United Security Bancshares and Subsidiaries

Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity (Unaudited)

~~(unaudited)~~For the Three Months Ended June 30, 2023 and 2022


	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)	Number of Shares	Amount						Total
Balance March 31, 2022	17,034,407	$	59,736	$	62,314	$	(8,474)	$	113,576
Other comprehensive loss	—	—		—		(5,235)		(5,235)
Dividends payable ($0.11 per share)	—	—		(1,875)		—		(1,875)

Restricted stock units released	6,142	—		—		—		—

Director stock grant	—	47		—		—		47
Stock-based compensation expense	—	53		—		—		53
Net income	—	—		3,435		—		3,435
Balance June 30, 2022	17,040,549	$	59,836	$	63,874	$	(13,709)	$	110,001

Balance March 31, 2023	17,094,298	$	60,269	$	69,495	$	(16,856)	$	112,908
Other comprehensive income	—	—		—		228		228
Dividends payable ($0.12 per share)	—	—		(2,055)		—		(2,055)
Restricted stock units released	35,640	—		—		—		—

Director stock grant	—	41		—		—		41
Stock options exercised	—	106		—		—		106
Stock-based compensation expense	—	35		—		—		35
Net income	—	—		4,417		—		4,417
Balance June 30, 2023	17,129,938	$	60,451	$	71,857	$	(16,628)	$	115,680

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Common stock
(In thousands except shares) Number of Shares Amount Retained Earnings Accumulated Other Comprehensive Loss Total

Balance December 31, 2015* 16,051,406
$ 52,572
$ 37,265
$ (202 ) $ 89,635
*Excludes 15,019 unvested restricted shares

   Other comprehensive income

92
92
Common stock dividends 486,316
2,705
(2,705 )
—
Stock options exercised 2,463
6
6
Stock-based compensation expense
22

22
Net income

5,830

5,830
Balance September 30, 2016* 16,540,185
$ 55,305
$ 40,390
$ (110 ) $ 95,585
*Excludes 12,015 unvested restricted shares

Other comprehensive loss

(494 ) (494 )
Common stock dividends 165,409
1,244
(1,244 )
—
   Stock-based compensation expense
8

8
Net income

1,555

1,555
Balance December 31, 2016* 16,705,594
$ 56,557
$ 40,701
$ (604 ) $ 96,654
*Excludes 12,015 unvested restricted shares

  Other comprehensive income

236
236
Cash dividends on common stock ($0.17 per share) (2,870 ) (2,870 )
Common stock dividends 167,082
1,220
(1,220 )
—
Stock options exercised 2,514
6
6
Restricted stock units released 10,425
—
Stock-based compensation expense
78

78
Net income

7,004

7,004
Balance September 30, 2017* 16,885,615
$ 57,861
$ 43,615
$ (368 ) $ 101,108
*Excludes 9,011 unvested restricted shares
United Security Bancshares and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Six Months EndedJune 30, 2023 and 2022


	Common Stock		Retained Earnings	Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)	Number of Shares	Amount			Total
Balance December 31, 2021	17,028,239	59,636	61,745	(1,174)	120,207
Other comprehensive loss				(12,535)	(12,535)
Dividends payable ($0.11 per share)			(3,749)		(3,749)

Restricted stock units released	12,310				—
Tax benefit from restricted stock units released		(1)			(1)
Director stock grant		95			95
Stock-based compensation expense		106			106
Net income			5,878		5,878
Balance June 30, 2022	17,040,549	59,836	63,874	(13,709)	110,001

Balance December 31, 2022	17,067,253	60,030	69,928	(17,495)	112,463
Other comprehensive income	—			867	867
Dividends paid ($0.11 per share)	—		(1,880)		(1,880)
Dividends payable ($0.12 per share)			(2,055)		(2,055)
Restricted stock units released	62,685				—
Tax benefit from RSUs released	—	(10)			(10)
Director stock grant	—	249			249
Stock options exercised		106			106
Stock-based compensation expense	—	76			76
Cumulative effect of adopting Current Expected Credit Losses (CECL)	—		(4,678)		(4,678)
Net income	—		10,542		10,542
Balance June 30, 2023	17,129,938	60,451	71,857	(16,628)	115,680

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United Security Bancshares and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


	Six months ended June 30,
(In thousands)	2023		2022
Cash Flows From Operating Activities:
Net Income	$	10,542	$	5,878
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses	598		417
Depreciation and amortization	740		627
Amortization of operating lease right-of-use assets	331		304
Amortization of premium/discount on investment securities, net	208		348
Gain on sale of investment securities	—		(30)
Decrease (increase) in accrued interest receivable	720		(735)
(Decrease) increase in accrued interest payable	(5)		2
Increase (decrease) in accounts payable and accrued liabilities	4,717		(33)
(Decrease) increase in unearned fees and unamortized loan origination costs, net	(336)		237
Increase in income taxes receivable	(355)		(6)
Loss on marketable equity securities	7		309
Stock-based compensation expense	316		201
Benefit for deferred income taxes	60		214





Increase in cash surrender value of bank-owned life insurance	(303)		(253)
(Gain) loss on fair value option of junior subordinated debentures	(258)		1,869






Net decrease (increase) in other assets	672		(1,570)
Net cash provided by operating activities	17,654		7,749
Cash Flows From Investing Activities:


Purchase of correspondent bank stock	(1,433)		(2,428)
Purchases of available-for-sale securities	—		(81,762)

Principal payments of available-for-sale securities	6,364		11,898
Cash proceeds from sale of available-for-sale securities	—		15,676

Net decrease (increase) in loans	19,491		(78,731)






Capital expenditures of premises and equipment	(310)		(746)
Net cash provided by (used in) investing activities	24,112		(136,093)
Cash Flows From Financing Activities:
Net (decrease) increase in demand deposits and savings accounts	(131,307)		13,743
Net increase in time deposits	12,377		6,347

Proceeds from exercise of stock options	106		—
Net change in federal funds purchased	100,620		—
Dividends on common stock	(3,754)		(3,749)
Net cash (used in) provided by financing activities	(21,958)		16,341
Net change in cash and cash equivalents	19,808		(111,973)
Cash and cash equivalents at beginning of period	38,595		219,219
Cash and cash equivalents at end of period	$	58,403	$	107,246

Nine months ended September 30,
(In thousands) 2017 2016
Cash Flows From Operating Activities:
Net Income $ 7,004
$ 5,830
Adjustments to reconcile net income:to cash provided by operating activities:

Recovery of provision for credit losses (24 ) (7 )
Depreciation and amortization 996
1,091
Amortization of investment securities 406
335
Accretion of investment securities (6 ) (25 )
Increase in accrued interest receivable (1,951 ) (1,361 )
(Decrease) increase in accrued interest payable (35 ) 10
Increase (decrease) in accounts payable and accrued liabilities 282
(487 )
Increase in unearned fees and unamortized loan origination costs, net (142 ) (994 )
(Increase) decrease in income taxes receivable (734 ) 2,512
Stock-based compensation expense 78
22
(Benefit) provision for deferred income taxes (283 ) 20
Gain on sale of other real estate owned (336 ) (53 )
Increase in cash surrender value of bank-owned life insurance (400 ) (394 )
Loss (gain) on fair value option of financial liabilities 688
(48 )
Loss on tax credit limited partnership interest 118
122
Net increase in other assets (1,001 ) (548 )
Net cash provided by operating activities 4,660
6,025

Cash Flows From Investing Activities:

Net increase in interest-bearing deposits with banks (4 ) (6 )
Purchase of correspondent bank stock (495 ) (101 )
Purchases of available-for-sale securities —
(34,987 )
Maturities of available-for-sale securities 3,000
2,600
Principal payments of available-for-sale securities 6,091
2,700
Net increase in loans (12,346 ) (41,303 )
Cash proceeds from sales of other real estate owned 1,062
2,800
Payoff of senior liens on other real estate owned —
(705 )
(Investment in) distribution from limited partnership (1,075 ) 2
Capital expenditures of premises and equipment (1,020 ) (516 )
Net cash used in investing activities (4,787 ) (69,516 )

Cash Flows From Financing Activities:

Net increase in demand deposits and savings accounts 85,653
38,068
Net (decrease) increase in time deposits (36,984 ) 11,413
Proceeds from exercise of stock options 6
6
Dividends on common stock (1,688 ) —
Net cash provided by financing activities 46,987
49,487

Net increase (decrease) in cash and cash equivalents 46,860
(14,004 )
Cash and cash equivalents at beginning of period 113,032
125,751
Cash and cash equivalents at end of period $ 159,892
$ 111,747

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United Security Bancshares and Subsidiaries - Notes to Consolidated Financial Statements - (Unaudited)


1.	~~Organization and Summary of Significant Accounting and Reporting Policies~~

1.Organization and Summary of Significant Accounting and Reporting Policies

The consolidated financial statements include the accounts of United Security Bancshares (“Company” or “USB”) and its ~~wholly owned~~wholly-owned subsidiary, United Security Bank ~~(the “Bank”) and~~ ~~two~~ ~~bank subsidiaries, USB Investment Trust (the “REIT”) and United Security Emerging Capital Fund (collectively the “Company” or “USB”~~(“Bank”). Intercompany accounts and transactions have been eliminated in consolidation.

These unaudited financial statements have been prepared in accordance with accounting principles generally accepted ~~accounting principles~~in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited consolidated financial statements of the Company included in its ~~2016~~2022 Annual Report on Form 10-K. These interim consolidated financial statements do not include all of the information and footnotes required by ~~generally accepted accounting principles~~GAAP for complete financial statements. In the opinion of management, all adjustments ~~(consisting~~consisting of a normal, recurring ~~nature)~~nature and considered necessary for a fair presentation, have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

~~Recently Issued Accounting Standards~~:

~~In May 2014, the~~Impact of New Financial Accounting Standards ~~Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates Topic 606 and supersedes Topic 605, Revenue Recognition.~~ :

In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which postponed the effective date of 2014-09. Multiple ASUs and interpretative guidance have been issued in connection with ASU 2014-09. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company has begun their process to implement this new standard by reviewing all revenue sources to determine the sources that are in scope for this guidance. As a bank, key revenue sources, such as interest income have been identified as out of scope of this new guidance. The Company does not expect the application of this ASU to have a material impact on the consolidated financial statements.

~~In January~~June 2016, the Financial Accounting Standards Board (FASB) issued ~~Accounting Standards Update (ASU) No. 2016-01~~ ~~Financial Instruments-Overall: Recognition and Measurements of Financial Assets and Financial Liabilities.~~ This ASU requires equity investments to be measured at fair value, with changes in fair value recognized in net income. The amendment also simplifies the impairment assessment of equity investments for which fair value is not readily determinable by requiring an entity to perform a qualitative assessment to identify impairment. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods therein. The Company expects this ASU to impact its consolidated income and other comprehensive income disclosures for the fair value of its mutual fund investment and junior subordinated debenture.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The FASB is issuing this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification® and creating Topic 842, Leases. This Update, along with IFRS 16, Leases, are the results of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting. This ASU will be effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. Although an estimate of the impact of the new leasing standard has not yet been determined, the Company expects a significant new lease asset and related lease liability on the balance sheet due to the number of leased branches and standalone ATM sites the Bank currently has that are accounted for under current operating lease guidance.

~~In June 2016, FASB issued~~ ASU 2016-13, Financial ~~Instruments- Credit~~Instruments-Credit Losses (Topic 326). ~~The FASB is issuing this Update~~This update replaces the incurred loss methodology with a current expected loss methodology, commonly referred to as CECL, which seeks to improve financial reporting by requiring timelier recording of credit losses on ~~loans~~assets measured at amortized cost, such as loan receivables, held-to-maturity securities, and ~~other financial instruments held by financial institutions and other organizations.~~off-balance sheet exposures. The Update requires enhanced disclosures and judgments in estimating credit

losses and also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ~~This amendment is effective~~

On January 1, 2023, the Company adopted ASC 326, Financial Instruments-Credit Losses, using the modified retrospective method for ~~fiscal years~~all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after ~~December 15, 2019, including interim periods within those fiscal years.~~January 1, 2023, are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The ~~Company has established a project team for the implementation~~adoption of this new ~~standard.~~ standard required a cumulative adjustment to the allowance for credit losses, leading to an increase in the credit loss balance of $6.4 million and an increase in the reserve for unfunded loan commitments of $273,000, resulting in a combined adjustment to retained earnings of $4.7 million, net of a $1.9 million tax adjustment.

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The ~~team has started by working with a vendor to put a new Allowance for Loan Loss software in place and is collecting additional historical data to estimate~~following table summarized the impact of ~~this standard. An estimate~~the adoption of ASU 2016-13 by loan category:


(In thousands)	Allowance for credit losses as reported under ASU 2016-13		Allowance before the adoption of ASU 2016-13		Impact to allowance of adoption of ASU 2016-13
Assets:
Commercial and industrial:
Commercial and business loans	$	2,290	$	954	$	1,336
Government program loans	2		2		—
Total commercial and industrial	2,292		956		1,336
Real estate mortgage:
Commercial real estate	2,735		659		2,076
Residential mortgages	986		703		283
Home improvement and home equity loans	2		2		—
Total real estate mortgage	3,723		1,364		2,359
Real estate construction and development	4,129		3,408		721
Agricultural	1,550		525		1,025
Installment and student loans	4,855		2,898		1,957
Unallocated	—		1,031		(1,031)
Allowance for credit losses for all loans	$	16,549	$	10,182	$	6,367
Liabilities:
Allowance for credit losses on off-balance sheet exposures	$	805	$	532	$	273

Available-for-sale debt securities in an unrealized loss position are evaluated when the ~~impact~~amortized cost of ~~this standard has~~a security exceeds its fair value. If it is determined that it will be necessary to sell a security before the fair value increases to the amortized cost, the amortized cost will be written down to fair value through income. At that point, any previously recorded allowance for credit loss (ACL) would be written off and any additional impairment would be recognized through earnings. If it is believed that the Company will not ~~yet been~~be required to sell a security before the fair value recovers, a determination will be made as to whether or not the decline in fair value is the result of a credit loss or noncredit factors such as changes in current market rates. If it is determined ~~however,~~that the ~~impact on~~decline is due to a credit loss, the ~~Company's consolidated financial statements is~~amount recognized as the credit loss will be determined using a discounted cash flow approach. Cash flows expected to be ~~significant.~~

~~As of January 1, 2017,~~collected would be discounted at the ~~Company adopted~~effective interest rate established at acquisition. If the Financial Accounting Standards Board's (FASB) Accounting Standard Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09, seeks to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As required by ASU 2016-09, all adjustments are reflected as of the beginning of the fiscal year, January 1, 2016. By applying this ASU, the Company no longer adjusts common stock for the tax impact of shares released, instead the tax impact is recognized as tax expense in the period the shares are released. This simplifies the tracking of the excess tax benefits and deficiencies, but could cause volatility in tax expense for the periods presented. The statementpresent value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses would be recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been ~~adjusted~~recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to ~~reflect~~sell is met.

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. This ASU was effective for all entities as of March 12, 2020, through December 31, 2022. However, the effective date was updated in ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the sunset date of Topic 848, and is currently set for December 31, 2024. The Company is in the process of evaluating the provisions of this ~~ASU. The application of this~~ ASU ~~did not have a material impact~~and its effects on ~~the~~our consolidated financial statements. The Company anticipates a minimal impact to junior subordinated debt and floating rate loans tied to LIBOR.

In ~~January 2017,~~March 2022, FASB issued ASU ~~2017-04, Intangibles - Goodwill~~2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Other (Topic 350). The FASB is issuing this Update to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge basedVintage Disclosures. This ASU provides new guidance on the ~~excess~~treatment of a reporting unit's carrying amount over its fair value. This ASU will be effective for public business entities for annual periods beginning after December 15, 2019 (i.e. calendar periods beginning on January 1, 2020, and interim periods therein. The Company does not expect any impact on the Company's consolidated financial statements resulting fromtroubled debt restructurings in relation to the adoption of ~~this~~the CECL model for the accounting for credit losses (see note above regarding ASU 2016-13). Previous accounting guidance related to troubled debt restructurings is eliminated and new disclosure requirements are adopted in regard to loan refinancing and restructurings made to borrowers experiencing financial difficulties under the assumption that the CECL model

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will capture credit losses related to troubled debt restructurings. New disclosures regarding gross write-offs for financing receivables by year of origination are also included in the update. This update has been adopted as of January 1, 2023. The Bank will no longer report troubled debt restructurings or classify loans as such. TDRs previously recognized have been incorporated into the CECL methodology as it applies to loan loss reserves as of January 1, 2023.

In March 2017, FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The provisions of the update require premiums recognized upon the purchase of callable debt securities to be amortized to the earliest call date in order to avoid losses recognized upon call. For public business entities that are SEC filers the amendments of the update will become effective in fiscal years beginning after December 15, 2018. The Company does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

2.Investment Securities


2.	~~Investment Securities~~

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~:2022:


	June 30, 2023
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
Securities available-for-sale:
U.S. Government agencies	$	7,023	$	5	$	(52)	$	6,976
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	105,633		7		(13,183)		92,457
U.S. Treasury securities	30,023		—		(506)		29,517
Municipal bonds	50,581		—		(9,027)		41,554
Corporate bonds	34,778		31		(3,100)		31,709
Total securities available-for-sale	$	228,038	$	43	$	(25,868)	$	202,213

(in 000's) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Carrying Amount)
September 30, 2017
Securities available for sale:
U.S. Government agencies $ 20,676
$ 338
$ (44 ) $ 20,970
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 23,693
70
(160 ) 23,603
Mutual Funds 4,000
—
(217 ) 3,783
Total securities available for sale $ 48,369
$ 408
$ (421 ) $ 48,356

(in 000's) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Carrying Amount)
December 31, 2016
Securities available for sale:
U.S. Government agencies $ 22,992
$ 280
$ (69 ) $ 23,203
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 30,867
107
(402 ) 30,572
Mutual Funds 4,000
—
(284 ) 3,716
Total securities available for sale $ 57,859
$ 387
$ (755 ) $ 57,491


	December 31, 2022
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
Securities available-for-sale:
U.S. Government agencies	$	8,275	$	7	$	(51)	$	8,231
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	110,908		5		(13,695)		97,218
U.S. Treasury securities	30,004		—		(780)		29,224

Municipal bonds	50,678		—		(10,508)		40,170
Corporate bonds	34,745		5		(2,048)		32,702
Total securities available-for-sale	$	234,610	$	17	$	(27,082)	$	207,545

The amortized cost and fair value of securities available for sale at ~~September~~June 30, ~~2017~~,2023, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns. ~~Mutual funds are included in the "due in one year or less" category below.~~


	June 30, 2023
(In thousands)	Amortized Cost		Fair Value (Carrying Amount)
Due in one year or less	$	30,123	$	29,616
Due after one year through five years	27,981		26,368
Due after five years through ten years	59,040		49,041
Due after ten years	5,261		4,730
Collateralized mortgage obligations	105,633		92,458
	$	228,038	$	202,213

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September 30, 2017
Amortized Cost Fair Value (Carrying Amount)
(in 000's)
Due in one year or less $ 4,000
$ 3,783
Due after one year through five years —
—
Due after five years through ten years 716
728
Due after ten years 19,960
20,242
Collateralized mortgage obligations 23,693
23,603
$ 48,369
$ 48,356

~~There were~~ noProceeds and gross realized gains ~~or losses on~~(losses) from sales of available-for-sale investment securities are shown below:


	Three Months Ended				Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Proceeds from sales or calls	$	—	$	—	$	—	$	15,676
Gross realized gains from sales or calls	$	—	$	—	$	—	$	78
Gross realized losses from sales or calls	$	—	$	—	$	—	$	(48)

As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using the proceeds to purchase securities that better fit with the Company’s current risk profile is appropriate and beneficial to the Company. There were no losses recorded due to credit-related factors for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~ ~~and~~ ~~September~~2023 or June 30, ~~2016. There were~~ no ~~other-than-temporary impairment losses for the three and nine month periods ended~~ ~~September~~2022.

At June 30, ~~2017~~ ~~and~~ ~~September 30, 2016~~.

At ~~September 30, 2017~~,2023, available-for-sale securities with an amortized cost of approximately ~~$36,896,960~~ ~~(fair~~$75.5 million and a fair value of ~~$36,955,121~~)$65.8 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

~~The Company had no held-to-maturity or trading securities at~~ ~~September 30, 2017~~ or At December 31, ~~2016~~.2022, available-for-sale securities with an amortized cost of approximately $78.8 million and a fair value of $69.0 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

The following summarizes AFS debt securities in an unrealized loss position for which a credit loss has not been recorded:


	Less than 12 Months				12 Months or More				Total
(In thousands)	Fair Value (Carrying Amount)		Unrealized Losses		Fair Value (Carrying Amount)		Unrealized Losses		Fair Value (Carrying Amount)		Unrealized Losses
June 30, 2023
U.S. Government agencies	$	—	$	—	$	4,778	$	(52)	$	4,778	$	(52)
U.S. Government sponsored entities and agencies collateralized by mortgage obligations	4,357		(211)		87,660		(12,972)		92,017		(13,183)
Corporate bonds	—		—		26,865		(3,100)		26,865		(3,100)
Municipal bonds	—		—		41,553		(9,027)		41,553		(9,027)
U.S. Treasury securities	9,938		(29)		19,578		(477)		29,516		(506)

Total available-for-sale	$	14,295	$	(240)	$	180,434	$	(25,628)	$	194,729	$	(25,868)

December 31, 2022
U.S. Government agencies	$	—	$	—	$	5,831	$	(51)	$	5,831	$	(51)
U.S. Government sponsored entities and agencies collateralized by mortgage obligations	47,968		(3,949)		48,763		(9,746)		96,731		(13,695)
Corporate bonds	24,424		(1,491)		5,443		(557)		29,867		(2,048)
Municipal bonds	—		—		40,170		(10,508)		40,170		(10,508)
U.S. Treasury securities	14,714		(190)		14,510		(590)		29,224		(780)

Total available-for-sale	$	87,106	$	(5,630)	$	114,717	$	(21,452)	$	201,823	$	(27,082)

Table of Contents

The following summarizes the number of AFS debt securities in an unrealized loss position for which a credit loss has not been recorded:


	June 30, 2023	December 31, 2022
Securities available for sale:
U.S. Government agencies	4	4
U.S. Government sponsored entities and agencies collateralized by mortgage obligations	52	51
Municipal bonds	46	46
Corporate bonds	9	9
U.S. Treasury securities	4	4
Total available for sale	115	114

Management ~~periodically evaluates~~has evaluated each available-for-sale investment security in an unrealized loss position to determine if ~~the impairment is temporary or other-than-temporary.~~

~~The following summarizes temporarily impaired investment securities:~~

(in 000's) Less than 12 Months 12 Months or More Total
September 30, 2017 Fair Value (Carrying Amount) Unrealized Losses Fair Value (Carrying Amount) Unrealized Losses Fair Value (Carrying Amount) Unrealized Losses
Securities available for sale:
U.S. Government agencies $ 1,768
$ (4 ) 7,132
(40 ) $ 8,900
$ (44 )
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 9,363
(25 ) 12,245
(135 ) 21,608
(160 )
Mutual Funds —
—
3,783
(217 ) 3,783
(217 )
Total impaired securities $ 11,131
$ (29 ) $ 23,160
$ (392 ) $ 34,291
$ (421 )

December 31, 2016

Securities available for sale:

U.S. Government agencies $ 12,281
$ (69 ) $ —
$ —
$ 12,281
$ (69 )
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 25,904
(402 ) —
—
25,904
(402 )
Mutual Funds —
—
3,716
(284 ) 3,716
(284 )
Total impaired securities $ 38,185
$ (471 ) $ 3,716
$ (284 ) $ 41,901
$ (755 )

Temporarily impaired securities at September 30, 2017, were comprised of one mutual fund, three U.S. government agency securities, and ten U.S. government sponsored entities and agencies collateralized by mortgage obligations securities.

The Company evaluates investment securities for other-than-temporary impairment (OTTI) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into ~~two~~ ~~general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC Topic 320,~~ ~~Investments – Debt and Equity Instruments. Certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, are evaluated under ASC Topic 325-40,~~ ~~Beneficial Interest in Securitized Financial Assets.~~

In the first segment, the Company considers many factors in determining OTTI, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at the time of the evaluation.

The second segment of the portfolio uses the OTTI guidance that is specific to purchased beneficial interests including private label mortgage-backed securities. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

~~Additionally, other-than-temporary-impairment occurs when the Company intends to sell the security or more likely than not will~~it would be required to sell the security before ~~recovery of its~~the fair value increases to amortized cost ~~basis less~~and whether any ~~current-period~~unrealized losses are due to credit ~~loss. If~~losses or noncredit factors such as current market rates, which would not require the ~~Company intends to sell or more likely than not will be required to sell the security before recovery~~establishment of ~~its amortized cost basis less any current-period~~an allowance for credit ~~loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire~~

difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not 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 loss, the other-than-temporary-impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is recognized in earnings, and is determined based on the difference between the present value of cash flows expected to be collected and the current amortized cost of the security. The amount of the total other-than-temporary-impairment related to other factors shall be recognized in other comprehensive (loss) income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.

losses. At ~~September~~June 30, ~~2017~~,2023, the decline in fair value of the ~~impaired mutual fund, the three U.S. government agency securities, and the ten U.S. government sponsored entities and agencies collateralized by mortgage obligations~~available-for-sale securities is ~~attributable~~attributed to changes in interest rates and not credit quality. These declines are primarily the result of the fast pace and large increases in interest rates during the last two years, which have led to decreases in bond prices and increases in yields. Because the Company does not ~~have the intent~~intend to sell these ~~impaired~~ securities, and because it is ~~not~~ more likely than not that it will not be required to sell these securities before ~~its~~their anticipated recovery, the Company does not consider ~~these~~it necessary to provide an allowance for any available-for-sale security at June 30, 2023.

During the six months ended June 30, 2023 and 2022, the Company recognized $7,000 of unrealized losses and $309,000 of unrealized losses, respectively, related to marketable equity securities, related to ~~be other-than-temporarily impaired~~one mutual fund, in the consolidated statements of income. During the quarters ended June 30, 2023 and 2022, the Company recognized $50,000 and $127,000 of unrealized losses related to the same mutual fund.

The Company had no held-to-maturity or trading securities at ~~September~~June 30, ~~2017~~.2023 or December 31, 2022.


3.	~~Loans~~

3.Loans

Loans, net of deferred loan fees are comprised of the following:

(in 000's) September 30, 2017
December 31, 2016
Commercial and Business Loans $ 45,937
$ 47,464
Government Program Loans 1,014
1,541
Total Commercial and Industrial 46,951
49,005
Real Estate – Mortgage:

Commercial Real Estate 199,668
200,213
Residential Mortgages 90,284
87,388
Home Improvement and Home Equity loans 510
599
Total Real Estate Mortgage 290,462
288,200
Real Estate Construction and Development 128,883
130,687
Agricultural 58,505
56,918
Installment and Student Loans 57,583
44,949
Total Loans $ 582,384
$ 569,759


(In thousands)	June 30, 2023		December 31, 2022
Commercial and industrial:
Commercial and business loans	$	52,800	$	57,770
Government program loans	127		132
Total commercial and industrial	52,927		57,902
Real estate mortgage:
Commercial real estate	403,216		398,115
Residential mortgages	265,858		273,357
Home improvement and home equity loans	43		49
Total real estate mortgage	669,117		671,521
Real estate construction and development	135,300		153,374
Agricultural	57,666		52,722
Installment and student loans	45,111		44,659
Total loans	$	960,121	$	980,178

The ~~Company's~~Company’s directly-originated loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. ~~Although the Company does participate in~~The Company’s participation loans with other financial institutions ~~they~~ are primarily in the state of California.

Table of Contents

Commercial and industrial loans, ~~represent~~ ~~8.1%~~representing 5.5% of total loans at ~~September~~June 30, ~~2017~~2023 and 5.9% at December 31, 2022, are generally made to support the ongoing operations of ~~small-to-medium sized~~small- to medium-sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real ~~estate. The~~estate; the remainder are ~~unsecured; however, extensions~~unsecured. Extensions of credit are predicated upon the financial capacity of the ~~borrower. Repayment of commercial loans~~borrower and repayment is generally from the cash flow of the borrower.

Real estate mortgage loans, representing ~~49.9%~~69.7% of total loans at ~~September~~June 30, ~~2017~~,2023 and 68.5% at December 31, 2022, are typically secured by either trust deeds on ~~primarily~~ commercial property ~~but are also secured by trust deeds on~~or single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the ~~borrower.~~borrower and or guarantor(s).

•Commercial real estate mortgage loans comprise the largest segment of this loan category and are available ~~on all types of income producing~~for both income-producing and non-income-producing commercial properties, including: office buildings, shopping ~~centers;~~centers, apartments and ~~motels;~~motels, owner occupied ~~buildings;~~buildings, manufacturing facilities, and more. Commercial real estate mortgage loans can also be used to refinance existing debt. ~~Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment.~~

~~Commercial real estate~~These loans are ~~made under the premise that the loan will be~~typically repaid from the ~~borrower's~~borrower’s business operations, rental income associated with the real property, or personal assets.

•Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool. ~~Most residential mortgages originated~~

•Home improvement and home equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by ~~the Company are of a shorter term than conventional mortgages, with maturities ranging from 3 to 15 years on average.~~junior trust deeds, but may be secured by 1st trust deeds.


•	Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans, and are offered to borrowers for the purpose of home improvements, although the proceeds may be used for other purposes. Home equity loans are generally secured by junior trust deeds, but may be secured by 1^st ~~trust deeds.~~

Real estate construction and development loans, representing ~~22.1%~~14.1% of total loans at ~~September~~June 30, ~~2017~~,2023 and 15.5% at December 31, 2022, consist of loans for residential and commercial construction projects, as well as land acquisition and development, orand land held for future development. Loans in this category are secured by real estate, including ~~improved~~improved- and ~~unimproved land,~~unimproved-land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the ~~project.~~project or from the sale of the constructed homes to individuals.

Agricultural loans, ~~represent~~ ~~10.0%~~representing 6.0% of total loans at ~~September~~June 30, ~~2017~~2023 and 5.4% at December 31, 2022, are generally secured by land, equipment, inventory, and receivables. Repayment is from the cash flow of the borrower.

Installment ~~and student~~ loans, ~~represent~~ ~~9.9%~~which represented 4.7% of total loans at ~~September~~June 30, ~~2017~~2023 and 4.6% at December 31, 2022, generally consist of student ~~loans,~~loans; loans to individuals for household, family and other personal ~~expenditures such as credit cards, automobiles~~expenditures; automobiles; or other consumer items. ~~Included in installment loans are $51,185,000 in~~See Note 4 - Student Loans for specific information on the student loans made to medical and pharmacy school students. Repayment on student loans is deferred until 6 months after graduation. Accrued interest on loans that have not entered repayment status totaled $3,769,000 at September 30, 2017.loan portfolio.

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~,2022, these financial instruments include commitments to extend credit of ~~$107,580,000~~$224.4 million and ~~$120,485,000~~,$190.2 million, respectively, and standby letters of credit of ~~$2,058,000~~$1.2 million and ~~$1,201,000~~,$1.6 million for the same period ends, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to ~~the~~these financial ~~instrument for commitments to extend credit and standby letters of credit~~instruments is represented by the contractual amounts of those instruments. The Company ~~uses~~applies the same credit policies ~~as it does~~used for on-balance sheet instruments.

Commitments to extend credit ~~are agreements to lend to a customer,~~continue as long as there is no violation of any condition established in the customer’s contract. ~~A majority~~Substantially all of these commitments are at floating interest rates based on the ~~Prime rate. Commitments~~prime rate and generally have fixed expiration dates. The Company evaluates each ~~customer's~~customer’s creditworthiness on a case-by-case ~~basis. The amount of~~basis and collateral ~~obtained, if deemed necessary, is based on management's credit evaluation.~~may be required in some cases. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties.

Table of Contents

Past Due Loans

The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the ~~Loan Committee~~loan committee and monthly reports to the Board of Directors.

The following is a summary of the amortized cost of delinquent loans at ~~September~~June 30, ~~2017~~ ~~(in 000's):~~2023:


(In thousands)	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and business loans	$	—	$	—	$	—	$	—	$	52,800	$	52,800	$	—
Government program loans	—		—		—		—		127		127		—
Total commercial and industrial	—		—		—		—		52,927		52,927		—
Commercial real estate loans	—		—		—		—		403,216		403,216		—
Residential mortgages	573		—		—		573		265,285		265,858		—
Home improvement and home equity loans	6		—		—		6		37		43		—
Total real estate mortgage	579		—		—		579		668,538		669,117		—
Real estate construction and development loans	—		—		11,390		11,390		123,910		135,300		—
Agricultural loans	—		—		73		73		57,593		57,666		—
Installment and student loans	984		215		171		1,370		43,530		44,900		171
Overdraft protection lines	—		—		—		—		12		12		—
Overdrafts	—		—		—		—		199		199		—
Total installment and student loans	984		215		171		1,370		43,741		45,111		171
Total loans	$	1,563	$	215	$	11,634	$	13,412	$	946,709	$	960,121	$	171

Table of Contents

September 30, 2017
Loans
30-60 Days Past Due

Loans
61-89 Days Past Due

Loans
90 or More
Days Past Due
Total Past Due Loans Current Loans Total Loans
Accruing
Loans 90 or
More Days Past Due
Commercial and Business Loans $ 249
$ —
$ 22
$ 271
$ 45,666
$ 45,937
$ —
Government Program Loans —
—
—
—
1,014
1,014
—
Total Commercial and Industrial 249
—
22
271
46,680
46,951
—
Commercial Real Estate Loans —
—
—
—
199,668
199,668
—
Residential Mortgages —
—
—
—
90,284
90,284
—
Home Improvement and Home Equity Loans —
14
—
14
496
510
—
Total Real Estate Mortgage —
14
—
14
290,448
290,462
—

Real Estate Construction and Development Loans —
360
—
360
128,523
128,883
—
Agricultural Loans —
—
—
—
58,505
58,505
—
Consumer Loans —
—
—
—
57,313
57,313
—
Overdraft Protection Lines —
—
—
—
40
40
—
Overdrafts —
—
—
—
230
230
—
Total Installment —
—
—
—
57,583
57,583
—
Total Loans $ 249
$ 374
$ 22
$ 645
$ 581,739
$ 582,384
$ —

The following is a summary of the amortized cost of delinquent loans at December 31, ~~2016~~ ~~(in 000's):~~2022:


(In thousands)	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and business loans	$	—	$	—	$	—	$	—	$	57,770	$	57,770	$	—
Government program loans	—		—		—		—		132		132		—
Total commercial and industrial	—		—		—		—		57,902		57,902		—

Commercial real estate loans	—		—		—		—		398,115		398,115		—
Residential mortgages	—		—		—		—		273,357		273,357		—
Home improvement and home equity loans	8		—		—		8		41		49		—
Total real estate mortgage	8		—		—		8		671,513		671,521		—
Real estate construction and development loans	—		—		12,545		12,545		140,829		153,374		—
Agricultural loans	—		—		108		108		52,614		52,722		—
Installment and student loans	546		642		252		1,440		42,714		44,154		252
Overdraft protection lines	—		—		—		—		17		17		—
Overdrafts	—		—		—		—		488		488		—
Total installment and student loans	546		642		252		1,440		43,219		44,659		252

Total loans	$	554	$	642	$	12,905	$	14,101	$	966,077	$	980,178	$	252

December 31, 2016
Loans
30-60 Days Past Due

Loans
61-89 Days Past Due

Loans
90 or More
Days Past Due
Total Past Due Loans Current Loans Total Loans
Accruing
Loans 90 or
More Days Past Due
Commercial and Business Loans $ —
$ 432
$ —
$ 432
$ 48,009
$ 48,441
$ —
Government Program Loans —
—
290
290
1,251
1,541
—
Total Commercial and Industrial —
432
290
722
49,260
49,982
—
Commercial Real Estate Loans —
—
—
—
199,810
199,810
—
Residential Mortgages —
—
—
—
87,388
87,388
—
Home Improvement and Home Equity Loans —
—
—
—
599
599
—
Total Real Estate Mortgage —
—
—
—
287,797
287,797
—
Real Estate Construction and Development Loans 166
—
1,250
1,416
128,697
130,113
1,250
Agricultural Loans —
—
—
—
56,918
56,918
—
Consumer Loans —
—
965
965
43,785
44,750
—
Overdraft Protection Lines —
—
—
—
48
48
—
Overdrafts —
—
—
—
151
151
—
Total Installment —
—
965
965
43,984
44,949
—
Total Loans $ 166
$ 432
$ 2,505
$ 3,103
$ 566,656
$ 569,759
$ 1,250

Nonaccrual Loans

~~Commercial, construction and commercial real estate loans~~Loans are placed on nonaccrual status under the following circumstances:

- When there is doubt regarding the full repayment of interest and principal.

- When principal and/or interest on the loan has been in default for a period of 90~~-days~~ days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.

- When the loan is identified as having loss elements and/or is risk rated ~~"8"~~“8” Doubtful.

Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO.

Loans ~~meeting any of the preceding criteria are placed~~ on nonaccrual status ~~and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.~~

All other loans where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

~~When a loan is placed on nonaccrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways.~~

~~Cost recovery method~~: If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes.

~~Cash basis~~: This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest are credited to interest income as received.

~~Loans on non-accrual status~~ are usually ~~not~~ returned to accrual status ~~unless~~when all delinquent principal and/or interest has been brought current, when there is no identified element of loss, and when current and continued satisfactory performance is ~~expected (loss of the contractual amount not the carrying amount of the loan).~~expected. Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization. There was no interest income recognized on nonaccrual loans for the six months ended June 30, 2023 and 2022.

~~Nonaccrual loans totaled~~ ~~$5,145,000~~ ~~and~~ ~~$7,264,000~~ at ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively.~~ There were no remaining undisbursed commitments to extend credit on nonaccrual loans at ~~September~~June 30, ~~2017~~2023 or December 31, ~~2016~~.2022.

Table of Contents

The following ~~is a summary~~table presents the amortized cost basis of ~~nonaccrual loan balances at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~ ~~(in 000's).~~

September 30, 2017 December 31, 2016
Commercial and Business Loans $ 271
$ 275
Government Program Loans —
290
Total Commercial and Industrial 271
565

Commercial Real Estate Loans 466
1,126
Residential Mortgages —
—
Home Improvement and Home Equity Loans —
—
Total Real Estate Mortgage 466
1,126

Real Estate Construction and Development Loans 4,408
4,608
Agricultural Loans —
—

Consumer Loans —
965
Overdraft Protection Lines —
—
Overdrafts —
—
Total Installment —
965
Total Loans $ 5,145
$ 7,264

~~Impaired Loans~~

A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.

~~The Company applies its normal loan review procedures in making judgments regarding probable losses and loan impairment. The Company evaluates for impairment those~~ loans on nonaccrual status graded doubtful, graded substandard or those that are troubled debt restructures. The primary basis for inclusion in impaired status under generally accepted accounting pronouncements is that it is probable that the Bank will be unable to collect all amountsand loans past due ~~according to the contractual terms of the loan agreement.~~over 89 days and still accruing:

A loan is not considered impaired if there is merely an insignificant delay or shortfall in the amounts of payments and the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay.


	June 30, 2023						December 31, 2022
(In thousands)	Nonaccrual Loans With No Allowance For Credit Losses		Nonaccrual Loans		Loans past due over 89 Days Still Accruing		Nonaccrual Loans With No Allowance For Credit Losses		Nonaccrual Loans		Loans Past Due Over 89 Days Still Accruing









Real estate construction and development loans	$	13,142	$	13,142	$	—	$	14,436	$	14,436	$	—
Agricultural loans	—		73		—				108		—
Installment and student loans	—		—		171						252
Total	$	13,142	$	13,215	$	171	$	14,436	$	14,544	$	252

Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company’s present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance.

~~For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price.~~

For loans secured by collateral including real estate and equipment, the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable. For loans that are not considered collateral dependent, a discounted cash flow methodology is used.

The discounted cash flow method of measuring the impairment of a loan is used for impaired loans that are not considered to be collateral dependent. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. The difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company’s troubled debt restructurings or other impaired loans where some payment stream is being collected.


-	~~The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.~~

The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructure. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.

Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.

~~The following is a summary of impaired loans at~~ ~~September 30, 2017~~ ~~(in 000's).~~

September 30, 2017
Unpaid
Contractual
Principal Balance

Recorded
Investment
With No Allowance (1)

Recorded
Investment
With Allowance (1)

Total
Recorded Investment
Related Allowance
Average
Recorded Investment (2)
Interest Recognized (2)
Commercial and Business Loans $ 3,590
$ 543
$ 3,061
$ 3,604
$ 567
$ 3,965
$ 63
Government Program Loans 83
54
29
83
4
275
36
Total Commercial and Industrial 3,673
597
3,090
3,687
571
4,240
99

Commercial Real Estate Loans 1,147
—
1,151
1,151
221
1,102
10
Residential Mortgages 2,783
512
2,281
2,793
206
2,643
150
Home Improvement and Home Equity Loans —
—
—
—
—
—
—
Total Real Estate Mortgage 3,930
512
3,432
3,944
427
3,745
160

Real Estate Construction and Development Loans 6,797
6,816
—
6,816
—
6,889
415
Agricultural Loans 887
1
890
891
743
1,170
64

Consumer Loans —
—
—
—
—
322
—
Overdraft Protection Lines —
—
—
—
—
—
—
Overdrafts —
—
—
—
—
—
—
Total Installment —
—
—
—
—
322
—
Total Impaired Loans $ 15,287
$ 7,926
$ 7,412
$ 15,338
$ 1,741
$ 16,366
$ 738

~~(1) The recorded investment in loans includes accrued interest receivable of $51,000.~~

~~(2) Information is based on the nine month period ended September 30, 2017.~~

~~The following is a summary of impaired loans at~~ ~~December 31, 2016~~ ~~(in 000's).~~

December 31, 2016
Unpaid
Contractual
Principal Balance

Recorded
Investment
With No Allowance (1)

Recorded
Investment
With Allowance (1)

Total
Recorded Investment
Related Allowance
Average
Recorded Investment (2)
Interest Recognized (2)
Commercial and Business Loans $ 4,635
$ 495
$ 4,158
$ 4,653
$ 757
$ 5,050
$ 302
Government Program Loans 356
356
—
356
—
372
20
Total Commercial and Industrial 4,991
851
4,158
5,009
757
5,422
322

Commercial Real Estate Loans 1,454
—
1,456
1,456
450
1,503
89
Residential Mortgages 2,467
526
1,949
2,475
153
2,874
138
Home Improvement and Home Equity Loans —
—
—
—
—
—
—
Total Real Estate Mortgage 3,921
526
3,405
3,931
603
4,377
227

Real Estate Construction and Development Loans 6,267
6,274
—
6,274
—
8,794
361
Agricultural Loans —
—
—
—
—
5
8

Consumer Loans 965
965
—
965
—
968
35
Overdraft Protection Lines —
—
—
—
—
—
—
Overdrafts —
—
—
—
—
—
—
Total Installment 965
965
—
965
—
968
35
Total Impaired Loans $ 16,144
$ 8,616
$ 7,563
$ 16,179
$ 1,360
$ 19,566
$ 953

~~(1) The recorded investment in loans includes accrued interest receivable of $35,000.~~

~~(2) Information is based on the twelve month period ended~~ ~~December 31, 2016~~.

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructurings for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.

The average recorded investment in impaired loans for the quarters ended September 30, 2017 and 2016 was $15,681,000 and $19,397,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2017 and 2016 was approximately $192,000 and $34,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $70,000 and $126,000 for the quarters ended September 30, 2017 and 2016, respectively.

The average recorded investment in impaired loans for the nine months ended September 30, 2017 and 2016 was $16,366,000 and $21,440,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2017 and 2016 was approximately $738,000 and $741,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $260,000 and $362,000 for the nine months ended September 30, 2017 and 2016, respectively.

~~Troubled Debt Restructurings~~

In certain circumstances, when the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDRs are reported as a component of impaired loans.

A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.

~~A TDR may include, but is not limited to, one or more of the following:~~

~~- A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan.~~

~~- A modification of terms of a debt such as one or a combination of:~~


◦	~~The reduction (absolute or contingent) of the stated interest rate.~~


◦	~~The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.~~


◦	~~The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.~~


◦	~~The reduction (absolute or contingent) of accrued interest.~~

~~For a restructured loan to return to accrual status there needs to be, among other factors, at least~~ ~~6 months~~ successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off.

~~The following tables illustrates TDR activity for the periods indicated:~~

Three Months Ended September 30, 2017
($ in 000's) Number of
Contracts Pre-
Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Number of Contracts which Defaulted During Period Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans —
$ —
$ —
—
$ —
Government Program Loans —
—
—
—
—
Commercial Real Estate Term Loans —
—
—
—
—
Single Family Residential Loans 1
167
167
—
—
Home Improvement and Home Equity Loans —
—
—
—
—
Real Estate Construction and Development Loans —
—
—
—
—
Agricultural Loans 1
587
587
—
—
Consumer Loans —
—
—
—
—
Overdraft Protection Lines —
—
—
—
—
Total Loans 2
$ 754
$ 754
—
$ —

Nine Months Ended September 30, 2017
($ in 000's) Number of
Contracts Pre-
Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Number of Contracts which Defaulted During Period Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans 1
$ 69
$ 69
—
$ —
Government Program Loans 1
178
178
—
—
Commercial Real Estate Term Loans —
—
—
—
—
Single Family Residential Loans 2
404
404
—
—
Home Improvement and Home Equity Loans —
—
—
—
—
Real Estate Construction and Development Loans 1
790
790
—
—
Agricultural Loans 2
1,437
1,437
—
—
Consumer Loans —
—
—
—
—
Overdraft Protection Lines —
—
—
—
—
Total Loans 7
$ 2,878
$ 2,878
—
$ —

~~Three Months Ended September 30, 2016~~

~~($ in 000's)~~

~~Number of~~
~~Contracts~~

~~Pre-~~
~~Modification~~
~~Outstanding~~
~~Recorded~~
~~Investment~~

~~Post-~~
~~Modification~~
~~Outstanding~~
~~Recorded~~
~~Investment~~

~~Number of Contracts which Defaulted During Period~~

~~Recorded Investment on Defaulted TDRs~~

~~Troubled Debt Restructurings~~

~~Commercial and Business Loans~~

—

~~Government Program Loans~~

—

~~Commercial Real Estate Term Loans~~

—

~~Single Family Residential Loans~~

—

~~Home Improvement and Home Equity Loans~~

—

~~Real Estate Construction and Development Loans~~

—

~~Agricultural Loans~~

—

~~Consumer Loans~~

—

~~Overdraft Protection Lines~~

—

~~Total Loans~~

—

Nine Months Ended September 30, 2016
($ in 000's) Number of
Contracts Pre-
Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Number of Contracts which Defaulted During Period Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans 4
$ 1,021
$ 749
—
$ —
Government Program Loans 1
100
100
—
—
Commercial Real Estate Term Loans —
—
—
—
—
Single Family Residential Loans —
—
—
—
—
Home Improvement and Home Equity Loans —
—
—
—
—
Real Estate Construction and Development Loans —
—
—
—
—
Agricultural Loans —
—
—
—
—
Consumer Loans —
—
—
—
—
Overdraft Protection Lines —
—
—
—
—
Total Loans 5
$ 1,121
$ 849
—
$ —

~~The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At~~ ~~September 30, 2017, the Company had~~ 29 ~~restructured loans totaling~~ ~~$12,150,000~~ ~~as compared to~~ 28 ~~restructured loans totaling~~ ~~$12,410,000~~ at ~~December 31, 2016~~.

~~The following tables summarize TDR activity by loan category for the quarters ended September 30, 2017 and September 30, 2016.~~

Three Months Ended September 30, 2017 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
& Other Total
Beginning balance $ 1,055
$ 1,062
$ 2,573
$ —
$ 6,868
$ 400
$ —
$ 11,958

Defaults —
—
—
—
—
—
—
—
Additions —
—
167
—
—
587
—
754

—

Principal (reductions) additions (425 ) 85
(52 ) —
(70 ) (100 ) —
(562 )

Ending balance $ 630
$ 1,147
$ 2,688
$ —
$ 6,798
$ 887
$ —
$ 12,150

Allowance for loan loss $ 15
$ 221
$ 206
$ —
$ —
$ 743
$ —
$ 1,185

Three Months Ended September 30, 2016 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
& Other Total
Beginning balance $ 1,236
$ 1,510
$ 2,400
$ —
$ 12,100
$ 6
$ 965
$ 18,217

Defaults —
—
—
—
—
—
—
—
Additions —
—
—
—
—
—
—
—

—

Principal reductions 10
(25 ) (15 ) —
(6,991 ) (5 ) —
(7,026 )

Ending balance $ 1,246
$ 1,485
$ 2,385
$ —
$ 5,109
$ 1
$ 965
$ 11,191

Allowance for loan loss $ 38
$ 472
$ 163
$ —
$ —
$ —
$ —
$ 673

~~The following tables summarize TDR activity by loan category for the~~ ~~nine months endedSeptember 30, 2017~~ ~~and~~ ~~September 30, 2016~~ ~~(in 000's).~~

Nine Months Ended September 30, 2017 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural
Installment
& Other
Total
Beginning balance $ 1,356
$ 1,454
$ 2,368
$ —
$ 6,267
$ —
$ 965
$ 12,410

Defaults —
—
—
—
—
—
—
—
Additions 247
—
404
—
790
1,437
—
2,878

Principal reductions (973 ) (307 ) (84 ) —
(259 ) (550 ) (965 ) (3,138 )

Ending balance $ 630
$ 1,147
$ 2,688
$ —
$ 6,798
$ 887
$ —
$ 12,150

Allowance for loan loss $ 15
$ 221
$ 206
$ —
$ —
$ 743
$ —
$ 1,185

Nine Months Ended September 30, 2016 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural
Installment
& Other
Total
Beginning balance $ 898
$ 1,243
$ 3,533
$ —
$ 12,168
$ 16
$ 650
$ 18,508

Defaults —
—
—
—
—
—
—
—
Additions 849
—
—
—
—
—
—
849

Principal additions (reductions) (501 ) 242
(1,148 ) —
(7,059 ) (15 ) 315
(8,166 )

Ending balance $ 1,246
$ 1,485
$ 2,385
$ —
$ 5,109
$ 1
$ 965
$ 11,191

Allowance for loan loss $ 38
$ 472
$ 163
$ —
$ —
$ —
$ —
$ 673

Credit Quality Indicators

As part of its credit monitoring program, the Company utilizes a risk rating system ~~which quantifies~~to quantify the risk the Company estimates it has assumed during the life of a loan. ~~The~~This system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.

For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each ~~loan~~ credit facility is ~~to be~~ given a risk rating that takes into account factors that materially affect credit quality.

When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower ~~rating as follows:~~rating:

Facility Rating:

The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires ~~that it be rated differently from the~~a different risk rating than that assigned to the borrower. The Company assesses the risk impact of these factors:

Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, the liquidation value, and the Company's ability to dispose of the collateral.

Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of ~~closely related~~ persons closely-related to the borrower who offer only modest support.

Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.

Borrower Rating:

The borrower rating is a measure of loss possibility based on the historical, current, and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers ~~at least~~ the following factors:

- Quality of management

- Liquidity

- Leverage/capitalization

- Profit margins/earnings trend

- Adequacy of financial records

- Alternative funding sources

- Geographic risk

- Industry risk

- Cash flow risk

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- Accounting practices

- Asset protection

- Extraordinary risks

The Company assigns risk ratings to loans, other than consumer loans and other homogeneous loan pools, based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. ~~When~~The Company uses the following risk rating grades:

Pass Ratings:

- Grades 1 and 2 – These grades include loans to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower has a strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

- Grade 3 – This grade includes loans to borrowers with solid credit quality and minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

- Grades 4 and 5 – These include pass grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. Although, the borrower may have recognized a loss over three or four years, recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset borrowers who fully comply with all underwriting standards and are performing according to projections are assigned this rating. These also include grade 5 loans which are leveraged or on management’s watch list. While still considered pass loans, the borrower’s financial condition, cash flow, or operations evidence more than average risk and short term weaknesses. These loans warrant a higher than average level of monitoring, supervision, and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade 5 rating are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

Special Mention Rating:

- Grade 6 – This grade includes loans that are currently protected but potentially weak. This is generally an interim classification and these loans will typically be upgraded to an acceptable rating or downgraded to a substandard rating within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent in the loan origination and loan servicing, and may have some technical deficiencies. This designation indicates a distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

Substandard Rating:

- Grade 7 – This grade includes substandard loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that may impair the regular liquidation of the debt. When a loan has been downgraded to substandard, there exists a distinct possibility that the Company will sustain a loss if the deficiencies are not corrected.

Doubtful Ratings:

- Grade 8 – This grade includes doubtful loans that exhibit the same characteristics as substandard loans. Loan weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high but, due to pending factors which may work toward the strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

- Grade 9 – This grade includes loans classified as loss which are considered uncollectible and of such little value that their continuance as bankable-assets is not warranted. This classification does not mean that the asset has no recovery

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or salvage value, but rather that it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

The following table presents loans by class, net of deferred fees, by risk rating and ~~the facility ratings differ, the lowest rating applied is:~~period indicated as of June 30, 2023:


-	~~Grades 1 and 2~~ – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

~~Grade 3~~ – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over ~~three~~ or ~~four~~ years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

~~Grade 6~~ – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

~~Grade 7~~ – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.

~~Grade 8~~ – This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

~~Grade 9~~ – This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

~~The Company did not carry any loans graded as loss at~~ ~~September 30, 2017~~ or ~~December 31, 2016~~.

~~The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~:


	Term Loans Amortized Cost Basis by Origination Year - As of June 30, 2023												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans
(In thousands)	2023		2022		2021		2020		2019		Prior						Total
Commercial and business
Pass	$	3,046	$	4,856	$	1,343	$	958	$	16	$	1,132	$	41,448	$	—	$	52,799
Special Mention	—		—		—		—		—		—		1		—		1
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	3,046		4,856		1,343		958		16		1,132		41,449		—		52,800
Government program
Pass	—		—		—		6		—		121		—		—		127
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	—		—		—		6		—		121		—		—		127
Commercial real estate
Pass	26,005		102,723		36,314		59,724		53,770		110,099		1,797		—		390,432
Special Mention	—		—		—		4,997		7,787		—		—		—		12,784
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	26,005		102,723		36,314		64,721		61,557		110,099		1,797		—		403,216
Residential mortgages
Not graded	—		25,074		210,862		2,335		—		10,300		—		—		248,571
Pass	1,995		1,925		5,465		1,902		4,193		1,807		—		—		17,287
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	1,995		26,999		216,327		4,237		4,193		12,107		—		—		265,858
Home improvement and home equity
Not graded	—		—		—		—		—		37		—		—		37
Pass	—		—		—		—		—		6		—		—		6
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	—		—		—		—		—		43		—		—		43
Real estate construction and development
Pass	12,960		13,364		21,632		24,323		180		5,174		44,525		—		122,158
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		3,524		—		9,618		—		—		13,142
Doubtful	—		—		—		—		—		—		—		—		—
	12,960		13,364		21,632		27,847		180		14,792		44,525		—		135,300
Agricultural
Pass	—		6,651		465		3,035		1,691		12,830		31,662		—		56,334
Special Mention	—		—		—		513		—		356		—		—		869
Substandard	—		—		—		—		—		73		390		—		463

Table of Contents

Commercial and Industrial Commercial Real Estate Real Estate Construction and Development Agricultural Total
September 30, 2017
(in 000's)
Grades 1 and 2 $ 381
$ 2,972
$ —
$ 70
$ 3,423
Grade 3 268
5,600
—
—
5,868
Grades 4 and 5 – pass 40,155
182,089
108,506
55,488
386,238
Grade 6 – special mention 2,635
8,541
2,609
985
14,770
Grade 7 – substandard 3,512
466
17,768
1,962
23,708
Grade 8 – doubtful —
—
—
—
—
Total $ 46,951
$ 199,668
$ 128,883
$ 58,505
$ 434,007


Doubtful	—		—		—		—		—		—		—		—		—
	—		6,651		465		3,548		1,691		13,259		32,052		—		57,666
Installment and student loans
Not graded	667		310		193		162		529		41,225		736		—		43,822
Pass	1,288		—		—		—		—		—		—		—		1,288
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		1		—		1
Doubtful	—		—		—		—		—		—		—		—		—
	1,955		310		193		162		529		41,225		737		—		45,111
Total Loans	$	45,961	$	154,903	$	276,274	$	101,479	$	68,166	$	192,778	$	120,560	$	—	$	960,121

Commercial and Industrial Commercial Real Estate Real Estate Construction and Development Agricultural Total
December 31, 2016
(in 000's)
Grades 1 and 2 $ 340
$ —
$ —
$ 75
$ 415
Grade 3 4,823
5,767
—
—
10,590
Grades 4 and 5 – pass 34,921
192,699
110,992
56,843
395,455
Grade 6 – special mention 4,416
621
928
—
5,965
Grade 7 – substandard 4,505
1,126
18,767
—
24,398
Grade 8 – doubtful —
—
—
—
—
Total $ 49,005
$ 200,213
$ 130,687
$ 56,918
$ 436,823

The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse.

~~The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~:

September 30, 2017 December 31, 2016
Residential Mortgages
Home
Improvement and Home Equity
Installment and Other Total Residential Mortgages
Home
Improvement and Home Equity
Installment and Other Total
(in 000's)
Not graded $ 74,355
$ 486
$ 54,750
$ 129,591
$ 69,955
$ 573
$ 41,855
$ 112,383
Pass 14,659
24
2,827
17,510
15,669
26
2,120
17,815
Special Mention 647
—
—
647
—
—
—
—
Substandard 623
—
6
629
1,764
—
9
1,773
Doubtful —
—
—
—
—
—
965
965
Total $ 90,284
$ 510
$ 57,583
$ 148,377
$ 87,388
$ 599
$ 44,949
$ 132,936

Allowance for ~~Loan~~Credit Losses on Loans

The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326), effective January 1, 2023. This loss measurement, which uses the current expected credit loss (CECL) cohort methodology analysis, relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. Management estimates the allowance for credit loss balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience from 2006 to 2023. The Company expects that the markets in which it operates will experience a slight decline in economic conditions and an increase in unemployment rates and levels and trends of delinquencies over the next two years. Management has adjusted the historical loss experience for these expectations.

The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for ~~loan losses.~~credit losses on loans. The following summarizes some of the key risk characteristics for the ten segments of the loan ~~portfolio (Consumer loans include three segments):~~portfolio:

Commercial and industrial loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate or ~~if the~~ economic downturn isare prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balances in the overall portfolio.

Government program loans – This is a relatively a small part of the Company’s loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given their vulnerability to economic cycles.

Commercial real estate loans – This segment is considered to have more risk ~~in part because of~~due to the vulnerability of commercial businesses to economic cycles as well as ~~the~~their exposure to fluctuations in real estate ~~prices because most of these loans are secured by real estate.~~prices. Losses in this segment have ~~however~~ been historically low because most ~~of the~~ loans are real ~~estate secured,~~estate-secured, and the ~~bank~~Bank maintains appropriate loan-to-value ratios.

Residential mortgages – This segment is considered to have low risk factors based on the past experienced of both ~~from~~ the Company and ~~peer statistics. These loans~~peers. Loans in this category are secured by first deeds of trust. ~~The losses experienced over the past sixteen quarters are isolated to approximately~~ ~~nine~~ ~~loans and are generally the result of short sales.~~

Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. ~~Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.~~

Real estate construction and development loans ~~–This~~ – This segment of loans is considered to have a higher risk profile due to construction issues and market value ~~issues~~fluctuations in conjunction with normal credit risks.

Agricultural loans – This segment is considered to have risks associated with weather, insects, marketing issues, and ~~marketing issues. In addition, concentrations~~crop concentration. Additionally, California may experience severe droughts, which can significantly harm the business of customers and the credit quality of the loans to those customers. Water resources and related issues affecting customers are closely monitored. Signs of deterioration within this loan portfolio are closely monitored in ~~certain crops or certain agricultural areas can increase risk.~~an effort to manage credit quality and promote early efforts to work with borrowers in order to mitigate any potential losses.

Installment, ~~and other loans~~ ~~(Includes consumer loans,~~ overdrafts, and overdraft protection ~~lines)~~ lines – This segment is higher risk because ~~many~~most of the loans are unsecured. Additionally, in the case of student loans, there are increased risks associated with liquidity as there is a significant time lag between funding of a student loan and eventual repayment.

Table of Contents

The following summarizes the activity in the allowance for credit losses by loan ~~category~~category:


	Three Months Ended June 30, 2023
(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	1,908	$	3,705	$	3,587	$	1,256	$	5,166	$	15,622
Provision (recapture of provision) for credit losses (1)	98		(5)		(74)		248		689		956
Charge-offs	—		—		—		—		(518)		(518)
Recoveries	1		31		—		—		18		50
Net recoveries (charge-offs)	1		31		—		—		(500)		(468)
Ending balance	$	2,007	$	3,731	$	3,513	$	1,504	$	5,355	$	16,110

(1) Includes a $135,000 provision for unfunded loan commitments.


	Three Months Ended June 30, 2022
(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
Beginning balance	$	559	$	1,295	$	2,897	$	957	$	2,632	$	936	$	9,276
Provision (recapture of provision) for credit losses	277		1		631		143		(1)		(445)		606

Charge-offs	—		—		—		—		(6)		—		(6)
Recoveries	—		2		—		20		9		—		31
Net (charge-offs) recoveries	—		2		—		20		3		—		25
Ending balance	$	836	$	1,298	$	3,528	$	1,120	$	2,634	$	491	$	9,907


	Six Months Ended June 30, 2023
(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance, prior to adoption of ASC 326	$	955	$	1,363	$	3,409	$	525	$	3,930	$	10,182
Impact of ASC 326 adoption	1,336		2,359		721		1,025		926		6,367
Provision (recapture of provision) for credit losses (1)	(285)		(42)		(617)		(46)		1,453		463

Charge-offs	—		—		—		—		(995)		(995)
Recoveries	1		51		—		—		41		93
Net recoveries (charge-offs)	1		51		—		—		(954)		(902)
Ending balance	$	2,007	$	3,731	$	3,513	$	1,504	$	5,355	$	16,110

(1) Includes a $135,000 provision for unfunded loan commitments.


	Six Months Ended June 30, 2022
(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
Beginning balance	$	597	$	1,174	$	2,840	$	1,233	$	2,720	$	769	$	9,333
Provision (recapture of provision) for credit losses	(29)		118		688		(149)		261		(278)		611

Charge-offs	—		—		—		—		(364)		—		(364)
Recoveries	268		6		—		36		17		—		327
Net (charge-offs) recoveries	268		6		—		36		(347)		—		(37)
Ending balance	$	836	$	1,298	$	3,528	$	1,120	$	2,634	$	491	$	9,907

Table of Contents

Collateral-Dependent Loans

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

The following table presents the recorded investment in collateral-dependent loans by type of loan:


	June 30, 2023			December 31, 2022
(Dollars in thousands)	Amount		Number of Collateral-Dependent Loans		Amount		Number of Collateral-Dependent Loans







Real estate construction and development loans	$	13,142	4		$	14,436	4
Agricultural loans	390		1		108		2

Total	$	13,532	5		$	14,544	6

Reserve for Unfunded Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit, and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments in the same manner as it evaluates credit risk within the loan portfolio. The adoption of CECL as of January 1, 2023, required a cumulative adjustment of $273,000 to the reserve for unfunded loan commitments, increasing the liability balance to $805,000, post adoption. There was a $135,000 provision for unfunded loan commitments for the ~~quarters~~quarter ended ~~September~~June 30, ~~2017~~2023 increasing the liability balance to $940,000. There was no provision made during the first quarter. The reserve for the unfunded loan commitments is a liability on the Company’s consolidated financial statements and ~~2016 (in 000's).~~is included in other liabilities.

Loan Modifications

Three Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Other Unallocated Total
September 30, 2017
Beginning balance $ 1,764
$ 1,174
$ 2,887
$ 1,589
$ 814
$ 777
$ 9,005
Provision (recovery of provision) for credit losses (271 ) (91 ) 112
81
(69 ) 245
7

Charge-offs (1 ) —
—
—
—
—
(1 )
Recoveries 11
59
—
—
77
—
147
Net charge-offs 10
59
—
—
77
—
146

Ending balance $ 1,503
$ 1,142
$ 2,999
$ 1,670
$ 822
$ 1,022
$ 9,158
Period-end amount allocated to:

Loans individually evaluated for impairment 571
427
—
743
—
—
1,741
Loans collectively evaluated for impairment 932
715
2,999
927
822
1,022
7,417
Ending balance $ 1,503
$ 1,142
$ 2,999
$ 1,670
$ 822
$ 1,022
$ 9,158

Three Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Other Unallocated Total
September 30, 2016
Beginning balance $ 1,685
$ 1,665
$ 3,455
$ 554
$ 1,219
$ 331
$ 8,909
Provision (recovery of provision) for credit losses (15 ) (131 ) 271
74
(438 ) 243
4

Charge-offs (4 ) (7 ) —
—
—
(4 ) (15 )
Recoveries 13
6
—
—
1
—
20
Net charge-offs 9
(1 ) 0
0
1
(4 ) 5

Ending balance $ 1,679
$ 1,533
$ 3,726
$ 628
$ 782
$ 570
$ 8,918
Period-end amount allocated to:

Loans individually evaluated for impairment 735
635
—

—
—
1,370
Loans collectively evaluated for impairment 944
898
3,726
628
782
570
7,548
Ending balance $ 1,679
$ 1,533
$ 3,726
$ 628
$ 782
$ 570
$ 8,918

~~The following summarizes~~Occasionally, the ~~activity~~Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, and other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged off against the allowance for credit ~~losses by~~losses. There were no loan ~~category~~modifications for the ~~nine~~quarter or year ended June 30, 2023.

4.Student Loans

Included in the installment loan portfolio are $41.0 million and $42.1 million in student loans at June 30, 2023 and December 31, 2022, respectively, made to medical and pharmacy school students. Upon graduation the loan is automatically placed in a grace period of six months. This may be extended up to 48 months for graduates enrolling in internship, medical residency or fellowship programs. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months throughout the life of the loan. No new student loans were originated or purchased during the periods ended~~September~~ June 30, ~~2017~~2023 and ~~2016~~ ~~(in 000's).~~June 30, 2022.

As of June 30, 2023 and December 31, 2022, the reserve against the student loan portfolio was $5.3 million and $2.6 million, respectively. At June 30, 2023, there were $171,000 in student loans in the substandard category. At December 31, 2022, there were $252,000 in student loans included in the substandard category.

Nine Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Other Unallocated Total
September 30, 2017
Beginning balance $ 1,843
$ 1,430
$ 3,378
$ 666
$ 888
$ 697
$ 8,902
Provision (recovery of provision) for credit losses (408 ) (359 ) (379 ) 983
(198 ) 337
(24 )

Charge-offs (106 ) (2 ) —
—
—
(12 ) (120 )
Recoveries 174
73
—
21
132
—
400
Net recoveries 68
71
—
21
132
(12 ) 280

Ending balance $ 1,503
$ 1,142
$ 2,999
$ 1,670
$ 822
$ 1,022
$ 9,158
Period-end amount allocated to:

Loans individually evaluated for impairment 571
427
—
743
—
—
1,741
Loans collectively evaluated for impairment 932
715
2,999
927
822
1,022
7,417
Ending balance $ 1,503
$ 1,142
$ 2,999
$ 1,670
$ 822
$ 1,022
$ 9,158

Table of Contents

Nine Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Other Unallocated Total
September 30, 2016
Beginning balance $ 1,652
$ 1,449
$ 4,629
$ 655
$ 1,258
$ 70
$ 9,713
Provision (recovery of provision) for credit losses 822
93
(933 ) (27 ) (482 ) 520
(7 )

Charge-offs (846 ) (29 ) —
—
—
(20 ) (895 )
Recoveries 51
20
30
—
6
—
107
Net charge-offs (795 ) (9 ) 30
—
6
(20 ) (788 )

Ending balance $ 1,679
$ 1,533
$ 3,726
$ 628
$ 782
$ 570
$ 8,918
Period-end amount allocated to:

Loans individually evaluated for impairment 735
635
—

—
—
1,370
Loans collectively evaluated for impairment 944
898
3,726
628
782
570
7,548
Ending balance $ 1,679
$ 1,533
$ 3,726
$ 628
$ 782
$ 570
$ 8,918

The following ~~summarizes information with respect~~tables summarize the credit quality indicators for outstanding student loans:


	June 30, 2023					December 31, 2022
(Dollars in thousands)	Number of Loans	Principal Amount		Accrued Interest		Number of Loans	Principal Amount		Accrued Interest
School	63	$	1,719	$	914	70	$	2,056	$	908
Grace	15	459		205		27	667		348
Repayment	452	21,373		250		516	23,414		857
Deferment	196	8,471		1,536		268	10,974		1,732
Forbearance	185	8,943		593		91	5,019		237
Total	911	$	40,965	$	3,498	972	$	42,130	$	4,082

School - The time in which the borrower is still actively in school at least half-time. No payments are expected during this stage, though the borrower may make payments during this time.

Grace - A six-month period of time granted upon graduation, or end of active-student status, during which payment is not required but interest continues to accrue. Upon completion of the six month grace period, the loan ~~balances~~is transferred to repayment status. This status may also represent an in-school borrower activated to military duty. The borrower must return to at ~~September~~least half-time status within six months of their active-duty end date in order to return to in-school status.

Repayment - The time in which the borrower is no longer attending school at least half-time, and has not received an approved grace, deferment, or forbearance. Regular payment is expected from these borrowers under an allotted payment plan.

Deferment - May be granted for up to 48 months for borrowers who have begun the repayment period on their loans but are either actively enrolled in an eligible school at least half-time or actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.

Forbearance - The period of time during which the borrower may postpone making principal and interest payments due to either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance and will be capitalized at the end of the forbearance period. If the borrower is delinquent at the time the forbearance is granted, unpaid interest and interest accrued during the delinquency will also be capitalized. Loan terms will not change as a result of forbearance and payment amounts may be increased to allow the loan to pay off in the required time frame. A forbearance that results in an insignificant delay in payment, is not considered a concessionary change in terms, provided the borrower affirms the obligation. Forbearance is not an uncommon status designation and is considered standard industry practice, consistent with the succession of students migrating from school to career. However, additional risk is associated with this designation.

Student Loan Aging

Student loans are generally charged off at the end of the quarter during which the account becomes 120 days contractually past due. Accrued but unpaid interest related to charged-off student loans is reversed and charged against interest income. For the six months ended June 30, ~~2017~~2023, $111,000 in accrued interest receivable was reversed, due to charge-offs of $985,000. For the six months ended June 30, 2022, $14,000 in accrued interest receivable was reversed, due to charge-offs of $353,000. For the quarter ended June 30, 2023, $83,000 in accrued interest receivable was reversed, due to charge-offs of $515,000. There were no charge-offs or reversal of accrued interest during the quarter ended June 30, 2022.

The following table summarize the amortized cost of student loan aging for loans in repayment and ~~2016.~~forbearance:


	June 30, 2023			December 31, 2022
(Dollars in thousands)	Number of Borrowers	Amount		Number of Borrowers	Amount
Current or less than 31 days	256	$	28,947	251	$	26,993
31 - 60 days	8	984		8	546
61 - 90 days	2	215		5	642
91 - 120 days	2	171		4	252

Total	268	$	30,317	268	$	28,433

September 30, 2017 September 30, 2016

Loans
Individually
Evaluated for Impairment

Loans
Collectively
Evaluated for Impairment
Total Loans
Loans
Individually
Evaluated for Impairment

Loans
Collectively
Evaluated for Impairment
Total Loans
(in 000's)
Commercial and Business Loans $ 3,604
$ 42,333
$ 45,937
$ 5,101
$ 52,404
$ 57,505
Government Program Loans 83
931
1,014
365
1,612
1,977
Total Commercial and Industrial 3,687
43,264
46,951
5,466
54,016
59,482

Commercial Real Estate Loans 1,151
198,517
199,668
1,511
179,983
181,494
Residential Mortgage Loans 2,793
87,491
90,284
2,961
98,339
101,300
Home Improvement and Home Equity Loans —
510
510
—
760
760
Total Real Estate Mortgage 3,944
286,518
290,462
4,472
279,082
283,554

Real Estate Construction and Development Loans 6,816
122,067
128,883
12,131
126,043
138,174

Agricultural Loans 891
57,614
58,505
6
46,757
46,763

Installment and Other Loans —
57,583
57,583
965
28,271
29,236

Total Loans $ 15,338
$ 567,046
$ 582,384
$ 23,040
$ 534,169
$ 557,209

Table of Contents

5.Deposits


4.	~~Deposits~~

Deposits include the following:


(in 000's)	September 30, 2017		December 31, 2016
(In thousands)					(In thousands)	June 30, 2023		December 31, 2022
Noninterest-bearing deposits	$	315,877	$	262,697	Noninterest-bearing deposits	$	476,387	$	481,629
Interest-bearing deposits:					Interest-bearing deposits:
NOW and money market accounts	262,037		235,873		NOW and money market accounts	385,667		499,861
Savings accounts	81,378		75,068		Savings accounts	114,075		125,946
Time deposits:					Time deposits:
Under $250,000	53,702		87,419		Under $250,000	51,145		42,933
$250,000 and over	12,304		15,572		$250,000 and over	19,280		15,115
Total interest-bearing deposits	409,421		413,932		Total interest-bearing deposits	570,167		683,855
Total deposits	$	725,298	$	676,629	Total deposits	$	1,046,554	$	1,165,484

Total brokered deposits included in time deposits above	$	9,755	$	28,132


5.	~~Short-term Borrowings/Other Borrowings~~

6.Short-term Borrowings/Other Borrowings

The following table sets forth the Company’s credit lines, balances outstanding, and pledged collateral:


(In thousands)	June 30, 2023		December 31, 2022
Unsecured credit lines:
Credit limit	$	120,000	$	120,000
Balance outstanding	25,620		—
Federal Home Loan Bank:
Credit limit	137,097		2,151
Balance outstanding	—		—
Collateral pledged	241,129		2,151
Federal Reserve Bank:
Credit limit	449,232		435,599
Balance outstanding	75,000		—
Collateral pledged	596,333		590,427

At ~~September~~June 30, ~~2017~~,2023, pledged collateral at the ~~Company had collateralized lines~~Federal Home Loan Bank consisted of ~~credit with~~$2.4 million in available-for-sale investment securities and $238.7 million in loan balances. Pledged collateral at the Federal Reserve Bank consisted of ~~San Francisco totaling~~ ~~$283,948,000, as well as~~$4.3 million in available-for-sale investment securities and $592.1 million in loan balances. At December 31, 2022, pledged collateral at the Federal Home Loan Bank ~~(FHLB) lines~~consisted of ~~credit totaling~~ ~~$14,400,000~~. At September 30, 2017, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ("PCBB") totaling $10,000,000, a Fed Funds line of $10,000,000 with Union Bank, and a Fed Funds line of $20,000,000 with Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock$2.2 million in ~~the FHLB,~~available-for-sale investment securities and ~~certain qualifying mortgage loans. As of~~ ~~September 30, 2017~~, ~~$15,327,000~~ ~~in investment securities~~pledged collateral at ~~FHLB were pledged as collateral for FHLB advances. Additionally,~~ ~~$410,463,000~~ ~~in secured and unsecured loans were pledged at~~ ~~September 30, 2017, as collateral for borrowing lines with~~ the Federal Reserve Bank ~~totaling~~ ~~$283,948,000. At~~ ~~September~~consisted of $590.4 million in loan balances.

7.Leases

The Company leases land and premises for its branch banking-offices, administration facility, and ITMs. The initial terms of these leases expire at various dates through 2032. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted to certain economic indices or market conditions. Lease terms may also include options for termination. As of June 30, ~~2017~~,2023, the Company had 14 operating leases and no ~~outstanding borrowings.~~

financing leases. At ~~December 31, 2016~~,June 30, 2022, the Company had ~~collateralized lines~~13 operating leases and no financing leases.

Table of ~~credit with the Federal Reserve Bank~~Contents

The components of ~~San Francisco totaling~~ ~~$323,162,000~~,lease expense are as ~~well~~follows:


	Three Months Ended				Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022



Operating lease expense	$	178	$	184	$	356	$	368
Variable lease expense	—		—		—		—

Total	$	178	$	184	$	356	$	368

Supplemental information related to leases are as ~~Federal Home Loan Bank (“FHLB”) lines~~follows:


	Six Months Ended
(In thousands)	June 30, 2023			June 30, 2022




Operating cash flows from operating leases	$	356		$	368



Weighted-average remaining lease term in years for operating leases	4.29			4.73

Weighted-average discount rate for operating leases	5.11		%	5.13		%

Maturities of ~~credit totaling~~ ~~$2,037,000. At~~ ~~December 31, 2016~~, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ("PCBB") totaling $10,000,000 and a Fed Funds line of $20,000,000 with Zions First National Bank. These lines of credit generally have interest rates tied to the Federal Funds rate orlease liabilities are ~~indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans. As of~~ ~~December 31, 2016~~, ~~$2,152,000~~ ~~in investment securities at FHLB were pledged~~ as ~~collateral for FHLB advances. Additionally,~~ ~~$471,737,000~~ ~~in secured and unsecured loans were pledged at~~ ~~December 31, 2016, as collateral for used and unused borrowing lines with the Federal Reserve Bank totaling $323,162,000. At~~ ~~December 31, 2016, the Company had no outstanding borrowings.~~follows:


(In thousands)	June 30, 2023
2023	$	698
2024	486
2025	268
2026	132
2027	110
Thereafter	264
Total undiscounted cash flows	1,958
Less: present value discount	(199)
Present value of net future minimum lease payments	$	1,759

~~All lines of credit are~~

8.Supplemental Cash Flow Disclosures


	Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022
Cash paid during the period for:
Interest	$	4,201	$	1,135
Income taxes	—		2,920
Noncash investing activities:


Impact of ASC 326 CECL adoption	6,367		—
Unrealized gain on unrecognized post retirement costs	43		44
Unrealized gain (loss) on available for sale securities	1,239		(20,433)
Unrealized (loss) gain on junior subordinated debentures	(53)		2,594

Cash dividend declared	2,055		1,874

9.Dividends on ~~an “as available” basis and can be revoked by the grantor at any time.~~Common Stock


6.	~~Supplemental Cash Flow Disclosures~~

Nine months ended September 30,
(in 000's) 2017 2016
Cash paid during the period for:
Interest $ 1,313
$ 1,003
Income taxes $ 5,700
$ 1,110
Noncash investing activities:

OREO financed $ —
$ 3,766
Unrealized gain on securities $ 355
$ 118
Stock dividends issued $ 1,220
$ 1,673
Cash dividend declared $ 1,182
$ —


7.	~~Dividends on Common Stock~~

On ~~March 28, 2017~~, the Company’s Board of Directors declared a one-percent (1%) stock dividend on the Company’s outstanding common stock. Based upon the number of outstanding common shares on the record date of April 7, 2017, 167,082 additional shares were issued to shareholders on April 17, 2017. Because the stock dividend was considered a “small stock dividend,” approximately $1,219,759 was transferred from retained earnings to common stock based upon the ~~$7.38~~ ~~closing price of the Company’s common stock on the declaration date of~~ ~~March 28, 2017~~. There were no fractional shares paid. Except for earnings-per-share calculations, shares issued for the stock dividend have been treated prospectively for financial reporting purposes. For purposes of earnings per share calculations, the Company’s weighted average shares outstanding and potentially dilutive shares used in the computation of earnings per share have been restated after giving retroactive effect to a 1% ~~stock dividend to shareholders for all periods presented.~~

On ~~April 25, 2017,~~June 27, 2023, the Company’s Board of Directors declared a cash dividend of ~~$0.05~~$0.12 per share on the ~~Company's~~Company’s common stock. The dividend was payable on ~~May 17, 2017,~~July 24, 2023, to shareholders of record as of ~~May 8, 2017.~~July 10, 2023. Approximately ~~$846,000~~$2.1 million was ~~transfered~~transferred from retained earnings to ~~cash~~dividends payable as of June 30, 2023 to allow for distribution of the dividend to shareholders.

The ~~Board of Directors also authorized the~~Company has a program to repurchase of up to $3 million of ~~the~~its outstanding common ~~stock of the Company.~~stock. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. For the three months and six months ended June 30, 2023 and June 30, 2022, no shares have been repurchased.

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~~On June 27, 2017, the Company’s Board of Directors declared a cash dividend of $0.05~~

10.Net Income per share on the Company's common stock. The dividend was payable on July 21, 2017, to shareholders of record as of July 7, 2017. Approximately $844,000 were transfered from retained earnings to cash to allow for distribution of the dividend to shareholders.Common Share

On September 26, 2017, the Company’s Board of Directors declared a cash dividend of $0.07 per share on the Company's common stock. The dividend is payable on October 19, 2017, to shareholders of record as of October 10, 2017. Approximately $1,182,000 were transfered from retained earnings to other liabilities to allow for distribution of the dividend to shareholders.


8.	~~Net Income per Common Share~~

The following table provides a reconciliation of the numerator and the denominator of the basic EPS computation with the numerator and the denominator of the diluted EPS computation:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net income (in thousands)	$	4,417	$	3,435	$	10,542	$	5,878
Weighted average shares issued	17,102,740		17,036,364		17,089,693		17,033,401
Add: dilutive effect of stock options	12,000		21,391		13,908		21,341
Weighted average shares outstanding adjusted for potential dilution	17,114,740		17,057,755		17,103,601		17,054,742
Basic earnings per share	$	0.26	$	0.20	$	0.62	$	0.35
Diluted earnings per share	$	0.26	$	0.20	$	0.62	$	0.34
Anti-dilutive stock options excluded from earnings per share calculation	98,000		97,000		98,000		97,000

11.Taxes on Income

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Net income (000's, except per share amounts) $ 2,740
$ 2,040
$ 7,004
$ 5,830

Weighted average shares issued 16,885,615
16,881,422
16,885,578
16,880,835
Add: dilutive effect of stock options 21,652
9,644
18,485
6,243
Weighted average shares outstanding adjusted for potential dilution 16,907,267
16,891,066
16,904,063
16,887,078

Basic earnings per share $ 0.16
$ 0.12
$ 0.41
$ 0.35
Diluted earnings per share $ 0.16
$ 0.12
$ 0.41
$ 0.35
Anti-dilutive stock options excluded from earnings per share calculation 30,000
21,000
30,000
21,000

~~Prior year anti-dilutive stock options excluded from earnings per share calculation have been restated to reflect the impact of stock dividends.~~


9.	~~Taxes on Income~~

The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority.

The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. At ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~,2022, the Company had no recorded valuation allowance. The Company is no longer subject to examinations by taxing authorities for years before 2018 and 2017 for Federal and California jurisdictions, respectively.

The Company and its subsidiary file income tax returns in the U.S federal jurisdiction, and several states within the U.S. There are no filings in foreign jurisdictions. During 2014, the Company began the process to amend its California state tax returns for the years 2009 through 2012 to file a combined report on a unitary basis with the Company and USB Investment Trust. The amended returns for 2009, 2010, and 2011 were filed in 2014, 2015, and 2016 respectively. The amended return for 2012 was filed during 2016. During the third quarter of 2016, the IRS notified the Company it would be conducting an examination of the Company's 2014 federal return. As of September 30, 2017, the Company is unaware of any change in tax positions as a result of the IRS examination.

~~The Company's~~Company’s policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. ~~Interest and~~There were no interest or penalties recognized on uncertain tax positions during the periods ended ~~September~~June 30, ~~2017~~2023 and ~~2016 were insignificant.~~2022.

The Company reported a provision for income taxes of $4.3 million for the six months ended June 30, 2023 compared to $2.4 million for the comparable period of 2022. The effective tax rate was 29.1% for the six months ended June 30, 2023 compared to 28.7% for the comparable period of 2022.


~~10.~~	~~Junior Subordinated Debt/Trust Preferred Securities~~

12.Junior Subordinated Debt/Trust Preferred Securities

~~Effective September 30, 2009 and beginning with~~The contractual principal balance of the ~~quarterly interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's~~ ~~$15.0 million~~ ~~of junior subordinated~~Company’s debentures relating to its trust preferred ~~securities. The terms of the debentures and trust indentures allow for the Company to defer interest payments for up to~~ 20 ~~consecutive quarters without default or penalty. During the period that the interest deferrals were elected, the Company continued to record interest expense associated with the debentures. As~~securities is $12.0 million as of June 30, ~~2014, the Company ended the extension period, paid all accrued~~2023 and ~~unpaid interest, and is currently making quarterly interest payments.~~December 31, 2022. The Company may redeem the junior subordinated debentures at any time at par.

During August 2015, the Bank purchased $3.0 million of the Company's junior subordinated debentures related to the Company's trust preferred securities at a fair value discount of 40%. Subsequently, in September 2015, the Company purchased those shares from the Bank and canceled $3.0 million in par value of the junior subordinated debentures, realizing a $78,000 gain on redemption. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of September 30, 2017.

The ~~fair value guidance generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. Effective January 1, 2008, the~~ Company ~~elected the fair value option~~accounts for its junior subordinated debt issued under USB Capital Trust ~~II.~~II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the consolidated balance sheet. ~~The~~As of June 30, 2023, the rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.

At ~~September~~June 30, ~~2017~~2023, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine ~~the~~its present ~~value of those cash flows.~~value. The cash flow model approach utilizes the forward ~~3-month LIBOR~~three-month SOFR curve to estimate future quarterly interest payments due over the ~~thirty-year~~ life of the debt instrument. ~~These cash~~Cash flows were discounted at a rate ~~which incorporates a~~based on current market ~~rate~~rates for similar-term debt instruments and adjusted for additional credit and liquidity risks associated with the junior subordinated debt. ~~We believe the~~ ~~5.89%~~The 6.56% discount rate used represents ~~what a market participant would consider under the circumstances~~an investor yield based on current market assumptions. At ~~September~~June 30, ~~2017,~~2023, the total cumulative gain recorded on the debt ~~is $3,008,000.~~was $1.94 million.

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The net fair value calculation performed at ~~September~~as of June 30, ~~2017~~2023 resulted in a net pretax ~~loss~~gain adjustment of ~~$688,000~~ (~~$405,000~~,$205,000 for the six months ended June 30, 2023 compared to a net pretax gain adjustment of $725,000 for the six months ended June 30, 2022.

For the six months ended June 30, 2023, the net $205,000 fair value gain adjustment was separately presented as a $258,000 gain ($182,000, net of tax) ~~for the~~ ~~nine months endedSeptember 30, 2017, compared to a pretax~~ ~~gain~~ ~~adjustment of~~ ~~$48,000~~ (~~$28,000, net of tax) for the~~ ~~nine months endedSeptember 30, 2016. Fair value gains and losses are reflected as a component of noninterest income~~recognized on the consolidated statements of ~~income.~~

~~The fair value calculation performed at September 30, 2017 resulted in~~income, and a ~~pretax~~$53,000 loss ~~adjustment of $88,000~~ ($~~52,000,~~37,000, net of tax) ~~for~~associated with the ~~three~~instrument-specific credit risk recognized in other comprehensive income. For the six months ended ~~September~~June 30, ~~2017, compared to a pretax~~2022, the net $725,000 fair value gain adjustment ~~of $423,000~~was separately presented as a $2,594,000 gain ($~~249,000,~~1,827,000, net of tax) ~~for the three months ended September 30, 2016. Fair value gains and losses are reflected as a component of noninterest income~~recognized on the consolidated statements of income, and a $1,869,000 loss ($1,317,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods indicated.

The net fair value calculation performed as of June 30, 2023 resulted in a net pretax gain adjustment of $312,000 for the quarter ended June 30, 2023 compared to a net pretax gain adjustment of $422,000 for the quarter ended June 30, 2022.


~~11.~~	~~Fair Value Measurements and Disclosure~~

For the quarter ended June 30, 2023, the net $312,000 fair value gain adjustment was separately presented as a $75,000 gain ($53,000, net of tax) recognized on the consolidated statements of income, and a $387,000 gain ($273,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended June 30, 2022, the net $422,000 fair value gain adjustment was separately presented as a $869,000 loss ($612,000, net of tax) recognized on the consolidated statements of income, and a $1.3 million gain ($910,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods indicated.

13.Fair Value Measurements and Disclosure

The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825, Fair Value Measurements and Disclosures ~~(formerly Statement of Financial Accounting Standards No. 107,~~ ~~Disclosures about Fair Value of Financial Instruments~~), which requires the disclosure of fair value information ~~about~~for both on- and off-balance sheet financial instruments where it is practicable to estimate that value.

~~Generally accepted accounting~~ This guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value, ~~in accordance with generally accepted accounting principles~~ and expands fair value disclosure requirements. ~~This guidance applies whenever~~Additionally, it is applicable to other accounting pronouncements ~~require~~requiring or ~~permit~~permitting fair value measurements.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad ~~levels (Level~~levels: Level 1, Level 2, and Level ~~3).~~3. Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices ~~included within Level 1~~ that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s ~~own~~ assumptions ~~about~~regarding the ~~assumptions that market participants would use in~~ pricing ~~the~~of an asset or liability ~~(including~~by a market participant, including assumptions about ~~risk).~~risk.

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:


	June 30, 2023
(In thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:


Investment securities	$	202,213	$	202,213	$	—	$	202,213	$	—
Marketable equity securities	3,308		3,308		3,308		—		—
Loans, net	944,011		880,462		—		—		880,462
Financial Liabilities:
Total deposits	1,046,554		1,045,647		976,129		—		69,518
Junior subordinated debt	10,719		10,719		—		—		10,719

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September 30, 2017
(in 000's) Carrying Amount Estimated Fair Value Quoted Prices In Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3
Financial Assets:
Cash and cash equivalents $ 159,892
$ 159,892
$ 159,892
$ —
$ —
Interest-bearing deposits 654
654
—
654
—
Investment securities 48,356
48,356
3,783
44,573
—
Loans 574,443
569,970
—
—
569,970
Accrued interest receivable 5,846
5,846
—
5,846
—
Financial Liabilities:

Deposits:

Noninterest-bearing 315,877
315,877
315,877
—
—
NOW and money market 262,037
262,037
262,037
—
—
Savings 81,378
81,378
81,378
—
—
Time deposits 66,006
65,658
—
—
65,658
Total deposits 725,298
724,950
659,292

65,658
Junior subordinated debt 9,534
9,534
—
—
9,534
Accrued interest payable 41
41
—
41
—

December 31, 2016
(in 000's) Carrying Amount Estimated Fair Value Quoted Prices In Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3
Financial Assets:
Cash and cash equivalents $ 113,032
$ 113,032
$ 113,032
$ —
$ —
Interest-bearing deposits 650
650
—
650
—
Investment securities 57,491
57,491
3,716
53,775
—
Loans 561,932
557,914
—
—
557,914
Accrued interest receivable 3,895
3,895
—
3,895
—
Financial Liabilities:

Deposits:

Noninterest-bearing 262,697
262,697
262,697
—
—
NOW and money market 235,873
235,873
235,873
—
—
Savings 75,068
75,068
75,068
—
—
Time deposits 102,991
102,743
—
—
102,743
Total deposits 676,629
676,381
573,638
—
102,743
Junior subordinated debt 8,832
8,832
—
—
8,832
Accrued interest payable 76
76
—
76
—


	December 31, 2022
(In thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:


Investment securities	$	207,545	$	207,545	$	—	$	207,545	$	—
Marketable equity securities	3,315		3,315		3,315		—		—
Loans, net	969,996		906,050		—		—		906,050
Financial Liabilities:
Time deposits	1,165,484		1,164,492		1,107,436		—		57,056
Junior subordinated debt	10,883		10,883		—		—		10,883

The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as ~~available-for-sale~~those on investment securities ~~(AFS)~~ and junior subordinated debt are performed on a recurring basis, while others, such as ~~impairment~~evaluations of loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.

~~The Company’s~~ •Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices. ~~The Company’s~~

•Level 2 financial assets include highly liquid debt instruments of U.S. government agencies, collateralized mortgage obligations, and debt obligations of states and political subdivisions, whose fair

values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded. ~~The Company’s~~

•Level 3 financial assets include certain instruments where the assumptions may be made by usthe Company or third parties about assumptions that market participants would use in pricing the asset or liability. ~~From time to time, the~~

The Company recognizes transfers between ~~Level~~Levels 1, 2, and 3, when a change in circumstances warrants a transfer. There were no transfers ~~in or out of Level 1 and Level 2~~between fair value ~~measurements~~measurement classifications during the ~~three~~six months ended June 30, 2023 or ~~nine month periods~~the six months ended ~~September 30, 2017~~.December 31, 2022.

The following methods and assumptions were used in estimating the fair values of financial ~~instruments:~~

~~Cash and Cash Equivalents~~ ~~- The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their estimated fair values.~~

~~Interest-bearing Deposits –~~ ~~Interest bearing deposits in other banks consist of fixed-rate certificates of deposits. Accordingly,~~instruments measured at fair value ~~has been estimated~~on a recurring and non-recurring basis:

Investment Securities - Available-for-sale and marketable equity security values are based ~~upon interest rates currently being offered~~ on ~~deposits with similar characteristics and maturities.~~

~~Investment Securities~~ ~~– Available for sale securities are valued based upon~~ open-market price quotes obtained from reputable third-party ~~brokers that actively make a market in those securities.~~brokers. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine the fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix ~~pricing approach~~pricing-approach, based on comparable securities in the market, is utilized. Level 2 pricing may include ~~using~~the use of a forward spread from the last observable trade or may use a proxy bond, ~~like~~such as a TBA mortgage, to ~~come up with a~~determine the price for the security being valued. Changes in fair market value are recorded through ~~other comprehensive~~other-accumulated-comprehensive-income as an unrecognized gain or loss ~~as the securities are available for sale.~~

~~Loans~~ ~~- Fair values of variable rate loans, which reprice frequently and with no significant change in credit risk, are based~~ on carrying values adjusted for credit risk. Fair values for all other loans, except impaired loans, are estimated using discounted cash flows over their remaining maturities, using interest rates at which similar loans would currently be offered to borrowers with similar credit ratings and for the same remaining maturities. The allowance for loan loss is considered to be a reasonable estimate of loan discount for credit quality concerns.fair value.

~~Impaired~~Individually-Evaluated Loans - Fair value measurements for ~~collateral dependent impaired~~individually-evaluated loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third party appraisals ~~and~~or observed market prices. ~~Collateral dependent~~Collateral-dependent loans are measured for impairment using the fair value of the collateral. ~~Changes are recorded directly~~There were no individually-evaluated loans measured at fair value as ~~an adjustment to current earnings.~~of June 30, 2023 or December 31, 2022.

Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. No OREO properties were measured at fair value as of June 30, 2023 or December 31, 2022.

~~Deposits~~ – Fair values for transaction and savings accounts are equal to the respective amounts payable on demand (i.e., carrying amounts). Fair values of fixed-maturity certificates of deposit were estimated using the rates currently offered for deposits with similar remaining maturities.

Junior Subordinated Debt – - The fair value of the junior subordinated debt ~~was determined~~is based ~~upon~~on a discounted cash ~~flows~~flow model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company ~~used~~uses characteristics that market participants would generally use, and ~~considered~~considers factors specific to ~~(a)~~ the liability ~~(b)~~and the principal, ~~(or~~or most ~~advantageous)~~

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advantageous, market for the ~~liability, and (c) market participants with whom the reporting entity would transact in that market.~~liability. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar junior subordinated debt and circumstances unique to the Company. The Company believes that the subjective nature of ~~theses~~these inputs, ~~due primarily to~~credit concerns in the ~~current economic environment, require~~capital markets, and inactivity in the trust preferred markets, limit the observability of market spreads, requiring the junior subordinated debt to be classified asat a Level 3 fair value.

~~Accrued Interest Receivable~~The following tables summarize the Company’s assets and ~~Payable- The carrying value of these instruments is a reasonable estimate of fair value.~~

~~Off-Balance Sheet Instruments~~ - Off-balance sheet instruments consist of commitments to extend credit, standby letters of credit and derivative contracts. Fair values of commitments to extend credit are estimated using the interest rate currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present

~~counterparties’ credit standing. There was no material difference between the contractual amount and the estimated~~liabilities that were measured at fair value on a recurring basis as of ~~commitments to extend credit~~June 30, 2023:


(In thousands)	June 30, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
AFS Securities:
U.S. Government agencies	$	6,976	$	—	$	6,976	$	—
U.S. Government collateralized mortgage obligations	92,457		—		92,457		—

Municipal bonds	41,554		—		41,554		—
U.S. Treasury securities	29,517		—		29,517		—
Corporate bond	31,709		—		31,709		—
Total AFS securities	202,213		—		202,213		—
Marketable equity securities	3,308		3,308		—		—
Total	$	205,521	$	3,308	$	202,213	$	—


Liabilities:
Junior subordinated debt	$	10,719	—	—	$	10,719
Total	$	10,719	—	—	$	10,719

The following tables summarize the Company’s assets and liabilities that were measured at ~~September 30, 2017~~ ~~and~~ fair value on a recurring basis as of December 31, ~~2016~~.2022:


(In thousands)	December 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
AFS Securities:
U.S. Government agencies	$	8,231	$	—	$	8,231	$	—
U.S. Government collateralized mortgage obligations	97,218		—		97,218		—

Municipal bonds	40,170		—		40,170		—
Treasury securities	29,224		—		29,224		—
Corporate bonds	32,702		—		32,702		—
Total AFS securities	207,545		—		207,545		—
Marketable equity securities	3,315		3,315		—		—
Total	$	210,860	$	3,315	$	207,545	$	—

~~Fair values of standby letters of credit are based on fees currently charged for similar agreements. The~~


Liabilities:
Junior subordinated debt	$	10,883	$	—	$	—	$	10,883
Total	$	10,883	$	—	$	—	$	10,883

There were no non-recurring fair value adjustments at June 30, 2023 or December 31, 2022.

Table of commitments generally approximates the fees received from the customer for issuing such commitments. These fees are not material to the Company’s consolidated balance sheets and results of operations.Contents

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

June 30, 2023

December 31, 2022

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

6.56%

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

6.63%

September 30, 2017 December 31, 2016
Financial Instrument Valuation Technique Unobservable Input Weighted Average Financial Instrument Valuation Technique Unobservable Input Weighted Average
Junior Subordinated Debt Discounted cash flow Discount Rate 5.89% Junior Subordinated Debt Discounted cash flow Discount Rate 6.46%

Management believes that the credit ~~risk adjusted~~risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures ~~carried at fair value~~ is indicative of the nonperformance risk premium a willing market participant would require under current, inactive market ~~conditions, that is, the inactive market.~~conditions. Management attributes the change in fair value of the junior subordinated debentures ~~during the period~~ to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. The narrowing of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the negative fair value adjustments.debt. Generally, an increase in the credit risk adjusted spread and/or a decrease in the ~~three month~~three-month LIBOR swap curve will result in a positive fair value ~~adjustments (and~~adjustment and a decrease in the fair value ~~measurement).~~measurement. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the ~~three month~~three-month LIBOR swap curve will result in a negative fair value ~~adjustments (and~~adjustment and an increase in the fair value ~~measurement).~~measurement. The ~~decrease~~increase in discount rate between the periods ended ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022, is primarily due to ~~decreases~~increases in rates for similar debt instruments.

~~The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of~~ ~~September 30, 2017~~ ~~(in 000’s):~~

Description of Assets September 30, 2017
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
AFS Securities (2):
U.S. Government agencies $ 20,970
$ —
$ 20,970
$ —
U.S. Government collateralized mortgage obligations 23,603
—
23,603
—
Mutual Funds 3,783
3,783
—
—
Total AFS securities $ 48,356
$ 3,783
$ 44,573
$ —

Total $ 48,356
$ 3,783
$ 44,573
$ —

Description of Liabilities September 30, 2017
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (2) $ 9,534
—
—
$ 9,534
Total $ 9,534
—
—
$ 9,534

~~(1)Nonrecurring~~

~~(2)Recurring~~

~~The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of~~ ~~December 31, 2016~~ ~~(in 000’s):~~

Description of Assets December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
AFS Securities (2):
U.S. Government agencies $ 23,203
$ —
$ 23,203
$ —
U.S. Government collateralized mortgage obligations 30,572
—
30,572
—
Mutual Funds 3,716
3,716
—
—
Total AFS securities 57,491
3,716
53,775
$ —
Impaired Loans (1):

Commercial and industrial 301
—
—
301
Total impaired loans $ 301
$ —
$ —
$ 301

Total $ 57,792
$ 3,716
$ 53,775
$ 301

Description of Liabilities December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (2) $ 8,832
$ —
$ —
$ 8,832
Total $ 8,832
$ —
$ —
$ 8,832

~~(1)Nonrecurring~~

~~(2)Recurring~~

~~The Company did not record a write-down on other real estate owned during the~~ ~~nine months endedSeptember 30, 2017~~ ~~or the year ended December 31, 2016.~~

The following table ~~presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at~~ ~~December 31, 2016~~ ~~(in 000's). There were no assets measured at fair value on a non-recurring basis as of September 30, 2017.~~

December 31, 2016
Financial Instrument Fair Value Valuation Technique Unobservable Input Range, Weighted Average
Impaired Loans:
Commercial and industrial $ 301
Sales Comparison Approach Adjustment for difference between comparable sales 7% - 29%, 19.1%

~~The following tables provide~~provides a reconciliation of ~~assets and~~ liabilities at fair value using Level 3 significant, unobservable inputs ~~(Level 3)~~ on a recurring ~~basis during the three~~basis:


	Three Months Ended				Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Junior Subordinated Debt:
Beginning balance	$	11,017	$	10,887	$	10,883	$	11,189
Gross (gain) loss included in earnings	74		869		(258)		1,869
Gross (gain) loss related to changes in instrument specific credit risk	(387)		(1,292)		53		(2,594)
Change in accrued interest	15		$	25	41		25
Ending balance	$	10,719	$	10,489	$	10,719	$	10,489
The amount of total (gain) loss for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date	$	74	$	869	$	(258)	$	1,869

14.Goodwill and ~~nine months endedSeptember~~Intangible Assets

At June 30, ~~2017 and 2016~~ ~~(in 000’s):~~

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Reconciliation of Liabilities:
Junior
Subordinated
Debt
Junior
Subordinated
Debt
Junior
Subordinated
Debt

Junior
Subordinated
Debt
Beginning balance $ 9,441
$ 7,837
$ 8,832
$ 8,300
Total loss (gain) included in earnings 88
423
688
(48 )
Other accrued interest 5
2
14
10
Ending balance $ 9,534
$ 8,262
$ 9,534
$ 8,262
The amount of total loss (gains) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date $ 88
$ 423
$ 688
$ (48 )


~~12.~~	~~Goodwill and Intangible Assets~~

At ~~September 30, 2017~~,2023, the Company ~~had~~held goodwill in the amount of ~~$4,488,000~~$4.5 million in connection with various business combinations and purchases. This amount was unchanged from the balance of ~~$4,488,000~~$4.5 million at December 31, ~~2016. While goodwill is not amortized, the~~2022. The Company ~~does conduct periodic~~conducts impairment analysis on goodwill ~~at least~~ annually or, more often ~~as conditions require.~~if triggering events occur. The Company performed ~~its~~an analysis of goodwill impairment and concluded goodwill was not impaired ~~at September 30, 2017.~~


~~13.~~	~~Subsequent Events~~

~~Subsequent events~~are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the dateas of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewedDecember 31, 2022, with no material events occurring through the ~~date~~period ended June 30, 2023.

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15.Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income included in shareholders’ equity are as follows:


	June 30, 2023						December 31, 2022
(In thousands)	Net unrealized (loss) on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized (loss) gain on junior subordinated debentures		Net unrealized (loss) gain on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain (loss) on junior subordinated debentures
Beginning balance	$	(19,066)	$	(194)	$	1,765	$	(236)	$	(627)	$	(311)
Current period comprehensive income (loss), net of tax	873		32		(38)		(18,830)		433		2,076
Ending balance	$	(18,193)	$	(162)	$	1,727	$	(19,066)	$	(194)	$	1,765
Accumulated other comprehensive loss					$	(16,628)					$	(17,495)

16.Investment in York Monterey Properties

As of June 30, 2023 and December 31, 2022, the Bank’s investment in York Monterey Properties, Inc., totaled $5.1 million. York Monterey Properties, Inc., is included within the consolidated financial statements ~~were~~of the Company, with $4.6 million of the total investment recognized within the balance of other-real-estate-owned on the consolidated balance sheets.

17.Commitments and Contingent Liabilities

Financial Instruments with Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risk which arise in the normal course of business. These instruments, which may contain elements of credit risk, interest rate risk, and liquidity risk, include commitments to extend credit and standby letters of credit. The credit risks associated with these instruments are essentially the same as those involved in extending credit to customers and are represented by the contractual amount indicated in the table below:


(In thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	$	224,389	$	190,183
Standby letters of credit	$	1,211	$	1,570

Commitments to extend credit are agreements to lend to a customer, as long as conditions established in the contract have not been violated. These commitments are floating-rate instruments based on the current prime rate, and, in most cases, have fixed expiration dates. The Company evaluates each customer’s creditworthiness on a case-by-case basis, and the amount of collateral obtained is based on management’s credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. As many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company.

Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s letters of credit are short-term guarantees and generally have ~~identified no subsequent events requiring disclosure.~~terms from one month to three years.

In the ordinary course of business, the Company may become involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material to the financial position of the Company.

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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Certain matters discussed, or incorporated by reference in this Quarterly Report of Form 10-Q, ~~are~~ contain forward-looking statements about the Company that are intended to be covered by the safe harbor for “forward looking statements” provided by the Private Securities Litigation Reform Act of 1995 and are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations.projected. Such risks and uncertainties include, but are not limited to, the following factors: ~~i) competitive~~

•Adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures, labor shortages, and global conflict and unrest;

•Changes in general economic and financial market conditions either nationally or locally;

•Fiscal policies of the ~~banking industry and changes in the regulatory environment; ii) exposure to changes in the~~U.S. government including interest rate ~~environment~~policies of the Board of Governors of the Federal Reserve System and the resulting impact on the Company’s ~~interest rate~~interest-rate sensitive assets and liabilities; ~~iii) decline~~

•Government policies that could lead to a tightening of credit and a requirement that the Company raise additional capital;

•Increased competition in the ~~health~~Company’s markets, impacting the ability to execute its business plans;

•Loss or inability to attract key personnel;

•Unanticipated deterioration in our loan portfolio, credit losses, and the sufficiency of our allowance for credit losses;

•The ability to grow our loan portfolio due to constraints on concentrations of credit;

•Drought, earthquakes, floods, wildfires, or other natural disasters impacting the local economy ~~nationally~~ and/or ~~regionally which could reduce~~ the ~~demand for loans or reduce the value~~condition of real estate ~~collateral securing most~~collateral;

•The impact of technological changes and the ability to develop and maintain secure and reliable electronic systems including failures in or breaches of the Company’s ~~loans; iv) credit~~operational and/or security systems or infrastructure;

•The failure to maintain effective controls over our financial reporting;

•The quality ~~deterioration that could cause an increase~~and quantity of our deposits and our ability to attract and retain deposits and other sources of funding and liquidity;

•Adverse developments in the ~~provision for loan losses; v)~~ financial services industry generally such as the recent bank failures and any related impact on depositor behavior or investor sentiment;

•The possibility that our recorded goodwill could become impaired which may have an adverse impact on our earnings and capital;

•Asset/~~Liability~~liability matching ~~risks and liquidity~~ risks; ~~volatility and devaluation~~

•Changes in the ~~securities~~accounting policies or procedures; and

•The continuing adverse impact on the U.S. economy, including the markets ~~vi) expected cost savings from recent acquisitions are not realized, vii) potential impairment~~in which we operate due to the lingering effects of ~~goodwill and other intangible assets, and viii) technology implementation problems and information security breaches. Therefore,~~ the COVID-19 global pandemic.

The information set forth ~~therein~~herein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2022.

The Company

United Security Bancshares, ~~(the “Company” or “Holding Company") is~~ a California corporation, ~~incorporated during March of 2001 and~~ is ~~registered with the Board of Governors of the Federal Reserve System as~~ a bank holding company registered under the Bank Holding Company Act (BHCA) with corporate headquarters located in Fresno, California. The principal business of ~~1956,~~United Security Bancshares is to serve as ~~amended.~~the holding company for its wholly-owned subsidiary, United Security Bank. References to the “Bank” refer to United Security Bank ~~(the “Bank”) is a~~together with its wholly-owned ~~bank~~ subsidiary, ~~of the Company and was formed in 1987.~~York Monterey Properties, Inc. References to the ~~Company are references~~“Company” refer to United Security Bancshares ~~(including the Bank).~~together with its subsidiaries on a consolidated basis. References to the ~~Bank are~~“Holding Company” refer to United Security ~~Bank, while references to the Holding Company are to~~Bancshares, the parent ~~only, United Security Bancshares.~~company, on a stand-alone basis. The ~~Company~~Bank currently ~~has eleven~~maintains twelve banking branches, which provide ~~financial~~banking services in Fresno, Madera, Kern, and Santa Clara counties, in the state of California. In addition to full-service branches, the Bank has several stand-alone interactive teller machines (ITMs) within its geographic footprint.

Executive Summary

During 2023, the Company has worked closely with long-term, core customers to provide deposit and lending solutions that meet their business and individual needs. The Company has also focused on maintaining adequate liquidity, managing credit risk, and responsibly managing growth on the balance sheet.

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2023 Highlights:

▪Net income increased to $4.4 million for the quarter ended June 30, 2023 compared to the $3.4 million reported for the quarter ended June 30, 2022. Loan interest income increased $3.8 million and investment securities income increased $497,000 as a result of growth in loan balances and increases in interest rates, when compared to the second quarter of 2022.

▪The Company had available secured lines of credit of $586.3 million, unsecured lines of credit of $120.0 million, unpledged investment securities of $136.4 million, and cash and cash equivalents of $58.4 million as of June 30, 2023. The total borrowings as of June 30, 2023 were $100.6 million.

▪Total assets decreased 0.8% to $1.29 billion, compared to $1.30 billion at December 31, 2022.

▪Total loans, net of unearned fees, decreased 2.0% to $960.1 million, compared to $980.2 million at December 31, 2022.

▪Total investments decreased 2.5%, or $5.3 million, to $205.5 million, compared to $210.9 million at December 31, 2022.

▪Total deposits decreased 10.2% to $1.05 billion, compared to $1.17 billion at December 31, 2022.

▪The allowance for credit losses as a percentage of gross loans increased to 1.68%, compared to 1.04% at December 31, 2022. The increase is primarily the result of an accounting adjustment of $6.6 million related to the adoption of a new accounting standard referred to as the current expected credit loss methodology, or “CECL.” The accounting standard was adopted on January 1, 2023.

▪Net interest income before the provision for credit losses increased 20.1% to $12.5 million for the quarter ended June 30, 2023, compared to $10.4 million for the quarter ended June 30, 2022.

▪The Company recorded a provision for credit losses of $1.1 million for the quarter ended June 30, 2023, compared to a provision for credit losses of $512,000 for the quarter ended June 30, 2022.

▪Book value per share increased to $6.75, compared to $6.59 at December 31, 2022.

▪Net interest margin increased to 4.30% for the quarter ended June 30, 2023, compared to 3.38% for the quarter ended June 30, 2022.

▪Annualized average cost of deposits was 0.71% for the quarter ended June 30, 2023, compared to 0.17% for the quarter ended June 30, 2022.

▪Net charge-offs totaled $469,000, compared to net recoveries of $25,000 for the quarter ended June 30, 2022.

▪Capital position remains well-capitalized with a 11.16% Tier 1 Leverage Ratio compared to 10.10% as of December 31, 2022.

▪Return on average assets (ROAA) was 1.68%, compared to 0.89% for the six months ended June 30, 2022.

▪Return on average equity (ROAE) was 19.32%, compared to 10.19% for the six months ended June 30, 2022.

Trends Affecting Results of Operations and Financial Position

The Company’s overall operations are impacted by a number of factors including not only interest rates and margin spreads, which impact the results of operations, but also the composition of the Company’s consolidated balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.

Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. ~~Our business~~Business results are dependent in large part upon the business activity, population, income levels, deposits, and real estate activity in the Central Valley, and declines in economic conditions can have ~~adverse material~~materially-adverse effects upon the Bank. ~~In addition,~~Due to the Central ~~Valley remains largely dependent~~Valley’s economic dependence on ~~agriculture. A~~agriculture, a downturn in agriculture and ~~agricultural related~~agricultural-related business could indirectly and adversely affect the Company as many borrowers and customers are involved in, or are ~~impacted~~ to some extent impacted by, the agricultural industry. While ~~a great number~~most of our borrowers are not directly involved in agriculture, they would likely be impacted by ~~difficulties~~downturns in the agricultural industry ~~since~~as many jobs in our market areas are ancillary to the regular production, processing, marketing, and sale of agricultural commodities. ~~While~~Despite the ~~prolonged drought has been alleviated during the past year due to significant amounts of precipitation,~~unusually wet winter experienced in 2022/2023, the state of California ~~recently~~has experienced severe droughts which have resulted in water-allocation reductions for farmers in the ~~worst drought in recorded history. It is not possible~~Central Valley. Due to ~~quantify~~these uncertain water issues, the ~~drought's~~ impact on businesses and consumers located in the ~~Company's~~Company’s market areas oris not possible to predict ~~adverse economic impacts related~~or quantify. In response to ~~future droughts.~~drought conditions, the California state legislature passed the Sustainable Groundwater Management Act in 2014 with the goal of ensuring better local and regional management of groundwater use and sustainable groundwater management in California by 2042. Development, preparation, and implementation of the Groundwater Sustainability Plan began in 2020. The effects of this plan have yet to be determined.

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The ~~residential real estate markets~~Company’s earnings are impacted by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank (FRB) has a significant impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in ~~the five county region from Merced~~order to ~~Kern has strengthened since 2013 and that trend has continued through 2017.~~curb inflation or combat a recession. The severe declines in residential construction and home prices that began in 2008 have ended and home prices are now rising on a year-over-year basis. The sustained period of double-digit price declines from 2008–2011 adversely impacted the Company’s operations and increasedFRB affects the levels of ~~nonperforming assets, increased expenses related~~bank loans, investments. and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to ~~foreclosed properties,~~member banks, and ~~decreased profit margins. As the Company continues~~ its ~~business development and expansion efforts throughout its market areas, it will also maintain its commitment~~influence over reserve requirements to which member banks may be subject. The Federal Open Market Committee (FOMC) continued raising interest rates during 2023, with increases to the ~~reduction~~overnight benchmark rate of ~~nonperforming assets~~25bps in February, March, and ~~provision of options for borrowers experiencing difficulties. Those options include combinations of~~May 2023. However, it is unknown what effects increases or decreases in the inflation rate and ~~term concessions, as well as forbearance agreements~~the recent banking turmoil, in conjunction with ~~borrowers.~~continued international instability, will have on FRB monetary policies.

The Company continues to emphasize relationship banking and core deposit growth, and has focused greater attention on its market area of Fresno, Madera, and Kern Counties, as well as Campbell, in Santa Clara County. The San Joaquin Valley and

other California markets are exhibiting stronger demand for construction lending and commercial lending from small and medium size businesses, as commercial and residential real estate markets have shown improvements.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. ~~Balance~~Managing the balance sheet, ~~management,~~ enhancing revenue sources, attracting and retaining deposit customers, and maintaining market share will continue to be of primary importance during 2017 and beyond. The previous pressure on net margins as interest rates hit historical lows may now be ending as interest rates are anticipated to rise slowly. As a result, market rates of interest and asset quality will continue to be important factors in the Company’s ongoing strategic planning process.importance.

Results of Operations

On a year-to-date basis, the Company reported net income of ~~$7,004,000~~$10.5 million or ~~$0.41~~$0.62 per share (~~$0.41~~($0.62 diluted), for the ~~nine~~six months ended ~~September~~June 30, ~~2017, as~~2023, compared to ~~$5,830,000~~$5.9 million, or $0.35 per share ($~~0.35~~0.34 diluted), for the same period in ~~2016~~.2022. The Company’s return on average assets was ~~1.17%~~1.68% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, as~~2023, compared to ~~1.04%~~0.89% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~.2022. The Company’s return on average equity was ~~9.42%~~19.32% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, as~~2023, compared to ~~8.38%~~10.19% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~.2022. The increase in the return on average assets is primarily attributable to growth in interest income as a result of increased interest rates and the Company’s deployment of cash into its loan and investment portfolios during 2022. The increase in the return on average equity is due to decreases in equity resulting from unrealized losses in the investment portfolio, dividends declared, and an accounting adjustment due to the transition to CECL, offset by an increase in income during the period.

Net Interest Income

The following tables present condensed average balance sheet information, together with interest income and yields earned on average ~~interest earning~~interest-earning assets and interest expense and rates paid on average interest-bearing liabilities for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2023 and ~~2016.~~2022.

Table 1. of Contents

Distribution of Average Assets, Liabilities and Shareholders’ ~~Equity:~~Equity:

~~Interest rates and Interest Differentials~~

Three Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022


	June 30, 2023						June 30, 2022
(Dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)
Assets:
Interest-earning assets:
Loans (1)	$	954,634	$	13,529	5.68	%	$	906,396	$	9,731	4.31	%
Investment securities (3)	207,639		1,501		2.90	%	192,494		1,004		2.09	%
Interest-bearing deposits in FRB	3,674		56		6.11	%	136,898		258		0.76	%
Total interest-earning assets	1,165,947		$	15,086	5.19	%	1,235,788		$	10,993	3.57	%
Allowance for credit losses	(15,644)						(9,302)
Noninterest-earning assets:
Cash and due from banks	36,883						34,904
Premises and equipment, net	9,398						9,064
Accrued interest receivable	7,366						7,602
Other real estate owned	4,582						4,582
Other assets	61,617						54,860
Total average assets	$	1,270,149					$	1,337,498
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
NOW accounts	$	138,866	$	79	0.23	%	$	130,487	$	37	0.11	%
Money market accounts	379,597		1,580		1.67	%	411,211		382		0.37	%
Savings accounts	116,164		32		0.11	%	124,864		34		0.11	%
Time deposits	70,120		252		1.44	%	70,587		62		0.35	%
Other borrowings	33,602		443		5.20	%	—		—		0.00	%
Junior subordinated debentures	10,912		196		7.20	%	10,863		69		2.55	%
Total interest-bearing liabilities	749,261		$	2,582	1.38	%	748,012		$	584	0.31	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	390,953						465,926
Accrued interest payable	351						118
Other liabilities	21,854						9,465
Total liabilities	1,162,419						1,223,521
Total shareholders’ equity	107,730						113,977
Total average liabilities and shareholders’ equity	$	1,270,149					$	1,337,498
Interest income as a percentage of average earning assets					5.19	%					3.57	%
Interest expense as a percentage of average earning assets					0.89	%					0.19	%
Net interest margin					4.30	%					3.38	%

2017 2016
(dollars in thousands) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)

Assets:
Interest-earning assets:
Loans and leases (1) $ 574,484
$ 7,978
5.51 % $ 574,885
$ 7,435
5.15 %
Investment Securities – taxable (3) 51,811
238
1.82 % 56,887
244
1.71 %
Interest-bearing  deposits in other banks 654
1
0.61 % 1,533
2
0.52 %
Interest-bearing  deposits in FRB 117,803
375
1.26 % 56,264
72
0.51 %
Total interest-earning assets 744,752
$ 8,592
4.58 % 689,569
$ 7,753
4.47 %
Allowance for credit losses (9,104 )

(8,913 )

Noninterest-earning assets:

Cash and due from banks 22,375

21,857

Premises and equipment, net 10,623

10,321

Accrued interest receivable 4,878

2,791

Other real estate owned 5,745

7,407

Other assets 37,355

36,734

Total average assets $ 816,624

$ 759,766

Liabilities and Shareholders' Equity:

Interest-bearing liabilities:

NOW accounts $ 87,435
$ 30
0.14 % $ 86,074
$ 30
0.14 %
Money market accounts 156,050
187
0.48 % 148,411
142
0.38 %
Savings accounts 81,027
47
0.23 % 67,652
34
0.20 %
Time deposits 66,841
91
0.54 % 70,772
83
0.47 %
Junior subordinated debentures 9,399
80
3.38 % 7,805
60
3.06 %
Total interest-bearing liabilities 400,752
$ 435
0.43 % 380,714
$ 349
0.36 %
Noninterest-bearing liabilities:

Noninterest-bearing checking 308,480

275,878

Accrued interest payable 92

73

Other liabilities 6,298

8,194

Total Liabilities 715,622

664,859

Total shareholders' equity 101,002

94,907

Total average liabilities and shareholders' equity $ 816,624

$ 759,766

Interest income as a percentage  of average earning assets

4.58 %

4.47 %
Interest expense as a percentage of average earning assets

0.23 %

0.20 %
Net interest margin

4.35 %

4.27 %


~~(1)~~	(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan costs of approximately $68,000 for the quarter ended September 30, 2017 and loan costs of $133,000 for the quarter ended September 30, 2016.


~~(2)~~	~~Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation~~


~~(3)~~	~~Yields on investments securities are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.~~

~~For the quarter ended September 30, 2017, total~~ interest income ~~increased $839,000 or 10.82%, as compared~~has been included only if collected for the period prior to the ~~quarter~~loan being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately $141,000 for the three months ended ~~September~~June 30, ~~2016. Comparing those two periods, average interest earning assets increased $55,183,000, with a $61,539,000 increase~~2023 and loan fee income of $66,000 for the three months ended June 30, 2022.

(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation.

(3)Yields on ~~balances held at the Federal Reserve Bank, partially offset by a $5,076,000 decrease in~~ investment securities, ~~and a $401,000 decrease~~aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in ~~loans and leases. The average yield on total interest-earning assets increased 11 basis points. Loan yields increased 36 basis points primarily~~fair value are reflected as a ~~result~~component of shareholders’ equity.

Table of Contents

Distribution of Average Assets, Liabilities and Shareholders’ Equity:

Six Months Ended June 30, 2023 and 2022



(Dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)
Assets:
Interest-earning assets:
Loans (1)	$	957,620	$	26,529	5.59	%	$	888,722	$	18,849	4.28	%
Investment securities (3)	209,571		3,002		2.89	%	190,141		1,795		1.90	%
Interest-bearing deposits in FRB	4,578		114		5.02	%	156,959		340		0.44	%
Total interest-earning assets	1,171,769		$	29,645	5.10	%	1,235,822		$	20,984	3.42	%
Allowance for credit losses	(15,984)						(9,408)
Noninterest-earning assets:
Cash and due from banks	36,448						36,089
Premises and equipment, net	9,541						8,997
Accrued interest receivable	7,528						7,340
Other real estate owned	4,582						4,582
Other assets	58,327						52,238
Total average assets	$	1,272,211					$	1,335,660
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	140,535	$	119	0.17	%	$	140,249	$	84	0.12	%
Money market accounts	371,701		2,624		1.42	%	402,436		744		0.37	%
Savings accounts	120,478		66		0.11	%	120,771		66		0.11	%
Time deposits	64,554		478		1.49	%	68,712		129		0.38	%
Other borrowings	20,619		532		5.20	%	—		—		—	%
Junior subordinated debentures	10,856		377		7.00	%	11,009		114		2.09	%
Total interest-bearing liabilities	728,743		$	4,196	1.16	%	743,177		$	1,137	0.31	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	418,092						466,097
Accrued interest payable	304						115
Other liabilities	14,735						9,659
Total liabilities	1,161,874						1,219,048
Total shareholders’ equity	110,337						116,612
Total average liabilities and shareholders' equity	$	1,272,211					$	1,335,660
Interest income as a percentage of average earning assets					5.10	%					3.42	%
Interest expense as a percentage of average earning assets					0.72	%					0.19	%
Net interest margin					4.38	%					3.23	%

(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan ~~growth~~being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately $168,000 for the six months ended June 30, 2023 and loan fee income of $366,000 for the six months ended June 30, 2022.

(2)Interest income/expense is divided by actual number of days in the ~~higher-yielding student loan portfolio, and increases on rates throughout the loan portfolio reflecting the increase~~period times 365 days in the ~~prime rate.~~ yield calculation.

(3)Yields on ~~interest bearing deposits at the Federal Reserve Bank and other banks increased for the quarter ended September 30, 2017~~investment securities, aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a ~~result~~component of the two 0.25% interest rate increases during 2017. For the quarter ended September 30, 2017, total interest expense increased $86,000 or 24.64% as compared to the quarter ended September 30, 2016, as a resultshareholders’ equity.

Table of a $20,038,000 increase in interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 0.43% for the quarter ended September 30, 2017 and 0.36% for the quarter ended September 30, 2016.Contents

~~Interest rates and Interest Differentials~~

~~Nine months ended September 30, 2017 and 2016~~

2017 2016
(dollars in 000's) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)

Assets:
Interest-earning assets:
Loans and leases (1) $ 565,068
$ 22,782
5.39 % $ 532,133
$ 20,722
5.20 %
Investment Securities – taxable (3) 54,284
691
1.70 % 46,384
618
1.78 %
Interest-bearing deposits in other banks 652
4
0.82 % 1,531
6
0.52 %
Interest-bearing deposits in FRB 107,921
858
1.06 % 93,305
348
0.50 %
Total interest-earning assets 727,925
$ 24,335
4.47 % 673,353

$ 21,694
4.30 %
Allowance for credit losses (9,017 )

(9,439 )

Noninterest-earning assets:

Cash and due from banks 21,393

22,126

Premises and equipment, net 10,708

10,550

Accrued interest receivable 4,248

2,350

Other real estate owned 6,083

9,797

Other assets 36,731

36,552

Total average assets $ 798,071

$ 745,289

Liabilities and Shareholders' Equity:

Interest-bearing liabilities:

NOW accounts $ 87,598
$ 87
0.13 % $ 84,610
$ 81
0.13 %
Money market accounts 152,257
506
0.44 % 146,801
419
0.38 %
Savings accounts 78,247
136
0.23 % 66,117
103
0.21 %
Time deposits 80,861
326
0.54 % 70,936
234
0.44 %
Junior subordinated debentures 9,114
223
3.27 % 7,995
176
2.94 %
Total interest-bearing liabilities 408,077

$ 1,278
0.42 % 376,459

$ 1,013
0.36 %
Noninterest-bearing liabilities:

Noninterest-bearing checking 283,783

268,820

Accrued interest payable 104

73

Other liabilities 6,714

7,218

Total Liabilities 698,678

652,570

Total shareholders' equity 99,393

92,719

Total average liabilities and shareholders' equity $ 798,071

$ 745,289

Interest income as a percentage of average earning assets

4.47 %

4.30 %
Interest expense as a percentage of average earning assets

0.23 %

0.20 %
Net interest margin

4.24 %

4.10 %


~~(1)~~	Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan costs of approximately $336,000 and $169,000 for the nine months ended September 30, 2017 and 2016, respectively.


~~(2)~~	~~Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation~~


~~(3)~~	~~Yields on investments securities are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.~~

The prime rate ~~was raised~~increased from 4.75% at June 30, 2022 to ~~4.00% in March 2017,~~8.25% at June 30, 2023. Future increases or decreases will affect both interest income and ~~raised to 4.25% in June 2017. These increases affect rates for loans~~expense and ~~customer deposits, both of which have increased and are likely to increase further as~~ the ~~prime rate continues to rise.~~resultant net interest margin.

Both ~~the Company's~~ net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as ~~"volume~~volume change." Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as ~~"rate~~rate change." The following table sets forth the changes in interest income and interest expense for each major category of interest-earning ~~asset~~assets and interest-bearing ~~liability,~~liabilities, and the amount of change attributable to volume and rate changes for the periods indicated.

~~Table 2.~~ Rate and Volume Analysis:


	Three Months Ended
	June 30, 2023 compared to June 30, 2022
(In thousands)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	3,798	$	3,256	$	542
Investment securities available for sale	497		413		84
Interest-bearing deposits in FRB	(202)		2,043		(2,245)
Total interest income	4,093		5,712		(1,619)
Increase (decrease) in interest expense:
Interest-bearing demand accounts	2,324		2,343		(19)
Savings and money market accounts	32		35		(3)
Time deposits	416		416		—
Other borrowings	442		—		442
Subordinated debentures	307		307		—
Total interest expense	3,521		3,101		420
Increase (decrease) in net interest income	$	572	$	2,611	$	(2,039)

Increase (decrease) in the nine months ended September 30, 2017 compared to September 30, 2016
(in 000's) Total Rate Volume
Increase (decrease) in interest income:
Loans and leases $ 2,060
$ 832
$ 1,228
Investment securities available for sale 73
(25 ) 98
Interest-bearing deposits in other banks (2 ) 4
(6 )
Interest-bearing deposits in FRB 510
386
124
Total interest income 2,641
1,197
1,444
Increase (decrease) in interest expense:

Interest-bearing demand accounts 93
75
18
Savings and money market accounts 33
13
20
Time deposits 92
57
35
Subordinated debentures 47
22
25
Total interest expense 265
167
98
Increase in net interest income $ 2,376
$ 1,030
$ 1,346

For the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2023, total interest income increased ~~approximately $2,641,000,~~$4.1 million, or ~~12.17%~~37.2%, as compared to the ~~nine~~three months ended ~~September~~June 30, 2016. Earning asset volumes for loans and leases increased $32,935,000 on average. Overnight investments with the FRB increased $14,616,000 and available for sale investment securities increased $7,900,000 between2022. In comparing the two ~~periods.~~periods, average interest-earning assets decreased $69.8 million, with a decrease of $133.2 million in balances held at the Federal Reserve Bank, partially offset by an increase of $48.2 million in loan balances and an increase of $15.1 million in investment securities. The increase in loan balances is partially attributed to growth in the commercial real estate and residential mortgage portfolios. Investment securities yields increased 81 basis points and loan yields increased 137 basis points. The average yield on ~~loans~~total interest-earning assets increased 19162 basis ~~points between~~points. The increase in yields is a result of the purchases of treasury, corporate, and mortgage-backed securities at higher yields due to market rate increases, increases on loan yields, and increases in yields on overnight deposits related to the increase in the Fed Funds rate.

Table of Contents


	Six Months Ended
	June 30, 2023 compared to June 30, 2022
(In thousands)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	7,680	$	6,128	$	1,552
Investment securities available for sale	1,207		1,008		199
Interest-bearing deposits in FRB	(226)		3,862		(4,088)
Total interest income	8,661		10,998		(2,337)
Increase (decrease) in interest expense:
Interest-bearing demand accounts	1,915		1,964		(49)
Savings and money market accounts	—		—		—
Time deposits	349		357		(8)
Other borrowings	532		—		532
Subordinated debentures	262		264		(2)
Total interest expense	3,058		2,585		473
Increase (decrease) in net interest income	$	5,603	$	8,413	$	(2,810)

For the six months ended June 30, 2023, total interest income increased 5.4 million, or 27.9%, compared to the six months ended June 30, 2022. In comparing the two periods, average interest-earning assets decreased $64.1 million, with a decrease of $152.4 million in balances held at the Federal Reserve Bank, partially offset by an increase of $68.9 million in loan balances and ~~the~~an increase of $19.4 million in investment securities. Investment securities yields increased 99 basis points and loan yields increased 131 basis points. The average yield on ~~investment securities decreased approximately 8~~total interest-earning assets increased 168 basis ~~points during the nine months ended September 30, 2017 as compared~~points. The increase in yields is a result of increases on loan yields, and increases in yields on overnight deposits related to the ~~same period of 2016.~~ increase in the Fed Funds rate.

The overall average yield on the loan portfolio increased to ~~5.39%~~5.59% for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, as compared to ~~5.20%~~4.28% for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The Company has successfully sought to mitigate the low-interest rate environment with loan floors included in new and renewed loans when practical.~~2022. At ~~September~~June 30, ~~2017, 53.0%~~2023, 35.6% of the ~~Company's~~Company’s loan portfolio consisted of floating rate instruments, as compared to ~~52.1%~~44.3% of the portfolio at December 31, ~~2016,~~2022, with the majority of those tied to the prime rate. Approximately ~~25.3%~~62.4%, or ~~$78,201,000,~~$213.4 million, of the ~~floating rate~~floating-rate loans had rate floors at ~~September~~June 30, ~~2017, making them effectively fixed-rate loans~~2023.

The Company’s net interest margin increased to 4.38% for ~~certain increases~~the six months ended June 30, 2023, compared to 3.23% for the six months ended June 30, 2022. The net interest margin increased primarily as a result of a shift in ~~interest rates,~~the mix to higher earning assets due to the growth in average loan and ~~fixed-rate loans for all decreases~~investment balances and an increase in ~~interest rates. None of the loans with floors have floor spreads of 100 basis points or more.~~loan and investment yields.

~~Although market rates of interest are at historically low levels, the~~The Company’s disciplined deposit pricing efforts have helped keep the ~~Company's~~Company’s cost of funds relatively low. The Company’s net interest margin increased to 4.24% for the nine months ended September 30, 2017, when compared to 4.10% for the nine months ended September 30, 2016. The net interest margin increased due to increases in the loan portfolio yield and increases in the yield on overnight investments held at correspondent banks. As interest rates paid on ~~deposits have also~~interest-bearing liabilities increased ~~the Company’s average cost of funds rose~~ to ~~0.42%~~1.16% for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, compared to 0.31% for the six months ended June 30, 2022. For the six months ended June 30, 2023, total interest expense increased approximately $3.1 million, or 269.0%, as compared to ~~0.36% for~~ the ~~nine~~six months ended ~~September~~June 30, ~~2016. The~~2022. Between those two periods, average interest-bearing liabilities decreased by $14.4 million due to decreases in NOW and money market accounts, savings accounts, and time deposits. While the Company ~~utilizes~~may utilize brokered deposits as an additional source of ~~funding. Currently,~~funding, the Company ~~holds CDARs reciprocal deposits, which are preferred by some depositors. These comprise $9,755,000 of the balance of certificates of~~held no brokered deposits at ~~September~~June 30, ~~2017. For the nine months ended September 30, 2017, total interest expense increased approximately $265,000,~~2023 or ~~26.16%, as compared to the nine months ended September 30, 2016. Between those two periods, average interest-bearing liabilities increased by $31,618,000 due to increases across all categories~~December 31, 2022.

Table of ~~customer deposits.~~Contents

Interest-Earning Assets and Liabilities:

Net interest income has increased between the nine months ended September 30, 2017 and 2016, totaling $23,057,000 for the nine months ended September 30, 2017 as compared to $20,681,000 for the nine months ended September 30, 2016. The increase in net interest income between 2016 and 2017 was primarily the result of reinvestment of low yielding overnight investments into the loan and investment portfolios and growth in total interest-earning assets.

The following table summarizes the year-to-date (YTD) averages of the components of interest-earning assets as a percentage of total interest-earning assets and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:


	YTD Averages
	June 30, 2023	December 31, 2022	June 30, 2022
Loans	81.72%	74.02%	71.92%
Investment securities available for sale	17.89%	16.16%	15.39%
Interest-bearing deposits in FRB	0.39%	9.82%	12.69%
Total interest-earning assets	100.00%	100.00%	100.00%
NOW accounts	19.28%	18.49%	18.86%
Money market accounts	51.01%	53.92%	54.15%
Savings accounts	16.53%	16.70%	16.25%
Time deposits	8.86%	9.44%	9.25%
Other borrowings	2.83%	0.00%	0.00%
Subordinated debentures	1.49%	1.45%	1.49%
Total interest-bearing liabilities	100.00%	100.00%	100.00%

YTD Average
9/30/2017

YTD Average
12/31/16

YTD Average
9/30/2016
Loans 77.63% 79.26% 79.02%
Investment securities available for sale 7.46% 7.27% 6.89%
Interest-bearing deposits in other banks 0.09% 0.22% 0.23%
Interest-bearing deposits in FRB 14.82% 13.25% 13.86%
Total interest-earning assets 100.00% 100.00% 100.00%

NOW accounts 21.47% 22.25% 22.48%
Money market accounts 37.31% 38.82% 39.00%
Savings accounts 19.17% 17.62% 17.56%
Time deposits 19.82% 19.21% 18.84%
Subordinated debentures 2.23% 2.10% 2.12%
Total interest-bearing liabilities 100.00% 100.00% 100.00%
Noninterest Income

~~Table 3.~~ Changes in Noninterest ~~Income~~Income:

The following tables ~~sets~~set forth the amount and percentage changes in the categories presented for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~:2022:


	Three Months Ended
(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Customer service fees	$	767	$	776	$	(9)	(1.2)	%
Increase in cash surrender value of bank-owned life insurance	171		114		57		50.0	%
Gain (loss) on fair value of marketable equity securities	(50)		(127)		77		60.6	%

Gain (loss) on fair value of junior subordinated debentures	(75)		(869)		794		91.4	%


Other	198		708		(510)		(72.0)	%
Total noninterest income	$	1,011	$	602	$	409	67.9	%

(in 000's)
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Amount of
Change Percent
Change
Customer service fees $ 959
$ 924
$ 35
3.79 %
Increase in cash surrender value of BOLI/COLI 134
131
3
2.29 %
(Loss) gain on fair value of financial liability (88 ) (423 ) 335
(79.20 )%
Gain on sale of other investment 3
—
3
100.00 %
Other 168
154
14
9.09 %
Total noninterest income $ 1,176
$ 786
$ 390
49.62 %

Noninterest income for the quarter ended ~~September~~June 30, ~~2017~~2023 increased ~~$390,000~~$409,000 to ~~$1,176,000,~~$1,011,000 compared to the quarter ended ~~September~~June 30, ~~2016. The~~2022. Included in the increase is ~~mostly attributed to~~ a decrease in the loss on the fair value of ~~financial liability~~marketable equity securities of ~~$335,000~~$77,000. Additionally, the change in fair value of junior subordinated debentures caused a $75,000 loss for the quarter ended ~~September~~June 30, ~~2017. The fluctuation in fair value of financial liability was caused by changes in the LIBOR yield curve.~~

(in 000's)
Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Amount of
Change

Percent
Change
Customer service fees $ 2,897
$ 2,867
$ 30
1.05 %
Increase in cash surrender value of BOLI/COLI 400
394
6
1.52 %
(Loss) gain on fair value of financial liability (688 ) 48
(736 ) (1,533.33 )%
Gain on sale of other investment 3
—
3
100.00 %
Other 539
464
75
16.16 %
Total noninterest income $ 3,151
$ 3,773
$ (622 ) (16.49 )%

~~Noninterest income for the~~ ~~nine months endedSeptember 30, 2017decrease~~d ~~$622,000, or~~ ~~16.49%, when compared to the same period of~~ ~~2016. Customer service fees, the primary component of noninterest income,~~ ~~increase~~d ~~$30,000, or~~ ~~1.05%, between the two periods presented. The~~ ~~decrease~~ ~~in noninterest income of~~ ~~$622,000~~ ~~between the two periods is primarily the result of a $688,000 loss recorded on the fair value of a financial liability for the nine months ended September 30, 2017 as~~2023, compared to a ~~$48,000 gain on the fair value of a financial liability recorded~~$869,000 loss for the ~~same period~~quarter ended June 30, 2022, resulting in ~~2016.~~a difference of $794,000. The change in the fair value of ~~financial liability~~junior subordinated debentures was ~~primarily~~ caused by fluctuations in the LIBOR yield curve. Customer service fees decreased $9,000 between the two quarters. Included in other noninterest income for the three months ended June 30, 2022 was $566,000 in nonrecurring income from an investment in a limited partnership which provides private capital for small to mid-sized businesses used to finance later stage growth, strategic acquisitions, ownership transitions, and recapitalizations, or mezzanine capital.

~~The cost~~

Table of Contents


	Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Customer service fees	$	1,501	$	1,429	$	72	5.0	%
Increase in cash surrender value of bank-owned life insurance	303		253		50		19.8	%
Gain (loss) on fair value of marketable equity securities	(7)		(309)		302		97.7	%
Gain (loss) on fair value of junior subordinated debentures	258		(1,869)		2,127		113.8	%

Gain on sale of investment securities	—		30		(30)		100.0	%
Other	405		861		(456)		(53.0)	%
Total noninterest income	$	2,460	$	395	$	2,065	522.8	%

Noninterest income for the ~~Company’s~~quarter ended June 30, 2023 increased $2.1 million to $2.5 million compared to the quarter ended June 30, 2022. Included in the increase is a decrease is a loss on the fair value of marketable equity securities of $302,000. Additionally, the change in fair value of junior subordinated debentures ~~issued by USB Capital Trust II has remained low as market rates have remained low during~~caused a $258,000 gain for the ~~first nine months of 2017. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 2.85% at September~~quarter ended June 30, ~~2017, as~~2023, compared to ~~2.15% at September~~a $1.9 million loss for the quarter ended June 30, ~~2016. Pursuant to~~2022, resulting in a difference of $2.1 million. The change in the fair value ~~accounting guidance, the Company has recorded $688,000 in pretax fair value loss on its~~of junior subordinated ~~debt during~~debentures was caused by fluctuations in the ~~nine~~LIBOR yield curve. Customer service fees increased $72,000 between the two quarters. Additionally, noninterest income for the six months ended ~~September~~June 30, ~~2017, bringing~~2023, included an increase of $99,000 in FHLB stock dividends. Included in other noninterest income for the ~~total cumulative gain recorded on the debt to $3,008,000 at September~~six months ended June 30, ~~2017.~~2022, was $566,000 in nonrecurring income from an investment in a limited partnership.

Noninterest Expense

Changes in Noninterest Expense:

The following ~~table sets~~tables set forth the amount and percentage changes in the categories presented for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:


	Three Months Ended
(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Salaries and employee benefits	$	3,301	$	2,777	$	524	18.9	%
Occupancy expense	858		849		9		1.1	%
Data processing	205		145		60		41.4	%
Professional fees	910		919		(9)		(1.0)	%
Regulatory assessments	193		187		6		3.2	%
Director fees	106		116		(10)		(8.6)	%
Correspondent bank service charges	19		24		(5)		(20.8)	%
Net cost of operation of OREO	58		2		56		2,800.0	%
Other	557		651		(94)		(14.4)	%
Total expense	$	6,207	$	5,670	$	537	9.5	%

~~Table 4. Changes in Noninterest Expense~~

(in 000's)
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Amount of
Change

Percent
Change
Salaries and employee benefits $ 2,578
$ 2,533
$ 45
1.78 %
Occupancy expense 1,087
1,097
(10 ) (0.91 )%
Data processing 29
23
6
26.09 %
Professional fees 312
327
(15 ) (4.59 )%
FDIC/DFI insurance assessments 43
131
(88 ) (67.18 )%
Director fees 72
75
(3 ) (4.00 )%
Loss on California tax credit partnership (1 ) 49
(50 ) (102.04 )%
Net cost on operation of OREO 21
39
(18 ) (46.15 )%
Other 605
590
15
2.54 %
Total expense $ 4,746
$ 4,864
$ (118 ) (2.43 )%

Noninterest expense for the quarter ended ~~September~~June 30, ~~2017 decreased $118,000~~2023 increased $537,000 to ~~$4,746,000,~~$6.2 million, compared to the quarter ended ~~September~~June 30, ~~2016.~~2022. The ~~decrease~~increase was primarily attributed to ~~lower OREO~~increases in salaries and employees benefits, occupancy expense, and data processing expenses, a decrease in the loss of a tax credit partnership, and a reduction in regulatory assessment expense. The FDIC assessment rate for the Company was reduced effective third quarter 2017. OREO expenses decreased $18,000 during the quarter ended September 30, 2017 as a result of partial sales on OREO properties in 2016 and 2017.

(in 000's)
Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Amount of
Change

Percent
Change
Salaries and employee benefits $ 8,149
$ 7,592
$ 557
7.34 %
Occupancy expense 3,144
3,212
(68 ) (2.12 )%
Data processing 81
108
(27 ) (25.00 )%
Professional fees 912
1,116
(204 ) (18.28 )%
FDIC/DFI insurance assessments 313
632
(319 ) (50.47 )%
Director fees 215
218
(3 ) (1.38 )%
Loss on California tax credit partnership 118
122
(4 ) (3.28 )%
Net (gain) cost on operation of OREO (257 ) 216
(473 ) (218.98 )%
Other 1,868
1,772
96
5.42 %
Total expense $ 14,543
$ 14,988
$ (445 ) (2.97 )%

Noninterest expense decreased approximately $445,000 or 2.97% between the nine months ended September 30, 2016 and September 30, 2017. The decrease experienced during the nine months ended September 30, 2017, was primarily the result ofpartially offset by decreases ~~of $473,000 in net cost of OREO, $319,000 in regulatory assessments, $204,000~~ in professional fees and ~~$68,000~~and director fees. The increase in salaries and employee benefits was caused by increases in salary expense and group insurance expense. The decrease in other noninterest expense was due partially to decreases in communications expense.

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	Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Salaries and employee benefits	$	6,561	$	5,826	$	735	12.6	%
Occupancy expense	1,820		1,628		192		11.8	%
Data processing	379		260		119		45.8	%
Professional fees	1,792		1,868		(76)		(4.1)	%
Regulatory assessments	385		417		(32)		(7.7)	%
Director fees	216		234		(18)		(7.7)	%
Correspondent bank service charges	38		50		(12)		(24.0)	%
Net cost of operation of OREO	96		(6)		102		1,700.0	%
Other	1,161		1,308		(147)		(11.2)	%
Total expense	$	12,448	$	11,585	$	863	7.4	%

Noninterest expense for the six months ended June 30, 2023 increased $0.9 million to $12.4 million, compared to the six months ended June 30, 2022. The increase was primarily attributed to increases in salaries and employees benefits, occupancy expense, and data processing expenses, partially offset by ~~an increase of $557,000~~decreases in ~~employee salary~~professional fees, regulatory assessments, director fees, and ~~benefit expenses.~~correspondent bank service charges. The increase in salaries and employee ~~salary and benefit expenses is driven~~benefits was caused by increases in salary expense and group insurance expense. Occupancy expense increased due to increases in fixed asset depreciation expense and ~~higher employee incentives, compared to the nine months ended September 30, 2016.~~building services expenses.

Income Taxes

The Company’s income tax expense is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the Company’s pretax income or loss shown in the statements of operations and comprehensive income. As pretax income or loss amounts become smaller, the impact of these differences become more significant and are reflected as variances in the Company’s effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the Company’s statements of income and comprehensive income.

The Company reviews its current tax positions at least quarterly based on the accounting standards related to uncertainty in income ~~taxes which includes~~taxes. These standards identify the ~~criteria that an~~ individual tax position criteria which would have to ~~meet for some or all of the~~be met in order to recognize an income tax benefit ~~to be recognized in~~on a taxable entity’s financial statements. Under the income tax guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the ~~more-likely-than-not~~more likely than not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority.

The Company has reviewed all of its tax positions as of ~~September~~June 30, ~~2017,~~2023, and has determined that there are no material amounts to be recorded under the current income tax accounting guidelines.

The Company’s effective tax rate for the six months ended June 30, 2023 was 29.07% compared to 28.67% for the six months ended June 30, 2022.

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Financial Condition

The following table illustrates the changes in balances as of and for the periods ended:


							Year-to-Date		Prior Period Comparison
(In thousands)	June 30, 2023		December 31, 2022		June 30, 2022		$ Change		$ Change
Due from Federal Reserve Bank (FRB)	$	25,183	$	6,945	$	73,545	$	18,238	$	(48,362)
Net loans	944,011		969,996		940,084		(25,985)		3,927
Investment securities	205,521		210,860		215,774		(5,339)		(10,253)
Total assets	1,288,819		1,299,193		1,339,517		(10,374)		(50,698)
Total deposits	1,046,554		1,165,484		1,208,194		(118,930)		(161,640)
Total liabilities	1,173,139		1,186,730		1,229,516		(13,591)		(56,377)
Average interest-earning assets	1,171,769		1,248,578		1,235,822		(76,809)		(64,053)
Average interest-earning liabilities	728,743		738,766		743,177		(10,023)		(14,434)

Total assets ~~increase~~d ~~$55,535,000, or~~ ~~7.05%, to a balance of~~ ~~$843,507,000~~ at ~~September~~decreased 0.8% between June 30, ~~2017, from the balance of~~ ~~$787,972,000~~ at 2023 and December 31, ~~2016~~,2022, and ~~increase~~d ~~$61,915,000, or~~ ~~7.92%, from the balance of $781,592,000 at~~ ~~September~~3.8% between June 30, ~~2016~~.2023 and June 30, 2022. Total deposits of ~~$725,298,000~~ at ~~September 30, 2017~~decreased 10.2% and 13.38%, ~~increase~~d ~~$48,669,000~~,respectively, during the same periods. Net loans decreased $26.0 million, or ~~7.19%~~2.7%, ~~from the balance reported at~~ ~~December 31, 2016, and~~ ~~increase~~d ~~$54,012,000, or~~ ~~8.05%, from the balance of~~ ~~$671,286,000~~ ~~reported at~~ ~~September 30, 2016. Cash and cash equivalents~~ ~~increase~~d ~~$46,860,000, or~~ ~~41.46%, between~~ ~~December 31, 2016~~ ~~and~~ ~~September 30, 2017; net loans~~ ~~increase~~d ~~$12,511,000, or~~ ~~2.23%, to a balance of~~ ~~$574,443,000~~; and investment securities ~~decrease~~d ~~$9,135,000~~decreased $5.3 million, or 2.5%, or ~~15.89%~~,between June 30, 2023 and December 31, 2022. Net loans increased on a year-over-year basis due to organic growth and the purchase of real-estate mortgage loan pools and declined year-to-date due to loan payoffs and paydowns. Investments securities decreased on a year-over-year basis due to repayments of principal. Deposits decreased on a year-over-year basis due to decreases in savings accounts, NOW and money market accounts, and time deposits and decreased year-to-date due to decreases in savings accounts and NOW and money market accounts, partially offset by increases in time deposits. The balances in overnight interest-bearing deposits in the Federal Reserve Bank and federal funds sold decreased on a year-over-year basis due to the purchases of loan pools and investment securities and decreases in deposits. Fed funds purchased at June 30, 2023 totaled $100.6 million. There were no fed funds purchased during the ~~first nine~~six months ~~of 2017~~.ended June 30, 2022.

Earning assets averaged ~~approximately~~ ~~$727,925,000~~$1.17 billion during the ~~nine~~six months ended~~September~~ June 30, ~~2017, as~~2023, compared to ~~$673,353,000~~$1.24 billion for the same period in ~~2016~~.2022. Average interest-bearing liabilities ~~increased~~decreased to ~~$408,077,000~~$728.7 million for the ~~nine~~six months ended~~September~~ June 30, ~~2017~~,2023, from ~~$376,459,000~~ ~~reported~~$743.2 million for the comparative period of ~~2016~~.2022.

Loans ~~and Leases~~

The ~~Company's~~Company’s primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest and most important component of earning assets. Loans totaled ~~$582,384,000~~$961.4 million at ~~September~~June 30, ~~2017, an~~ ~~increase~~2023, a decrease of ~~$12,625,000~~,$20.4 million, or ~~2.22%~~2.1%, when compared to the balance of ~~$569,759,000~~$981.8 million at December 31, ~~2016~~,2022, and an increase of ~~$22,785,000~~,$12.1 million, or ~~4.07%~~1.3%, when compared to the balance of ~~$559,599,000~~$948.0 million reported at ~~September~~June 30, ~~2016~~.2022. Loans on average ~~increase~~d ~~$32,935,000~~,increased $68.9 million, or ~~6.19%~~7.8%, between the ~~nine~~six months ended~~September~~ June 30, ~~2016~~2022 and ~~September~~June 30, ~~2017~~,2023, with loans averaging ~~$565,068,000~~$957.6 million for the ~~nine~~six months ended~~September~~ June 30, ~~2017~~,2023, as compared to ~~$532,133,000~~$888.7 million for the same period of ~~2016~~.in 2022.

Total loans increased $12,625,000 between December 31, 2016 and September 30, 2017, and increased $22,785,000 between September 30, 2016 and September 30, 2017. During the nine months ended September 30, 2017, the Company experienced increases in real estate, agriculture, and consumer loans compared to the same period ended September 30, 2016. Commercial and industrial loans decreased $2,054,000 between December 31, 2016 and September 30, 2017 and decreased $762,000 between September 30, 2016 and September 30, 2017. Installment and other loans increased $12,634,000 during the same period due to growth in the student loan portfolio. Included in installment loans are $51,185,000 in student loans made to medical and pharmacy school students. Repayment on student loans is deferred until 6 months after graduation. Accrued interest on loans that have not entered repayment status totaled $3,769,000 at September 30, 2017. The outstanding balance of student loans that have not entered repayment status totaled $47,759,000 at September 30, 2017. Real estate mortgage loans increased $2,262,000, or 0.78%, between December 31, 2016 and September 30, 2017, and increased $450,000 between September 30, 2016 and September 30, 2017. Agricultural loans increased $1,587,000, or 2.79%, between December 31, 2016

and September 30, 2017 and increased $5,236,000 between September 30, 2016 and September 30, 2017. Commercial real estate loans (a component of real estate mortgage loans) continue to represent a significant portion of the total loan portfolio. Commercial real estate loans amounted to 34.28%, 35.14%, and 35.30%, of the total loan portfolio at September 30, 2017, December 31, 2016, and September 30, 2016, respectively. Residential mortgage loans are not generally originated by the Company, but some residential mortgage loans have been made over the past several years to facilitate take-out loans for construction borrowers when they were not able to obtain permanent financing elsewhere. These loans are generally 30-year amortizing loans with maturities of between three and five years. Residential mortgages totaled $90,284,000, or 15.50%, of the portfolio at September 30, 2017, $87,388,000, or 15.34% of the portfolio at December 31, 2016, and $91,852,000 or 16.41% of the portfolio at September 30, 2016. The Company held no loan participation purchases at September 30, 2016, December 31, 2016 or September 30, 2017. Loan participations sold decreased from $7,632,000, or 1.36%, of the portfolio at September 30, 2016, to $7,548,000, or 1.3% of the portfolio, at December 31, 2016, and increased to $9,069,000, or 1.6% of the portfolio, at September 30, 2017.

The following table sets forth the amounts of loans outstanding by category at ~~September 30, 2017~~and~~December 31, 2016~~, the category percentages for the periods presented:


	June 30, 2023				December 31, 2022				June 30, 2022
(In thousands)	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Commercial and industrial	$	52,927	5.5	%	$	57,902	5.9	%	$	53,981	5.7	%
Real estate – mortgage	669,117		69.7	%	671,521		68.5	%	604,487		63.8	%
RE construction & development	135,300		14.1	%	153,374		15.6	%	176,839		18.6	%
Agricultural	57,666		6.0	%	52,722		5.4	%	64,957		6.9	%
Installment and student loans	45,111		4.7	%	44,659		4.6	%	47,767		5.0	%
Total gross loans	$	960,121	100.00	%	$	980,178	100.00	%	$	948,031	100.00	%

Loan volume continues to be highest in what has historically been the primary lending emphasis: real estate mortgage and construction lending. Total loans decreased $20.1 million during the first six months of 2023. There were decreases of $18.1

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million, or 11.8%, in real estate construction and development loans, $5.0 million, or 8.6% in commercial and industrial loans, and $2.4 million, or 0.4%, in real estate mortgage loans. Agricultural loans increased by $4.9 million, or 9.4%, and installment loans increased by $452,000, or 1.0%.

The real estate mortgage loan portfolio totaled $669.1 million at June 30, 2023, and consists of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting to 42.0%, 40.6%, and 37.0% of the total loan portfolio at June 30, 2023, December 31, 2022, and June 30, 2022, respectively. Commercial real estate balances increased to $403.2 million at June 30, 2023 from $398.1 million at December 31, 2022. Commercial real estate loans are generally a mix of short- to medium-term, fixed- and floating-rate instruments and are mainly secured by commercial income and multi-family residential properties.

Residential mortgage loans are generally 30-year amortizing loans with an average life of nine to 11 years. These loans totaled $265.9 million, or 27.7%, of the portfolio at June 30, 2023, $273.4 million, or 27.9%, of the portfolio at December 31, 2022, and $253.3 million, or 26.7%, of the portfolio at June 30, 2022. Included in the residential mortgage portfolio are purchased home-mortgage loan pools with aggregate balances of $236.8 million, comprising 89.0% of the total residential mortgage portfolio at June 30, 2023. These loans were purchased in whole-loan form, in several pools, beginning in May 2021 and continuing through December 2022. Dovenmuehle Mortgage, Inc. (DMI) is the third-party sub-servicer for the Company’s purchased residential mortgage portfolio. DMI’s services include administration, Company-approved modification, escrow management, monitoring, and collection. DMI is paid a monthly servicing fee based primarily upon the number of loans being serviced which, at June 30, 2023, totaled 259.

Real estate construction and development loans, representing 14.1%, 15.6%, and 18.6% of total loans at June 30, 2023, December 31, 2022, and June 30, 2022, respectively, consist of loans for residential and commercial construction projects, as well as land acquisition and development, and land held for future development. Loans in this category are secured by real estate, including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at the completion of the project or from the sale of the constructed homes to individuals.

Commercial and industrial loans decreased $5.0 million between December 31, 2022 and June 30, 2023 and decreased $1.1 million between June 30, 2022 and June 30, 2023. Agricultural loans increased $4.9 million between December 31, 2022 and June 30, 2023 and decreased $7.3 million between June 30, 2022 and June 30, 2023. Installment loans increased $452,000 between December 31, 2022 and June 30, 2023 and decreased $2.7 million between June 30, 2022 and June 30, 2023, primarily due to decreases in student loan balances.

Included in installment loans are $41.0 million in unsecured student loans made to medical and pharmacy school students in the US and Caribbean. Student loans decreased between the six months ended June 30, 2023 and 2022, due to paydowns, consolidations with other lenders, and charge-offs within the student loan portfolio. The outstanding balance of loans for students who are in school or a grace period and have not entered repayment status totaled $2.2 million at June 30, 2023. At June 30, 2023 there were 833 loans within repayment, deferment, and forbearance which represented $21.4 million, $8.5 million, and $8.9 million in outstanding balances, respectively. Student loans are no longer originated by the bank.

While student loan repayment terms may vary per borrower, repayment occurs within 10 to 20 years on average. Underwriting is premised on qualifying credit scores. The weighted average credit score for the portfolio is in the mid-700s. In addition, there are non-student, co-borrowers for roughly one-third of the portfolio that provide additional repayment capacity. Graduation and employment placement rates are high for both medical and pharmacy students. The average student loan balance per borrower as of ~~those dates,~~June 30, 2023, was approximately $104,000. Loan interest rates ranged from 6.00% to 12.125%, with a weighted average rate of 11.14%.

ZuntaFi is the third-party servicer for the student loan portfolio. ZuntaFi’s services include application administration, processing, approval, documenting, funding, collection, and borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the ~~net change between~~outstanding principal balance.

The Company classifies student loans delinquent more than 90 days as substandard. As of June 30, 2023 and December 31, 2022, reserves against the ~~two periods presented.~~student loan portfolio totaled $5.3 million and $2.6 million, respectively. For the six months ended June 30, 2023, $111,000 in accrued interest receivable was reversed, due to charge-offs of $985,000. For the six months ended June 30, 2022, $14,000 in accrued interest receivable was reversed, due to charge-offs of $353,000. For the quarter ended

Table ~~5. Loans~~

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September 30, 2017 December 31, 2016
(in 000's) Dollar Amount % of Loans Dollar Amount % of Loans Net Change % Change
Commercial and industrial $ 46,951
8.1 % $ 49,005
8.6 % $ (2,054 ) (4.19 )%
Real estate – mortgage 290,462
49.9 % 288,200
50.6 % 2,262
0.78 %
RE construction & development 128,883
22.1 % 130,687
22.9 % (1,804 ) -1.38 %
Agricultural 58,505
10.0 % 56,918
10.0 % 1,587
2.79 %
Installment/other 57,583
9.9 % 44,949
7.9 % 12,634
28.11 %
Total Gross Loans $ 582,384
100.0 % $ 569,759
100.0 % $ 12,625
2.22 %
June 30, 2023, $83,000 in accrued interest receivable was reversed, due to charge-offs of $515,000. There were no charge-offs or reversal of accrued interest during the quarter ended June 30, 2022.

The following table sets forth the Bank’s student loan portfolio with activity from December 31, 2022 to June 30, 2023:


(In thousands)	Balance
Student Loan Portfolio Balance as of December 31, 2022	$	42,132

Capitalized Interest	2,091
Loan Consolidations/Payoffs	(1,542)
Payments Received	(731)
Loans Charged-off	(985)
Student Loan Portfolio Balance as of June 30, 2023	$	40,965

Loan participations purchased decreased to $9.3 million, or 1.0% of the portfolio, at June 30, 2023, decreased from $9.4 million, or 1.0%, of the portfolio at December 31, 2022, and decreased from $9.5 million, or 1.0%, of the portfolio at June 30, 2022. Loan participations sold increased from $3.8 million, or 0.4%, of the portfolio at June 30, 2022, to $9.7 million, or 1.0%, of the portfolio, at December 31, 2022, and decreased to $9.4 million, or 1.0%, of the portfolio, at June 30, 2023.

Deposits

~~Total deposits~~Deposit balances totaled ~~$725,298,000~~$1.0 billion at ~~September~~June 30, ~~2017~~,2023, representing an ~~increase~~a decrease of ~~$48,669,000~~,$118.9 million, or ~~7.19%~~10.2%, from the balance of ~~$676,629,000~~$1.2 billion reported at December 31, ~~2016~~,2022, and an ~~increase~~a decrease of ~~$54,012,000~~,$161.6 million, or ~~8.05%~~13.4%, from the balance of ~~$671,286,000~~ ~~reported~~$1.2 billion at ~~September~~June 30, ~~2016~~.2022.

The following table sets forth the amounts of deposits outstanding by category at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~,2022, and the net change between the two periods ~~presented.~~presented:


(In thousands)	June 30, 2023		December 31, 2022		$ Change		% Change
Noninterest-bearing deposits	$	476,387	$	481,629	$	(5,242)	(1.1)	%
Interest-bearing deposits:
NOW and money market accounts	385,667		499,861		(114,194)		(22.8)	%
Savings accounts	114,075		125,946		(11,871)		(9.4)	%
Time deposits:
Under $250,000	51,145		42,933		8,212		19.1	%
$250,000 and over	19,280		15,115		4,165		27.6	%
Total interest-bearing deposits	570,167		683,855		(113,688)		(16.6)	%
Total deposits	$	1,046,554	$	1,165,484	$	(118,930)	(10.2)	%

The following tables set forth estimated deposit balances exceeding the FDIC insurance limits as of:


(In thousands)	June 30, 2023		December 31, 2022
Uninsured deposits (1)	$	519,391	$	706,183

(1) Represents amount over insurance limit


	June 30, 2023
(In thousands)	Three months or less		Over three months through six months		Over six months through twelve months		Over twelve months		Total
Uninsured time deposits (1)	$	1,586	$	617	$	1,831	$	5,996	$	10,030

(1) Represents amount over insurance limit

Table ~~6. Deposits~~

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(in 000's) September 30, 2017 December 31, 2016
Net
Change

Percentage
Change
Noninterest bearing deposits $ 315,877
$ 262,697
$ 53,180
20.24 %
Interest bearing deposits:

NOW and money market accounts 262,037
235,873
26,164
11.09 %
Savings accounts 81,378
75,068
6,310
8.41 %
Time deposits:

Under $250,000 53,702
87,419
(33,717 ) -38.57 %
$250,000 and over 12,304
15,572
(3,268 ) -20.99 %
Total interest bearing deposits 409,421
413,932
(4,511 ) -1.09 %
Total deposits $ 725,298
$ 676,629
$ 48,669
7.19 %


	December 31, 2022
(In thousands)	Three months or less		Over three months through six months		Over six months through twelve months		Over twelve months		Total
Uninsured time deposits (1)	$	362	$	412	$	3,419	$	1,173	$	5,366

(1) Represents amount over insurance limit

~~The Company's deposit base consists of two major components represented by noninterest bearing (demand) deposits and interest bearing deposits, totaling~~ ~~$315,877,000~~ ~~and~~ ~~$409,421,000~~ at ~~September 30, 2017, respectively. Interest bearing~~

~~deposits consist of time certificates, NOW and money market accounts, and savings deposits. Total interest bearing deposits~~ ~~decrease~~d ~~$4,511,000, or~~ ~~1.09%, between~~ ~~December 31, 2016~~ ~~and~~ ~~September 30, 2017, and noninterest bearing deposits~~ ~~increase~~d ~~$53,180,000, or~~ ~~20.24%, between the same two periods presented. Included in the~~ ~~decrease~~ of ~~$4,511,000~~ ~~in interest bearing deposits during the~~ ~~nine months endedSeptember 30, 2017~~, are decreases of $36,985,000 in time deposits and $26,164,000 in NOW and money market accounts, offset by increases of $6,310,000 in savings accounts and $26,164,000 in NOW and money market accounts. The decrease in time deposits is attributed to the maturities of $17,285,000 in brokered deposits and $18,413,000 in out-of-market time deposits.

Core deposits, as defined by the Company as consisting of all deposits other than time deposits of more than $250,000 and brokered deposits, continue to provide the foundation ~~for~~of the ~~Company's~~Company’s principal sources of funding and liquidity. These core deposits amounted to ~~96.96%~~98.16% and ~~90.82%~~ ~~of the total deposit portfolio at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively. Brokered deposits totaled~~ ~~$9,755,000~~ at ~~September 30, 2017, as compared to~~ ~~$28,132,000~~ at ~~December 31, 2016, and $12,146,000 at~~ ~~September 30, 2016. Brokered deposits were~~ ~~1.34%~~ ~~and~~ ~~4.16%~~98.70% of total deposits at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~,2022, respectively. The Company held no brokered deposits at June 30, 2023 or December 31, 2022.

On a year-to-date average basis, the Company experienced an ~~increase~~a decrease of ~~$45,462,000~~,$82.9 million, or ~~7.13%~~6.9%, in total deposits between the ~~nine~~six months ended~~September~~ June 30, ~~2017~~2023 and ~~September~~the six months ended June 30, ~~2016~~.2022. Between these two periods, ~~average interest bearing~~interest-bearing deposits ~~increase~~d ~~$30,499,000~~,decreased $34.9 million, or ~~8.28%~~4.8%, and ~~total~~ noninterest-bearing deposits ~~increase~~d ~~$14,963,000~~,decreased $48.0 million, or ~~5.57%, on a year-to-date average basis.~~10.3%.

Short-Term Borrowings

At ~~September~~June 30, ~~2017~~,2023, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$283,948,000~~,$449.2 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling ~~$14,400,000~~.$137.1 million. At ~~September~~June 30, ~~2017,~~2023, the Company had uncollateralized lines of credit with ~~both~~ Pacific Coast Bankers Bank ~~("PCBB")~~(PCBB), ~~Union~~PNC, Zions Bank, and ~~Zion's~~US Bank totaling ~~$10,000,000, $10,000,000,~~$50 million, $40 million, $20 million and ~~$20,000,000,~~$10 million, respectively. These lines of credit generally have interest rates tied to either the Federal Funds rate or short-term U.S. Treasury ~~rates, or LIBOR.~~rates. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. At ~~September~~June 30, ~~2017~~ ~~and~~ ~~September~~2023, the Company had outstanding borrowings of $100.6 million. At June 30, ~~2016~~,2022, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of ~~$323,162,000~~,$435.6 million, collateralized FHLB lines of credit totaling ~~$2,037,000~~,$2.2 million, and uncollateralized lines of credit of ~~$10,000,000~~$50 million with PCBB, ~~$10,000,000~~$40 million with PNC, $20 million with Zion’s Bank, and $10 million with Union Bank ~~and $20,000,000 with Zions Bank~~ at December 31, ~~2016~~.2022.

Asset Quality and Allowance for Credit Losses

Lending money is the ~~Company's~~Company’s principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.

The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), effective January 1, 2023, and utilizes a current expected credit loss (CECL) methodology which relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. The allowance for credit losses on most loans is ~~maintained at~~measured on a collective (pool) basis for loans with similar characteristics. The Company estimates the appropriate level ~~deemed appropriate~~of allowance for credit losses for collateral-dependent loans by ~~management~~evaluating them separately. The Company also uses the CECL model to ~~provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy of~~calculate the allowance for credit losses ~~is based upon management's continuing assessment of various factors affecting the collectability of loans and commitments to extend credit; including current economic conditions, past~~on off-balance sheet credit ~~experience, collateral, and concentrations~~exposures, such as undrawn amounts on lines of credit. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The conclusion that a loan may become uncollectible, either in part or in whole is subjective and contingent upon economic, environmental, and other conditions which cannot be predicted with certainty. When determining the adequacy ofWhile the allowance for credit losses ~~the Company follows, in accordance with GAAP, the guidelines set forth in the Revised Interagency Policy Statement~~ on ~~the Allowance for Loan and Lease Losses (“Statement”) issued by banking regulators in December 2006. The Statement~~loans is a revision of the previous guidance released in July 2001, and outlines characteristics that should be used in segmentation of the loan portfolio for purposes of the analysis including risk classification, past due status, type of loan, industry or collateral. It also outlines factors to consider when adjusting the loss factors for various segments of the loan portfolio, and updates previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the allowance for credit losses. Securities and Exchange Commission Staff Accounting Bulletin No. 102 was released during July 2001, and represents the SEC staff’s view relating to methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations. It is also generally consistent with the guidance published by the banking regulators.

~~The allowance for loan losses includes an asset-specific component, as well~~reported as a general or formula-based component. The Company segments the loan and lease portfolio into eleven (11) segments, primarily by loan class and type, that have homogeneity and commonality of purpose and termscontra-asset for ~~analysis under the formula-based component of the allowance. Those~~ loans, which are determined to be impaired under current accounting guidelines are not subject to the formula-based reserve analysis, and evaluated individually for specific impairment under the asset-specific component of the allowance.

~~The Company’s methodology for assessing the adequacy of~~ the allowance for credit losses ~~consists of several key elements, which include:~~

~~- the formula allowance~~

~~- specific allowances for problem graded loans identified as impaired~~

~~- and the unallocated allowance~~

~~The formula allowance~~on off-balance sheet credit exposure is calculated by applying loss factors to outstanding loans and certain unfunded loan commitments. Loss factors are based on the Company’s historical loss experience and on the internal risk grade of those loans and, may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Factors that may affect collectability of the loan portfolio include:

~~Levels of, and trends in delinquencies and nonaccrual loans;~~

~~Trends in volumes and term of loans;~~

~~Effects of any changes in lending policies and procedures including those for underwriting, collection, charge-off, and recovery;~~

~~Experience, ability, and depth of lending management and staff;~~

~~National and local economic trends and conditions and;~~

~~Concentrations of credit that might affect loss experience across one or more components of the portfolio, including high-balance loan concentrations and participations.~~

Management determines the loss factors for problem graded loans (substandard, doubtful, and loss), special mention loans, and pass graded loans, based on a loss migration model. The migration analysis incorporates loan losses over the previous quarters as determined by management (time horizons adjusted as business cycles or environment changes) and loss factors are adjusted to recognize and quantify the loss exposure from changes in market conditions and trends in the Company’s loan portfolio. For purposes of this analysis, loans are grouped by internal risk classifications and categorized as pass, special mention, substandard, doubtful, or loss. Certain loans are homogeneous in nature and are therefore pooled by risk grade. These homogeneous loans include consumer installment and home equity loans. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize repayment of the loan and result in further downgrades. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as doubtful has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include impaired loans and loans categorized as substandard, doubtful, and loss which are not considered impaired. At ~~September 30, 2017, impaired and classified loans totaled $28,214,000, or 5.2%, of gross loans as compared to~~ ~~$29,838,000, or 5.2%, of gross loans at~~ ~~December 31, 2016~~.

Loan participations are reviewed for allowance adequacy under the same guidelines as other loans in the Company’s portfolio, with an additional participation factor added, if required, for specific risks associated with participations. In general, participations are subject to certain thresholds set by the Company, and are reviewed for geographic location as well as the well-being of the underlying agent bank.

Specific allowances are established based on management’s periodic evaluation of loss exposure inherent in impaired loans. For impaired loans, specific allowances are determined based on the net realizable value of the underlying collateral, the net present value of the anticipated cash flows, or the market value of the underlying assets. Formula allowances for classified loans, excluding impaired loans, are determined on the basis of additional risks involved with individual loans that may be in excess of risk factors associated with the loan portfolioreported as a whole. The specific allowance is different from the formula allowance in that the specific allowance is determined on a loan-by-loan basis based on risk factors directly related to a particular loan, as opposed to the formula allowance which is determined for a poolliability.

Table of ~~loans with similar risk characteristics, based on past historical trends~~Contents

Individually-Evaluated Loans and ~~other risk factors which may be relevant on an ongoing basis.~~Specific Reserves:

The unallocated portion of the allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to,

~~general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.~~

~~The following table summarizes the specific allowance, formula allowance, and unallocated allowance at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, as well as classified loans at those period-ends.~~

(in 000's) September 30, 2017 December 31, 2016
Specific allowance – impaired loans $ 1,741
$ 1,360
Formula allowance – classified loans not impaired 1,286
1,226
Formula allowance – special mention loans 385
248
Total allowance for special mention and classified loans 3,412
2,834

Formula allowance for pass loans 4,724
5,371
Unallocated allowance 1,022
697
Total allowance for loan losses $ 9,158
$ 8,902

Impaired loans 15,338
16,179
Classified loans not considered impaired 12,876
13,659
Total classified loans / impaired loans $ 28,214
$ 29,838
Special mention loans not considered impaired $ 13,990
$ 5,515

~~While impaired loans decreased~~ ~~$841,000~~ ~~between~~ ~~December 31, 2016~~ ~~and~~ ~~September 30, 2017, the specific allowance related to impaired loans~~ ~~increase~~d ~~$381,000~~ ~~between~~ ~~December 31, 2016~~ ~~and~~ ~~September 30, 2017~~ due to the addition of a new highly reserved impaired Ag loan in the period. The decrease in impaired loans is primarily due to a decrease in troubled debt restructures. The formula allowance related to classified and special mention unimpaired loans ~~increased by~~ ~~$197,000~~ ~~between~~ ~~December 31, 2016~~ ~~and~~ ~~September 30, 2017~~. The unallocated allowance increased from $697,000 at December 31, 2016 to $1,022,000 at September 30, 2017. The increase in unallocated allowance is the result of declining historical loss factors. Although there has been a reduction in required loss reserves as economic conditions have improved, the Company has a concentration in loans to finance CRE, construction and land development activities not secured by real estate. These loans have inherently higher risk characteristics and management believes maintaining additional, unallocated reserves to address the inherent losses in these loans is reasonable and appropriate. The level of “pass” loans increased approximately $5,972,000 between December 31, 2016 and September 30, 2017. The related formula allowance ~~decrease~~d ~~$647,000~~ ~~during the same period. The formula allowance for “pass loans” is derived from the loan loss factors under migration analysis.~~

The Company’s methodology includes features that are intended to reduce the difference between estimated and actual losses. The specific allowance portion of the analysis is designed to be self-correcting by taking into account the current loan loss experience based on that portion of the portfolio. By analyzing the estimated losses inherent in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates using the most recent information available. In performing the periodic migration analysis, management believes that historical loss factors used in the computation of the formula allowance need to be adjusted to reflect current changes in market conditions and trends in the Company’s loan portfolio. There are a number of other factors which are reviewed when determining adjustments in the historical loss factors. Those factors include 1) trends in delinquent and nonaccrual loans, 2) trends in loan volume and terms, 3) effects of changes in lending policies, 4) concentrations of credit, 5) competition, 6) national and local economic trends and conditions, 7) experience of lending staff, 8) loan review and Board of Directors oversight, 9) high balance loan concentrations, and 10) other business conditions.

The general reserve requirements (ASC 450-70) decreased with the continued strengthening of local, state, and national economies and their impact on our local lending base, which has resulted in a lower qualitative component for the general reserve calculation. These positive factors were partially offset by the Company including OREO financial results in loss history and extending the look back period used to capture the loss history for the quantitative portion of the ALLL. In the third quarter of 2013, the look back period was changed from 4 years to stake-in-the-ground (December 31, 2005), in an effort to include higher losses experienced during the credit crisis. Changes in the mix of historical losses in the look back period resulted in a reallocation of the general reserve component of the allowance amount within the various loan segments as compared to September 30, 2017, as loss experience by segment has fluctuated over time. The stake-in-the-ground

methodology requires the Company to use December 31, 2005, as the starting point of the look back period to capture loss history. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and environment changes.

Management and the Company’s lending officers evaluate the loss exposure of classified and impaired loans on a weekly/monthly basis. The Company’s Loan Committee meets weekly and serves as a forum to discuss specific problem assets that pose significant concerns to the Company, and to keep the Board of Directors informed through committee minutes. All special mention and classified loans are reported quarterly on Problem Asset Reports and Impaired Loan Reports and are reviewed by senior management. Migration analysis and impaired loan analysis are performed on a quarterly basis and adjustments are made to the allowance as deemed necessary. The Board of Directors is kept abreast of any changes or trends in problem assets on a monthly basis, or more often if required.

The specific allowance for impaired loans is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary differences between impaired loans and nonperforming loans are: i) all loan categories are considered in determining nonperforming loans while impaired loan recognition is limited to commercial and industrial loans, commercial and residential real estate loans, construction loans, and agricultural loans, and ii) impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but may also include problem loans other than delinquent loans.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans, troubled debt restructures, and performing loans in which full payment of principal or interest is not expected. Management bases the measurement of these impaired loans either on the fair value of the loan's collateral or the expected cash flows on the loans discounted at the loan's stated interest rates. Cash receipts on impaired loans not performing to contractual terms and that are on nonaccrual status are used to reduce principal balances. Impairment losses are included in the allowance for credit losses through a charge to the provision, if applicable.

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring, for which the loan has been performing for a prescribed period of time under the current contractual terms, income is recognized under the accrual method. At ~~September 30, 2017, included in impaired loans, were troubled debt restructures totaling~~ ~~$12,150,000. Nonaccrual loans, totaling $5,124,000, were included in that balance. The remaining troubled debt restructures, totaling~~ ~~$7,026,000, were current with regards to payments, and were performing according to their modified contractual terms.~~

Commercial and industrial loans and real estate mortgage loans, respectively, comprised approximately 24.04% and 25.71% of total impaired loan balances at September 30, 2017. Of the $3,687,000 in commercial and industrial impaired loans reported at September 30, 2017, two loans, with a total recorded investment of $286,000, were secured by real estate. Specific collateral related to impaired loans is reviewed for current appraisal information, economic trends within geographic markets, loan-to-value ratios, and other factors that may impact the value of the loan collateral. Adjustments are made to collateral values as needed for these factors. Of total impaired loans at September 30, 2017, approximately $11,046,000, or 72.0%, are secured by real estate. The majority of impaired real estate construction and development loans are for the purpose of residential construction, residential and commercial acquisition and development, and land development. Residential construction loans are made for the purpose of building residential 1-4 single family homes. Residential and commercial acquisition and development loans are made for the purpose of purchasing land, developing that land if required, and developing real estate or commercial construction projects on those properties. Land development loans are made for the purpose of converting raw land into construction-ready building sites. The following table summarizes the components of ~~impaired~~individually-evaluated loans and ~~their~~ related specific reserves:


	June 30, 2023				December 31, 2022
(In thousands)	Individually-Evaluated Loan Balances		Specific Reserve		Individually-Evaluated Loan Balances		Specific Reserve
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate – mortgage	72		2		141		4
Real estate construction and development	13,130		—		14,436		—
Agricultural	463		41		1,051		48
Installment and student loans	—		—		—		—
Total individually-evaluated loans	$	13,665	$	43	$	15,628	$	52

Individually-evaluated loans declined $2.0 million to $13.7 million at June 30, 2023 compared to $15.6 million at December 31, 2022. Included in the balance of specific reserves at ~~September~~June 30, ~~2017 and December 31, 2016.~~

Impaired Loan Balance Reserve Impaired Loan Balance Reserve
(in 000’s) September 30, 2017 September 30, 2017 December 31, 2016 December 31, 2016
Commercial and industrial $ 3,687
$ 571
$ 5,009
$ 757
Real estate – mortgage 3,944
427
3,931
603
RE construction & development 6,816
—
6,274
—
Agricultural 891
743
—
—
Installment/other —
—
965
—
Total Impaired Loans $ 15,338
$ 1,741
$ 16,179
$ 1,360

~~Included in impaired loans~~2023, are ~~loans modified in troubled debt restructurings (TDRs), where concessions have been granted~~$2,000 allocated to borrowers experiencing financial difficulties in an attempt to maximize collection. The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At ~~September 30, 2017, approximately~~ ~~$3,835,000~~ ~~of the total~~ ~~$12,150,000~~ ~~in TDRs was comprised of~~one real estate ~~mortgages. An additional~~ ~~$6,798,000~~ ~~was related~~mortgage loan and $41,000 allocated to ~~real estate construction and development loans.~~one agricultural loan. There were no ~~reserve amounts~~reserves for real estate construction and development ~~impaired loans and impaired installment~~ loans at June 30, 2023 and December 31, ~~2016 and September 30, 2017,~~2022, due to the ~~Company securing collateral on those loans.~~

~~Total troubled debt restructurings~~ ~~decrease~~d ~~2.10%~~ ~~between~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016. Nonaccrual TDRs~~ ~~decreased by~~ ~~29.46%~~ ~~while accruing TDRs~~ ~~increased by~~ ~~36.53%~~ ~~over the same period. Total residential mortgages and real estate construction TDRs~~ ~~increased slightly to~~ ~~5.39%. Many of these credits are related to real estate projects that slowed significantly or stalled during the recession, leading the Company to pursue restructuring~~value of the qualified credits allowing the real estate market time to recover and developers opportunity to finish projects at a slower pace. Concessions granted in these circumstances include lengthened maturities and/or rate reductions that enabled the borrower to finish the projects and may be entirely successful. In large part, current successes are related to a recovering real estate market.collateral securing those loans.

Credit Quality Indicators for Outstanding Student Loans:

The following table summarizes ~~TDRs by type, classified separately~~the credit quality indicators for outstanding student loans as ~~nonaccrual or accrual, which~~of:


	June 30, 2023					December 31, 2022
(Dollars in thousands)	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	63	$	1,719	$	914	70	$	2,056	$	908
Grace	15	459		205		27	667		348
Repayment	452	21,373		250		516	23,414		857
Deferment	196	8,471		1,536		268	10,974		1,732
Forbearance	185	8,943		593		91	5,019		237
Total	911	$	40,965	$	3,498	972	$	42,130	$	4,082

Included in installment loans are ~~included~~$41.0 million and $42.1 million in ~~impaired~~student loans at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016.~~2022, respectively, made to medical and pharmacy school students. As of June 30, 2023 and December 31, 2022, the reserve against the student loan portfolio totaled $5.3 million and $2.6 million, respectively. Loan interest rates on the student loan portfolio range from 6.00% to 12.125% and 5.75% to 10.75% at June 30, 2023 and December 31, 2022, respectively.

Table of Contents

Total TDRs Nonaccrual TDRs Accruing TDRs
(in 000's) September 30, 2017 September 30, 2017 September 30, 2017
Commercial and industrial $ 630
$ 250
$ 381
Real estate - mortgage:

Commercial real estate 1,147
466
681
Residential mortgages 2,688
—
2,688
Total real estate mortgage 3,835
466
3,369
RE construction & development 6,798
4,408
2,389
Agricultural 887
—
887
Total Troubled Debt Restructurings $ 12,150
$ 5,124
$ 7,026
Nonperforming Assets:

The following table summarizes the components of nonperforming assets as of June 30, 2023 and December 31, 2022, and the percentage of nonperforming assets to total gross loans, total assets, and the percentage of nonperforming assets to allowance for loan losses:

Total TDRs Nonaccrual TDRs Accruing TDRs
(in 000's) December 31, 2016 December 31, 2016 December 31, 2016
Commercial and industrial $ 1,356
$ 565
$ 791
Real estate - mortgage:

Commercial real estate 1,454
1,126
328
Residential mortgages 2,368
—
2,368
Total real estate mortgage 3,822
1,126
2,696
RE construction & development 6,267
4,608
1,659
Installment/other 965
965
—
Total Troubled Debt Restructurings $ 12,410
$ 7,264
$ 5,146


(In thousands)	June 30, 2023			December 31, 2022
Nonaccrual loans	$	13,203		$	14,544
Loans past due 90 days or more, still accruing	171			252
Total nonperforming loans	13,374			14,796
Other real estate owned	4,582			4,582
Total nonperforming assets	$	17,956		$	19,378
Nonperforming loans to total gross loans	1.39		%	1.51		%
Nonperforming assets to total assets	1.39		%	1.48		%
Allowance for loan losses to nonperforming loans	120.46		%	68.82		%

OfNonperforming assets, which are primarily related to the ~~$12,150,000 in total TDRs at September 30, 2017, $5,124,000 were on nonaccrual status at period-end. Of the $12,410,000 in total TDRs~~real estate loan and other-real-estate-owned portfolio, decreased $1,422,000 from $19.4 million at December 31, ~~2016, $7,264,000 were on nonaccrual status~~2022 to $18.0 million at ~~period-end. As~~June 30, 2023. Nonaccrual loan balances decreased to $13.2 million between the two periods and are well collateralized and in the process of ~~September~~collection. Loans past due 90 days or more and still accruing at June 30, ~~2017, the Company has no commercial real estate (CRE) workouts whereby an existing loan was restructured into multiple new~~2023, consist of student loans ~~(i.e., A Note/B Note structure).~~

~~For a restructured loan to return to accrual status there needs to~~which will be ~~at least 6 months successful payment history. In addition, the Company’s Credit Administration performs a financial analysis~~charged off if delinquency continues past 120 days. The ratio of the allowance for credit losses to determine whether the borrower has the ability to continue to perform successfully over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and a cash flow analysis of the borrower. Only after determining that the borrower has the ability to perform under the terms of thenonperforming loans ~~will the restructured credit be considered for accrual status.~~

~~Table 7. Nonperforming Assets~~

(in 000's) September 30, 2017 December 31, 2016
Nonaccrual Loans (1) $ 5,145
$ 7,264
Restructured Loans 7,026
5,146
Loans past due 90 days or more, still accruing —
—
Total nonperforming loans 12,171
12,410
Other real estate owned 5,745
6,471
Total nonperforming assets $ 17,916
$ 18,881

Nonperforming loans to total gross loans 2.09 % 2.18 %
Nonperforming assets to total assets 2.12 % 2.40 %
Allowance for loan losses to nonperforming loans 75.24 % 71.73 %


~~(1)~~	~~Included in nonaccrual loans~~increased from 68.82% at ~~September 30, 2017 and December 31, 2016 are restructured loans totaling $5,124,000 and $7,264,000, respectively.~~

~~Non-performing loans decreased $239,000 between~~ December 31, ~~2016 and September~~2022 to 120.46% at June 30, 2017. Nonaccrual loans decreased $2,119,000 between December 31, 2016 and September 30, 2017, with real estate mortgage and real estate construction loans comprising approximately 94.73% of total nonaccrual loans at September 30, 2017.2023. The ~~reduction in nonaccrual loans~~percentage increase is primarily ~~attributed~~due to ~~a payoff of a $965,000~~the adjustment for CECL and reserve increases due to student loan ~~and the migration of a $589,000 loan to accrual.~~ delinquencies.

The following table summarizes the nonaccrual totals by loan category for the periods ~~shown. The ratio of the allowance for loan losses to nonperforming loans increased from 71.73% at December 31, 2016 to 75.24% at September 30, 2017.~~shown:


(In thousands)	June 30, 2023		December 31, 2022		$ Change
Nonaccrual Loans:


Real estate construction and development	$	13,142	$	14,436	$	(1,294)
Agricultural	73		108		(35)

Total nonaccrual loans	$	13,215	$	14,544	$	(1,329)

(in 000's)

Balance Balance Change from
Nonaccrual Loans: September 30, 2017 December 31, 2016 December 31, 2016
Commercial and industrial $ 271
$ 565
$ (294 )
Real estate - mortgage 466
1,126
(660 )
RE construction & development 4,408
4,608
(200 )
Installment/other —
965
(965 )
Total Nonaccrual Loans $ 5,145
$ 7,264
$ (2,119 )

Loans past due more than 30 days receive increased management attention and are monitored for increased risk. The Company continues to move past due loans to nonaccrual status in an ongoing effort to recognize and address loan problems as early and most effectively as possible. As ~~impaired~~individually-evaluated loans, nonaccrual, and ~~restructured~~modified loans are reviewed for specific reserve allocations, the allowance for credit losses is adjusted accordingly.

Except for the nonaccrual loans included in the above table, or those included in the ~~impaired~~individually-evaluated loan totals, there were no loans at ~~September~~June 30, ~~2017~~2023, where the known credit problems of a borrower caused the Company to have serious doubts as to the ability of such borrower to comply with the present loan repayment ~~terms and which would result in such loan being included as a nonaccrual, past due, or restructured loan~~terms.

Nonaccrual loans, totaling $13.2 million at ~~some future date.~~

~~Nonperforming assets, which are primarily related to the real estate loan and other real estate owned portfolio, decreased$965,000~~June 30, 2023, decreased $1.3 million from ~~a balance of $18,881,000~~$14.5 million at December 31, ~~2016 to a balance~~2022, with real estate mortgage and real estate construction loans comprising 99.4% of ~~$17,916,000~~total nonaccrual loans at ~~September~~June 30, 2017, but remained relatively high compared to peers during the nine months ended September 30, 2017. Nonaccrual loans, totaling $5,145,000 at September 30, 2017, decreased $2,119,000 from the balance of $7,264,000 reported at December 31, 2016.2023. In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit-related issues. At June 30, 2023 and December 31, 2022, nonaccrual loans represented 1.37% and 1.48% of total loans, respectively. The loan allowance for credit ~~issues related to~~loss represented 121.9% and 70.0% of nonaccrual loans for the ~~specific loans. Impaired loans decreased $841,000 during the nine months ended September 30, 2017 to a balance of $15,338,000 at September 30, 2017.~~ same periods.

Other real estate owned through foreclosure ~~decreased to $5,745,000~~remained at $4.6 million for the ~~period~~periods ended ~~September~~June 30, ~~2017 from the $6,471,000 balance recorded at~~2023 and December 31, ~~2016.~~2022. Nonperforming assets as a percentage of total assets decreased from ~~2.40%~~1.48% at December 31, ~~2016~~2022 to ~~2.12%~~1.39% at ~~September~~June 30, ~~2017.~~2023.

~~The following table summarizes various nonperforming components of the loan portfolio, the related allowance for credit losses and provision for credit losses for the periods shown.~~

(in 000's) September 30, 2017 December 31, 2016 September 30, 2016
Recovery of provision for credit losses year-to-date $ (24 ) $ (21 ) $ (7 )
Allowance as % of nonperforming loans 75.24 % 71.73 % 77.06 %

Nonperforming loans as % total loans 2.09 % 2.18 % 2.07 %
Restructured loans as % total loans 2.09 % 2.18 % 2.00 %

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Management continues to monitor economic conditions in the real estate market for signs of ~~further~~ deterioration or improvement which may impact the level of the allowance for ~~loan~~credit losses required to cover identified and potential losses in the loan portfolio. ~~Greater focus~~Focus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including loan restructures, to work through these difficult economic times. Restructured loan balances are comprised of 29 loans totaling $12,150,000 at September 30, 2017, compared to 28 loans totaling $12,410,000 at December 31, 2016.assets.

The following table summarizes special mention loans by type at ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~.as of:

(in thousands) September 30, 2017 December 31, 2016
Commercial and industrial $ 2,635
$ 4,416
Real estate - mortgage:

Commercial real estate 8,541
621
Residential mortgages 647
—
Total real estate mortgage 9,188
621
RE construction & development 2,609
928
Agricultural 985
—
Total Special Mention Loans $ 15,417
$ 5,965


(In thousands)	June 30, 2023		December 31, 2022
Commercial and industrial	$	1	$	200

Commercial real estate mortgage	12,784		26,019




Agricultural	869		1,017

Total special mention loans	$	13,654	$	27,236

The Company ~~focuses~~remains focused on competition and other economic conditions within its market area ~~and other geographical areas in which it does business,~~ which may ultimately affect the risk assessment of the portfolio. The Company continues to experience increased competition from major banks, local independents, and non-bank institutions, which creates pressure on loan pricing. ~~Low interest rates and a weak economy continue to dominate, even as real estate prices show signs of stabilization and interest rates have begun to rise. The Company continues to place increased~~Increased emphasis has been placed on reducing both the level of nonperforming assets and ~~the level of~~potential losses on the disposition of ~~these~~those assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure in an effort to reduce the impacts on the real estate market. As part of this strategy, the Company ~~has increased its level of troubled debt restructurings,~~enters into loan modifications when it makes economic sense. While business and consumer spending show improvement in recent quarters, current GDP remains anemic. It is difficult to forecast what impact Federal Reserve actions to hold rates low will have on the economy. Local unemployment rates in the San Joaquin Valley have improved, but remain elevated compared with other regions and historically are higher as a result of the area's agricultural dynamics. The Company believes that the Central San Joaquin Valley will continue to grow and diversify as property and housing costs remain low relative to other areas of the state.improves collection prospects. Management recognizes the increased risk of loss due to the

~~Company's~~ Company’s exposure to local and worldwide economic conditions, as well as potentially volatile real estate markets, and takes these factors into consideration when analyzing the adequacy of the allowance for credit losses.

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The following table provides a summary of the ~~Company's~~Company’s allowance for ~~possible~~loan credit losses, loan loss provisions, ~~made to that allowance,~~ and charge-off and recovery activity affecting the allowance for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~September~~June 30, ~~2016.~~2022.

~~Table 8.~~ Allowance for Credit Losses - Summary of ~~Activity~~Activity:


(In thousands)	June 30, 2023			June 30, 2022
Total loans outstanding at end of period before deducting allowances for credit losses	$	960,121		$	948,031
Average loans outstanding during period	957,620			888,722

Balance of allowance at beginning of period	$	10,182		$	9,333
Impact of adoption of ASU 2016-13	6,367			—
Loans charged-off:



Installment and student loans	(995)			(364)
Total loans charged-off	(995)			(364)
Recoveries of loans previously charged-off:
Real estate	51			6
Commercial and industrial	1			304
Installment and student loans	41			17
Total loan recoveries	93			327
Net loans charged-off	(902)			(37)
Provision charged to operating expense	463			417
Balance of allowance for credit losses at end of period	$	16,110		$	9,713

Net loan charged-off to total average loans (annualized)	0.19		%	0.01		%
Net loan charged-off to loans at end of period (annualized)	0.38		%	0.02		%
Allowance for credit losses to total loans at end of period	1.68		%	1.05		%
Net loan charged-off to allowance for credit losses (annualized)	22.40		%	1.49		%
Provision for credit losses to net charged-off (annualized)	102.66		%	(3,302.70)		%

(in 000's) September 30, 2017 September 30, 2016
Total loans outstanding at end of period before deducting allowances for credit losses $ 583,601
$ 560,651
Average loans outstanding during period 565,068
532,133

Balance of allowance at beginning of period 8,902
9,713
Loans charged off:

Real estate (2 ) (29 )
Commercial and industrial (106 ) (846 )
Installment and other (12 ) (20 )
Total loans charged off (120 ) (895 )
Recoveries of loans previously charged off:

Real estate 73
50
Commercial and industrial 195
51
Installment and other 132
6
Total loan recoveries 400
107
Net loans recovered (charged off) 280
(788 )

Recovery of provision charged to operating expense (24 ) (7 )
Balance of allowance for credit losses at end of period $ 9,158
$ 8,918

Net loan (recoveries) charge offs to total average loans (annualized) (0.07 )% 0.20 %
Net loan (recoveries) charge offs to loans at end of period (annualized) (0.10 )% 0.19 %
Allowance for credit losses to total loans at end of period 1.57 % 1.59 %
Net loan (recoveries) charge offs to allowance for credit losses (annualized) (6.11 )% 35.34 %
Provision for credit losses to net (charge offs) recoveries (annualized) (11.43 )% 1.18 %

Provisions for credit losses are determined on the basis of ~~management's~~management’s periodic credit review of the loan portfolio, consideration of past loan loss experience, expected losses within the portfolio, current and future economic conditions, and other pertinent factors. Management believes its estimate of the allowance for credit losses adequately covers estimated losses inherent in the loan portfolio and, based on the condition of the loan portfolio, management believes the allowance is sufficient to cover risk elements in the loan portfolio. For the ~~nine~~six months ended ~~September~~June 30, ~~2017, the recovery of~~2023, a $598,000 provision ~~for~~was recorded to the allowance for credit losses ~~was $24,000~~ as compared to a ~~recovery of~~$417,000 provision ~~of $7,000~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2022.

The following provides a summary of the Company’s net charge-offs as a percentage of average loan balances in each category for the quarters indicated:


	June 30, 2023						June 30, 2022
(In thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage		Net Charge-offs (Recoveries)		Average Loan Balance		Percentage
Commercial and industrial	$	(1)	$	49,628	<0.01%		$	(268)	$	39,820	(0.67)	%
Real estate mortgages	(51)		667,376		<0.01%		(6)		581,782		<0.01%
RE construction and development	—		148,340		—	%	—		165,229		—	%
Agricultural	—		50,332		—	%	(36)		49,590		(0.07)	%
Installment and student loans	954		44,972		2.12	%	347		49,926		0.70	%
Total	$	902	$	960,648	0.09	%	$	37	$	886,347	<0.01%

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Net ~~recoveries~~charge-offs during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 totaled ~~$280,000~~$902,000 as compared to net charge-offs of ~~$788,000~~$37,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2022. The Company charged-off, or had partial charge-offs on 324 loans during the ~~nine~~six months ended ~~September~~June 30, ~~2017, as~~2023, compared to 114 loans during the same period ended ~~September~~June 30, ~~2016, and 13 loans during the year ended December 31, 2016.~~2022. The annualized percentage of net ~~recoveries~~charge-offs to average loans ~~were 0.07%~~was 0.19% for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 0.15%~~2023, 0.14% for the year ended December 31, ~~2016, as compared to net charge-offs of 0.20%~~2022, and 0.01% for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2022. The ~~Company's~~Company’s loans net ~~loans~~of unearned fees increased from ~~$560,651,000~~$950.0 million at ~~September~~June 30, ~~2016~~2022 to ~~$583,601,000~~$960.1 million at ~~September~~June 30, ~~2017.~~2023.

The allowance at ~~September~~June 30, ~~2017~~2023 was ~~1.57%~~1.68% of outstanding loan balances, ~~at September 30, 2017,~~ as compared to ~~1.56%~~1.04% at December 31, ~~2016,~~2022, and ~~1.59%~~1.05% at ~~September~~June 30, ~~2016. The increase in the allowance as a percentage of outstanding loan balances between December 31, 2016~~2022. At June 30, 2023 and ~~September~~June 30, ~~2017 is primarily attributed to increases in specific reserves due to newly impaired loans.~~

~~At September 30, 2017 and September 30, 2016, $370,000 and $316,000, respectively, of the formula allowance is allocated to~~2022, unfunded loan ~~commitments~~commitment reserves of $935,000 and ~~is, therefore,~~$569,000 respectively, were reported ~~separately~~ in other ~~liabilities on the consolidated balance sheet.~~ liabilities.

Management believes that the ~~1.57%~~loan allowance for credit ~~loss allowance~~losses, totaling 1.68% of the loan portfolio at ~~September~~June 30, ~~2017~~2023, is adequate to absorb both known and inherent risks in the loan portfolio. No assurance can be given, however, regarding future economic conditions, or other circumstances, which may adversely affect the ~~Company's~~Company’s service areas and result in ~~future~~ losses toin the loan portfolio not captured by the current allowance for credit losses. Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company’s loan portfolio.

~~Asset/Liability Management –~~ Liquidity and ~~Cash Flow~~Capital Resources

The ~~primary function of~~Company’s asset/liability management, isliquidity strategy, and capital planning are guided by policies formulated and monitored by the Asset and Liability Management Committee (ALCO) and Management, to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities.

Liquidity

Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill both on- and off-balance sheet financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the Company relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The Company's principal cash outflows are for loan ~~origination,~~originations, purchases of investment securities, depositor withdrawals, and payment of operating expenses.

The Company continues to emphasize liability management as part of its overall asset/liability strategy. Through the discretionary acquisition of short term borrowings, the Company has, when needed, been able to provide liquidity to fund asset growth while, at the same time, better utilizing its capital resources, and better controlling interest rate risk. This does not preclude the Company from selling assets such as investment securities to fund liquidity needs but, with favorable borrowing rates, the Company has maintained a positive yield spread between borrowed liabilities and the assets which those liabilities fund. If, at some time, rate spreads become unfavorable, the Company has the ability to utilize an asset management approach and, either control asset growth or fund further growth with maturities or sales of investment securities. At ~~September 30, 2017, the Company had no borrowings, as its deposit base currently provides funding sufficient to support its asset values.~~

~~The Company's~~Company’s liquid asset base, which generally consists of cash and due from banks, federal funds sold, ~~securities purchased under agreements to resell (“reverse repos”)~~ and investment securities, is maintained at ~~a level~~levels deemed sufficient to provide the cash ~~outlay~~ necessary to fund loan growth, ~~as well as any customer~~unfunded loan commitments, and deposit ~~runoff that may occur. Additional liquidity requirements may be funded with overnight or term borrowing arrangements with various correspondent banks, FHLB and the Federal Reserve Bank. Within~~runoff. Included in this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans and investment securities, which ~~historically have represented the Company's highest yielding asset.~~ typically provide higher yields than cash balances.

The following table sets forth asset balances as of:


	June 30, 2023				December 31, 2022
(Dollars in thousands)	Balance		% Total Assets		Balance		% Total Assets
Cash and cash equivalents	$	58,403	4.5	%	$	38,595	3.0	%
Net loans	944,011		73.2	%	969,996		74.7	%
Investment securities	205,521		15.9	%	210,860		16.2	%

At ~~September~~June 30, ~~2017, the loan portfolio totaled~~ ~~69.19%~~ ~~of total assets and~~2023, the loan to deposit ratio was ~~79.20%~~91.74%, compared to ~~72.44%~~ ~~and~~ ~~83.05%, respectively,~~a loan to deposit ratio of 84.10% at December 31, ~~2016. Liquid assets~~2022.

Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowing capabilities. Core deposits, which comprised approximately 98.2% of total deposits at ~~September~~June 30, ~~2017, included cash~~2023, provide a significant and ~~cash equivalents totaling~~ ~~$159,892,000~~ ~~as compared to~~ ~~$113,032,000~~ at ~~December 31, 2016. Other sources of liquidity include collateralized lines of~~stable funding source for the Company. The bank held $75 million in borrowings from a secured credit ~~from the Federal Home Loan Bank, and from~~line with the Federal Reserve Bank ~~totaling $298,348,000~~ and ~~uncollateralized~~$25.6 million in borrowings from an unsecured credit line with PCBB for a total of $100.6 million in borrowings at June 30, 2023. Unused lines of credit ~~from Pacific Coast Banker's~~with the Federal Reserve Bank ~~(PCBB)~~and FHLB, totaling $605.7 million, were collateralized by investment securities and certain qualifying loans in the Company’s portfolio. The carrying value of ~~$10,000,000, Union Bank of $10,000,000, and Zion's Bank of $20,000,000~~loans pledged on these borrowing lines totaled $592.1 million at ~~September~~June 30, ~~2017~~.

~~The liquidity~~2023. For a further detail of the ~~parent company, United Security Bancshares, is primarily dependent on~~Company’s borrowing arrangements, see Note 6 - Short-term Borrowings/Other Borrowings, in the ~~payment~~notes to the consolidated financial statements.

Table of cash dividends by its subsidiary, United Security Bank, subject to limitations imposed by the Financial Code of the State of California. During the nine months ended September 30, 2017, the Company has received $3,109,000 in cash dividends from the Bank.Contents

~~Cash Flow~~

The period-end balances of cash and cash equivalents for the periods shown are as follows (from Consolidated Statements of Cash ~~Flows – in 000’s)~~Flows):


(In thousands)	Balance
December 31, 2021	$	219,219
June 30, 2022	107,246
December 31, 2022	38,595
June 30, 2023	58,403

Capital and Dividends

(in 000's) Balance
December 31, 2015 $ 125,751
September 30, 2016 $ 111,747
December 31, 2016 $ 113,032
September 30, 2017 $ 159,892

~~Cash and cash equivalents increased $46,860,000 during the nine months ended September 30, 2017, compared to a decrease of $14,004,000 during the nine months ended September 30, 2016.~~

The Company had a net cash inflow from operating activities of $4,660,000 for the nine months ended September 30, 2017 and a cash inflow from operations totaling $6,025,000 for the period ended September 30, 2016. The Company experienced net cash outflows from investing activities of $4,787,000 related to a $12,346,000 increase in loan balances, partially offset by principal payments on available-for-sale securities of $6,091,000 and proceeds from the sale of OREO of $1,062,000 during the nine months ended September 30, 2017. For the nine months ended September 30, 2016, the Company experienced net cash outflows from investing activities of $69,516,000 due an increase of $41,303,000 in loan balances and purchases of $34,987,000 in available-for-sale securities.

~~During the nine months ended September 30, 2017, the Company experienced net cash inflows from financing activities totaling~~ ~~$46,987,000, primarily as the result of increases of $85,653,000 in demand deposits and savings accounts, offset by decreases of $36,984,000 in time deposits and purchased brokered deposits. For the~~ ~~nine months endedSeptember 30, 2016, the Company experienced net cash~~ ~~inflows of~~ ~~$49,487,000~~ ~~from financing activities due to increases in demand deposit accounts, time deposits, and savings accounts.~~

~~The Company has the ability to increase or decrease loan growth, increase or decrease deposits and borrowings, or a combination of both to manage balance sheet liquidity.~~

~~Regulatory Matters~~

~~Termination of Regulatory Agreements~~

Effective April 12, 2017, the Federal Reserve Bank of San Francisco (the “Reserve Bank”) terminated the informal supervisory agreement with the Company (the “Agreement”) that required, among other things, that the Company obtain prior regulatory approval to accept dividends from the Bank, to pay dividends to its shareholders, or to pay interest on the Company’s junior subordinated debt. The Agreement had replaced a previous formal supervisory agreement with the Reserve Bank effective November 19, 2014.

Effective October 19, 2016, the California Department of Business Oversight (the “DBO”) terminated the informal memorandum of understanding (“MOU”) the Bank had entered into on September 24, 2013, replacing a previous formal order. The MOU required the Bank to maintain a ratio of tangible shareholder’s equity to total tangible assets equal to or greater than 9.0% and also required the DBO’s approval for the Bank to pay a dividend to the Company.

~~Capital Adequacy~~

~~The Company (on a consolidated basis)~~ and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the “Board of Governors”). Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, ~~for prompt corrective action,~~ the ~~consolidated~~ Company and the Bank must meet specific capital guidelines that ~~involve~~include quantitative measures of their assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. ~~The capital amounts~~Capital levels and ~~classification~~classifications are also subject to qualitative judgments by the regulators ~~about~~in regard to components, risk weightings, and other factors. ~~Prompt corrective action provisions are not applicable to bank holding companies.~~

Quantitative measures established by the capital adequacy guidelines require insured institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum of common stockholders' equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, minus intangible assets, identified losses and investments in certain subsidiaries, plus unrealized losses or minus unrealized gains on available for sale securities) to total assets. Institutions which have received the

highest composite regulatory rating and which are not experiencing or anticipating significant growth are required to maintain a minimum leverage capital ratio of 3% of Tier 1 capital to total assets. All other institutions are required to maintain a minimum leverage capital ratio of at least 100 to 200 basis points above the 3% minimum requirement.

The ~~Company has adopted a~~Company’s capital plan ~~that~~ includes guidelines and trigger points designed to ensure sufficient capital is maintained at both the Bank and ~~the~~ Company ~~and that capital~~levels. Capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the Bank’s level of classified assets, concentrations of credit, ~~ALLL,~~allowance for credit losses, current and projected growth, and projected retained earnings. The capital plan ~~also~~ contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company, on a consolidated basis. The capital plan requires the Bank to maintain a ~~ratio of tangible shareholder’s equity to total tangible assets~~Tier 1 Leverage Ratio equal to or greater than ~~9.0%~~9%. The Bank’s ~~ratio of tangible shareholders’ equity to total tangible assets~~Tier 1 Capital Ratio was ~~12.5%~~11.18% and ~~12.7%~~9.55% at ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

The following table sets forth the Company’s and the ~~Bank's~~Bank’s actual capital positions at ~~September~~June 30, ~~2017, as well as~~2023:

Capital Ratios:


	June 30, 2023	Ratios at December 31, 2022	Minimum Requirement to be Well Capitalized	Minimum requirement for Community Bank Leverage Ratio (1)









Tier 1 capital to adjusted average assets (“Leverage Ratio”)
Company	11.16%	10.10%	5.00%	9.00%
Bank	11.18%	10.11%	5.00%	9.00%

(1) If the Bank’s Leverage Ratio exceeds the minimum ~~capital requirements and requirements~~ratio under the Community Bank Leverage Ratio Framework (CBLR), it is deemed to be ~~well capitalized~~“well capitalized” under ~~prompt corrective action provisions (Bank required only) under~~all other regulatory capital requirements. If the ~~regulatory guidelines discussed above:~~

~~Table 9. Capital Ratios~~

Ratio at September 30, 2017 Ratio at December 31, 2016 Minimum for Capital Adequacy Minimum requirement for "Well Capitalized" Institution
Total capital to risk weighted assets
Company 17.97% 17.26% 8.00% N/A
Bank 17.85% 17.19% 8.00% 10.00%
Tier 1 capital to risk-weighted assets
Company 16.72% 16.01% 6.00% N/A
Bank 16.60% 15.94% 6.00% 8.00%
Common equity tier 1 capital to risk-weighted assets
Company 15.29% 14.68% 4.50% N/A
Bank 16.60% 15.94% 4.50% 6.50%
Tier 1 capital to adjusted average assets (leverage)
Company 12.96% 12.97% 4.00% N/A
Bank 12.95% 12.99% 4.00% 5.00%

The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (commonly referred to as “Basel III”) as well as requirements encompassed by the Dodd-Frank Act.

The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. The final rules also require a Common Equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. The capital buffer requirement will be phased in over three years beginning in 2016, and will effectively raiseBank’s leverage ratio falls below the minimum required, ~~Common Equity Tier 1 RBC Ratio~~it would no longer be eligible to ~~7.0%,~~elect use of the Tier 1 RBC Ratio to 8.5%, and the Total RBC Ratio to 10.5% on a fully phased-in basis. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets.CBLR framework.

As of ~~September~~June 30, ~~2017,~~2023, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both the Company and the Bank will continue to meet their minimum capital requirements infor the foreseeable future.

Dividends

Dividends paid to shareholders by the Holding Company are subject to restrictions set forth inunder the California General Corporation Law. As applicable to the Holding Company, the California General Corporation Law provides that the Holding Company may make a distribution to its shareholders if either retainedearnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution or, ~~if immediately after~~proceeding the distribution, the value of the Holding Company’s assets would equal or exceed the sum of its total liabilities. The primary source of funds ~~with which~~for dividends ~~will be~~ paid to shareholders ~~will come from~~is cash dividends received by the Company from the Bank.

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On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to ~~$3,000,000~~$3.0 million of the outstanding stock of the Holding Company. This amount represents 3%2.6% of total ~~shareholders'~~shareholders’ equity of ~~$101,108,000~~$115.7 million at ~~September~~June 30, ~~2017.~~2023. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. During the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2023, the Company did not repurchase any of the shares available.

During the ~~nine month period~~six months ended ~~September~~ended June 30, ~~2017~~,2023, the Bank paid ~~$3,109,000~~$2.0 million in cash dividends to the Holding Company which funded the Holding Company’s operating costs, ~~and~~ payments of interest on its junior subordinated debt, ~~all~~and dividend payments to shareholders.

On June 27, 2023, the Company’s Board of ~~which were approved by~~Directors declared a cash dividend of $0.12 per share on the ~~Reserve Bank and~~Company’s common stock. The dividend was payable on July 24, 2023, to shareholders of record as of July 10, 2023. Approximately $2.1 million was transferred from retained earnings to dividends payable to allow for distribution of the ~~DBO, as applicable.~~dividend to shareholders.

The Bank, as a state-chartered bank, is subject to dividend restrictions set forth in the California Financial Code, as administered by the Commissioner of the ~~DBO (“Commissioner”)~~Department of Financial Protection and Innovation (Commissioner). As applicable to the Bank, the Financial Code provides that the Bank may not pay cash dividends in an amount which exceeds the lesser of the retained earnings of the Bank or the Bank’s net income for the last three fiscal years ~~(less~~less the amount of distributions to the Holding Company during that period of ~~time).~~time. If the above test is not met, cash dividends may only be paid with the prior approval of the Commissioner, in an amount not exceeding the Bank’s net income for its last fiscal year or the amount of its net income for the current fiscal year. Such restrictions do not apply to stock dividends, which generally require neither the satisfaction of any tests nor the approval of the Commissioner. Notwithstanding the foregoing, if the Commissioner finds that the ~~shareholder's~~shareholders’ equity of the Bank is not adequate or that the declaration of a dividend would be unsafe or unsound, the Commissioner may order the Bank not to pay any dividend. The Reserve Bank may also limit dividends paid by the Bank.

~~Reserve Balances~~

~~The Bank~~Item 3 - Quantitative and Qualitative Disclosures about Market Risk

This item is ~~required~~not applicable to maintain average reserve balances with the Federal Reserve Bank. During 2005, the Company implemented a deposit reclassification program, which allows the Company to reclassify a portion of transaction accounts to non-transaction accounts for reserve purposes. The deposit reclassification program is provided by a third-party vendor, and has been approved by the Federal Reserve Bank. At ~~September 30, 2017, the Bank was not subject to a reserve requirement.~~smaller reporting companies.

Item 4.Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required ~~disclosure.~~disclosures. In designing and evaluating ~~our~~ disclosure controls and procedures, ~~our~~ management recognizes that any controls and procedures, no matter how ~~well designed~~well-designed and ~~operated,~~executed, can provide only reasonable assurance ~~of achieving the~~that desired control objectives ~~and our management~~will be achieved. Management is required to apply its judgment in evaluating the cost-benefit relationship of ~~possible~~ controls and procedures.

As of ~~September~~June 30, ~~2017, the end of the period covered by this report,~~2023, an evaluation ~~under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,~~ of the effectiveness of the design and operation of ~~our~~ disclosure controls and procedures was carried ~~out.~~out under the supervision and participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at ~~the~~a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There ~~have not been any~~were no changes inmade to the ~~Company's~~Company’s internal control over financial reporting ~~that occurred~~ during the quarter ended ~~September~~June 30, ~~2017,~~2023, that ~~have~~ materially affected, or ~~are~~was reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and ~~operated,~~executed, can provide only reasonable, not absolute, assurance that the objectives of the control procedure ~~are~~will be met. Because of ~~the~~these inherent limitations in ~~all~~ control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be

Table of Contents

faulty, and that breakdowns in controls or procedures can occur ~~because of~~due to simple ~~error~~errors or ~~mistake.~~mistakes. Additionally, controls can be circumvented by the individual acts of ~~some persons,~~a person, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future ~~conditions; over~~conditions. Over time, controls may become inadequate ~~because of~~due to changes in conditions or deterioration in the ~~degree~~degrees of compliance with ~~the~~ policies and/or ~~procedures may deteriorate.~~procedures. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and may not be detected.

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PART II. Other Information

Item 1.Legal Proceedings

~~Not applicable~~The Company is involved in various legal proceedings in the normal course of business. In the opinion of Management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operations.

~~Item 1A.Risk Factors~~

~~There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None during the quarter ended ~~September~~June 30, ~~2017~~.2023.

~~Item 3.Defaults Upon Senior Securities~~

~~Not applicable~~

~~Item 4.Mine Safety Disclosures~~

~~Not applicable~~

~~Item 5.Other Information~~

~~Not applicable~~

Item 6.Exhibits:

(a)Exhibits:


~~(a)~~11			~~Exhibits:~~



11	Computation of Earnings per Share*
31.1		Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Data required by Accounting Standards Codification (ASC) 260, Earnings per Share, is provided in Note 810 to the consolidated financial statements in this report.

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			United Security Bancshares

Date:		~~November 2, 2017~~August 14, 2023	/S/ Dennis R. Woods
			Dennis R. Woods
			President and
	Chief Executive Officer

			/S/ ~~Bhavneet Gill~~David A. Kinross
			~~Bhavneet Gill~~David A. Kinross
			Senior Vice President and Chief Financial Officer

6355



CALIFORNIA						91-2112732
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2126 Inyo Street, Fresno, California						93721
(Address of principal executive offices)						(Zip Code)



Large accelerated filer o ☐	Accelerated filer o ☐	Non-accelerated filer o ☒
~~Small~~Smaller reporting company x ☒		Emerging growth company o ☐



PART I. Financial Information

	Item 1. Financial Statements (Unaudited)

		Consolidated Balance Sheets			3
						Consolidated Statements of Income		4
						Consolidated Statements of Comprehensive Income (Loss)		5
						Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity		6
						Consolidated Statements of Cash Flows		78
						Notes to Consolidated Financial Statements		9

	Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations						3932

		Overview			3932
						Results of Operations		4034
						Financial Condition		4742
						~~Asset/Liability Management –~~ Liquidity and ~~Cash Flow~~Capital		5750
				~~Regulatory Matters~~Item 3. Quantitative and Qualitative Disclosures about Market Risk					5852

	Item 4. Controls and Procedures						6052

PART II. Other Information
			Item 1.			Legal Proceedings		6254
			Item ~~1A.~~2.			~~Risk Factors~~		62
	~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	6254



			Item 3.6.			~~Defaults Upon Senior Securities~~Exhibits		6254
								~~Item 4.~~	~~Mine Safety Disclosures~~Signatures	6255
	~~Item 5.~~	~~Other Information~~	62
	~~Item 6.~~	~~Exhibits~~	62

~~Signatures~~			63



x☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023



o☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .


(In thousands except shares)	June 30, 2023		December 31, 2022
Assets
Cash and noninterest-bearing deposits in other banks	$	33,220	$	31,650
Due from Federal Reserve Bank (FRB)	25,183		6,945
Cash and cash equivalents	58,403		38,595

Investment securities (at fair value)
Available-for-sale (AFS) securities	202,213		207,545
Marketable equity securities	3,308		3,315
Total investment securities	205,521		210,860
Loans	961,379		981,772
Unearned fees and unamortized loan origination costs - net	(1,258)		(1,594)
Allowance for credit losses	(16,110)		(10,182)
Net loans	944,011		969,996
Premises and equipment - net	9,340		9,770
Accrued interest receivable	7,770		8,489
Other real estate owned	4,582		4,582
Goodwill	4,488		4,488
Deferred tax assets - net	14,348		12,825
Cash surrender value of life insurance	23,196		22,893

Operating lease right-of-use assets	1,653		1,984
Other assets	15,507		14,711
Total assets	$	1,288,819	$	1,299,193

Liabilities & Shareholders’ Equity
Liabilities
Deposits
Non-interest-bearing	$	476,387	$	481,629
Interest-bearing	570,167		683,855
Total deposits	1,046,554		1,165,484
Short-term borrowings	100,620		—
Operating lease liabilities	1,759		2,093
Other liabilities	13,487		8,270
Junior subordinated debentures (at fair value)	10,719		10,883
Total liabilities	1,173,139		1,186,730
Shareholders’ Equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,129,938 at June 30, 2023 and 17,067,253 at December 31, 2022	60,451		60,030
Retained earnings	71,857		69,928
Accumulated other comprehensive loss, net of tax	(16,628)		(17,495)
Total shareholders’ equity	115,680		112,463
Total liabilities and shareholders’ equity	$	1,288,819	$	1,299,193


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except shares and EPS)	2023		2022		2023		2022
Interest Income:
Interest and fees on loans	$	13,529	$	9,731	$	26,529	$	18,849
Interest on investment securities	1,501		1,004		3,002		1,795
Interest on deposits in FRB	56		258		114		340

Total interest income	15,086		10,993		29,645		20,984
Interest Expense:
Interest on deposits	1,944		515		3,287		1,023
Interest on other borrowed funds	638		69		909		114
Total interest expense	2,582		584		4,196		1,137
Net Interest Income	12,504		10,409		25,449		19,847
Provision for Credit Losses	1,091		512		598		417
Net Interest Income after Provision for Credit Losses	11,413		9,897		24,851		19,430
Noninterest Income:
Customer service fees	767		776		1,501		1,429
Increase in cash surrender value of bank-owned life insurance	171		114		303		253
Unrealized loss on fair value of marketable equity securities	(50)		(127)		(7)		(309)


Gain (loss) on fair value of junior subordinated debentures	(75)		(869)		258		(1,869)
Gain on sale of investment securities	—		—		—		30

Other	198		708		405		861
Total noninterest income	1,011		602		2,460		395
Noninterest Expense:
Salaries and employee benefits	3,301		2,777		6,561		5,826
Occupancy expense	858		849		1,820		1,628
Data processing	205		145		379		260
Professional fees	910		919		1,792		1,868
Regulatory assessments	193		187		385		417
Director fees	106		116		216		234
Correspondent bank service charges	19		24		38		50

Net cost of operation of OREO	58		2		96		(6)
Other	557		651		1,161		1,308
Total noninterest expense	6,207		5,670		12,448		11,585
Income before provision for taxes	6,217		4,829		14,863		8,240
Provision for income taxes	1,800		1,394		4,321		2,362
Net income	$	4,417	$	3,435	$	10,542	$	5,878
Net Income per common share
Basic	$	0.26	$	0.20	$	0.62	$	0.35
Diluted	$	0.26	$	0.20	$	0.62	$	0.34
Weighted average common shares outstanding
Basic	17,102,740		17,036,364		17,089,693		17,033,401
Diluted	17,114,740		17,057,755		17,103,601		17,054,742



	Quarter Ended September 30,						Nine Months Ended September 30,
(In thousands except shares and EPS)	2017			2016			2017			2016
Interest Income:
Loans, including fees	$	7,978		$	7,435		$	22,782		$	20,722
Investment securities – AFS – taxable	238			244			691			618
Interest on deposits in FRB	375			72			858			348
Interest on deposits in other banks	1			2			4			6
Total interest income	8,592			7,753			24,335			21,694
Interest Expense:
Interest on deposits	355			289			1,055			837
Interest on other borrowings	80			60			223			176
Total interest expense	435			349			1,278			1,013
Net Interest Income	8,157			7,404			23,057			20,681
Provision (Recovery of Provision) for Credit Losses	7			4			(24		)	(7		)
Net Interest Income after Provision (Recovery of Provision) for Credit Losses	8,150			7,400			23,081			20,688
Noninterest Income:
Customer service fees	959			924			2,897			2,867
Increase in cash surrender value of bank-owned life insurance	134			131			400			394
(Loss) gain on fair value of financial liability	(88		)	(423		)	(688		)	48
Gain on sale of investment in limited partnership	3			—			3			—
Other	168			154			539			464
Total noninterest income	1,176			786			3,151			3,773
Noninterest Expense:
Salaries and employee benefits	2,578			2,533			8,149			7,592
Occupancy expense	1,087			1,097			3,144			3,212
Data processing	29			23			81			108
Professional fees	312			327			912			1,116
Regulatory assessments	43			131			313			632
Director fees	72			75			215			218
(Gain) loss on California tax credit partnership	(1		)	49			118			122
Net cost (gain) on operation and sale of OREO	21			39			(257		)	216
Other	605			590			1,868			1,772
Total noninterest expense	4,746			4,864			14,543			14,988
Income Before Provision for Taxes	4,580			3,322			11,689			9,473
Provision for Taxes on Income	1,840			1,282			4,685			3,643
Net Income	$	2,740		$	2,040		$	7,004		$	5,830

Net Income per common share
Basic	$	0.16		$	0.12		$	0.41		$	0.35
Diluted	$	0.16		$	0.12		$	0.41		$	0.35
Shares on which net income per common shares were based
Basic	16,885,615			16,881,422			16,885,578			16,880,835
Diluted	16,907,267			16,891,066			16,904,063			16,887,078



(In thousands)	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
Net Income	$	2,740		$	2,040		$	7,004		$	5,830

Unrealized holdings (loss) gain on securities	—			(190		)	355			118
Unrealized gains on unrecognized post-retirement costs	13			13			39			37
Other comprehensive income (loss), before tax	13			(177		)	394			155
Tax benefit (expense) related to securities	—			76			(142		)	(47		)
Tax expense related to unrecognized post-retirement costs	(5		)	(6		)	(16		)	(16		)
Total other comprehensive income (loss)	8			(107		)	236			92
Comprehensive Income	$	2,748		$	1,933		$	7,240		$	5,922



September 30, 2017	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance (1)		Recorded Investment With Allowance (1)		Total Recorded Investment		Related Allowance		Average Recorded Investment (2)		Interest Recognized (2)
Commercial and Business Loans	$	3,590	$	543	$	3,061	$	3,604	$	567	$	3,965	$	63
Government Program Loans	83		54		29		83		4		275		36
Total Commercial and Industrial	3,673		597		3,090		3,687		571		4,240		99

Commercial Real Estate Loans	1,147		—		1,151		1,151		221		1,102		10
Residential Mortgages	2,783		512		2,281		2,793		206		2,643		150
Home Improvement and Home Equity Loans	—		—		—		—		—		—		—
Total Real Estate Mortgage	3,930		512		3,432		3,944		427		3,745		160

Real Estate Construction and Development Loans	6,797		6,816		—		6,816		—		6,889		415
Agricultural Loans	887		1		890		891		743		1,170		64

Consumer Loans	—		—		—		—		—		322		—
Overdraft Protection Lines	—		—		—		—		—		—		—
Overdrafts	—		—		—		—		—		—		—
Total Installment	—		—		—		—		—		322		—
Total Impaired Loans	$	15,287	$	7,926	$	7,412	$	15,338	$	1,741	$	16,366	$	738



	Three Months Ended September 30, 2017
($ in 000's)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts which Defaulted During Period	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	—	$	—	$	—	—	$	—
Government Program Loans	—	—		—		—	—
Commercial Real Estate Term Loans	—	—		—		—	—
Single Family Residential Loans	1	167		167		—	—
Home Improvement and Home Equity Loans	—	—		—		—	—
Real Estate Construction and Development Loans	—	—		—		—	—
Agricultural Loans	1	587		587		—	—
Consumer Loans	—	—		—		—	—
Overdraft Protection Lines	—	—		—		—	—
Total Loans	2	$	754	$	754	—	$	—



	Nine Months Ended September 30, 2017
($ in 000's)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts which Defaulted During Period	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	1	$	69	$	69	—	$	—
Government Program Loans	1	178		178		—	—
Commercial Real Estate Term Loans	—	—		—		—	—
Single Family Residential Loans	2	404		404		—	—
Home Improvement and Home Equity Loans	—	—		—		—	—
Real Estate Construction and Development Loans	1	790		790		—	—
Agricultural Loans	2	1,437		1,437		—	—
Consumer Loans	—	—		—		—	—
Overdraft Protection Lines	—	—		—		—	—
Total Loans	7	$	2,878	$	2,878	—	$	—



	Nine Months Ended September 30, 2016
($ in 000's)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts which Defaulted During Period	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	4	$	1,021	$	749	—	$	—
Government Program Loans	1	100		100		—	—
Commercial Real Estate Term Loans	—	—		—		—	—
Single Family Residential Loans	—	—		—		—	—
Home Improvement and Home Equity Loans	—	—		—		—	—
Real Estate Construction and Development Loans	—	—		—		—	—
Agricultural Loans	—	—		—		—	—
Consumer Loans	—	—		—		—	—
Overdraft Protection Lines	—	—		—		—	—
Total Loans	5	$	1,121	$	849	—	$	—



Three Months Ended September 30, 2016	Commercial and Industrial		Commercial Real Estate			Residential Mortgages			Home Improvement and Home Equity		Real Estate Construction Development			Agricultural			Installment & Other		Total
Beginning balance	$	1,236	$	1,510		$	2,400		$	—	$	12,100		$	6		$	965	$	18,217

Defaults	—		—			—			—		—			—			—		—
Additions	—		—			—			—		—			—			—		—
											—
Principal reductions	10		(25		)	(15		)	—		(6,991		)	(5		)	—		(7,026		)

Ending balance	$	1,246	$	1,485		$	2,385		$	—	$	5,109		$	1		$	965	$	11,191

Allowance for loan loss	$	38	$	472		$	163		$	—	$	—		$	—		$	—	$	673



Nine Months Ended	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural		Installment & Other			Unallocated			Total
September 30, 2017	Commercial and Industrial			Real Estate Mortgage			Real Estate Construction Development			Agricultural		Installment & Other			Unallocated			Total
Beginning balance	$	1,843		$	1,430		$	3,378		$	666	$	888		$	697		$	8,902
Provision (recovery of provision) for credit losses	(408		)	(359		)	(379		)	983		(198		)	337			(24		)

Charge-offs	(106		)	(2		)	—			—		—			(12		)	(120		)
Recoveries	174			73			—			21		132			—			400
Net recoveries	68			71			—			21		132			(12		)	280

Ending balance	$	1,503		$	1,142		$	2,999		$	1,670	$	822		$	1,022		$	9,158
Period-end amount allocated to:
Loans individually evaluated for impairment	571			427			—			743		—			—			1,741
Loans collectively evaluated for impairment	932			715			2,999			927		822			1,022			7,417
Ending balance	$	1,503		$	1,142		$	2,999		$	1,670	$	822		$	1,022		$	9,158



	September 30, 2017						September 30, 2016
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
(in 000's)	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
Commercial and Business Loans	$	3,604	$	42,333	$	45,937	$	5,101	$	52,404	$	57,505
Government Program Loans	83		931		1,014		365		1,612		1,977
Total Commercial and Industrial	3,687		43,264		46,951		5,466		54,016		59,482

Commercial Real Estate Loans	1,151		198,517		199,668		1,511		179,983		181,494
Residential Mortgage Loans	2,793		87,491		90,284		2,961		98,339		101,300
Home Improvement and Home Equity Loans	—		510		510		—		760		760
Total Real Estate Mortgage	3,944		286,518		290,462		4,472		279,082		283,554

Real Estate Construction and Development Loans	6,816		122,067		128,883		12,131		126,043		138,174

Agricultural Loans	891		57,614		58,505		6		46,757		46,763

Installment and Other Loans	—		57,583		57,583		965		28,271		29,236

Total Loans	$	15,338	$	567,046	$	582,384	$	23,040	$	534,169	$	557,209



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Net income (000's, except per share amounts)	$	2,740	$	2,040	$	7,004	$	5,830

Weighted average shares issued	16,885,615		16,881,422		16,885,578		16,880,835
Add: dilutive effect of stock options	21,652		9,644		18,485		6,243
Weighted average shares outstanding adjusted for potential dilution	16,907,267		16,891,066		16,904,063		16,887,078

Basic earnings per share	$	0.16	$	0.12	$	0.41	$	0.35
Diluted earnings per share	$	0.16	$	0.12	$	0.41	$	0.35
Anti-dilutive stock options excluded from earnings per share calculation	30,000		21,000		30,000		21,000



Description of Assets	September 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
AFS Securities (2):
U.S. Government agencies	$	20,970	$	—	$	20,970	$	—
U.S. Government collateralized mortgage obligations	23,603		—		23,603		—
Mutual Funds	3,783		3,783		—		—
Total AFS securities	$	48,356	$	3,783	$	44,573	$	—

Total	$	48,356	$	3,783	$	44,573	$	—



Description of Liabilities	September 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Junior subordinated debt (2)	$	9,534	—	—	$	9,534
Total	$	9,534	—	—	$	9,534



December 31, 2016
Financial Instrument	Fair Value		Valuation Technique	Unobservable Input	Range, Weighted Average
Impaired Loans:
Commercial and industrial	$	301	Sales Comparison Approach	Adjustment for difference between comparable sales	7% - 29%, 19.1%



				2017							2016
(dollars in 000's)	Average Balance			Interest		Yield/Rate (2)		Average Balance			Interest		Yield/Rate (2)
	Average Balance			Interest		Yield/Rate (2)		Average Balance			Interest		Yield/Rate (2)
Assets:
Interest-earning assets:
Loans and leases (1)	$	565,068		$	22,782	5.39	%	$	532,133		$	20,722	5.20	%
Investment Securities – taxable (3)	54,284			691		1.70	%	46,384			618		1.78	%
Interest-bearing deposits in other banks	652			4		0.82	%	1,531			6		0.52	%
Interest-bearing deposits in FRB	107,921			858		1.06	%	93,305			348		0.50	%
Total interest-earning assets	727,925			$	24,335	4.47	%	673,353			$	21,694	4.30	%
Allowance for credit losses	(9,017		)					(9,439		)
Noninterest-earning assets:
Cash and due from banks	21,393							22,126
Premises and equipment, net	10,708							10,550
Accrued interest receivable	4,248							2,350
Other real estate owned	6,083							9,797
Other assets	36,731							36,552
Total average assets	$	798,071						$	745,289
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	87,598		$	87	0.13	%	$	84,610		$	81	0.13	%
Money market accounts	152,257			506		0.44	%	146,801			419		0.38	%
Savings accounts	78,247			136		0.23	%	66,117			103		0.21	%
Time deposits	80,861			326		0.54	%	70,936			234		0.44	%
Junior subordinated debentures	9,114			223		3.27	%	7,995			176		2.94	%
Total interest-bearing liabilities	408,077			$	1,278	0.42	%	376,459			$	1,013	0.36	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	283,783							268,820
Accrued interest payable	104							73
Other liabilities	6,714							7,218
Total Liabilities	698,678							652,570

Total shareholders' equity	99,393							92,719
Total average liabilities and shareholders' equity	$	798,071						$	745,289
Interest income as a percentage of average earning assets						4.47	%						4.30	%
Interest expense as a percentage of average earning assets						0.23	%						0.20	%
Net interest margin						4.24	%						4.10	%



	YTD Average 9/30/2017	YTD Average 12/31/16	YTD Average 9/30/2016
Loans	77.63%	79.26%	79.02%
Investment securities available for sale	7.46%	7.27%	6.89%
Interest-bearing deposits in other banks	0.09%	0.22%	0.23%
Interest-bearing deposits in FRB	14.82%	13.25%	13.86%
Total interest-earning assets	100.00%	100.00%	100.00%

NOW accounts	21.47%	22.25%	22.48%
Money market accounts	37.31%	38.82%	39.00%
Savings accounts	19.17%	17.62%	17.56%
Time deposits	19.82%	19.21%	18.84%
Subordinated debentures	2.23%	2.10%	2.12%
Total interest-bearing liabilities	100.00%	100.00%	100.00%



	Impaired Loan Balance		Reserve		Impaired Loan Balance		Reserve
(in 000’s)	September 30, 2017		September 30, 2017		December 31, 2016		December 31, 2016
Commercial and industrial	$	3,687	$	571	$	5,009	$	757
Real estate – mortgage	3,944		427		3,931		603
RE construction & development	6,816		—		6,274		—
Agricultural	891		743		—		—
Installment/other	—		—		965		—
Total Impaired Loans	$	15,338	$	1,741	$	16,179	$	1,360



	Total TDRs		Nonaccrual TDRs		Accruing TDRs
(in 000's)	September 30, 2017		September 30, 2017		September 30, 2017
Commercial and industrial	$	630	$	250	$	381
Real estate - mortgage:
Commercial real estate	1,147		466		681
Residential mortgages	2,688		—		2,688
Total real estate mortgage	3,835		466		3,369
RE construction & development	6,798		4,408		2,389
Agricultural	887		—		887
Total Troubled Debt Restructurings	$	12,150	$	5,124	$	7,026



(in 000's)	Balance
December 31, 2015	$	125,751
September 30, 2016	$	111,747
December 31, 2016	$	113,032
September 30, 2017	$	159,892



	Ratio at September 30, 2017	Ratio at December 31, 2016	Minimum for Capital Adequacy	Minimum requirement for "Well Capitalized" Institution
Total capital to risk weighted assets
Company	17.97%	17.26%	8.00%	N/A
Bank	17.85%	17.19%	8.00%	10.00%
Tier 1 capital to risk-weighted assets
Company	16.72%	16.01%	6.00%	N/A
Bank	16.60%	15.94%	6.00%	8.00%
Common equity tier 1 capital to risk-weighted assets
Company	15.29%	14.68%	4.50%	N/A
Bank	16.60%	15.94%	4.50%	6.50%
Tier 1 capital to adjusted average assets (leverage)
Company	12.96%	12.97%	4.00%	N/A
Bank	12.95%	12.99%	4.00%	5.00%