at June 30, 2024, from December 31, 2023. The increase primarily was due to cash and cash equivalents increasing $83.7 million or 27.2% and investment securities available-for-sale increasing $20.5 million or 12.6%, partially offset by decreases in loans receivable, net of $63.7 million or 3.3%.

Current wording

Total assets. Total assets increased $10.4 million, or 0.4%, to $2.6 billion at September 30, 2024, from December 31, 2023. The increase primarily was due to investment securities available-for-sale increasing $30.6 million or 18.8%, partially offset by decreases in loans receivable, net of $12.0 million or 0.6% and cash and cash equivalents of $6.3 million or 2.0%.

Previous wording

Cash and cash equivalents. Cash and cash equivalents increased $83.7 million, or 27.2%, to $391.2 million, at June 30, 2024, from $307.5 million at December 31, 2023. The increase primarily was due to a $78.3 million increase in federal funds sold and interest bearing balances in banks due to repayment on loans coupled with a decline in loan demand.

Current wording

Cash and cash equivalents. Cash and cash equivalents decreased $6.3 million, or 2.0%, to $301.3 million, at September 30, 2024, from $307.5 million at December 31, 2023. The decrease primarily was due to a $14.0 million decrease in federal funds sold and interest bearing balances in banks, as excess funds were used to fund loan growth and the increase in investment securities.

Previous wording

Investment securities available-for-sale. Investment securities available-for-sale increased $20.5 million, or 12.6%, to $183.6 million at June 30, 2024 from $163.2 million at December 31, 2024. The increase primarily was due to the purchase of $26.6 million of investment securities and unrealized gains on investment securities available-for-sale of $1.4 million as a result of fair value adjustments, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured of $7.4 million during the six months ended June 30, 2024.

Current wording

Investment securities available-for-sale. Investment securities available-for-sale increased $30.6 million, or 18.8%, to $193.8 million at September 30, 2024 from $163.2 million at December 31, 2024. The increase was due to the purchase of $39.0 million of investment securities and $4.8 million of fair value upward adjustments due to unrealized gains on investment securities available-for-sale, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured of $13.1 million during the nine months ended September 30, 2024.

Previous wording

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

Current wording

Equity securities. Equity securities increased $1.7 million, or 13.9%, to $14.3 million at September 30, 2024 from $12.6 million at December 31, 2023, primarily due to mark-to-market upward adjustments recorded during the nine months ended September 30, 2024.

Previous wording

Loans receivable, net. We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Total loans decreased $63.6 million, or 3.3% to $1.8 billion at June 30, 2024 from $1.9 billion at December 31, 2023. The decrease was due to $136.8 million of loan repayments and $4.7 million in loans sold, partially offset by $50.0 million of new loan originations and $27.6 million of loan purchases.

Current wording

Loans receivable, net. We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Total loans decreased $12.0 million, or 0.6%, to $1.9 billion at September 30, 2024 from $1.9 billion at December 31, 2023. The decrease was due to $200.4 million of loan repaymentsand $14.0 million of loans sold, partially offset by $135.4 million of new loan originations and $64.4 million of loan purchases.

Previous wording

Acquired loans. As of June 30, 2024, acquired non-PCD loans totaled $159.5 million with a remaining net premium of $2.2 million, compared to $187.7 million with a remaining net premium of $2.1 million as of December 31, 2023. The net premium for acquired non-PCD loans includes a credit discount based on estimated losses in the acquired loans, partially offset by any premium based on market interest rates on the date of acquisition.

Current wording

Acquired loans. As of September 30, 2024, acquired non-PCD loans totaled $151.6 million, with a remaining net premium of $2.0 million, compared to $187.7 million with a remaining net premium of $2.1 million as of December 31, 2023. The net premium for acquired non-PCD loans includes a credit discount based on estimated losses in the acquired loans, partially offset by any premium based on market interest rates on the date of acquisition.

Previous wording

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

Current wording

As of September 30, 2024, acquired PCD loans totaled $25.2 million, with a remaining net non-credit discount of $1.6 million, compared to $27.5 million with a remaining net non-credit discount of $1.8 million as of December 31, 2023.

Previous wording

Nonperforming assets and loans. Nonperforming assets generally consists of nonperforming loans and other real estate owned (“OREO”). Nonperforming loans generally consist of nonaccrual loans and accruing loans 90 days or more past due. There were no accruing loans 90 days or more past due or other real estate owned (“OREO”) at both June 30, 2024 and December 31, 2023.

Current wording

Nonperforming assets and loans. Nonperforming assets generally consist of nonperforming loans and other real estate owned (“OREO”). Nonperforming loans generally consist of nonaccrual loans and accruing loans 90 days or more past due. There were no accruing loans 90 days or more past due or OREO at both September 30, 2024 and December 31, 2023.

Previous wording

Nonperforming loans, consisting solely of nonaccrual loans, totaled $16.1 million, or 0.87% of total loans, at June 30, 2024, compared to $13.0 million, or 0.67% of total loans, at December 31, 2023. The increase in nonperforming loans was primarily due to the placement of six new loans on nonaccrual totaling $7.3 million, partially offset by partial charge-offs of two nonaccrual loans totaling $2.9 million, charge-offs of five nonaccrual loans totaling $435,000 and, to a lesser extent, pay-offs of five nonaccrual loans totaling $305,000, all of which occurred during the first quarter of 2024. At June 30, 2024, nonperforming loans totaling $2.1 million were guaranteed by governmental agencies, compared to $740,000 at December 31, 2023. At June 30, 2024 and December 31, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.

Current wording

At September 30, 2024, nonperforming loans totaling $2.0 million were guaranteed by governmental agencies, compared to $740,000 at December 31, 2023. At September 30, 2024 and December 31, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.

Previous wording

At June 30, 2024 and December 31, 2023, nonaccrual loans included $3.2 million and $927,000 of loans 30-89 days past due, and $6.3 million and $2.1 million of loans less than 30 days past due, respectively. At June 30, 2024, the $6.3 million of nonaccrual loans less than 30 days past due was comprised of 19 loans, all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

Current wording

At September 30, 2024 and December 31, 2023, nonaccrual loans included $2.4 million and $927,000 of loans 30-89 days past due, and $4.6 million and $2.1 million of loans less than 30 days past due, respectively. At September 30, 2024, the $4.6 million of nonaccrual loans less than 30 days past due was comprised of 18 loans, all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.

Previous wording

Loans may be acquired at a premium or discount to par value, in which case the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay-off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.

Current wording

Loans may be acquired at a premium or discount to par value, in which case the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, over time, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off before maturity. Upon the pay-off of a loan before maturity, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.

Previous wording

Modified loans to borrowers experiencing financial difficulty.** **Occasionally, the Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or any combination of these. When principal forgiveness is provided, the amount of the forgiveness is charged-off against the allowance for credit losses for loans. Upon the Company’s subsequent determination that a modified loan (or a portion thereof) is uncollectible, the loan (or portion thereof) is charged off. The amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses for loans is adjusted by the same amount.

Current wording

Modified loans to borrowers experiencing financial difficulty.** **Occasionally, the Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or any combination of these. When principal is forgiven, the amount of the forgiveness is charged-off against the allowance for credit losses for loans. Upon the Company’s subsequent determination that a modified loan (or a portion thereof) is uncollectible, the loan (or portion thereof) is charged off. The amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses for loans is adjusted by the same amount.

Previous wording

Loan modifications to borrowers experiencing financial difficulty as of June 30, 2024 totaled $2.9 million, of which none were accruing and performing according to their modified terms, compared to $4.3 million, of which none were accruing and performing according to their modified terms, at December 31, 2023. Modified loans that are accruing and performing according to their modified terms are not considered nonperforming loans as they continue to accrue interest despite their modified status. The related allowance for credit losses on individually evaluated modified loans totaled $27,000 and $1.3 million at June 30, 2024 and December 31, 2023, respectively. This change in the ACL was due to one full charge-off and one partial charge-off totaling $1.3 million during the first quarter of 2024, all of which was specifically reserved for at December 31, 2023.

Current wording

Loan modifications to borrowers experiencing financial difficulty as of September 30, 2024 totaled $2.7 million, compared to $4.3 million at December 31, 2023. All of such loans were on nonaccrual status as of such dates. Modified loans that are accruing and performing according to their modified terms are not considered nonperforming loans because they continue to accrue interest despite their modified status. The related allowance for credit losses on individually evaluated modified loans totaled $26,000 and $1.3 million at September 30, 2024 and December 31, 2023, respectively. This decrease in the ACL was due to one full charge-off and one partial charge-off totaling $1.3 million in the aggregate during the first quarter of 2024, all of which was specifically reserved for at December 31, 2023.

Previous wording

Interest foregone on nonaccrual loans was approximately $226,000 and $709,000 for the three and six months ended June 30, 2024 compared to $185,000 and $631,000 for the three and six months ended June 30, 2023. Interest income recognized on nonaccrual loans was approximately $79,000 and $86,000 for the three and six months ended June 30, 2024 and $16,000 and $81,000 for the three and six months ended June 30, 2023, respectively.

Current wording

Interest foregone on nonaccrual loans was approximately $397,000 and $1.1 million for the three and nine months ended September 30, 2024, compared to $173,000 and $593,000 for the three and nine months ended September 30, 2023, respectively. Interest income recognized on nonaccrual loans was approximately $7,400 and $93,600 for the three and nine months ended September 30, 2024, and $39,000 and $120,000 for the three and nine months ended September 30, 2023, respectively.

Previous wording

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

Current wording

At September 30, 2024, the Company’s allowance for credit losses for loans was $18.3 million, or 0.96% of total loans, compared to $22.0 million, or 1.14% of total loans, at December 31, 2023. Management currently believes that the $18.3 million allowance for credit losses at September 30, 2024 is adequate to absorb expected credit losses inherent in

Previous wording

million allowance for credit losses at June 30, 2024 is adequate to absorb expected credit losses inherent in the Company’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

Current wording

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

Previous wording

We recorded net charge-offs of $76,000 and $3.5 million for the three and six months ended June 30, 2024, compared to net charge-offs of $60,000 and $375,000 for the three and six months ended June 30, 2023, respectively. Net charge-offs during the first six months of 2024 consisted primarily of charge-offs of six nonaccrual loans totaling $595,000 and partial charge-offs of two nonaccrual loans totaling $2.9 million, of which $3.2 million of were specifically reserved for, partially offset by the recovery of $97,000 on one nonaccrual loan. These charge-offs were due to collateral shortfall amounts being deemed uncollectable.

Current wording

We recorded net charge-offs of $1.5 million and $5.0 million for the three and nine months ended September 30, 2024, compared to net charge-offs of $24,000 and $399,000 for the three and nine months ended September 30, 2023, respectively. Net charge-offs during the first nine months of 2024 consisted primarily of a charge-off of one commercial nonaccrual loan, which was fully reserved for at June 30, 2024, a $480,000 charge-off related to a nonaccrual loan sold during the third quarter, and a complete write-down of one nonaccrual loan for $88,000, partially offset by two recoveries totaling $50,000 during the third quarter. These actions were taken due to collateral shortfalls deemed uncollectable.

Previous wording

As of June 30, 2024, the Company individually evaluated $21.9 million in loans, inclusive of the $16.1 million of nonperforming loans as of that date. Of these individually evaluated loans, $7.4 million had a specific allowance of $1.5 million as of June 30, 2024. As of December 31, 2023, the Company individually evaluated $13.0 million in loans, all of which were on nonaccrual status. Of these individually evaluated loans, $9.7 million had a specific allowance of $4.4 million as of December 31, 2023.

Current wording

As of September 30, 2024, the Company individually evaluated $18.1 million in loans, inclusive of the $9.7 million of nonperforming loans as of that date. Of these individually evaluated loans, $2.4 million had a specific allowance totaling $444,000 as of September 30, 2024. As of December 31, 2023, the Company individually evaluated $13.0 million in loans, all of which were on nonaccrual status. Of these individually evaluated loans, $9.7 million had a specific allowance totaling $4.4 million as of December 31, 2023.

Previous wording

Management considers the allowance for credit losses for loans at June 30, 2024 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for credit losses for loans or that any increased allowance for credit losses for loans that may be required will not adversely impact our financial condition and results of operations. A further decline in national and local economic conditions due to employment levels, labor shortages, the effects of inflation, a potential recession, slowed economic growth or otherwise, could result in a material increase in the allowance for credit losses for loans and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for credit losses for loans is subject to review by bank regulators, as part of their routine examination process, which may result in additions to our provision for credit losses based upon their judgment of information available to them at the time of their examination.

Current wording

Management considers the allowance for credit losses for loans at September 30, 2024 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for credit losses for loans or that any increased allowance for credit losses for loans that may be required will not adversely impact our financial condition and results of operations. A further decline in national and local economic conditions due to unemployment levels, labor shortages, the effects of inflation, a potential recession, slowed economic growth or otherwise, could result in a material increase in the allowance for credit losses for loans and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for credit losses for loans is subject to review by bank regulators, as part of their routine examination process, which may result in additions to our provision for credit losses based upon their judgment of information available to them at the time of their examination.

Previous wording

Deposits. Deposits are our primary source of funding and generally consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. 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.

Current wording

Deposits. Deposits are our primary source of funding and generally consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest bearing and noninterest bearing demand accounts, savings accounts, money market accounts, 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.

Previous wording

We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. We also offer an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insurance limits. At June 30, 2024, our average deposit account size (excluding public funds), calculated by dividing period-end deposits by the population of accounts with balances, was approximately $59,000. See Note 17 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our top ten depositors.

Current wording

We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. We also offer an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insurance limits. At September 30, 2024, our average deposit account size (excluding public funds), calculated by dividing period-end deposits by the population of accounts with balances, was approximately $60,000. See “Note 17 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our top ten depositors.

Previous wording

At June 30, 2024 and December 31, 2023, we had the ability to borrow up to $514.1 million and $576.9 million, respectively, from the FHLB of San Francisco. At both June 30, 2024 and December 31, 2023, there were no FHLB advances outstanding.

Current wording

At September 30, 2024 and December 31, 2023, we had the ability to borrow up to $512.7 million and $576.9 million, respectively, from the FHLB of San Francisco. At both September 30, 2024 and December 31, 2023, there were no FHLB advances outstanding.

Previous wording

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

Current wording

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 September 30, 2024, we had the ability to borrow up to $42.3 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.

Previous wording

Shareholders’ equity. Shareholders’ equity increased $2.4 million, to $315.3 million at June 30, 2024 from $312.9 million at December 31, 2023. The increase in shareholders’ equity primarily was due to $11.5 million of net income earned and a $990,000 decrease in accumulated other comprehensive loss, net of taxes, partially offset by the repurchase of $8.1 million of Company common stock and cash dividends paid or accrued payable totaling $2.3 million, during the first six months of 2024. During the six months ended June 30, 2024, the Company repurchased a total of 402,914 shares of its common stock at a total cost of $8.1 million, or $20.19 per share, leaving 516,838 shares available for future purchases under the current stock repurchase plan. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

Current wording

Shareholders’ equity. Shareholders’ equity increased $8.8 million, to $321.7 million at September 30, 2024 from $312.9 million at December 31, 2023. The increase in shareholders’ equity primarily was due to $17.5 million of net income earned and a $3.4 million decrease in accumulated other comprehensive loss, net of taxes, partially offset by the repurchase of $9.2 million of Company common stock and cash dividends paid or accrued and payable totaling $3.4 million, during the first nine months of 2024. During the nine months ended September 30, 2024, the Company repurchased a total of 454,154 shares of its common stock at a total cost of $9.2 million and an average price of $20.30 per share, leaving 465,598 shares available for future purchases under the current stock repurchase plan. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

Previous wording

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

Current wording

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023

Previous wording

Earnings summary. Net income was $5.6 million for the three months ended June 30, 2024, compared to $7.2 million for the three months ended June 30, 2023, a decrease of $1.6 million or 22.3%. The decrease was the result of a $2.0 million decrease in net interest income and a $1.4 million increase in the provision for credit losses, resulting from a $171,000 provision for credit losses for the current quarter compared to a $1.3 million reversal of credit losses in the same quarter a year ago, partially offset by a $397,000 increase in noninterest income, a $545,000 decrease in noninterest expenses, and a $869,000 decrease in provision for income taxes. Basic and diluted earnings per share were $0.50 for the three months ended June 30, 2024, compared to $0.59 for the three months ended June 30, 2023.

Current wording

Earnings summary. Net income was $6.0 million for the three months ended September 30, 2024, compared to $6.6 million for the three months ended September 30, 2023, a decrease of $613,000 or 9.2%. The decrease was the result of a $1.9 million decrease in net interest income and a $571,000 increase in provision for credit losses, partially offset by a $1.1 million increase in noninterest income, a $445,000 decrease in noninterest expense, and a $366,000 decrease in provision for income taxes. Basic and diluted earnings per share were $0.54 for the three months ended September 30, 2024, compared to $0.56 for the three months ended September 30, 2023.

Previous wording

Net income was $11.5 million for the six months ended June 30, 2024, compared to $14.4 million for the six months ended June 30, 2023, a decrease of $2.9 million or 20.3%. The decrease was the result ofa $4.8 million decrease in net interest income and a $1.4 million increase in the provision for credit losses, resulting from a $423,000 provision for credit losses for the six months ended June 30, 2024 compared to a $985,000 reversal of credit losses in the same period a year ago, partially offset by a $898,000 increase in noninterest income, a $1.0 million decrease in noninterest expense and a $1.4 million decrease in provision for income taxes. Basic anddiluted earnings per share were $1.01 for the six months ended June 30, 2024, compared to $1.16 for the six months ended June 30, 2023.

Current wording

Net income was $17.5 million for the nine months ended September 30, 2024, compared to $21.0 million for the nine months ended September 30, 2023, a decrease of $3.5 million or 16.8%. The decrease was due toa $6.8 million decrease in net interest income and a $2.0 million increase in provision for credit losses, resulting from a $1.7 million provision for credit losses for the nine months ended September 30, 2024 compared to a $311,000 reversal of credit losses in the same period a year ago, partially offset by a $2.0 million increase in noninterest income, a $1.4 million decrease in noninterest expense and a $1.8 million decrease in provision for income taxes. Basic anddiluted earnings per share were $1.55 for the nine months ended September 30, 2024, compared to $1.72 for the nine months ended September 30, 2023.

Previous wording

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for credit losses and noninterest income, was 67.34% and 66.49% for the three and six months ended June 30, 2024, compared to 65.27% and 63.40% for the three and six months ended June 30, 2023, respectively. The deterioration in the efficiency ratio during the three months and six months June 30, 2024 as compared to the same periods in 2023 was primarily due to lower overall revenues, partially offset by lower noninterest expenses.

Current wording

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for (reversal of) credit losses and noninterest income, was 62.76% and 65.20% for the three and nine months ended September 30, 2024, compared to 62.42% and 63.07% for the three and nine months ended September 30, 2023, respectively. The deterioration in the efficiency ratio during the three months and nine months September 30, 2024 as compared to the same periods in 2023 was primarily due to lower overall revenues, partially offset by lower noninterest expenses.

Previous wording

Interest income. Interest income for the three months ended June 30, 2024 was $32.4 million, compared to $31.3 million for the three months ended June 30, 2023, an increase of $1.1 million or 3.7%. The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, except loans. Increased yields earned on interest-earning assets, along with an increase in the average balances of investment securities and fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income, partially offset by a decrease in the average balance of loans.

Current wording

Interest income. Interest income for the three months ended September 30, 2024 was $33.4 million, compared to $32.8 million for the three months ended September 30, 2023, an increase of $596,000 or 1.8%. The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, except loans. Increased yields earned on interest-earning assets, along with an increase in the average balances of investment securities and fed funds sold and interest bearing balances in banks, were the primary drivers of the increase in interest income, partially offset by a decrease in the average balance of loans.

Previous wording

Interest income on loans, including fees, decreased $1.7 million, or 6.2%, to $25.0 million for the three months ended June 30, 2024 from $26.7 million for three months ended June 30, 2023, primarily due to a $168.5 million decrease in the average balance of loans, partially offset by a 13 basis point increase in the average loan yield. The average balance of loans was $1.9 billion for the second quarter of 2024, compared to $2.0 billion for the second quarter of 2023. The average yield on loans was 5.41% for the three months ended June 30, 2024, compared to 5.28% for the three months ended June 30, 2023. The increase in the average yield on loans from the second quarter of 2023 was due to the impact of increased rates on variable rate loans as well as new loans being originated at higher market interest rates.

Current wording

Interest income on loans, including fees, decreased $997,000, or 3.7%, to $26.2 million for the three months ended September 30, 2024 from $27.2 million for three months ended September 30, 2023, due to a $105.3 million decrease in the average balance of loans, partially offset by a 11 basis point increase in the average loan yield. The average balance of loans was $1.9 billion for the third quarter of 2024, compared to $2.0 billion for the third quarter of 2023. The average yield on loans was 5.53% for the three months ended September 30, 2024, compared to 5.42% for the three months ended September 30, 2023. The increase in the average yield on loans from the third quarter of 2023 was due to the impact of increased rates on variable rate loans, as well as new loans being originated at higher market interest rates.

Previous wording

Interest income on loans for the three months ended June 30, 2024 and 2023 included $124,000 and $5,000 in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts. The balance of the remaining net discounts on these acquired loans totaled $540,000 and $331,000 at June 30, 2024 and 2023, respectively. Interest income on loans for the three months ended June 30, 2024 and 2023, included $70,000 and $48,000, respectively, in fees related to prepayment penalties.

Current wording

Interest income on loans for the three months ended September 30, 2024 and 2023 included $114,000 and $372,000 in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts. The balance of the remaining net discounts on these acquired loans totaled $449,000 and $419,000 at September 30, 2024 and 2023, respectively. Interest income on loans for the three months ended September 30, 2024 and 2023, included $12,000 and $142,000, respectively, in fees related to prepayment penalties.