SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2022~~2023


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

Commission file number: 000-32897

UNITED SECURITY BANCSHARES

(Exact name of registrant as specified in its charter)


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)

~~Registrants~~Registrant’s telephone number, including area code (559) 248-4943

~~Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒~~

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, no par value

UBFO

Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of ~~"large~~“large accelerated filer,~~" "accelerated~~” “accelerated filer,~~" "smaller~~” “smaller reporting company,"” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act.


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the ~~issuer's~~issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value

(Title of Class)

Shares outstanding as of ~~October~~July 31, ~~2022:~~ ~~17,049,061~~2023: 17,094,298

Table of Contents

TABLE OF CONTENTS

~~Facing Page~~

~~Table of Contents~~


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	8
		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	4134
		Financial Condition	4942
		Liquidity and Capital	6150

	Item 3. Quantitative and Qualitative Disclosures about Market Risk		6352

	Item 4. Controls and Procedures		6352

PART II. Other Information
	Item 1.	Legal Proceedings	6454
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6454
	~~Item 3.~~	~~Defaults Upon Senior Securities~~	64
	~~Item 4.~~	~~Mine Safety Disclosures~~	64
	~~Item 5.~~	~~Other Information~~	64
	Item 6.	Exhibits	6454

Signatures			6555

Table of Contents

PART I. Financial Information

Item 1 - Financial Statements (Unaudited)

United Security Bancshares and Subsidiaries

Consolidated Balance Sheets – (unaudited)

~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022


(in thousands except shares)		September 30, 2022		December 31, 2021
(In thousands except shares)						(In thousands except shares)	June 30, 2023		December 31, 2022
Assets	Assets					Assets
Cash and noninterest-bearing deposits in other banks	Cash and noninterest-bearing deposits in other banks	$	37,972	$	31,057	Cash and noninterest-bearing deposits in other banks	$	33,220	$	31,650
Due from Federal Reserve Bank ("FRB")		88,060		188,162
Due from Federal Reserve Bank (FRB)						Due from Federal Reserve Bank (FRB)	25,183		6,945
Cash and cash equivalents	Cash and cash equivalents	126,032		219,219		Cash and cash equivalents	58,403		38,595

Investment securities (at fair value)	Investment securities (at fair value)					Investment securities (at fair value)
Available-for-sale ("AFS") securities		208,560		178,902
Available-for-sale (AFS) securities						Available-for-sale (AFS) securities	202,213		207,545
Marketable equity securities	Marketable equity securities	3,287		3,744		Marketable equity securities	3,308		3,315
Total investment securities	Total investment securities	211,847		182,646		Total investment securities	205,521		210,860
Loans	Loans	960,549		869,314		Loans	961,379		981,772
Unearned fees and unamortized loan origination costs - net	Unearned fees and unamortized loan origination costs - net	1,617		2,219		Unearned fees and unamortized loan origination costs - net	(1,258)		(1,594)
Allowance for credit losses	Allowance for credit losses	(10,063)		(9,333)		Allowance for credit losses	(16,110)		(10,182)
Net loans	Net loans	952,103		862,200		Net loans	944,011		969,996
Premises and equipment - net	Premises and equipment - net	9,485		8,950		Premises and equipment - net	9,340		9,770
Accrued interest receivable	Accrued interest receivable	8,466		7,530		Accrued interest receivable	7,770		8,489
Other real estate owned	Other real estate owned	4,582		4,582		Other real estate owned	4,582		4,582
Goodwill	Goodwill	4,488		4,488		Goodwill	4,488		4,488
Deferred tax assets - net	Deferred tax assets - net	11,956		3,615		Deferred tax assets - net	14,348		12,825
Cash surrender value of life insurance	Cash surrender value of life insurance	22,680		22,338		Cash surrender value of life insurance	23,196		22,893

Operating lease right-of-use assets	Operating lease right-of-use assets	2,135		2,594		Operating lease right-of-use assets	1,653		1,984
Other assets	Other assets	15,478		12,782		Other assets	15,507		14,711
Total assets	Total assets	$	1,369,252	$	1,330,944	Total assets	$	1,288,819	$	1,299,193

Liabilities & Shareholders' Equity
Liabilities & Shareholders’ Equity						Liabilities & Shareholders’ Equity
Liabilities	Liabilities					Liabilities
Deposits	Deposits					Deposits
Non-interest-bearing	Non-interest-bearing	$	517,230	$	476,749	Non-interest-bearing	$	476,387	$	481,629
Interest-bearing	Interest-bearing	723,588		711,357		Interest-bearing	570,167		683,855
Total deposits	Total deposits	1,240,818		1,188,106		Total deposits	1,046,554		1,165,484

Short-term borrowings						Short-term borrowings	100,620		—
Operating lease liabilities	Operating lease liabilities	2,245		2,705		Operating lease liabilities	1,759		2,093
Other liabilities	Other liabilities	8,805		8,737		Other liabilities	13,487		8,270
Junior subordinated debentures (at fair value)	Junior subordinated debentures (at fair value)	10,305		11,189		Junior subordinated debentures (at fair value)	10,719		10,883
Total liabilities	Total liabilities	1,262,173		1,210,737		Total liabilities	1,173,139		1,186,730
Shareholders' Equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,046,676 at September 30, 2022 and 17,028,239 at December 31, 2021		59,924		59,636
Shareholders’ Equity						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						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	Retained earnings	66,465		61,745		Retained earnings	71,857		69,928
Accumulated other comprehensive loss		(19,310)		(1,174)
Total shareholders' equity		107,079		120,207
Total liabilities and shareholders' equity		$	1,369,252	$	1,330,944
Accumulated other comprehensive loss, net of tax						Accumulated other comprehensive loss, net of tax	(16,628)		(17,495)
Total shareholders’ equity						Total shareholders’ equity	115,680		112,463
Total liabilities and shareholders’ equity						Total liabilities and shareholders’ equity	$	1,288,819	$	1,299,193

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United Security Bancshares and Subsidiaries

Consolidated Statements of Income

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In thousands except shares and EPS)		2022		2021		2022		2021
(In thousands, except shares and EPS)										(In thousands, except shares and EPS)	2023		2022		2023		2022
Interest Income:	Interest Income:									Interest Income:
Interest and fees on loans	Interest and fees on loans	$	11,514	$	9,163	$	30,363	$	25,942	Interest and fees on loans	$	13,529	$	9,731	$	26,529	$	18,849
Interest on investment securities	Interest on investment securities	1,322		650		3,117		1,691		Interest on investment securities	1,501		1,004		3,002		1,795
Interest on deposits in FRB	Interest on deposits in FRB	683		64		1,023		168		Interest on deposits in FRB	56		258		114		340

Total interest income	Total interest income	13,519		9,877		34,503		27,801		Total interest income	15,086		10,993		29,645		20,984

Interest Expense:	Interest Expense:									Interest Expense:
Interest on deposits	Interest on deposits	679		496		1,702		1,391		Interest on deposits	1,944		515		3,287		1,023
Interest on other borrowed funds	Interest on other borrowed funds	110		44		224		136		Interest on other borrowed funds	638		69		909		114
Total interest expense	Total interest expense	789		540		1,926		1,527		Total interest expense	2,582		584		4,196		1,137

Net Interest Income	Net Interest Income	12,730		9,337		32,577		26,274		Net Interest Income	12,504		10,409		25,449		19,847
Provision for Credit Losses	Provision for Credit Losses	607		453		1,217		1,654		Provision for Credit Losses	1,091		512		598		417
Net Interest Income after Provision for Credit Losses	Net Interest Income after Provision for Credit Losses	12,123		8,884		31,360		24,620		Net Interest Income after Provision for Credit Losses	11,413		9,897		24,851		19,430

Noninterest Income:	Noninterest Income:									Noninterest Income:
Customer service fees	Customer service fees	899		745		2,328		2,094		Customer service fees	767		776		1,501		1,429
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	89		139		343		408		Increase in cash surrender value of bank-owned life insurance	171		114		303		253
Unrealized loss on fair value of marketable equity securities	Unrealized loss on fair value of marketable equity securities	(149)		(14)		(458)		(75)		Unrealized loss on fair value of marketable equity securities	(50)		(127)		(7)		(309)

Loss on fair value of junior subordinated debentures		(600)		(35)		(2,469)		(691)
Gain (loss) on fair value of junior subordinated debentures										Gain (loss) on fair value of junior subordinated debentures	(75)		(869)		258		(1,869)
Gain on sale of investment securities	Gain on sale of investment securities	—		—		30		—		Gain on sale of investment securities	—		—		—		30
(Loss) gain on sale of assets		—		(5)		—		8

Other	Other	153		100		1,015		349		Other	198		708		405		861
Total noninterest income	Total noninterest income	392		930		789		2,093		Total noninterest income	1,011		602		2,460		395

Noninterest Expense:	Noninterest Expense:									Noninterest Expense:
Salaries and employee benefits	Salaries and employee benefits	2,965		2,888		8,791		8,804		Salaries and employee benefits	3,301		2,777		6,561		5,826
Occupancy expense	Occupancy expense	923		1,013		2,551		2,705		Occupancy expense	858		849		1,820		1,628
Data processing	Data processing	215		147		475		382		Data processing	205		145		379		260
Professional fees	Professional fees	1,089		833		2,957		2,524		Professional fees	910		919		1,792		1,868
Regulatory assessments	Regulatory assessments	212		258		630		547		Regulatory assessments	193		187		385		417
Director fees	Director fees	110		91		345		275		Director fees	106		116		216		234
Correspondent bank service charges	Correspondent bank service charges	23		22		74		65		Correspondent bank service charges	19		24		38		50

Net cost on operation and sale of OREO		33		24		27		67
Net cost of operation of OREO										Net cost of operation of OREO	58		2		96		(6)
Other	Other	641		888		1,755		1,964		Other	557		651		1,161		1,308
Total noninterest expense	Total noninterest expense	6,211		6,164		17,605		17,333		Total noninterest expense	6,207		5,670		12,448		11,585

Income Before Provision for Taxes		6,304		3,650		14,544		9,380
Provision for Taxes on Income		1,837		1,039		4,199		2,653
Net Income		$	4,467	$	2,611	$	10,345	$	6,727

Income before provision for taxes										Income before provision for taxes	6,217		4,829		14,863		8,240
Provision for income taxes										Provision for income taxes	1,800		1,394		4,321		2,362
Net income										Net income	$	4,417	$	3,435	$	10,542	$	5,878
Net Income per common share	Net Income per common share									Net Income per common share
Basic	Basic	$	0.26	$	0.15	$	0.61	$	0.40	Basic	$	0.26	$	0.20	$	0.62	$	0.35
Diluted	Diluted	$	0.26	$	0.15	$	0.61	$	0.40	Diluted	$	0.26	$	0.20	$	0.62	$	0.34
Weighted average shares on which net income per common shares were based
Weighted average common shares outstanding										Weighted average common shares outstanding
Basic	Basic	17,042,479		17,010,288		17,036,460		17,010,236		Basic	17,102,740		17,036,364		17,089,693		17,033,401
Diluted	Diluted	17,063,947		17,035,533		17,057,638		17,027,671		Diluted	17,114,740		17,057,755		17,103,601		17,054,742

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United Security Bancshares and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands except shares and EPS) 2022 2021 2022 2021
Net Income $ 4,467 $ 2,611 $ 10,345 $ 6,727
Unrealized holdings loss on debt securities (8,799) (60) (29,232) (307)
Unrealized gains on unrecognized post-retirement costs 22 24 67 74
Unrealized gain (loss) on junior subordinated debentures 825 (8) 3,419 317
Other comprehensive (loss) income, before tax (7,952) (44) (25,746) 84
Tax benefit provision related to debt securities 2,601 18 8,641 91
Tax expense related to unrecognized post-retirement costs (7) (7) (20) (22)
Tax expense (benefit) related to junior subordinated debentures (243) 3 (1,011) (93)
Total other comprehensive (loss) income (5,601) (30) (18,136) 60
Comprehensive (loss) income $ (1,134) $ 2,581 $ (7,791) $ 6,787



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2023		2022		2023		2022
Net Income	$	4,417	$	3,435	$	10,542	$	5,878
Unrealized holdings (loss) gain on debt securities	(86)		(8,744)		1,239		(20,433)
Unrealized gain on unrecognized post-retirement costs	20		20		43		44
Unrealized gain (loss) on junior subordinated debentures	387		1,292		(53)		2,594
Other comprehensive income (loss), before tax	321		(7,432)		1,229		(17,795)
Tax benefit (expense) related to debt securities	26		2,585		(366)		6,040
Tax expense related to unrecognized post-retirement costs	(5)		(6)		(12)		(13)
Tax (expense) benefit related to junior subordinated debentures	(114)		(382)		16		(767)
Total other comprehensive income (loss)	228		(5,235)		867		(12,535)
Comprehensive income (loss)	$	4,645	$	(1,800)	$	11,409	$	(6,657)

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United Security Bancshares and Subsidiaries

Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity

(Unaudited)

Common Stock
(In thousands except shares) Number of Shares Amount Retained Earnings Accumulated Other Comprehensive (Loss) Income Total
Balance December 31, 2020 (1) 17,009,883 $ 59,397 $ 59,138 $ (728) $ 117,807
(1) Excludes 11,924 unvested restricted shares
   Other comprehensive loss (55) (55)
Dividends payable ($0.11 per share) (1,876) (1,876)
Restricted stock units released 405 —
Stock-based compensation expense 46 46
Net income 1,411 1,411
Balance March 31, 2021 (2) 17,010,288 $ 59,443 $ 58,673 $ (783) $ 117,333
(2) Excludes 41,424 unvested restricted shares
  Other comprehensive income 145 145
Dividends payable ($0.11 per share) (1,870) (1,870)
Stock-based compensation expense 53 53
Net income 2,705 2,705
Balance June 30, 2021 (3) 17,010,288 $ 59,496 $ 59,508 $ (638) $ 118,366
(3) Excludes 41,424 unvested restricted shares
  Other comprehensive loss (30) (30)
Dividends payable ($0.11 per share) (1,871) (1,871)
Stock-based compensation expense 53 53
Net income 2,611 2,611
Balance September 30, 2021 (4) 17,010,288 $ 59,549 $ 60,248 $ (668) $ 119,129
(4) Excludes 41,424 unvested restricted shares
  Other comprehensive loss (506) (506)
Dividends payable ($0.11 per share) (1,872) (1,872)
Restricted stock units released 17,951 —
Tax benefit from RSUs released (10) (10)
Director stock grant 44 44
Stock-based compensation expense 52 52
Net income 3,370 3,370
Balance December 31, 2021 (5) 17,028,239 $ 59,635 $ 61,746 $ (1,174) $ 120,207
(5) Excludes 27,949 unvested restricted shares
  Other comprehensive loss (7,300) (7,300)
Dividends payable ($0.11 per share) (1,874) (1,874)
Restricted stock units released 6,168 —
Tax benefit from RSUs released (1) (1)
Director stock grant 48 48
Stock-based compensation expense 53 53
Net income 2,443 2,443
Balance March 31, 2022 (6) 17,034,407 $ 59,735 $ 62,315 $ (8,474) $ 113,576
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

Table of Contents

(6) Excludes 26,949 unvested restricted shares
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 (7) 17,040,549 $ 59,835 $ 63,875 $ (13,709) $ 110,001
(7) Excludes 26,949 unvested restricted shares
Other comprehensive loss (5,601) (5,601)
Dividends payable ($0.11 per share) (1,877) (1,877)
Restricted stock units released 6,127 —
Director stock grant 44 44
Stock-based compensation expense 45 45
Net income 4,467 4,467
Balance September 30, 2022 (8) 17,046,676 $ 59,924 $ 66,465 $ (19,310) $ 107,079
(8) Excludes 29,449 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)


		Nine months ended September 30,					Six months ended June 30,
(In thousands)	(In thousands)	2022		2021		(In thousands)	2023		2022
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net Income	Net Income	$	10,345	$	6,727	Net Income	$	10,542	$	5,878
Adjustments to reconcile net income to cash provided by operating activities:	Adjustments to reconcile net income to cash provided by operating activities:					Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses	Provision for credit losses	1,217		1,654		Provision for credit losses	598		417
Depreciation and amortization	Depreciation and amortization	965		1,058		Depreciation and amortization	740		627
Amortization of operating lease right-of-use assets	Amortization of operating lease right-of-use assets	(459)		(115)		Amortization of operating lease right-of-use assets	331		304
Amortization of premium/discount on investment securities, net	Amortization of premium/discount on investment securities, net	500		729		Amortization of premium/discount on investment securities, net	208		348
Gain on sale of investment securities	Gain on sale of investment securities	(30)		—		Gain on sale of investment securities	—		(30)
Increase in accrued interest receivable		(936)		(82)
Increase (decrease) in accrued interest payable		19		(2)
Increase in accounts payable and accrued liabilities		192		559
Decrease (increase) in unearned fees and unamortized loan origination costs, net		579		(2,241)
Decrease (increase) in income taxes receivable		104		(173)
Unrealized loss on marketable equity securities		458		75
Decrease (increase) in accrued interest receivable						Decrease (increase) in accrued interest receivable	720		(735)
(Decrease) increase in accrued interest payable						(Decrease) increase in accrued interest payable	(5)		2
Increase (decrease) in accounts payable and accrued liabilities						Increase (decrease) in accounts payable and accrued liabilities	4,717		(33)
(Decrease) increase in unearned fees and unamortized loan origination costs, net						(Decrease) increase in unearned fees and unamortized loan origination costs, net	(336)		237
Increase in income taxes receivable						Increase in income taxes receivable	(355)		(6)
Loss on marketable equity securities						Loss on marketable equity securities	7		309
Stock-based compensation expense	Stock-based compensation expense	288		151		Stock-based compensation expense	316		201
Benefit (provision) for deferred income taxes		281		(110)
Loss on sale of other real estate owned		—		1
Benefit for deferred income taxes						Benefit for deferred income taxes	60		214

Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	(343)		(408)		Increase in cash surrender value of bank-owned life insurance	(303)		(253)
Loss on fair value option of junior subordinated debentures		2,469		691
(Gain) loss on fair value option of junior subordinated debentures						(Gain) loss on fair value option of junior subordinated debentures	(258)		1,869

Net (increase) decrease in other assets		(622)		367
Net decrease (increase) in other assets						Net decrease (increase) in other assets	672		(1,570)
Net cash provided by operating activities	Net cash provided by operating activities	15,027		8,881		Net cash provided by operating activities	17,654		7,749

Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:

Purchase of correspondent bank stock	Purchase of correspondent bank stock	(2,432)		(8)		Purchase of correspondent bank stock	(1,433)		(2,428)
Purchases of available-for-sale securities	Purchases of available-for-sale securities	(81,762)		(99,788)		Purchases of available-for-sale securities	—		(81,762)

Principal payments of available-for-sale securities	Principal payments of available-for-sale securities	6,726		19,363		Principal payments of available-for-sale securities	6,364		11,898
Cash proceeds from sale of investment securities		15,676		—
Cash proceeds from sale of available-for-sale securities						Cash proceeds from sale of available-for-sale securities	—		15,676

Net increase in loans		(91,700)		(153,558)
Cash proceeds from sales of other real estate owned		—		251

Investment in limited partnership		(311)		(248)
Net decrease (increase) in loans						Net decrease (increase) in loans	19,491		(78,731)

Purchase of bank-owned life insurance		—		(920)

Capital expenditures of premises and equipment	Capital expenditures of premises and equipment	(1,500)		(1,061)		Capital expenditures of premises and equipment	(310)		(746)
Net cash used in investing activities		(155,303)		(235,969)

Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	24,112		(136,093)
Cash Flows From Financing Activities:	Cash Flows From Financing Activities:					Cash Flows From Financing Activities:
Net increase in demand deposits and savings accounts		45,316		189,191
Net (decrease) increase in demand deposits and savings accounts						Net (decrease) increase in demand deposits and savings accounts	(131,307)		13,743
Net increase in time deposits	Net increase in time deposits	7,397		8,873		Net increase in time deposits	12,377		6,347

Proceeds from exercise of stock options						Proceeds from exercise of stock options	106		—
Net change in federal funds purchased						Net change in federal funds purchased	100,620		—
Dividends on common stock	Dividends on common stock	(5,624)		(5,617)		Dividends on common stock	(3,754)		(3,749)
Net cash provided by financing activities		47,089		192,447

Net decrease in cash and cash equivalents		(93,187)		(34,641)
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(21,958)		16,341
Net change in cash and cash equivalents						Net change in cash and cash equivalents	19,808		(111,973)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	219,219		294,069		Cash and cash equivalents at beginning of period	38,595		219,219
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	126,032	$	259,428	Cash and cash equivalents at end of period	$	58,403	$	107,246

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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

The consolidated financial statements include the accounts of United Security Bancshares ~~(Company~~(“Company” or ~~USB)~~“USB”) and its ~~wholly owned~~wholly-owned subsidiary, United Security Bank ~~(Bank)~~(“Bank”). Intercompany accounts and transactions have been eliminated in consolidation.

These unaudited financial statements have been prepared in accordance with accounting principles generally accepted 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 ~~2021~~2022 Annual Report on Form 10-K. These interim consolidated financial statements do not include all of the information and footnotes required by 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.

Impact of New Financial Accounting Standards:

In June 2016, ~~FASB~~the Financial Accounting Standards Board (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 original amendment was 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. In October 2019 FASB unanimously approved a vote~~January 1, 2023, are presented under ASC 326, while prior period amounts continue to ~~delay the effective date~~be reported in accordance with previously applicable GAAP. The adoption of this Standard to be effective for fiscal years beginning after December 15, 2022. The Company has formed a project team that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard ~~(current expected~~required a cumulative adjustment to the allowance for credit losses, ~~or CECL). An external provider specializing~~leading to an increase in ~~community bank~~the credit loss ~~driver~~balance of $6.4 million and ~~CECL reserving model design as well as other related consulting services has been~~an increase in the reserve for unfunded loan commitments of $273,000, resulting in a combined adjustment to retained ~~and the Company continues to evaluate potential CECL modeling alternatives. As part~~earnings of ~~this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated the key economic loss drivers for each segment.~~ $4.7 million, net of a $1.9 million tax adjustment.

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The Company has begun to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting. While the Company is currently unable to reasonably estimatefollowing table summarized the impact of ~~adopting this new guidance, management expects~~ the ~~impact~~adoption of ~~adoption~~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 amortized cost of a security exceeds its fair value. If it is determined that it will be ~~significantly influenced by~~necessary to sell a security before the ~~composition~~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 ~~quality~~any additional impairment would be recognized through earnings. If it is believed that the Company will not 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 that the ~~Company’s loan portfolio as well~~decline is due to a credit loss, the amount recognized as the ~~economic conditions as~~credit loss will be determined using a discounted cash flow approach. Cash flows expected to be collected would be discounted at the effective interest rate established at acquisition. If the present value of cash flows expected to be collected is less than the ~~date of adoption. The Company also anticipates significant changes to the processes~~amortized cost basis, a credit loss exists and ~~procedures for calculating the reserve~~an allowance for credit losses ~~and continues to evaluate~~would be recorded for the ~~potential impact on~~credit loss, limited by the ~~Company's consolidated financial statements.~~amount that the fair value is less than the amortized cost basis. Any impairment that has not been 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 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. ~~The~~This ASU iswas 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 and its effects on our consolidated financial statements. The Company anticipates ~~impacts~~a minimal impact to junior subordinated debt and floating rate loans tied to LIBOR.

In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. This ASU provides new guidance on the treatment of troubled debt restructurings in relation to the adoption of 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 ~~trouble~~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 beno longer report troubled debt restructurings or classify loans as such. TDRs previously recognized have been incorporated ~~along with~~into the ~~implementation~~CECL methodology as it applies to loan loss reserves as of ~~CECL and the Company is currently evaluating the impact this update will have on its consolidated financial statements.~~January 1, 2023.

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2.Investment Securities

Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


(in 000's)		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses					Fair Value (Carrying Amount)
September 30, 2022
											June 30, 2023
(In thousands)															(In thousands)			Amortized Cost					Gross Unrealized Gains					Gross Unrealized Losses					Fair Value (Carrying Amount)
Securities available-for-sale:	Securities available-for-sale:			Amortized Cost						Gross Unrealized Gains					Gross Unrealized Losses				Fair Value (Carrying Amount)		Securities available-for-sale:
U.S. Government agencies	U.S. Government agencies						U.S. Government agencies					$				7,023					$	5				$	(52)				$	6,976
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	U.S. Government sponsored entities & agencies collateralized by mortgage obligations						U.S. Government sponsored entities & agencies collateralized by mortgage obligations					105,633									7					(13,183)					92,457
U.S. Treasury securities	U.S. Treasury securities	29,994						—						(844)			29,150				U.S. Treasury securities				30,023					—					(506)	29,517
Municipal bonds	Municipal bonds	50,727					—				(11,025)				39,702	Municipal bonds				50,581					—					(9,027)					41,554
Corporate bonds	Corporate bonds	34,728			4			(2,297)					32,435		Corporate bonds			34,778					31					(3,100)					31,709
Total securities available for sale		$	238,126		$	18		$	(29,584)				$	208,560
Total securities available-for-sale															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)
December 31, 2021
Securities available-for-sale:
U.S. Government agencies $ 33,206 $ 260 $ (90) $ 33,376
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 64,880 184 (329) 64,735
U.S. Treasury securities 15,186 1 — 15,187
Asset-backed securities 4,092 38 — 4,130
Municipal bonds 50,872 86 (906) 50,052
Corporate bonds 11,000 429 (7) 11,422
Total securities available for sale $ 179,236 $ 998 $ (1,332) $ 178,902


	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, ~~2022,~~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 ~~pay downs.~~paydowns.


		September 30, 2022					June 30, 2023
		Amortized Cost		Fair Value (Carrying Amount)
(in 000's)
(In thousands)						(In thousands)	Amortized Cost		Fair Value (Carrying Amount)
Due in one year or less	Due in one year or less	$	9,975	$	9,971	Due in one year or less	$	30,123	$	29,616
Due after one year through five years	Due after one year through five years	39,245		36,924		Due after one year through five years	27,981		26,368
Due after five years through ten years	Due after five years through ten years	65,056		54,911		Due after five years through ten years	59,040		49,041
Due after ten years	Due after ten years	9,956		8,232		Due after ten years	5,261		4,730
Collateralized mortgage obligations	Collateralized mortgage obligations	113,894		98,522		Collateralized mortgage obligations	105,633		92,458
		$	238,126	$	208,560		$	228,038	$	202,213

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Proceeds and gross realized gains (losses) from sales of available-for-sale investment securities ~~for the periods ended September 30, 2022 and 2021~~ are shown below:


		Three Months Ended							Six Months Ended
~~Available-for-Sale Securities (in 000's)~~(In thousands)		~~Nine Months Ended September~~June 30, 2023			June 30, 2022				~~Nine Months Ended September~~June 30, ~~2021~~2023				June 30, 2022
Proceeds from sales or calls		~~15,676~~$	—		$	—			$	—			$	15,676
Gross realized gains from sales or calls		78$	—		$	—			$	—			$	78
Gross realized losses from sales or calls	~~(48)~~		$	—			$	—			$	—			$	(48)

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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 ~~other-than-temporary impairment~~ losses recorded due to credit-related factors for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022 and September~~2023 or June 30, ~~2021.~~2022.

At ~~September~~June 30, 2023, available-for-sale securities with an amortized cost of approximately $75.5 million and a fair value of $65.8 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances. At December 31, 2022, available-for-sale securities with an amortized cost of approximately ~~$80.4~~$78.8 million ~~(fair~~and a fair value of ~~$69.8 million)~~$69.0 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

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

(in 000's) Less than 12 Months 12 Months or More Total
September 30, 2022 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 $ — $ — $ 6,327 $ (44) $ 6,327 $ (44)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 71,123 (8,533) 27,093 (6,841) 98,216 (15,374)
Corporate bonds 29,600 (2,297) — — 29,600 (2,297)
Municipal bonds 7,986 (2,298) 31,716 (8,728) 39,702 (11,026)
U.S. Treasury securities 29,151 (843) — — 29,151 (843)
Total impaired securities $ 137,860 $ (13,971) $ 65,136 $ (15,613) $ 202,996 $ (29,584)
December 31, 2021
Securities available for sale:
U.S. Government agencies $ — $ — $ 9,699 $ (90) $ 9,699 $ (90)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 37,258 (329) 23 — 37,281 (329)
Corporate bonds 5,993 (7) — — 5,993 (7)
Municipal bonds 39,551 (896) 228 (10) 39,779 (906)
U.S. Treasury securities 7,416 — — — 7,416 —
Total impaired securities $ 90,218 $ (1,232) $ 9,950 $ (100) $ 100,168 $ (1,332)


	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)

Temporarily impaired securities at September 30, 2022, were comprised of forty-six municipal bonds, fifty-three U.S. government sponsored entities and agencies collateralized by mortgage obligations securities, nine corporate bonds, four U.S. government agency securities, and four U.S. treasury 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~~.

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-

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~~temporary decline exists involves~~The following summarizes the number of AFS debt securities in an unrealized loss position for which a ~~high degree of subjectivity and judgment and is based on the information available to the Company at the time of the evaluation.~~

Additionally, OTTI occurs when the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period 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 doeshas 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.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 it would be required to sell the ~~impairment is temporary~~security before the fair value increases to amortized cost and whether any unrealized losses are due to credit losses or ~~other-than-temporary.~~

noncredit factors such as current market rates, which would not require the establishment of an allowance for credit losses. At ~~September~~June 30, ~~2022,~~2023, the decline in fair value of the available-for-sale securities ~~available for sale~~ 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 intend to sell these ~~impaired~~ securities, and because it is 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 securities~~it necessary to ~~be other-than-temporarily impaired~~provide an allowance for any available-for-sale security at ~~September~~June 30, ~~2022.~~2023.

During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized ~~$458,000 and $75,000~~$7,000 of unrealized ~~holding~~ losses onand $309,000 of unrealized losses, respectively, related to marketable equity securities, related to one mutual fund, in the consolidated statements of income. During the quarters ended ~~September~~June 30, ~~2022~~2023 and ~~September 30, 2021,~~2022, the Company recognized ~~$149,000~~$50,000 and ~~$14,000~~$127,000 of unrealized ~~holding~~ losses ~~respectively,~~ related to the same mutual fund.

The Company had no held-to-maturity or trading securities at ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

3.Loans

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


(in 000's)		September 30, 2022		December 31, 2021
(In thousands)						(In thousands)	June 30, 2023		December 31, 2022
Commercial and industrial:	Commercial and industrial:					Commercial and industrial:
Commercial and business loans	Commercial and business loans	$	62,333	$	42,194	Commercial and business loans	$	52,800	$	57,770
Government program loans	Government program loans	88		3,310		Government program loans	127		132
Total commercial and industrial	Total commercial and industrial	62,421		45,504		Total commercial and industrial	52,927		57,902
Real estate mortgage:	Real estate mortgage:					Real estate mortgage:
Commercial real estate	Commercial real estate	382,607		331,050		Commercial real estate	403,216		398,115
Residential mortgages	Residential mortgages	250,091		226,926		Residential mortgages	265,858		273,357
Home improvement and home equity loans	Home improvement and home equity loans	52		80		Home improvement and home equity loans	43		49
Total real estate mortgage	Total real estate mortgage	632,750		558,056		Total real estate mortgage	669,117		671,521
Real estate construction and development	Real estate construction and development	161,571		154,270		Real estate construction and development	135,300		153,374
Agricultural	Agricultural	57,296		60,239		Agricultural	57,666		52,722
Installment and student loans	Installment and student loans	46,511		51,245		Installment and student loans	45,111		44,659
Total loans	Total loans	$	960,549	$	869,314	Total loans	$	960,121	$	980,178

The ~~Company's directly originated~~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 purchases residential mortgage loans and participates in~~The Company’s participation loans with other financial institutions ~~they~~ are primarily in the state of California.

1213

Table of Contents

Commercial and industrial loans, ~~represent 6.5%~~representing 5.5% of total loans at ~~September~~June 30, 2023 and 5.9% at December 31, 2022, ~~and~~ 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. ~~Included within the balance of Commercial and industrial loans is $14,000 in Paycheck Protection Program ("PPP") loans administrated by the SBA. PPP loans have a~~ ~~two~~ or five year term and earn interest at 1%. In addition to interest, the Company receives a processing fee ranging from 3%-5% of the loan balance for each PPP loan. The fees are recognized as income over the contractual life of the loan. The Company believes that the nearly all of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

Real estate mortgage loans, representing ~~65.9%~~69.7% of total loans at ~~September~~June 30, 2023 and 68.5% at December 31, 2022, are typically secured by either trust deeds on ~~primarily~~ commercial property or ~~by trust deeds on~~ single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the 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~~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. ~~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.

•Home ~~Improvement~~improvement and ~~Home Equity~~home equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.

Real estate construction and development loans, representing ~~16.8%~~14.1% of total loans at ~~September~~June 30, 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 or from the sale of the constructed homes to individuals.

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

Installment loans, ~~including student loans, represent 4.8%~~which represented 4.7% of total loans at ~~September~~June 30, 2023 and 4.6% at December 31, 2022, ~~and~~ generally consist of student ~~loans,~~loans; loans to individuals for household, family and other personal ~~expenditures, automobiles~~expenditures; automobiles; or other consumer items. See ~~"Note~~Note 4 - Student ~~Loans"~~Loans for specific information on the student 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, ~~2022~~2023 and December 31, ~~2021,~~2022, these financial instruments include commitments to extend credit of ~~$164.0~~$224.4 million and ~~$239.1~~$190.2 million, respectively, and standby letters of credit of ~~$1.7~~$1.2 million ~~at both~~and $1.6 million for the same period ~~ends.~~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. 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

~~Table of Contents~~

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, ~~2022 (in 000's):~~2023:


September 30, 2022		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
(In thousands)																(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	Commercial and business loans	$	—	$	—	$	—	$	—	$	62,333	$	62,333	$	—	Commercial and business loans	$	—	$	—	$	—	$	—	$	52,800	$	52,800	$	—
Government program loans	Government program loans	—		—		—		—		88		88		—		Government program loans	—		—		—		—		127		127		—
Total commercial and industrial	Total commercial and industrial	—		—		—		—		62,421		62,421		—		Total commercial and industrial	—		—		—		—		52,927		52,927		—

Commercial real estate loans	Commercial real estate loans	—		—		—		—		382,607		382,607		—		Commercial real estate loans	—		—		—		—		403,216		403,216		—
Residential mortgages	Residential mortgages	—		—		—		—		250,091		250,091		—		Residential mortgages	573		—		—		573		265,285		265,858		—
Home improvement and home equity loans	Home improvement and home equity loans	9		—		—		9		43		52		—		Home improvement and home equity loans	6		—		—		6		37		43		—
Total real estate mortgage	Total real estate mortgage	9		—		—		9		632,741		632,750		—		Total real estate mortgage	579		—		—		579		668,538		669,117		—

Real estate construction and development loans	Real estate construction and development loans	—		—		9,021		9,021		152,550		161,571		—		Real estate construction and development loans	—		—		11,390		11,390		123,910		135,300		—
Agricultural loans	Agricultural loans	—		—		130		130		57,166		57,296		—		Agricultural loans	—		—		73		73		57,593		57,666		—

Installment and student loans	Installment and student loans	585		56		—		641		45,870		46,511		—		Installment and student loans	984		215		171		1,370		43,530		44,900		171

Overdraft protection lines																Overdraft protection lines	—		—		—		—		12		12		—
Overdrafts																Overdrafts	—		—		—		—		199		199		—
Total installment and student loans																Total installment and student loans	984		215		171		1,370		43,741		45,111		171
Total loans	Total loans	$	594	$	56	$	9,151	$	9,801	$	950,748	$	960,549	$	—	Total loans	$	1,563	$	215	$	11,634	$	13,412	$	946,709	$	960,121	$	171

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The following is a summary of the amortized cost of delinquent loans at December 31, ~~2021 (in 000's):~~2022:


December 31, 2021		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
(In thousands)																(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	Commercial and business loans	$	—	$	—	$	—	$	—	$	42,194	$	42,194	$	—	Commercial and business loans	$	—	$	—	$	—	$	—	$	57,770	$	57,770	$	—
Government program loans	Government program loans	—		—		—		—		3,310		3,310		—		Government program loans	—		—		—		—		132		132		—
Total commercial and industrial	Total commercial and industrial	—		—		—		—		45,504		45,504		—		Total commercial and industrial	—		—		—		—		57,902		57,902		—

Commercial real estate loans	Commercial real estate loans	—		—		—		—		331,050		331,050		—		Commercial real estate loans	—		—		—		—		398,115		398,115		—
Residential mortgages	Residential mortgages	6,745		—		—		6,745		220,181		226,926		—		Residential mortgages	—		—		—		—		273,357		273,357		—
Home improvement and home equity loans	Home improvement and home equity loans	12		—		—		12		68		80		—		Home improvement and home equity loans	8		—		—		8		41		49		—
Total real estate mortgage	Total real estate mortgage	6,757		—		—		6,757		551,299		558,056		—		Total real estate mortgage	8		—		—		8		671,513		671,521		—

Real estate construction and development loans	Real estate construction and development loans	—		—		9,021		9,021		145,249		154,270		—		Real estate construction and development loans	—		—		12,545		12,545		140,829		153,374		—
Agricultural loans	Agricultural loans	—		—		209		209		60,030		60,239		—		Agricultural loans	—		—		108		108		52,614		52,722		—

Installment and student loans	Installment and student loans	1,628		328		453		2,409		48,836		51,245		453		Installment and student loans	546		642		252		1,440		42,714		44,154		252
Overdraft protection lines																Overdraft protection lines	—		—		—		—		17		17		—
Overdrafts																Overdrafts	—		—		—		—		488		488		—
Total installment and student loans																Total installment and student loans	546		642		252		1,440		43,219		44,659		252

Total loans	Total loans	$	8,385	$	328	$	9,683	$	18,396	$	850,918	$	869,314	$	453	Total loans	$	554	$	642	$	12,905	$	14,101	$	966,077	$	980,178	$	252

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~~90 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.

All loans, outside of student 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. See Note 4 - Student Loans for specific information on the student loan portfolio.

~~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~~nonaccrual 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. 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.

There were no remaining undisbursed commitments to extend credit on nonaccrual loans at ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~

~~Table of Contents~~

2022.

~~The following is a summary of nonaccrual loan balances at September 30, 2022 and December 31, 2021 (in 000's).~~

September 30, 2022 December 31, 2021
Real estate construction and development loans 11,015 11,226
Agricultural loans 130 212
Total nonaccrual loans $ 11,145 $ 11,438

~~Impaired Loans~~

~~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 amounts due according to the contractual terms of the loan agreement.

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.

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 loans utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.

Table of Contents

The following ~~is a summary~~table presents the amortized cost basis of ~~impaired~~ loans ~~at September 30, 2022 (in 000's).~~

September 30, 2022 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 $ — $ — $ — $ — $ — $ — $ —
Government program loans — — — — — — —
Total commercial and industrial — — — — — — —
Commercial real estate loans — — — — — — —
Residential mortgages 142 — 142 142 3 144 5
Home improvement and home equity loans — — — — — — —
Total real estate mortgage 142 — 142 142 3 144 5
Real estate construction and development loans 11,015 11,015 — 11,015 — 11,114 165
Agricultural loans 670 542 130 672 67 665 25
Installment and student loans — — — — — — —
Total impaired loans $ 11,827 $ 11,557 $ 272 $ 11,829 $ 70 $ 11,923 $ 195
on nonaccrual status and loans past due over 89 days and still accruing:

~~(1) The recorded investment in loans includes accrued interest receivable of $2.~~

~~(2) Information is based on nine months ended September 30, 2022.~~

~~Table of Contents~~

~~The following is a summary of impaired loans at December 31, 2021 (in 000's).~~

December 31, 2021 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 $ — $ — $ — $ — $ — $ 156 $ —
Government program loans — — — — — 110 —
Total commercial and industrial — — — — — 266 —
Commercial real estate loans — — — — — 538 —
Residential mortgages 146 — 146 146 3 377 6
Total real estate mortgage 146 — 146 146 3 915 6
Real estate construction and development loans 11,226 11,226 — 11,226 — 11,133 272
Agricultural loans 660 453 209 662 127 499 41
Total impaired loans $ 12,032 $ 11,679 $ 355 $ 12,034 $ 130 $ 12,813 $ 319

~~(1) The recorded investment in loans includes accrued interest receivable of $2.~~

~~(2) Information is based on the year ended December 31, 2021.~~

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, 2022 and 2021 was $11,857,000 and $11,792,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2022 and 2021 was approximately $52,000 and $59,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $44,000 and $67,000 for the quarters ended September 30, 2022 and 2021, respectively.

The average recorded investment in impaired loans for the nine months ended September 30, 2022 and 2021 was $11,923,000 and $13,007,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2022 and 2021 was approximately $195,000 and $231,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $173,000 and $223,000 for the nine months ended September 30, 2022 and 2021, 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:~~

~~Table of Contents~~

~~- 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 and continued satisfactory performance is expected. To this end, the Company typically 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, a conforming loan is renewed at market terms, or its outstanding balance is paid off.

~~There were no TDR additions or defaults for the quarters or nine month per ended September 30, 2022 and September 30, 2021.~~

The Company makes various types of concessions when structuring TDRs including rate discounts, payment extensions, and other-than-temporary forbearance. At September 30, 2022, the Company had 4 restructured loans totaling $2.3 million as compared to 5 restructured loans totaling $2.6 million at December 31, 2021.

~~The following tables summarize TDR activity by loan category for the quarters ended September 30, 2022 and September 30, 2021 (in 000's).~~

~~Table of Contents~~

Three Months Ended
September 30, 2022 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
and Student Loans Total
Beginning balance $ — $ — $ 143 $ — $ 2,047 $ 161 $ — $ 2,351
Additions — — — — — — — —
Principal reductions — — (1) — (53) (31) — (85)
Charge-offs — — — — — — — —
Ending balance $ — $ — $ 142 $ — $ 1,994 $ 130 $ — $ 2,266
Allowance for loan loss $ — $ — $ 3 $ — $ — $ 67 $ — $ 70
Defaults $ — $ — $ — $ — $ — $ — $ — $ —

Three Months Ended
September 30, 2021 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
and Student Loans Total
Beginning balance $ — $ — $ 359 $ — $ 2,335 $ 379 $ — $ 3,073
Additions — — — — — — — —
Principal reductions — — (212) — (50) (49) — (311)
Charge-offs — — — — — — — —
Ending balance $ — $ — $ 147 $ — $ 2,285 $ 330 $ — $ 2,762
Allowance for loan loss $ — $ — $ 4 $ — $ — $ 144 $ — $ 148
Defaults $ — $ — $ — $ — $ — $ — $ — $ —

Nine Months Ended
September 30, 2022 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
and Student Loans Total
Beginning balance $ — $ — $ 146 $ — $ 2,206 $ 242 $ — $ 2,594
Additions — — — — — — — —
Principal reductions — — (4) — (212) (112) — (328)
Charge-offs — — — — — — — —
Ending balance $ — $ — $ 142 $ — $ 1,994 $ 130 $ — $ 2,266
Allowance for loan loss $ — $ — $ 3 $ — $ — $ 67 $ — $ 70
Defaults $ — $ — $ — $ — $ — $ — $ — $ —

~~Table of Contents~~

Nine Months Ended
September 30, 2021 Commercial and Industrial Commercial Real Estate Residential Mortgages Home Improvement and Home Equity Real Estate Construction Development Agricultural Installment
and Student Loans Total
Beginning balance $ — $ — $ 365 $ — $ 2,452 $ 609 $ — $ 3,426
Additions — — — — — — — —
Principal reductions — — (218) — (167) (279) — (664)
Charge-offs — — — — — — — —
Ending balance $ — $ — $ 147 $ — $ 2,285 $ 330 $ — $ 2,762
Allowance for loan loss $ — $ — $ 4 $ — $ — $ 144 $ — $ 148
Defaults $ — $ — $ — $ — $ — $ — $ — $ —


	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

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 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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~~- Industry risk~~

~~- Cash flow risk~~

- 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 borrower rating and the facility ratings differ, the lowest rating is applied.~~ The Company uses the following risk rating grades:

Pass Ratings:

- 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 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 ~~with~~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”~~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~~Although, 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~~asset borrowers who fully comply with all underwriting standards and are performing according to projections ~~would be~~are assigned this rating. These also include grade 5 loans which are ~~“leveraged”~~leveraged or on management’s ~~“watch~~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~~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 ~~of 5~~ 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 ~~“special mention” loans which are~~ loans that are currently protected but ~~are~~ potentially weak. This is generally is an interim ~~grade~~ classification and these loans will ~~usually~~typically be upgraded to an ~~"acceptable"~~acceptable rating or downgraded to a ~~"substandard"~~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. ~~The main theme in special mention credits is the~~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”~~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. When a loan has been downgraded to ~~"substandard,"~~substandard, there exists a distinct possibility that the Company will sustain a loss if the deficiencies are not corrected. ~~Substandard loans may also include impaired loans.~~

Doubtful Ratings:

- Grade 8 – This grade includes ~~“doubtful”~~doubtful loans ~~which~~that exhibit the same characteristics as ~~the "substandard"~~substandard loans. ~~Additionally, loan~~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, ~~because of certain important and reasonably specific~~due to pending factors which may work totoward 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.

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- Grade 9 – This grade includes loans classified ~~“loss”~~as loss which are considered uncollectible and of such little value that their continuance as ~~bankable assets~~bankable-assets is not warranted. This classification does not mean that the asset has ~~absolutely~~ 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 Company did not carry any loans graded as loss at September 30, 2022 or December 31, 2021.~~

The following ~~tables summarize the credit risk ratings for commercial, construction, and other non-consumer related~~table presents loans ~~for September 30, 2022 and December 31, 2021:~~

September 30, 2022 Commercial and Industrial Commercial Real Estate Real Estate Construction and Development Agricultural Total
(in 000's)
Grades 1 and 2 $ 233 $ — $ — $ — $ 233
Grade 3 — — — — —
Grades 4 and 5 – pass 62,188 347,817 150,556 55,609 616,170
Grade 6 – special mention — 34,790 — 1,017 35,807
Grade 7 – substandard — — 11,015 670 11,685
Grade 8 – doubtful — — — — —
Total $ 62,421 $ 382,607 $ 161,571 $ 57,296 $ 663,895

December 31, 2021 Commercial and Industrial Commercial Real Estate Real Estate Construction and Development Agricultural Total
(in 000's)
Grades 1 and 2 $ 3,447 $ — $ — $ — $ 3,447
Grade 3 — 92 — — 92
Grades 4 and 5 – pass 42,054 301,866 143,044 46,739 533,703
Grade 6 – special mention — 29,092 — 11,197 40,289
Grade 7 – substandard 3 — 11,226 2,303 13,532
Grade 8 – doubtful — — — — —
Total $ 45,504 $ 331,050 $ 154,270 $ 60,239 $ 591,063

~~The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a~~by class, net of deferred fees, by 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. Within the student loan portfolio, the Company does not grade these loans individually, but monitors credit quality indicators suchperiod indicated as ~~delinquency and program defined status codes such as forbearance.~~of June 30, 2023:

~~The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for September 30, 2022 and December 31, 2021:~~

September 30, 2022 December 31, 2021
Residential Mortgages Home
Improvement and Home Equity Installment and Student Loans Total Residential Mortgages Home
Improvement and Home Equity Installment and Student Loans Total
(in 000's)
Not graded $ 233,955 $ 43 $ 46,387 $ 280,385 $ 211,622 $ 68 $ 50,421 $ 262,111
Pass 16,136 9 124 16,269 15,304 12 371 15,687
Special mention — — — — — — — —
Substandard — — — — — — 453 453
Doubtful — — — — — — — —
Total $ 250,091 $ 52 $ 46,511 $ 296,654 $ 226,926 $ 80 $ 51,245 $ 278,251


	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

2319

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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

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.

Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level.

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 in certain crops or certain agricultural areas can increase risk.~~crop concentration. Additionally, ~~from time to time,~~ California ~~experiences~~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 ~~the~~this loan portfolio are ~~also~~closely monitored in an effort to manage credit quality and promote early efforts to work with borrowers ~~where possible~~in order to mitigate any potential losses.

Installment, ~~and student loans~~ ~~(Includes consumer loans, student 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.

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~~COVID-19~~ – The Company has engaged in more frequent communication with borrowers to better understand their situation and the challenges faced as a result of COVID-19 and its variants. Outside of the student loan portfolio, the Company has not experienced any direct charge-offs related to COVID-19. The allowance for credit loss calculation, and the resulting provision for credit losses, are impacted by changes in economic conditions. Although economic conditions have improved since the pandemic was declared in March 2020, the credit risk in the loan portfolio remains heightened.

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 ~~the three months ended September 30, 2022 and 2021 (in 000's)~~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

2421

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Three Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Unallocated Total
September 30, 2022
Beginning balance $ 836 $ 1,298 $ 3,528 $ 1,120 $ 2,634 $ 491 $ 9,907
Provision (recapture of provision) for credit losses 111 23 81 (554) 413 533 607
Charge-offs — — — — (464) — (464)
Recoveries 1 4 — — 8 — 13
Net recoveries (charge-offs) 1 4 — — (456) — (451)
Ending balance $ 948 $ 1,325 $ 3,609 $ 566 $ 2,591 $ 1,024 $ 10,063
Period-end amount allocated to:
Loans individually evaluated for impairment — 3 — 67 — — 70
Loans collectively evaluated for impairment 948 1,322 3,609 499 2,591 1,024 9,993
Ending balance $ 948 $ 1,325 $ 3,609 $ 566 $ 2,591 $ 1,024 $ 10,063
Collateral-Dependent Loans

Three Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Unallocated Total
September 30, 2021
Beginning balance $ 632 $ 1,087 $ 3,213 $ 1,106 $ 2,789 $ 373 $ 9,200
Provision (recapture of provision) for credit losses 5 (20) (83) 314 402 (165) 453
Charge-offs — — — — (533) — (533)
Recoveries 2 4 — — 18 — 24
Net recoveries (charge-offs) 2 4 — — (515) — (509)
Ending balance $ 639 $ 1,071 $ 3,130 $ 1,420 $ 2,676 $ 208 $ 9,144
Period-end amount allocated to:
Loans individually evaluated for impairment — 4 — 144 — — 148
Loans collectively evaluated for impairment 639 1,067 3,130 1,276 2,676 208 8,996
Ending balance $ 639 $ 1,071 $ 3,130 $ 1,420 $ 2,676 $ 208 $ 9,144

Nine Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Unallocated Total
September 30, 2022
Beginning balance $ 597 $ 1,174 $ 2,840 $ 1,233 $ 2,720 $ 769 $ 9,333
Provision (recapture of provision) for credit losses 82 141 769 (703) 674 255 1,218
Charge-offs — — — — (828) — (828)
Recoveries 269 10 — 36 25 — 340
Net recoveries (charge-offs) 269 10 — 36 (803) — (488)
Ending balance $ 948 $ 1,325 $ 3,609 $ 566 $ 2,591 $ 1,024 $ 10,063
Period-end amount allocated to:
Loans individually evaluated for impairment — 3 — 67 — — 70
Loans collectively evaluated for impairment 948 1,322 3,609 499 2,591 1,024 9,993
Ending balance $ 948 $ 1,325 $ 3,609 $ 566 $ 2,591 $ 1,024 $ 10,063

~~Table~~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 ~~Contents~~

Nine Months Ended Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment and Student Loans Unallocated Total
September 30, 2021
Beginning balance $ 625 $ 575 $ 3,722 $ 711 $ 2,614 $ 275 $ 8,522
Provision (recapture of provision) for credit losses (27) 481 (592) 709 1,150 (67) 1,654
Charge-offs — — — — (1,199) — (1,199)
Recoveries 41 15 — — 111 — 167
Net (charge-offs) recoveries 41 15 — — (1,088) — (1,032)
Ending balance $ 639 $ 1,071 $ 3,130 $ 1,420 $ 2,676 $ 208 $ 9,144
Period-end amount allocated to:
Loans individually evaluated for impairment — 4 — 144 — — 148
Loans collectively evaluated for impairment 639 1,067 3,130 1,276 2,676 208 8,996
Ending balance $ 639 $ 1,071 $ 3,130 $ 1,420 $ 2,676 $ 208 $ 9,144
the collateral.

The following ~~summarizes information~~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 ~~respect~~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 ~~balances at September~~commitments, increasing the liability balance to $805,000, post adoption. There was a $135,000 provision for unfunded loan commitments for the quarter ended June 30, ~~2022~~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 ~~2021.~~is included in other liabilities.

September 30, 2022 September 30, 2021
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 $ — $ 62,333 $ 62,333 $ — $ 44,713 $ 44,713
Government program loans — 88 88 — 6,422 6,422
Total commercial and industrial — 62,421 62,421 — 51,135 51,135
Commercial real estate loans — 382,607 382,607 — 309,727 309,727
Residential mortgage loans 142 249,949 250,091 148 171,972 172,120
Home improvement and home equity loans — 52 52 — 83 83
Total real estate mortgage 142 632,608 632,750 148 481,782 481,930
Real estate construction and development loans 11,015 150,556 161,571 11,273 154,097 165,370
Agricultural loans 672 56,624 57,296 330 55,761 56,091
Installment and student loans — 46,511 46,511 — 53,411 53,411
Total loans $ 11,829 $ 948,720 $ 960,549 $ 11,751 $ 796,186 $ 807,937

Loan Modifications

Occasionally, the 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. There were no loan modifications for the quarter or year ended June 30, 2023.

4.Student Loans

Included in the installment ~~and student loans segment of the~~ loan portfolio are ~~$43.7~~$41.0 million and ~~$48.5~~$42.1 million in student loans at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, made to medical and pharmacy school students. Upon graduation the loan is automatically placed onin a grace ~~for 6~~period of six months. ~~Deferment~~This may be ~~granted~~extended up to 48 months for graduates enrolling in ~~Internship, Medical Residency~~internship, medical residency or ~~Fellowship~~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. ~~Accrued interest on~~No new student loans ~~that are in school~~were originated or ~~grace totaled $1,967,000 at September~~purchased during the periods ended June 30, ~~2022~~2023 and ~~$2,338,000 at December 31, 2021. At September~~June 30, 2022 there were 857 loans within repayment, deferment, and forbearance which represented $18.9 million, $10.5 million, and $9.2 million, respectively. At December 31, 2021, there were 901 loans within repayment, deferment, and forbearance which represented $23.8 million, $9.0 million and $8.2 million, respectively. 2022.

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the reserve against the student loan portfolio was ~~$2,561,000~~$5.3 million and ~~$2,647,000,~~$2.6 million, respectively. ~~There were no TDRs within the portfolio as of September~~At June 30, ~~2022 or December 31, 2021. At September 30,~~

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~~2022,~~2023, there were no$171,000 in student loans in the substandard category. At December 31, ~~2021,~~2022, there were ~~$453,000~~$252,000 in student loans included in the substandard category. ~~There were no student loans in the doubtful or loss categories at September 30, 2022 and December 31, 2021. There were no new student loans originated in 2021 and 2022.~~

ZuntaFi is the third-party servicer for the student loan portfolio. ZuntaFi's services include application administration, processing, approval, documenting, funding, and collection. They also provide borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi provides complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance. The servicing fee is presented as part

Table of ~~professional fees within noninterest expense.~~Contents

The following tables summarize the credit quality indicators for outstanding student ~~loans as of September 30, 2022 and December 31, 2021 (in 000's, except for number of borrowers):~~loans:


		September 30, 2022					December 31, 2021						June 30, 2023					December 31, 2022
		Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
(Dollars in thousands)												(Dollars in thousands)	Number of Loans	Principal Amount		Accrued Interest		Number of Loans	Principal Amount		Accrued Interest
School	School	82	$	2,370	$	1,015	185	$	6,555	$	2,021	School	63	$	1,719	$	914	70	$	2,056	$	908
Grace	Grace	75	2,781		952		28	912		317		Grace	15	459		205		27	667		348
Repayment	Repayment	414	18,888		418		500	23,834		715		Repayment	452	21,373		250		516	23,414		857
Deferment	Deferment	253	10,498		1,444		224	8,984		508		Deferment	196	8,471		1,536		268	10,974		1,732
Forbearance	Forbearance	190	9,161		833		177	8,172		1,077		Forbearance	185	8,943		593		91	5,019		237
Total	Total	1,014	$	43,698	$	4,662	1,114	$	48,457	$	4,638	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.~~half-time. No payments are expected during this stage, though the borrower may ~~begin immediate payments.~~make payments during this time.

Grace - A ~~six month~~six-month period of time granted ~~to the borrower immediately~~ upon graduation, or ~~if deemed no longer an active student. Interest~~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 is transferred to repayment status. ~~Additionally, if applicable, this~~This status may also represent aan in-school borrower activated to military ~~duty while in their in-school period, they will be allowed to return to that status once their active duty has expired.~~duty. The borrower must return to an at least ~~half time~~half-time status within six months of ~~the active duty~~their active-duty end date in order to return to an 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 ~~(1)~~either actively enrolled in an eligible school at least ~~half time,~~half-time or ~~(2) are~~ 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 ~~which may be granted for~~due to either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized ~~forbearance.~~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 covered by the forbearance and all accrued and unpaid interest from the date of delinquency or if none, from the date of beginning of the forbearance period, will be capitalized at the end of each forbearance period. The term of the loancapitalized. Loan terms will not change as a result of forbearance and ~~payments~~payment amounts may be increased to allow the loan to pay off in the required time frame. A forbearance that results in ~~only~~ 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 ~~this designation~~and is considered standard industry practice, ~~and is~~ consistent with the succession of students migrating from school to ~~employed medical professionals.~~career. However, additional risk is associated with this designation. In addition to forbearance granted for hardship or administrative reasons, the Company provided up to 18 months of additional disaster forbearance to those borrowers impacted by Hurricane Maria in 2017 and additional forbearance related to COVID-19.

Due to the COVID-19 pandemic, certain Federally guaranteed student loans are provided forbearance in the form of 0% interest and no payments from March 2020 through December 31, 2022. While loans serviced by ZuntaFi are not Federally guaranteed, ZuntaFi in keeping with the spirit of the Federal programs, offers a similar pandemic forbearance. Some student loans are granted additional non-program, no-pay forbearance during this same time frame, up to 90 days for each occurrence when requested, through December 31, 2022. Each request must be justified with the borrower, stating the financial hardship, that it was induced by the pandemic, and the borrower must also reaffirm the debt as part of the documentation for each forbearance

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period. The loans continue to accrue interest at the note rate under the program requirements. At this time, the expectation is the Pandemic Forbearance will no longer be offered as of December 31, 2022, at which time loans will resume under Repayment status, or be placed in other appropriate status, including program Forbearance or Deferment as qualified and as available.

Student Loan Aging

Student loans are generally charged off at the end of the quarter during which anthe account becomes 120 days contractually past due. Accrued but unpaid interest related to ~~charged off~~charged-off student loans is reversed and charged against interest income. For the ~~nine~~six months ended ~~September~~June 30, ~~2022, $100,000~~2023, $111,000 in accrued interest receivable was reversed, due to charge-offs of ~~$810,000 within the student loan portfolio.~~$985,000. For the ~~quarter~~six months ended ~~September~~June 30, 2022, ~~$86,000~~$14,000 in accrued interest receivable was reversed, due to charge-offs of ~~$457,000.~~$353,000. For the ~~three and nine months period~~quarter ended ~~September~~June 30, ~~2021, $54,000 and $97,000~~2023, $83,000 in accrued interest receivable was reversed, due to charge-offs of ~~$530,000 and $1,183,000 within~~$515,000. There were no charge-offs or reversal of accrued interest during the ~~student loan portfolio.~~quarter ended June 30, 2022.

The following ~~tables~~table summarize the amortized cost of student loan aging for loans in repayment and ~~forbearance as~~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

Table of ~~September 30, 2022 and December 31, 2021 (in 000's, except for number of borrowers):~~Contents

September 30, 2022 December 31, 2021
Number of Borrowers Amount Number of Borrowers Amount
Current or less than 31 days 247 $ 27,409 272 $ 29,596
31 - 60 days 5 585 10 1,628
61 - 90 days 1 56 3 328
91 - 120 days — — 5 453
Total 253 $ 28,050 290 $ 32,005

5.Deposits

Deposits include the following:


(in 000's)		September 30, 2022		December 31, 2021
(In thousands)						(In thousands)	June 30, 2023		December 31, 2022
Noninterest-bearing deposits	Noninterest-bearing deposits	$	517,230	$	476,749	Noninterest-bearing deposits	$	476,387	$	481,629
Interest-bearing deposits:	Interest-bearing deposits:					Interest-bearing deposits:
NOW and money market accounts	NOW and money market accounts	517,820		529,841		NOW and money market accounts	385,667		499,861
Savings accounts	Savings accounts	130,786		113,930		Savings accounts	114,075		125,946
Time deposits:	Time deposits:					Time deposits:
Under $250,000	Under $250,000	53,492		46,631		Under $250,000	51,145		42,933
$250,000 and over	$250,000 and over	21,490		20,955		$250,000 and over	19,280		15,115
Total interest-bearing deposits	Total interest-bearing deposits	723,588		711,357		Total interest-bearing deposits	570,167		683,855
Total deposits	Total deposits	$	1,240,818	$	1,188,106	Total deposits	$	1,046,554	$	1,165,484

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, ~~2022,~~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 $419.3~~$4.3 million ~~as well as~~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~~ $2.2 ~~million. At September 30, 2022, the Company had uncollateralized lines of credit with PNC Bank of $40~~ million with Pacific Coast Bankers Bank (PCBB) totaling $50 million, $20 million with Zions First National Bank and $10 million with Union Bank. All uncollateralized 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 in ~~the FHLB,~~available-for-sale investment securities and ~~certain qualifying mortgage loans.~~

~~As of September 30, 2022, $2.4 million in investment securities~~pledged collateral at FHLB were pledged as collateral for FHLB advances. Additionally, $571.1 million in secured and unsecured loans were pledged at September 30, 2022, as collateral for borrowing lines with the Federal Reserve Bank. At September 30, 2022, the Company had no outstanding borrowings.

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~~At December 31, 2021, the Company had collateralized lines of credit with~~ the Federal Reserve Bank consisted of ~~San Francisco totaling $320.6~~$590.4 million as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling $3.1 million. At December 31, 2021, the Company had uncollateralized lines of credit with PNC of $40 million, with Pacific Coast Bankers Bank ("PCBB") totaling $50 million, $20 million with Zions First National Bank, and $10 million with Union Bank. All uncollateralized lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit generally have interest rates 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 in ~~the FHLB, investment securities, and certain qualifying mortgage loans.~~loan balances.

As of December 31, 2021, $3.4 million in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $490.5 million in secured and unsecured loans were pledged at December 31, 2021, as collateral for used and unused borrowing lines with the Federal Reserve Bank. At December 31, 2021, the Company had no outstanding borrowings.

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7.Leases

The Company leases land and premises for its branch ~~banking offices,~~banking-offices, administration ~~facilities,~~facility, and ~~ATMs.~~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 ~~for changes reported in~~to certain economic indices or ~~as reflected by~~ market conditions. Lease terms may also include options ~~to extend or terminate the lease when it is reasonably certain~~for termination. As of June 30, 2023, the Company ~~will exercise that option. As of September~~had 14 operating leases and no financing leases. At June 30, 2022, the Company had 13 operating leases and no financing leases.

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The components of lease expense ~~were~~are as follows:


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
(in 000's)		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
(In thousands)										(In thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

Operating lease expense	Operating lease expense	$	185	$	184	$	553	$	520	Operating lease expense	$	178	$	184	$	356	$	368
Variable lease expense	Variable lease expense	$	—	$	95	$	—	$	251	Variable lease expense	—		—		—		—

Total	Total	$	185	$	279	$	553	$	771	Total	$	178	$	184	$	356	$	368

Supplemental ~~balance sheet~~ information related to leases ~~was~~are as follows:


~~(in 000's)~~	~~September 30, 2022~~




~~Operating cash flows from operating leases~~	$	~~553~~



~~Weighted-average remaining lease term in years for operating leases~~	~~4.59~~

~~Weighted-average discount rate for operating leases~~	~~5.12~~		%


	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 lease liabilities ~~were~~are as follows:


(in 000's)		September 30, 2022
(In thousands)				(In thousands)	June 30, 2023
2023	2023	$	742	2023	$	698
2024	2024	640		2024	486
2025	2025	450		2025	268
2026	2026	218		2026	132
2027	2027	122		2027	110
Thereafter	Thereafter	348		Thereafter	264
Total undiscounted cash flows	Total undiscounted cash flows	2,520		Total undiscounted cash flows	1,958
Less: present value discount	Less: present value discount	(275)		Less: present value discount	(199)
Present value of net future minimum lease payments	Present value of net future minimum lease payments	$	2,245	Present value of net future minimum lease payments	$	1,759

8.Supplemental Cash Flow Disclosures


		Nine months ended September 30,					Six Months Ended
(in 000's)		2022		2021
(In thousands)						(In thousands)	June 30, 2023		June 30, 2022
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	1,907	$	1,529	Interest	$	4,201	$	1,135
Income taxes	Income taxes	4,825		3,030		Income taxes	—		2,920
Noncash investing activities:	Noncash investing activities:					Noncash investing activities:

Unrealized gain on unrecognized post retirement costs, net of tax		47		52
Unrealized loss on available for sale securities, net of tax		(20,591)		(216)
Unrealized gain on junior subordinated debentures, net of tax		2,408		223
Impact of ASC 326 CECL adoption						Impact of ASC 326 CECL adoption	6,367		—
Unrealized gain on unrecognized post retirement costs						Unrealized gain on unrecognized post retirement costs	43		44
Unrealized gain (loss) on available for sale securities						Unrealized gain (loss) on available for sale securities	1,239		(20,433)
Unrealized (loss) gain on junior subordinated debentures						Unrealized (loss) gain on junior subordinated debentures	(53)		2,594

Cash dividend declared	Cash dividend declared	1,874		1,871		Cash dividend declared	2,055		1,874

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9.Dividends on Common Stock

On ~~September~~June 27, ~~2022,~~2023, the Company’s Board of Directors declared a cash dividend of ~~$0.11~~$0.12 per share on the ~~Company's~~Company’s common stock. The dividend was payable on ~~October 25, 2022,~~July 24, 2023, to shareholders of record as of ~~October 11, 2022.~~July 10, 2023. Approximately ~~$1,874,000~~$2.1 million was transferred from retained earnings to dividends payable as of ~~September~~June 30, ~~2022 to allow for distribution of the dividend to shareholders.~~

On June 28, 2022, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 22, 2022, to shareholders of record as of July 8, 2022. Approximately $1,874,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

On March 22, 2022, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 18, 2022, to shareholders of record as of April 6, 2022. Approximately $1,874,000 was transferred from retained earnings to dividends payable2023 to allow for distribution of the dividend to shareholders.

The Company has a program to repurchase up to $3 million of its outstanding common 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 ~~nine~~three months and six months ended ~~2022~~June 30, 2023 and ~~2021,~~June 30, 2022, no shares have been repurchased.

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10.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 September 30,				Nine months ended September 30,					Three Months Ended				Six Months Ended
		2022		2021		2022		2021			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net income (000's, except per share amounts)		$	4,467	$	2,611	$	10,345	$	6,727

Net income (in thousands)										Net income (in thousands)	$	4,417	$	3,435	$	10,542	$	5,878
Weighted average shares issued	Weighted average shares issued	17,042,479		17,010,288		17,036,460		17,010,236		Weighted average shares issued	17,102,740		17,036,364		17,089,693		17,033,401
Add: dilutive effect of stock options	Add: dilutive effect of stock options	21,468		25,245		21,178		17,435		Add: dilutive effect of stock options	12,000		21,391		13,908		21,341
Weighted average shares outstanding adjusted for potential dilution	Weighted average shares outstanding adjusted for potential dilution	17,063,947		17,035,533		17,057,638		17,027,671		Weighted average shares outstanding adjusted for potential dilution	17,114,740		17,057,755		17,103,601		17,054,742

Basic earnings per share	Basic earnings per share	$	0.26	$	0.15	$	0.61	$	0.40	Basic earnings per share	$	0.26	$	0.20	$	0.62	$	0.35
Diluted earnings per share	Diluted earnings per share	$	0.26	$	0.15	$	0.61	$	0.40	Diluted earnings per share	$	0.26	$	0.20	$	0.62	$	0.34
Anti-dilutive stock options excluded from earnings per share calculation	Anti-dilutive stock options excluded from earnings per share calculation	93,000		60,000		93,000		101,000		Anti-dilutive stock options excluded from earnings per share calculation	98,000		97,000		98,000		97,000

11.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, ~~2022~~2023 and December 31, ~~2021,~~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.

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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, ~~2022~~2023 and ~~2021 were insignificant.~~2022.

The Company reported a provision for income taxes of ~~$4,199,000~~$4.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to ~~the $2,653,000 provision reported in~~$2.4 million for the comparable period of ~~2021.~~2022. The effective tax rate was ~~28.9%~~29.1% for the ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to ~~28.3%~~28.7% for the comparable period of ~~2021. The Company recorded an income tax provision of $1.8 million for the three month ended September 30, 2022, compared to $1.0 million for the three month ended~~

~~September 30, 2021. The effective tax rate for the quarter ended September 30, 2022 was 29.1% compared to 28.5% for the three months ended September 30, 2021.~~2022.

12.Junior Subordinated Debt/Trust Preferred Securities

The contractual principal balance of the ~~Company's~~Company’s debentures relating to its trust preferred securities is $12.0 million as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. The Company may redeem the junior subordinated debentures at any time at par.

The Company accounts for its junior subordinated debt issued under USB Capital Trust 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. As of ~~September~~June 30, ~~2022,~~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, ~~2022,~~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 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. The ~~7.09%~~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, ~~2022,~~2023, the total cumulative gain recorded on the debt ~~is $1.55~~was $1.94 million.

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The net fair value calculation performed as of ~~September~~June 30, ~~2022~~2023 resulted in a net pretax gain adjustment of ~~$950,000~~$205,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to a net pretax ~~loss~~gain adjustment of ~~$373,000~~$725,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

For the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the net ~~$950,000~~$205,000 fair value gain adjustment was separately presented as a ~~$2,469,000 loss~~$258,000 gain ($~~1,739,000,~~182,000, net of tax) recognized on the consolidated statements of income, and a ~~$3,419,000 gain~~$53,000 loss ($~~2,408,000,~~37,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the net ~~$373,000~~$725,000 fair value ~~loss~~gain adjustment was separately presented as a ~~$691,000 loss~~$2,594,000 gain ($~~487,000,~~1,827,000, net of tax) recognized on the consolidated statements of income, and a ~~$317,000 gain~~$1,869,000 loss ($~~223,000,~~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 ~~ended.~~indicated.

The net fair value calculation performed as of ~~September~~June 30, ~~2022~~2023 resulted in a net pretax gain adjustment of ~~$225,000~~$312,000 for the quarter ended ~~September~~June 30, ~~2022~~2023 compared to a net pretax ~~loss~~gain adjustment of ~~$43,000~~$422,000 for the quarter ended ~~September~~June 30, ~~2021.~~2022.

For the quarter ended ~~September~~June 30, ~~2022,~~2023, the net ~~$225,000~~$312,000 fair value gain adjustment was separately presented as a ~~$600,000 loss~~$75,000 gain ($~~423,000,~~53,000, net of tax) recognized on the consolidated statements of income, and a ~~$825,000~~$387,000 gain ($~~581,000,~~273,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended ~~September~~June 30, ~~2021,~~2022, the net ~~$43,000~~$422,000 fair value ~~loss~~gain adjustment was separately presented as a ~~$35,000~~$869,000 loss ($~~25,000,~~612,000, net of tax) recognized on the consolidated statements of income, and a ~~$8,000 loss~~$1.3 million gain ($~~6,000,~~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 ~~ended.~~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, 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.

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~~GAAP~~ 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 assumptions regarding the pricing of an asset or liability by a market participant, ~~(including~~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:

September 30, 2022
(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:
Investment securities $ 202,378 $ 202,378 $ 3,436 $ 198,942 $ —
Loans, net 952,103 902,836 — — 902,836
Accrued interest receivable 8,466 8,466 — 8,466 —
Financial Liabilities:
Deposits:
Noninterest-bearing 517,230 517,230 517,230 — —
NOW and money market 517,820 517,820 517,820 — —
Savings 130,786 130,786 130,786 — —
Time deposits 74,982 73,763 — — 73,763
Total deposits 1,240,818 1,239,599 1,165,836 — 73,763
Junior subordinated debt 10,305 10,305 — — 10,305


	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

December 31, 2021
(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:
Investment securities $ 182,646 $ 182,651 $ 3,744 $ 178,907 $ —
Loans 862,200 854,697 — — 854,697
Accrued interest receivable 7,530 7,530 — 7,530 —
Financial Liabilities:
Deposits:
Noninterest-bearing 476,749 476,749 476,749 — —
NOW and money market 529,841 529,841 529,841 — —
Savings 113,930 113,930 113,930 — —
Time deposits 67,586 67,922 — — 67,922
Total deposits 1,188,106 1,188,442 1,120,520 — 67,922
Junior subordinated debt 11,189 11,189 — — 11,189

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	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 those on investment securities 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 the 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 between fair value ~~measurements~~measurement classifications during the ~~nine~~six months ended ~~September~~June 30, 2023 or the six months ended December 31, 2022.

The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:

Investment Securities - ~~– Available for sale~~Available-for-sale and marketable equity ~~securities~~security values are ~~valued~~ based ~~upon~~on 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.~~on 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 or observed market prices. ~~Collateral dependent~~Collateral-dependent loans are measured for impairment using the fair value of the collateral. ~~Changes are recorded directly as an adjustment to current earnings.~~ There were no ~~impaired~~individually-evaluated loans measured at fair value as of ~~September~~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. ~~There~~No OREO properties were ~~no OREO~~ measured at fair value as of ~~September~~June 30, 2023 or December 31, 2022.

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 these inputs, ~~and~~ credit concerns in the capital markets, and inactivity in the trust preferred markets, ~~that have limited~~limit the observability of ~~the~~ market spreads, ~~require~~requiring the junior subordinated debt to be classified asat a Level 3 fair value.

~~Table of Contents~~

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~~June 30, ~~2022 (in 000’s):~~2023:


Description of Assets		September 30, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
AFS Securities (1):
(In thousands)										(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:										Assets:
AFS Securities:										AFS Securities:
U.S. Government agencies	U.S. Government agencies	$	8,751	$	—	$	8,751	$	—	U.S. Government agencies	$	6,976	$	—	$	6,976	$	—
U.S. Government collateralized mortgage obligations	U.S. Government collateralized mortgage obligations	98,522		—		98,522		—		U.S. Government collateralized mortgage obligations	92,457		—		92,457		—

Municipal bonds	Municipal bonds	39,702		—		39,702		—		Municipal bonds	41,554		—		41,554		—
U.S. Treasury securities	U.S. Treasury securities	29,150				29,150				U.S. Treasury securities	29,517		—		29,517		—
Corporate bond	Corporate bond	32,435		—		32,435		—		Corporate bond	31,709		—		31,709		—
Total AFS securities	Total AFS securities	208,560		—		208,560		—		Total AFS securities	202,213		—		202,213		—

Marketable equity securities ~~(1)~~	Marketable equity securities ~~(1)~~	3,287		3,287		—		—		Marketable equity securities ~~(1)~~	3,308		3,308		—		—

Total	Total	$	211,847	$	3,287	$	208,560	$	—	Total	$	205,521	$	3,308	$	202,213	$	—

Description of Liabilities September 30, 2022 Quoted Prices
in Active
Markets for
Identical
Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (1) $ 10,305 — — $ 10,305
Total $ 10,305 — — $ 10,305

~~(1)Recurring~~

~~There were no non-recurring fair value adjustments at September 30, 2022 or December 31, 2021.~~


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 fair value on a recurring ~~and non-recurring~~ basis as of December 31, ~~2021 (in 000’s):~~2022:


Description of Assets		December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
AFS Securities (1):
(In thousands)										(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:										Assets:
AFS Securities:										AFS Securities:
U.S. Government agencies	U.S. Government agencies	$	33,376	$	—	$	33,376	$	—	U.S. Government agencies	$	8,231	$	—	$	8,231	$	—
U.S. Government collateralized mortgage obligations	U.S. Government collateralized mortgage obligations	64,735		—		64,735				U.S. Government collateralized mortgage obligations	97,218		—		97,218		—
Asset-backed securities		4,130		—		4,130

Municipal bonds	Municipal bonds	50,052		—		50,052				Municipal bonds	40,170		—		40,170		—
Treasury securities	Treasury securities	15,187				15,187				Treasury securities	29,224		—		29,224		—
Corporate bonds	Corporate bonds	11,422		—		11,422		—		Corporate bonds	32,702		—		32,702		—
Total AFS securities	Total AFS securities	178,902		—		178,902		—		Total AFS securities	207,545		—		207,545		—

Marketable equity securities ~~(1)~~	Marketable equity securities ~~(1)~~	3,744		3,744		—		—		Marketable equity securities ~~(1)~~	3,315		3,315		—		—

Total	Total	$	182,646	$	3,744	$	178,902	$	—	Total	$	210,860	$	3,315	$	207,545	$	—


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.

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Description of Liabilities December 31, 2021 Quoted Prices
in Active
Markets for
Identical
Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Junior subordinated debt (1) $ 11,189 $ — $ — $ 11,189
Total $ 11,189 $ — $ — $ 11,189

~~(1)Recurring~~

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, ~~2022~~2023 and December 31, ~~2021:~~2022:

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

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

7.09%

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

3.90%

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%

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. 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 increase in discount rate between the periods ended ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, is primarily due to increases in rates for similar debt instruments.

The following ~~tables provide~~table provides a reconciliation of ~~assets and~~ liabilities at fair value using Level 3 significant, unobservable inputs ~~(Level 3)~~ on a recurring ~~basis at September 30, 2022 and 2021 (in 000’s):~~basis:


		Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021			Three Months Ended				Six Months Ended
Reconciliation of Liabilities:		Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt
(In thousands)										(In thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Junior Subordinated Debt:										Junior Subordinated Debt:
Beginning balance	Beginning balance	$	10,489	$	11,253	$	11,189	$	10,924	Beginning balance	$	11,017	$	10,887	$	10,883	$	11,189
Gross loss included in earnings		600		35		2,469		691
Gross (gain) loss included in earnings										Gross (gain) loss included in earnings	74		869		(258)		1,869
Gross (gain) loss related to changes in instrument specific credit risk	Gross (gain) loss related to changes in instrument specific credit risk	(825)		8		(3,419)		(317)		Gross (gain) loss related to changes in instrument specific credit risk	(387)		(1,292)		53		(2,594)
Change in accrued interest	Change in accrued interest	41		$	(1)	66		(3)		Change in accrued interest	15		$	25	41		25
Ending balance	Ending balance	$	10,305	$	11,295	$	10,305	$	11,295	Ending balance	$	10,719	$	10,489	$	10,719	$	10,489
The amount of total 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		$	600	$	35	$	2,469	$	691
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										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 Intangible Assets

At ~~September~~June 30, ~~2022,~~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, ~~2021. While goodwill is not amortized, the~~2022. The Company ~~does conduct periodic~~conducts impairment analysis on goodwill ~~at least~~ annually or, more often

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~~as conditions require.~~ if triggering events occur. The Company performed ~~its~~an analysis of goodwill impairment and concluded goodwill was not impaired as of December 31, ~~2021~~2022, with no material events occurring through the period ended ~~September~~June 30, ~~2022.~~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:


		September 30, 2022						December 31, 2021							June 30, 2023						December 31, 2022
(in 000's)		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
(In thousands)														(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	Beginning balance	$	(236)	$	(627)	$	(311)	$	630	$	(770)	$	(588)	Beginning balance	$	(19,066)	$	(194)	$	1,765	$	(236)	$	(627)	$	(311)
Current period comprehensive (loss) income, net of tax		(20,591)		47		2,408		(866)		143		277
Current period comprehensive income (loss), net of tax														Current period comprehensive income (loss), net of tax	873		32		(38)		(18,830)		433		2,076
Ending balance	Ending balance	$	(20,827)	$	(580)	$	2,097	$	(236)	$	(627)	$	(311)	Ending balance	$	(18,193)	$	(162)	$	1,727	$	(19,066)	$	(194)	$	1,765
Accumulated other comprehensive loss	Accumulated other comprehensive loss					$	(19,310)					$	(1,174)	Accumulated other comprehensive loss					$	(16,628)					$	(17,495)

16.Investment in York Monterey Properties

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the ~~Bank's~~Bank’s investment in York Monterey Properties, Inc., totaled ~~$5.3~~$5.1 million. York Monterey Properties, Inc., is included within the consolidated financial statements of the Company, with $4.6 million of the total investment recognized within the balance of ~~other real estate owned~~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, ~~and~~ include commitments to extend credit and standby letters of credit. The credit ~~risk~~risks associated with these instruments isare essentially the same as ~~that~~those involved in extending credit to customers and isare represented by the contractual amount indicated in the table below:


		Contractual Amount
(In thousands)	(In thousands)	September 30, 2022		December 31, 2021		(In thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	Commitments to extend credit	$	164,030	$	239,095	Commitments to extend credit	$	224,389	$	190,183
Standby letters of credit	Standby letters of credit	$	1,719	$	1,719	Standby letters of credit	$	1,211	$	1,570

Commitments to extend credit are agreements to lend to a customer, as long as ~~there is no violation of any condition~~conditions established in the ~~contract. Substantially all of these~~contract have not been violated. These commitments are ~~at floating interest rates~~floating-rate instruments based on the current prime rate, and, in most cases, have fixed expiration dates. The Company evaluates each ~~customer's~~customer’s creditworthiness on a case-by-case basis, and the amount of collateral obtained ~~if deemed necessary,~~ is based on ~~management's~~management’s credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. ~~Many~~As many of the commitments are expected to expire without being drawn upon, ~~and, as a result,~~ 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 terms from ~~less than~~ one month to ~~approximately 3~~three years. ~~At September 30, 2022, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $1,719,000.~~

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In the ordinary course of business, the Company ~~becomes~~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.~~projected. Such risks and uncertainties include, but are not limited to, the following factors: ~~i) adverse~~

•Adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, ~~global conflicts,~~ inflationary pressures, labor shortages, and ~~labor shortages; (ii) the COVID-19~~ global ~~pandemic, including the effects~~conflict and unrest;

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

•Fiscal policies of the steps being taken to address the pandemic and their impact on the Company’s market and employees; iii) Severe weather or natural disasters, such as wildfires, earthquakes, drought, or flood; iv) competitive pressures in the banking industry and changes in the regulatory environment; v) exposure to changes in theU.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; ~~vi) 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; vii) 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; viii)~~ 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; ~~ix) volatility and devaluation~~

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

•The continuing adverse impact on the U.S. economy, including the markets ~~x) potential impairment~~in which we operate due to the lingering effects of ~~goodwill and other intangible assets, and xi) 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, ~~2021.~~2022.

The Company

United Security Bancshares, a California corporation, is a bank holding company registered under the ~~BHCA~~Bank Holding Company Act (BHCA) with corporate headquarters located in Fresno, California. The principal business of United Security Bancshares is to serve as the holding company for its wholly-owned subsidiary, United Security Bank. References to the “Bank” refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties, Inc. References to the “Company” refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the “Holding Company” refer to United Security Bancshares, the parent company, on a stand-alone basis. The Bank currently ~~has~~maintains twelve banking branches, which provide 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 ~~ATM and ITM (Intelligent Teller Machines)~~interactive teller machines (ITMs) within its geographic footprint.

Executive Summary

During ~~2021 and through the third quarter of 2022,~~2023, the Company ~~executed a multi-phase strategy~~has worked closely with long-term, core customers to ~~deploy excess liquidity. As part of~~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 cash deployment strategy, during 2021, the Company purchased $201.0 million in residential mortgage loans with a 2.90% weighted average coupon rate and $125.7 million in investment securities with a weighted average purchase yield of 1.73%. During the first quarter of 2022, the Company purchased $35.6 million in residential mortgage loans with a 3.06% weighted average coupon rate and $81.5 million in investment securities with a 2.95% weighted average purchase yield.balance sheet.

~~2022 Highlights as~~

Table of ~~September 30, 2022~~Contents

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 ~~increased 2.9%~~decreased 0.8% to ~~$1.37~~$1.29 billion, compared to ~~$1.33~~$1.30 billion at December 31, ~~2021.~~2022.

▪Total loans, net of unearned fees, ~~increased 10.4%~~decreased 2.0% to ~~$962.2~~$960.1 million, compared to ~~$871.5~~$980.2 million at December 31, ~~2021.~~2022.

▪Total investments ~~increased 16.0%~~decreased 2.5%, or ~~$29.2~~$5.3 million, to ~~$211.8~~$205.5 million, compared to ~~$182.6~~$210.9 million at December 31, ~~2021.~~2022.

▪Total deposits ~~increased 4.4%~~decreased 10.2% to ~~$1.24~~$1.05 billion, compared to ~~$1.19~~$1.17 billion at December 31, ~~2021.~~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 ~~24.0%~~20.1% to ~~$32.6~~$12.5 million for the ~~nine months~~quarter ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$26.3~~$10.4 million for the ~~nine months~~quarter ended ~~September~~June 30, ~~2021.~~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 ~~decreased~~increased to ~~$6.28,~~$6.75, compared to ~~$7.06~~$6.59 at December 31, ~~2021.~~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 ~~$488,000,~~$469,000, compared to net ~~charge-offs~~recoveries of ~~$1,032,000~~$25,000 for the ~~nine months~~quarter ended ~~September~~June 30, ~~2021.~~2022.

▪Capital position remains well-capitalized with a ~~9.56%~~11.16% Tier 1 Leverage Ratio compared to ~~9.79%~~10.10% as of December 31, ~~2021.~~2022.

▪Return on average assets ~~("ROAA")~~(ROAA) was ~~1.03%~~1.68%, compared to ~~0.75%~~0.89% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

▪Return on average equity ~~("ROAE")~~(ROAE) was ~~11.99%~~19.32%, compared to ~~7.55%~~10.19% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

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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. 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 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. ~~The~~Despite the unusually wet winter experienced in 2022/2023, the state of California ~~is experiencing a~~has experienced severe ~~drought and water allocations~~droughts which have ~~been significantly reduced~~resulted in water-allocation reductions for farmers in the Central Valley. Due to these uncertain water issues, the impact on businesses and consumers located in the ~~Company's~~Company’s market areas is not possible to predict or quantify. In response to drought conditions, the California state legislature passed the Sustainable Groundwater Management Act in 2014 with the ~~purpose to ensure~~goal of ensuring better local and regional management of groundwater use and sustainable groundwater management in California by 2042. ~~The local districts began to develop, prepare,~~Development, preparation, and ~~begin~~ implementation of the Groundwater Sustainability ~~Plans~~Plan began in 2020. The ~~effect~~effects of ~~such plans~~this plan have yet to ~~Central Valley agriculture, if any, is still unknown.~~be determined.

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The ~~Company's~~Company’s earnings are impacted by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank ~~("FRB")~~(FRB) has ~~and is likely to continue to have, an important~~a significant impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, ~~investments~~investments. and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks ~~are~~may be subject. The Federal Open Market Committee ~~(" FOMC") has indicated that due to rising inflation it expects to raise~~(FOMC) continued raising interest rates during ~~2022 and 2023. The FOMC increased~~2023, with increases to the overnight benchmark rate of 25bps in February, March, ~~2022, 50bps~~and May 2023. However, it is unknown what effects increases or decreases in ~~May 2022, 75bps~~the inflation rate and the recent banking turmoil, in ~~June 2022, 75bps in July 2022, and 75 bps in September 2022, for an increase of 300bps during the year. Further rate hikes are expected during the year in order to combat record high inflation.~~conjunction with continued international instability, will have on FRB monetary policies.

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.

~~COVID-19~~

The COVID-19 pandemic has impacted the local economy in the Central Valley. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as banks, medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates have been improving over the last year. As of August 2022, the unemployment rate in Fresno County was 5.90% compared to 8.80% in August 2021. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package, and the Consolidated Appropriations Act, 2021 was signed into law at the end of December 2020 as a $900 billion legislative package. While it is not possible to know the full universe or extent of these impacts as of the date of this filing, we are disclosing potentially material items of which we are aware.

~~Financial position and results of operations~~

Pertaining to the Company's September 30, 2022 financial condition and results of operations, COVID-19 has had an impact on the allowance for credit losses. While the Company has not yet experienced any charge-offs related to COVID-19, its allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from a significant increase in economic uncertainty. Although economic scenarios related to the pandemic have improved since March 2020, the credit risk in the loan portfolio remains heightened resulting in the need for an additional reserve for credit loss. Additionally, the economic uncertainty related to higher inflation during 2021 and 2022, the significant

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increases in the yield curve, the potential for recession indicated by the current yield curve inversion, and the magnitude of rate hikes in 2022 warrant the increase in additional reserves for credit losses.

~~Capital and liquidity~~

As of September 30, 2022, the Company and Bank's capital ratios were in excess of all regulatory requirements. The Company's management team believes that while the Company and Bank have sufficient capital to withstand an economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from the Bank to service its debt. If the Bank is unable to pay dividends for an extended period of time, the Company may not be able to service its debt.

The Company maintains access to multiple sources of liquidity. If an extended recession caused large numbers of its deposit customers to withdraw their funds, it might become more reliant on volatile or more expensive sources of funding. Wholesale funding markets are available to the Company.

~~Lending operations and accommodations to borrowers~~

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company has executed a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for up to six months. During 2020, the Company had executed 23 payment deferrals or modifications on outstanding loan balances of $69,814,000 in connection with the COVID-19 relief provided by the CARES Act and interagency guidance issued in March 2020. The Company has not recognized any losses on the loan modifications and as of September 30, 2022, there were no modifications outstanding.

The Company participated in the first and second draw of the Paycheck Protection Program ("PPP"), administered by the Small Business Administration ("SBA"). The PPP program ended on May 31, 2021 after the second draw. PPP loans earn interest at 1% and have either a two or five year term. In addition to interest, the Company receives a processing fee ranging from 3%-5% of the loan balance for each PPP loan. The Company believes that almost all of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2022, there were two outstanding SBA PPP loans representing $14,000 in balances.

The Company has worked with customers directly affected by COVID-19. The Company has provided short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. The Company is engaging in more frequent communication with the servicer and individual schools participating in the student loan portfolio to better understand the effects of COVID-19 on students in school or in clinical programs. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. There remain shortages in raw materials, manufactured products and labor across many industries resulting in rising prices, which may disrupt business operations and negatively impact financial performance and operating results for the Company's borrowers. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance.

Results of Operations

On a year-to-date basis, the Company reported net income of ~~$10.3~~$10.5 million or ~~$0.61~~$0.62 per share ($~~0.61~~0.62 diluted), for the ~~nine~~six months ended ~~September~~June 30, ~~2022, as~~2023, compared to ~~$6.7~~$5.9 million, or ~~$0.40~~$0.35 per share ($~~0.40~~0.34 diluted), for the same period in ~~2021.~~2022. The Company’s return on average assets was ~~1.03%~~1.68% for the ~~nine~~six months ended ~~September~~June 30, ~~2022, as~~2023, compared to ~~0.75%~~0.89% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The Company’s return on average equity was ~~11.99%~~19.32% for the ~~nine~~six months ended ~~September~~June 30, ~~2022, as~~2023, compared to ~~7.55%~~10.19% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The increase in the return on average assets is primarily ~~attributed~~attributable to growth in interest income as a result of increased interest rates and the ~~Company deploying~~Company’s deployment of cash into its loan and investment portfolios during ~~2021~~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 ~~2022.~~an accounting adjustment due to the transition to CECL, offset by an increase in income during the period.

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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, ~~2022~~2023 and ~~2021.~~2022.

~~Table 1. Distribution of Average Assets, Liabilities and Shareholders’ Equity:~~

~~Interest rates and Interest Differentials~~

~~Three Months Ended September 30, 2022 and 2021~~

2022 2021
(dollars in thousands) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)

Assets:
Interest-earning assets:
Loans (1) $ 952,518 $ 11,514 4.80 % $ 826,754 $ 9,163 4.40 %
Investment securities (3) 215,416 1,322 2.43 % 170,408 650 1.51 %
Interest-bearing deposits in FRB 111,704 683 2.43 % 172,073 64 0.15 %
Total interest-earning assets 1,279,638 $ 13,519 4.19 % 1,169,235 $ 9,877 3.35 %
Allowance for credit losses (9,902) (9,203)
Noninterest-earning assets:
Cash and due from banks 37,547 44,804
Premises and equipment, net 9,401 9,139
Accrued interest receivable 7,853 7,848
Other real estate owned 4,583 4,716
Other assets 54,037 43,784
Total average assets $ 1,383,157 $ 1,270,323
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $ 125,133 $ 35 0.11 % $ 160,496 $ 59 0.15 %
Money market accounts 395,665 511 0.51 % 339,378 309 0.36 %
Savings accounts 124,962 35 0.11 % 108,067 30 0.11 %
Time deposits 75,023 98 0.52 % 67,478 98 0.58 %
Junior subordinated debentures 10,459 110 4.17 % 11,225 44 1.56 %
Total interest-bearing liabilities 731,242 $ 789 0.43 % 686,644 $ 540 0.31 %
Noninterest-bearing liabilities:
Noninterest-bearing checking 528,033 453,159
Accrued interest payable 139 109
Other liabilities 9,915 9,859
Total liabilities 1,269,329 1,149,771
Total shareholders' equity 113,828 120,552
Total average liabilities and shareholders' equity $ 1,383,157 $ 1,270,323
Interest income as a percentage of average earning assets 4.19 % 3.35 %
Interest expense as a percentage of average earning assets 0.24 % 0.18 %
Net interest margin 3.95 % 3.17 %

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Distribution of Average Assets, Liabilities and Shareholders’ Equity:

Three Months Ended June 30, 2023 and 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	%

(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 costs includes loan fee income of approximately ~~$51,000~~$141,000 for the three months ended ~~September~~June 30, ~~2022~~2023 and loan fee income of ~~$269,000~~$66,000 for the three months ended ~~September~~June 30, ~~2021.~~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 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 component of ~~shareholders'~~shareholders’ equity.

~~Table 1. Distribution of Average Assets, Liabilities and Shareholders’ Equity:~~

~~Interest rates and Interest Differentials~~

~~Nine months ended September 30, 2022 and 2021~~

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2022 2021
(dollars in thousands) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)

Assets:
Interest-earning assets:
Loans (1) $ 910,221 $ 30,363 4.46 % $ 753,424 $ 25,942 4.60 %
Investment securities (3) 198,658 3,117 2.10 % 146,434 1,691 1.54 %
Interest-bearing deposits in FRB 141,708 1,023 0.97 % 203,366 168 0.11 %
Total interest-earning assets 1,250,587 $ 34,503 3.69 % 1,103,224 $ 27,801 3.37 %
Allowance for credit losses (9,577) (8,762)
Noninterest-earning assets:
Cash and due from banks 36,581 44,968
Premises and equipment, net 9,134 9,043
Accrued interest receivable 7,513 7,825
Other real estate owned 4,582 4,917
Other assets 52,859 47,367
Total average assets $ 1,351,679 $ 1,208,582
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $ 135,155 $ 119 0.12 % $ 156,912 $ 174 0.15 %
Money market accounts 400,154 1,255 0.42 % 304,090 812 0.36 %
Savings accounts 122,183 101 0.11 % 105,431 87 0.11 %
Time deposits 70,839 227 0.43 % 64,390 318 0.66 %
Junior subordinated debentures 10,824 224 2.77 % 11,029 136 1.65 %
Total interest-bearing liabilities 739,155 $ 1,926 0.35 % 641,852 $ 1,527 0.32 %
Noninterest-bearing liabilities:
Noninterest-bearing checking 486,983 437,482
Accrued interest payable 123 103
Other liabilities 9,745 9,686
Total liabilities 1,236,006 1,089,123
Total shareholders' equity 115,673 119,459
Total average liabilities and shareholders' equity $ 1,351,679 $ 1,208,582
Interest income as a percentage of average earning assets 3.69 % 3.37 %
Interest expense as a percentage of average earning assets 0.21 % 0.19 %
Net interest margin 3.48 % 3.18 %
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 being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately ~~$416,000~~$168,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and loan fee income of ~~$1,208,000~~$366,000 for ~~nine~~the six months ended ~~September~~June 30, ~~2021.~~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 ~~investments~~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 component of ~~shareholders'~~shareholders’ equity.

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The prime rate increased from ~~3.25%~~4.75% at ~~September~~June 30, ~~2021~~2022 to ~~6.25%~~8.25% at ~~September~~June 30, ~~2022.~~2023. Future increases or decreases will affect both interest income and expense and the 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:


		Increase (decrease) for the three months ended							Three Months Ended
		September 30, 2022 compared to September 30, 2021							June 30, 2023 compared to June 30, 2022
(in 000's)		Total		Rate		Volume
(In thousands)								(In thousands)	Total		Rate		Volume
Increase (decrease) in interest income:	Increase (decrease) in interest income:							Increase (decrease) in interest income:
Loans	Loans	$	2,351	$	860	$	1,491	Loans	$	3,798	$	3,256	$	542
Investment securities available for sale	Investment securities available for sale	672		468		204		Investment securities available for sale	497		413		84

Interest-bearing deposits in FRB	Interest-bearing deposits in FRB	619		995		(376)		Interest-bearing deposits in FRB	(202)		2,043		(2,245)
Total interest income	Total interest income	3,642		2,323		1,319		Total interest income	4,093		5,712		(1,619)
Increase (decrease) in interest expense:	Increase (decrease) in interest expense:							Increase (decrease) in interest expense:
Interest-bearing demand accounts	Interest-bearing demand accounts	178		162		16		Interest-bearing demand accounts	2,324		2,343		(19)
Savings and money market accounts	Savings and money market accounts	5		—		5		Savings and money market accounts	32		35		(3)
Time deposits	Time deposits	—		(11)		11		Time deposits	416		416		—

Other borrowings								Other borrowings	442		—		442
Subordinated debentures	Subordinated debentures	66		69		(3)		Subordinated debentures	307		307		—
Total interest expense	Total interest expense	249		220		29		Total interest expense	3,521		3,101		420
Increase (decrease) in net interest income	Increase (decrease) in net interest income	$	3,393	$	2,103	$	1,290	Increase (decrease) in net interest income	$	572	$	2,611	$	(2,039)

For the three months ended ~~September~~June 30, ~~2022,~~2023, total interest income increased ~~$3.6~~$4.1 million, or ~~36.9%~~37.2%, as compared to the three months ended ~~September~~June 30, ~~2021.~~2022. In comparing the two periods, average ~~interest earning~~interest-earning assets ~~increased $110.4~~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 ~~$125.8~~$48.2 million in loan balances and an increase of ~~$45.0~~$15.1 million in investment ~~securities, partially offset by a decrease of $60.4 million in balances held at the Federal Reserve Bank.~~securities. The increase in loan balances is ~~primarily~~partially attributed to ~~purchases of~~growth in the commercial real estate and residential mortgage ~~pools.~~portfolios. Investment securities yields increased 9281 basis points and loan yields increased 40137 basis points. The average yield on total interest-earning assets increased 84162 basis points. The increase in yields is a result of the purchases of ~~investment~~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.

Increase (decrease) for the nine months ended
September 30, 2022 compared to September 30, 2021
(in 000's) Total Rate Volume
Increase (decrease) in interest income:
Loans $ 4,421 $ (892) $ 5,313
Investment securities available for sale 1,426 711 715
Interest-bearing deposits in FRB 855 1,314 (459)
Total interest income 6,702 1,133 5,569
Increase (decrease) in interest expense:
Interest-bearing demand accounts 388 213 175
Savings and money market accounts 14 — 14
Time deposits (91) (121) 30
Subordinated debentures 88 91 (3)
Total interest expense 399 183 216
Increase (decrease) in net interest income $ 6,303 $ 950 $ 5,353

4537

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 ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, total interest income increased ~~$6.7~~5.4 million, or ~~24.1%~~27.9%, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. In comparing the two periods, average ~~interest earning~~interest-earning assets ~~increased $147.4~~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 ~~$156.8~~$68.9 million in loan balances and an increase of ~~$52.2~~$19.4 million in investment ~~securities, partially offset by a decrease of $61.7 million in balances held at the Federal Reserve Bank.~~securities. Investment securities yields increased 5699 basis points ~~while~~and loan yields ~~decreased 14~~increased 131 basis points. The ~~decrease~~average yield on total interest-earning assets increased 168 basis points. The increase in yields is a result of increases on loan yields, ~~is attributed~~and increases in yields on overnight deposits related to the ~~purchased residential mortgage pools, which have a lower yield compared to~~increase in the rest of the loan portfolio, and lower yields on real estate construction loans. Interest-bearing deposits in FRB, the Company's lowest-yielding interest-earning asset, comprised 11.3% of the average interest-earning assets for period ended September 30, 2022, compared to 18.4% for the same period ended 2021.Fed Funds rate.

The overall average yield on the loan portfolio ~~decreased~~increased to ~~4.46%~~5.59% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to ~~4.60%~~4.28% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. At ~~September~~June 30, ~~2022, 40.4%~~2023, 35.6% of the ~~Company's~~Company’s loan portfolio consisted of floating rate instruments, as compared to ~~45.8%~~44.3% of the portfolio at December 31, ~~2021,~~2022, with the majority of those tied to the prime rate. Approximately ~~63.4%~~62.4%, or ~~$246.0~~$213.4 million, of the ~~floating rate~~floating-rate loans had rate floors at ~~September~~June 30, ~~2022, making them effectively fixed-rate loans for certain decreases in interest rates. There were no loans with floor spreads of 100 basis points or more.~~2023.

The Company’s net interest margin increased to ~~3.48%~~4.38% for the ~~nine~~six months ended ~~September~~June 30, ~~2022, when~~2023, compared to ~~3.18%~~3.23% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The net interest margin increased primarily as a result of a shift in the mix to higher earning assets due to the growth in average loan and investment balances ~~partially offset by the decrease~~and an increase in loan and investment yields.

The Company’s disciplined deposit pricing efforts have helped keep the ~~Company's~~Company’s cost of funds relatively low. The rates paid on interest-bearing liabilities increased to ~~0.35%~~1.16% for the ~~nine~~six months ended ~~September~~June 30, ~~2022, as~~2023, compared to ~~0.32%~~0.31% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. For the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, total interest expense increased approximately ~~$399,000,~~$3.1 million, or ~~26.1%~~269.0%, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Between those two periods, average interest-bearing liabilities ~~increased~~decreased by ~~$97.3~~$14.4 million due to ~~increases~~decreases in NOW and money market accounts, savings accounts, and time deposits. While the Company may utilize brokered deposits as an additional source of funding, the Company held no brokered deposits at ~~September~~June 30, 2023 or December 31, 2022.

Table 3. of Contents

Interest-Earning Assets and ~~Liabilities~~Liabilities:

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
		YTD Average September 30, 2022	YTD Average December 31, 2021	YTD Average September 30, 2021		June 30, 2023	December 31, 2022	June 30, 2022
Loans	Loans	72.79%	68.99%	68.30%	Loans	81.72%	74.02%	71.92%
Investment securities available for sale	Investment securities available for sale	15.89%	13.35%	13.30%	Investment securities available for sale	17.89%	16.16%	15.39%
Interest-bearing deposits in FRB	Interest-bearing deposits in FRB	11.32%	17.66%	18.40%	Interest-bearing deposits in FRB	0.39%	9.82%	12.69%
Total interest-earning assets	Total interest-earning assets	100.00%	100.00%	100.00%	Total interest-earning assets	100.00%	100.00%	100.00%

NOW accounts	NOW accounts	18.28%	23.77%	24.50%	NOW accounts	19.28%	18.49%	18.86%
Money market accounts	Money market accounts	54.14%	48.44%	47.40%	Money market accounts	51.01%	53.92%	54.15%
Savings accounts	Savings accounts	16.53%	16.20%	16.40%	Savings accounts	16.53%	16.70%	16.25%
Time deposits	Time deposits	9.58%	9.90%	10.00%	Time deposits	8.86%	9.44%	9.25%

Other borrowings					Other borrowings	2.83%	0.00%	0.00%
Subordinated debentures	Subordinated debentures	1.47%	1.69%	1.70%	Subordinated debentures	1.49%	1.45%	1.49%
Total interest-bearing liabilities	Total interest-bearing liabilities	100.00%	100.00%	100.00%	Total interest-bearing liabilities	100.00%	100.00%	100.00%

Noninterest Income

~~Table 4.~~ Changes in Noninterest ~~Income~~Income:

The following tables set forth the amount and percentage changes in the categories presented for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

~~Table of Contents~~


(in 000's)		Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Amount of Change		Percent Change
											Three Months Ended
(In thousands)										(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Customer service fees	Customer service fees	$	899	$	745	$	154	20.7	%	Customer service fees	$	767	$	776	$	(9)	(1.2)	%
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	89		139		(50)		(36.0)	%	Increase in cash surrender value of bank-owned life insurance	171		114		57		50.0	%
Unrealized loss on fair value of marketable equity securities		(149)		(14)		(135)		(964.3)	%
Gain (loss) on fair value of marketable equity securities										Gain (loss) on fair value of marketable equity securities	(50)		(127)		77		60.6	%

(Loss) on fair value of junior subordinated debentures		(600)		(35)		(565)		(1,614.3)	%
Gain (loss) on fair value of junior subordinated debentures										Gain (loss) on fair value of junior subordinated debentures	(75)		(869)		794		91.4	%

Loss on sale of assets		—		(5)		5		(100.0)	%

Other	Other	153		100		53		53.0	%	Other	198		708		(510)		(72.0)	%
Total noninterest income	Total noninterest income	$	392	$	930	$	(538)	(57.8)	%	Total noninterest income	$	1,011	$	602	$	409	67.9	%

Noninterest income for the quarter ended ~~September~~June 30, ~~2022 decreased $538,000~~2023 increased $409,000 to ~~$392,000 when~~$1,011,000 compared to the quarter ended ~~September~~June 30, ~~2021.~~2022. Included in the ~~decrease~~increase is ~~an increase~~a decrease in the loss on the fair value of marketable equity securities of ~~$135,000.~~$77,000. Additionally, the change in fair value of junior subordinated debentures caused a ~~$600,000~~$75,000 loss for the quarter ended ~~September~~June 30, ~~2022,~~2023, compared to a ~~$35,000~~$869,000 loss for the quarter ended ~~September~~June 30, ~~2021,~~2022, resulting in a difference of ~~$565,000.~~$794,000. The change in the fair value of junior subordinated debentures was caused by fluctuations in the LIBOR yield curve. Generally, an increase in the three month LIBOR yield curve will result in negative fair value adjustments. Conversely, a decrease in the three month LIBOR yield curve will result in positive fair value adjustments. Customer service fees ~~increased $154,000~~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.

(in 000's) Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Amount of
Change Percent
Change
Customer service fees $ 2,328 $ 2,094 $ 234 11.2 %
Increase in cash surrender value of bank-owned life insurance 343 408 (65) (15.9) %
Unrealized loss on fair value of marketable equity securities (458) (75) (383) (510.7) %
Loss on fair value of junior subordinated debentures (2,469) (691) (1,778) (257.3) %
Gain on sale of assets — 8 (8) (100.0) %
Gain on sale of investment securities 30 — 30 100.0 %
Other 1,015 349 666 190.8 %
Total noninterest income $ 789 $ 2,093 $ (1,304) (62.3) %

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 ~~nine months~~quarter ended ~~September~~June 30, ~~2022 decreased $1,304,000~~2023 increased $2.1 million to ~~$789,000 when~~$2.5 million compared to the ~~nine months~~quarter ended ~~September~~June 30, ~~2021.~~2022. Included in the ~~change~~increase is ~~the~~a decrease ofis a loss on the fair value of marketable equity securities of ~~$383,000. The~~$302,000. Additionally, the change in fair value of junior subordinated debentures caused a ~~$2,469,000~~$258,000 gain for the quarter ended June 30, 2023, compared to a $1.9 million loss for the ~~nine months~~quarter ended ~~September~~June 30, 2022, ~~compared to a $691,000 loss for the nine months ended September 30, 2021,~~ resulting in a difference of ~~$1,778,000.~~$2.1 million. The change in the fair value of junior subordinated debentures was caused by fluctuations in the LIBOR yield curve. ~~Generally, an increase in~~Customer service fees increased $72,000 between the three month LIBOR yield curve will result in negative fair value adjustments. Conversely, a decrease in the three month LIBOR yield curve will result in positive fair value adjustments. Also included intwo quarters. Additionally, noninterest income for the ~~nine~~six months ended ~~September~~June 30, 2023, included an increase of $99,000 in FHLB stock dividends. Included in other noninterest income for the six months ended June 30, 2022, was $566,000 in nonrecurring income ~~received~~ from ~~The Central Valley Fund II (Small Business Investment Corporation or SBIC), Limited Partnership.~~an investment in a limited partnership.

Noninterest Expense

~~Table 5.~~ Changes in Noninterest ~~Expense~~Expense:

The following tables set forth the amount and percentage changes in the categories presented for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

~~Table of Contents~~


(in 000's)		Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Amount of Change		Percent Change
											Three Months Ended
(In thousands)										(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	2,965	$	2,888	$	77	2.7	%	Salaries and employee benefits	$	3,301	$	2,777	$	524	18.9	%
Occupancy expense	Occupancy expense	923		1,013		(90)		(8.9)	%	Occupancy expense	858		849		9		1.1	%
Data processing	Data processing	215		147		68		46.3	%	Data processing	205		145		60		41.4	%
Professional fees	Professional fees	1,089		833		256		30.7	%	Professional fees	910		919		(9)		(1.0)	%
Regulatory assessments	Regulatory assessments	212		258		(46)		(17.8)	%	Regulatory assessments	193		187		6		3.2	%
Director fees	Director fees	110		91		19		20.9	%	Director fees	106		116		(10)		(8.6)	%
Correspondent bank service charges	Correspondent bank service charges	23		22		1		4.5	%	Correspondent bank service charges	19		24		(5)		(20.8)	%
Net cost on operation of OREO		33		24		9		37.5	%
Net cost of operation of OREO										Net cost of operation of OREO	58		2		56		2,800.0	%
Other	Other	641		888		(247)		(27.8)	%	Other	557		651		(94)		(14.4)	%
Total expense	Total expense	$	6,211	$	6,164	$	47	0.8	%	Total expense	$	6,207	$	5,670	$	537	9.5	%

Noninterest expense for the quarter ended ~~September~~June 30, ~~2022~~2023 increased ~~$47,000~~$537,000 to ~~$6,211,000,~~$6.2 million, compared to the quarter ended ~~September~~June 30, ~~2021.~~2022. The increase was primarily attributed to increases in ~~professional fees,~~ salaries and employees benefits, occupancy expense, and data processing expenses, partially offset by decreases in ~~occupancy expense~~professional fees and ~~other expenses, which included a decrease of $228,000 in the provision for unfunded loans.~~and director fees. The increase in ~~professional fees~~salaries and employee benefits was ~~related to~~caused by increases in ~~expenses related~~salary expense and group insurance expense. The decrease in other noninterest expense was due partially to ~~consulting fees and services contracts.~~decreases in communications expense.

Table of Contents


(in 000's)		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Amount of Change		Percent Change
											Six Months Ended
(In thousands)										(In thousands)	June 30, 2023		June 30, 2022		$ Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	8,791	$	8,804	$	(13)	(0.1)	%	Salaries and employee benefits	$	6,561	$	5,826	$	735	12.6	%
Occupancy expense	Occupancy expense	2,551		2,705		(154)		(5.7)	%	Occupancy expense	1,820		1,628		192		11.8	%
Data processing	Data processing	475		382		93		24.3	%	Data processing	379		260		119		45.8	%
Professional fees	Professional fees	2,957		2,524		433		17.2	%	Professional fees	1,792		1,868		(76)		(4.1)	%
Regulatory assessments	Regulatory assessments	630		547		83		15.2	%	Regulatory assessments	385		417		(32)		(7.7)	%
Director fees	Director fees	345		275		70		25.5	%	Director fees	216		234		(18)		(7.7)	%
Correspondent bank service charges	Correspondent bank service charges	74		65		9		13.8	%	Correspondent bank service charges	38		50		(12)		(24.0)	%
Net cost on operation of OREO		27		67		(40)		(59.7)	%
Net cost of operation of OREO										Net cost of operation of OREO	96		(6)		102		1,700.0	%
Other	Other	1,755		1,964		(209)		(10.6)	%	Other	1,161		1,308		(147)		(11.2)	%
Total expense	Total expense	$	17,605	$	17,333	$	272	1.6	%	Total expense	$	12,448	$	11,585	$	863	7.4	%

Noninterest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 increased ~~$272,000~~$0.9 million to ~~$17,605,000,~~$12.4 million, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The increase was primarily attributed to increases in salaries and employees benefits, occupancy expense, and data processing expenses, partially offset by decreases in professional fees, regulatory assessments, director fees, and ~~data processing expenses, offset by decreases in occupancy expense and other expenses.~~correspondent bank service charges. The increase in ~~regulatory assessments~~salaries and employee benefits was ~~the result of an increase in the assessment rate and the increase in professional fees was the result of~~caused by increases in ~~consulting fees~~salary expense and ~~servicing fees for purchased real estate loans. The decrease~~group insurance expense. Occupancy expense increased due to increases in ~~other fees was related to the decrease in the provision for unfunded loans.~~fixed asset depreciation expense and 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

~~Table of Contents~~

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, ~~2022,~~2023, and has determined that there are no material amounts to be recorded under the current income tax accounting guidelines.

The ~~Company's~~Company’s effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~28.87%~~29.07% compared to ~~28.28%~~28.67% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Table of Contents

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 ~~increased $38.3~~decreased 0.8% between June 30, 2023 and December 31, 2022, and 3.8% between June 30, 2023 and June 30, 2022. Total deposits decreased 10.2% and 13.38%, respectively, during the same periods. Net loans decreased $26.0 million, or ~~2.9%~~2.7%, ~~to a balance of $1.37 billion at September~~and investment securities decreased $5.3 million, or 2.5%, between June 30, ~~2022, from the balance of $1.33 billion at~~2023 and December 31, 2021, and increased $76.5 million, or 5.9%, from the balance of $1.29 billion at September 30, 2021. Total deposits of $1.24 billion at September 30, 2022, reflected an increase of $52.7 million, or 4.4%, from the balance reported at December 31, 2021, and $90.1 million, or 7.8%, from the balance of $1.15 billion reported at September 30, 2021. Cash and cash equivalents decreased $93.2 million, or 42.5%, between December 31, 2021 and September 30, 2022. Net loans increased ~~$89.9 million, or 10.4%,~~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 ~~balance~~year-over-year basis due to repayments of ~~$952.1 million,~~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 ~~increased $29.2 million, or 16.0%, to a balance of $211.8 million~~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 ofended June 30, 2022.

Earning assets averaged ~~$1.25~~$1.17 billion during the ~~nine~~six months ended ~~September~~June 30, ~~2022, as~~2023, compared to ~~$1.10~~$1.24 billion for the same period in ~~2021.~~2022. Average interest-bearing liabilities ~~increased~~decreased to ~~$739.2~~$728.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, from ~~$641.9~~$743.2 million ~~reported~~ for the comparative period of ~~2021.~~2022.

Loans

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 ~~$960.5~~$961.4 million at ~~September~~June 30, ~~2022, an increase~~2023, a decrease of ~~$91.2~~$20.4 million, or ~~10.5%~~2.1%, when compared to the balance of ~~$869.3~~$981.8 million at December 31, ~~2021,~~2022, and an increase of ~~$152.6~~$12.1 million, or ~~15.9%~~1.3%, when compared to the balance of ~~$807.9~~$948.0 million reported at ~~September~~June 30, ~~2021.~~2022. Loans on average increased ~~$156.8~~$68.9 million, or ~~20.8%~~7.8%, between the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2022,~~2023, with loans averaging ~~$910.2~~$957.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to ~~$753.4~~$888.7 million for the same period ~~of 2021.~~

~~Table 6. Loans~~in 2022.

The following table sets forth the amounts of loans outstanding by category and the category percentages for the periods presented:


		September 30, 2022				December 31, 2021				September 30, 2021					June 30, 2023				December 31, 2022				June 30, 2022
(in 000's)		Dollar Amount		% of Loans		Dollar Amount		% of Loans		Dollar Amount		% of Loans
(In thousands)														(In thousands)	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Commercial and industrial	Commercial and industrial	$	62,421	6.5	%	$	45,504	5.2	%	$	51,135	6.3	%	Commercial and industrial	$	52,927	5.5	%	$	57,902	5.9	%	$	53,981	5.7	%
Real estate – mortgage	Real estate – mortgage	632,750		65.9	%	558,056		64.2	%	481,930		59.7	%	Real estate – mortgage	669,117		69.7	%	671,521		68.5	%	604,487		63.8	%
RE construction & development	RE construction & development	161,571		16.8	%	154,270		17.7	%	165,370		20.5	%	RE construction & development	135,300		14.1	%	153,374		15.6	%	176,839		18.6	%
Agricultural	Agricultural	57,296		6.0	%	60,239		6.9	%	56,091		6.9	%	Agricultural	57,666		6.0	%	52,722		5.4	%	64,957		6.9	%
Installment and student loans	Installment and student loans	46,511		4.8	%	51,245		6.0	%	53,411		6.6	%	Installment and student loans	45,111		4.7	%	44,659		4.6	%	47,767		5.0	%
Total gross loans	Total gross loans	$	960,549	100.00	%	$	869,314	100.00	%	$	807,937	100.00	%	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 ~~increased $91.2~~decreased $20.1 million during the first ~~nine~~six months of ~~2022.~~2023. There were ~~increases~~decreases of $74.7 million, or 13.4%, in real estate mortgage loans, $7.3 million, or 4.7%, in real estate construction and development loans, $16.9 million, or 37.2% in commercial and industrial. Installment loans decreased by $4.7 million, or 9.2% and agricultural loans decreased by $2.9 million, or 4.9%. The Bank is subject to internal limits of 115% of capital on the real estate construction and development portfolio and 345% of capital for the non-owner occupied commercial real estate portfolio, which also includes construction and development loans. In addition, there is also a limit of 50% growth over the three years for the non-owner occupied commercial real estate portfolio. At September 30, 2022, the real estate construction and development portfolio totaled 88% of capital. Non-owner occupied commercial real estate totaled 329% of capital and had a three year growth rate of$18.1

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~~63.2%. The current limits may affect the ability of the Bank to significantly grow these segments of the loan portfolio. The Bank is not approaching internal~~million, or ~~regulatory concentration limits~~11.8%, in ~~other loan segments.~~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 ~~totaling $632.8~~totaled $669.1 million at ~~September~~June 30, ~~2022,~~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 ~~39.8%~~42.0%, ~~38.1%~~40.6%, and ~~38.3%~~37.0% of the total loan portfolio at ~~September~~June 30, ~~2022,~~2023, December 31, ~~2021,~~2022, and ~~September~~June 30, ~~2021,~~2022, respectively. Commercial real estate balances increased to ~~$382.6~~$403.2 million at ~~September~~June 30, ~~2022~~2023 from ~~$331.1~~$398.1 million at December 31, ~~2021.~~2022. Commercial real estate loans are generally a mix of ~~short~~short- to medium-term, ~~fixed~~fixed- and ~~floating rate~~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 ~~six~~nine to ~~eight~~11 years. These loans totaled ~~$250.1~~$265.9 million, or ~~26.0%~~27.7%, of the portfolio at ~~September~~June 30, ~~2022, $226.9~~2023, $273.4 million, or ~~26.1%~~27.9%, of the portfolio at December 31, ~~2021,~~2022, and ~~$172.1~~$253.3 million, or ~~21.3%~~26.7%, of the portfolio at ~~September~~June 30, ~~2021. Dovenmuehle Mortgage, Inc. (“DMI”) is~~2022. Included in the ~~third-party sub-servicer for the Company's purchased~~ residential mortgage portfolio are purchased home-mortgage loan pools with aggregate balances of ~~$219.2~~$236.8 million, ~~or 87.6%~~comprising 89.0% of the total residential mortgage portfolio at ~~September~~June 30, ~~2022.~~2023. These loans were purchased in ~~whole loan~~whole-loan form, in several pools, beginning in May 2021 and continuing through ~~March~~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, ~~(with the Company's approval),~~ escrow management, monitoring, and collection. DMI is paid a monthly servicing fee ~~primarily~~based onprimarily upon the number of loans being serviced which, at ~~September~~June 30, ~~2022~~2023, totaled ~~233.~~259.

Real estate mortgage loans in total increased $74.7 million during 2022 and increased $150.8 million between September 30, 2021 and September 30, 2022. As part of the strategy to deploy excess liquidity, the Company purchased residential mortgage portfolios totaling $201.0 million in 2021 and $36.6 million in 2022. Real estate construction and development loans, representing ~~16.8%~~14.1%, ~~17.7%~~15.6%, and ~~20.5%~~18.6% of total loans at ~~September~~June 30, ~~2022,~~2023, December 31, ~~2021,~~2022, and ~~September~~June 30, ~~2021,~~2022, respectively, 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 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 ~~increased $16.9~~decreased $5.0 million between December 31, ~~2021~~2022 and ~~September~~June 30, 2023 and decreased $1.1 million between June 30, 2022 and ~~increased $11.3 between September~~June 30, ~~2021 and September 30, 2022. Included in commercial and industrial loans as of September 30, 2022 are $14,000 in SBA PPP loans.~~2023. Agricultural loans ~~decreased $2.9~~increased $4.9 million between December 31, ~~2021~~2022 and ~~September~~June 30, 2023 and decreased $7.3 million between June 30, 2022 and June 30, 2023. Installment loans increased ~~$1.2 million between September 30, 2021 and September 30, 2022. Installment and student loans decreased $4.7 million~~$452,000 between December 31, ~~2021~~2022 and ~~September~~June 30, 2023 and decreased $2.7 million between June 30, 2022 and ~~decreased $6.9 million between September~~June 30, ~~2021 and September 30, 2022,~~2023, primarily due to decreases in student loan balances.

~~Installment and~~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 ~~$6.9 million~~ between ~~September~~the six months ended June 30, ~~2021~~2023 and ~~September 30,~~ 2022, due to paydowns, consolidations with other lenders, and charge-offs within the student loan portfolio. Included in installment loans are $43.7 million in student loans made to medical and pharmacy school students. The student loan portfolio consists of unsecured loans to medical and pharmacy students currently enrolled in medical and pharmacy schools in the US and the Caribbean. The medical student loans are made to US citizens attending medical schools in the US and Caribbean, while the pharmacy student loans are made to pharmacy students attending pharmacy school in the US. Upon graduation the loan is automatically placed on grace for six months. This may be extended as a deferment up to 48 months for graduates enrolling in internship, medical residency or fellowship. 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. The outstanding balance of ~~student~~ loans ~~that~~for students who are in school or a grace period and have not entered repayment status totaled ~~$5.2~~$2.2 million at ~~September~~June 30, ~~2022. Accrued interest on student loans that are in school or grace totaled $2.0 million at September~~2023. At June 30, ~~2022. At September 30, 2022~~2023 there were ~~857~~833 loans within repayment, deferment, and forbearance which represented ~~$18.9~~$21.4 million, ~~$10.5~~$8.5 million, and ~~$9.2~~$8.9 million in outstanding balances, respectively. ~~There were~~Student loans are no ~~new student loans~~longer originated ~~in 2021 and 2022.~~by the bank.

~~Repayment of the unsecured~~While student ~~loans is reliant on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelines~~loan repayment terms ~~can~~may vary per borrower, ~~however~~ repayment occurs ~~on average~~ within 10 to 20 ~~years.~~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 ~~September~~June 30, ~~2022 is~~2023, was approximately ~~$99,000.~~$104,000. Loan interest rates ~~range~~ranged from ~~4.25%~~6.00% to ~~9.25%~~12.125%, with a weighted average rate of ~~8.24%~~11.14%.

~~Table of Contents~~

ZuntaFi is the third-party servicer for the student loan portfolio. ~~ZuntaFi's~~ZuntaFi’s services include application administration, processing, approval, documenting, funding, collection, and ~~collection. They also provide~~ 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 outstanding principal balance.

The Company classifies student loans delinquent more than 90 days as substandard. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, reserves against the student loan portfolio totaled ~~$2,561,000~~$5.3 million and ~~$2,647,000,~~$2.6 million, respectively. ~~There were no TDRs within the portfolio as of September 30, 2022 or December 31, 2021.~~ For the ~~quarter ended September 30, 2022, $86,000 accrued interest receivable was reversed due to $457,000 in charge-offs. For the nine~~six months ended ~~September~~June 30, ~~2022, $100,000~~2023, $111,000 in accrued interest receivable was reversed, due to charge-offs of ~~$810,000 within the student loan portfolio.~~$985,000. For the ~~three and nine~~six months ~~period~~ ended ~~September~~June 30, ~~2021, $54,000 and $97,000~~2022, $14,000 in accrued interest receivable was reversed, due to charge-offs of ~~$530,000 and $1,183,000 within~~$353,000. For the ~~student loan portfolio.~~quarter ended

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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~~Bank’s student loan portfolio with activity from December 31, ~~2021~~2022 to ~~September~~June 30, ~~2022:~~2023:


(In thousands)		Balance
Student Loan Portfolio Balance as of December 31, ~~2021~~2022		$	~~48,456~~42,132
~~Disbursements~~	—
Capitalized Interest		~~1,400~~2,091
Loan Consolidations/Payoffs		~~(4,538)~~(1,542)
Payments Received		~~(808)~~(731)
Loans Charged-off		~~(810)~~(985)
Student Loan Portfolio Balance as of ~~September~~June 30, ~~2022~~2023		$	~~43,700~~40,965

Loan participations purchased decreased to ~~$9.4~~$9.3 million, or 1.0% of the portfolio, at ~~September~~June 30, ~~2022 from $9.6 million at December 31, 2021 and~~2023, decreased from ~~the $9.6 million reported at September 30, 2021. Loan participations sold decreased from $9.3~~$9.4 million, or ~~1.1%, of the portfolio at September 30, 2021, to $5.3 million, or 0.6%~~1.0%, of the portfolio at December 31, ~~2021,~~2022, and ~~increased to $12.9~~decreased from $9.5 million, or ~~1.3%~~1.0%, of the portfolio at ~~September~~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

Deposit balances totaled ~~$1.24~~$1.0 billion at ~~September~~June 30, ~~2022,~~2023, representing ~~an increase~~a decrease of ~~$52.7~~$118.9 million, or ~~4.4%~~10.2%, from the balance of ~~$1.19~~$1.2 billion reported at December 31, ~~2021,~~2022, and ~~an increase~~a decrease of ~~$90.1~~$161.6 million, or ~~7.8%~~13.4%, from the balance of ~~$1.15~~$1.2 billion ~~reported~~ at ~~September~~June 30, ~~2021.~~

~~Table 7. Deposits~~2022.

The following table sets forth the amounts of deposits outstanding by category at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, and the net change between the two periods ~~presented.~~presented:


(in 000's)		September 30, 2022		December 31, 2021		Net Change		Percentage Change
(In thousands)										(In thousands)	June 30, 2023		December 31, 2022		$ Change		% Change
Noninterest-bearing deposits	Noninterest-bearing deposits	$	517,230	$	476,749	$	40,481	8.5	%	Noninterest-bearing deposits	$	476,387	$	481,629	$	(5,242)	(1.1)	%
Interest-bearing deposits:	Interest-bearing deposits:									Interest-bearing deposits:
NOW and money market accounts	NOW and money market accounts	517,820		529,841		(12,021)		(2.3)	%	NOW and money market accounts	385,667		499,861		(114,194)		(22.8)	%
Savings accounts	Savings accounts	130,786		113,930		16,856		14.8	%	Savings accounts	114,075		125,946		(11,871)		(9.4)	%
Time deposits:	Time deposits:									Time deposits:
Under $250,000	Under $250,000	53,492		46,631		6,861		14.7	%	Under $250,000	51,145		42,933		8,212		19.1	%
$250,000 and over	$250,000 and over	21,490		20,955		535		2.6	%	$250,000 and over	19,280		15,115		4,165		27.6	%
Total interest-bearing deposits	Total interest-bearing deposits	723,588		711,357		12,231		1.7	%	Total interest-bearing deposits	570,167		683,855		(113,688)		(16.6)	%
Total deposits	Total deposits	$	1,240,818	$	1,188,106	$	52,712	4.4	%	Total deposits	$	1,046,554	$	1,165,484	$	(118,930)	(10.2)	%

The ~~Company's~~following tables set forth estimated deposit base consists of two major components represented by noninterest-bearing (demand) deposits and interest-bearing deposits, totaling $517.2 million and $723.6 million at September 30, 2022, respectively. Interest-bearingbalances 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

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deposits consist of time certificates, NOW and money market accounts, and savings deposits. Total interest-bearing deposits increased $12.2 million, or 1.7%, between December 31, 2021 and September 30, 2022, and noninterest-bearing deposits increased $40.5 million, or 8.5%, between the same two periods presented. Included in the increase of $12.2 million in interest-bearing deposits during the nine months ended September 30, 2022, are increases of $16.9 million in savings accounts and $7.4 million in time deposits, offset by decreases of $12.0 million in NOW and money market accounts.


	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

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 ~~98.27%~~98.16% and ~~98.24%~~98.70% of total deposits at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The Company held no brokered deposits at ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

On a year-to-date average basis, the Company experienced ~~an increase~~a decrease of ~~$147.0~~$82.9 million, or ~~13.8%~~6.9%, in total deposits between the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Between these two periods, interest-bearing deposits ~~increased $97.5~~decreased $34.9 million, or ~~15.5%~~4.8%, and noninterest-bearing deposits ~~increased $49.5~~decreased $48.0 million, or ~~11.3%, on a year-to-date average basis.~~10.3%.

Short-Term Borrowings

At ~~September~~June 30, ~~2022,~~2023, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$419.3~~$449.2 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling ~~$2.2~~$137.1 million. At ~~September~~June 30, ~~2022,~~2023, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB), PNC, ~~Zion's~~Zions Bank, and ~~Union~~US Bank totaling $50 million, $40 million, $20 million and $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, ~~2022 and September~~2023, the Company had outstanding borrowings of $100.6 million. At June 30, ~~2021,~~2022, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of ~~$320.6~~$435.6 million, collateralized FHLB lines of credit totaling ~~$3.1~~$2.2 million, and uncollateralized lines of credit of $50 million with PCBB, $40 million with PNC, $20 million with ~~Zion's~~Zion’s Bank, and $10 million with Union Bank at December 31, ~~2021.~~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~~loans is reported as a contra-asset for Loan and Lease Losses (Statement) issued by banking regulators in December 2006. The Statement 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 regardingloans, 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 the incurred loss 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. Itlosses on off-balance sheet credit exposure is ~~also generally consistent with the guidance published by the banking regulators.~~reported as a liability.

The allowance for loan losses includes an asset-specific component, as well as a general or formula-based component. The Company segments the loan and lease portfolio into eight (8) segments, primarily by loan class homogeneity and commonality of purpose 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.

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

•~~The formula allowance~~

•Individually-Evaluated Loans and Specific ~~allowances for problem graded loans identified as impaired; and~~

•~~The unallocated allowance~~

The formula allowance 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;~~

•~~Fluctuation in the valuation of underlying collateral securing loans;~~

•~~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, 2022, impaired and classified loans totaled $11.8 million, or 1.2%, of gross loans as compared to $13.7 million, or 1.6%, of gross loans at December 31, 2021.

The student loan portfolio is reviewed for allowance adequacy under the same guidelines as other loans in the Company's portfolio, with additional emphasis for specific risks associated with the portfolio. In general, the Company provides an additional reserve for a percentage of loans in forbearance and loans rated substandard.

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 portfolio 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 pool of loans with similar risk characteristics, based on past historical trends and other risk factors which may be relevant on an ongoing basis.

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,

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~~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.~~

~~Table 8. Allowance for Loan Losses~~Reserves:

The following table summarizes the components of individually-evaluated loans and related specific ~~allowance, formula allowance, and unallocated allowance at September 30, 2022 and December 31, 2021, as well as classified loans at those period-ends.~~reserves:

(in 000's) September 30, 2022 December 31, 2021
Specific allowance – impaired loans $ 70 $ 130
Formula allowance – classified loans not impaired — 523
Formula allowance – special mention loans 266 503
Total allowance for special mention and classified loans 336 1,156
Formula allowance for pass loans 8,703 7,408
Unallocated allowance 1,024 769
Total allowance for loan losses $ 10,063 $ 9,333
Impaired loans 11,829 12,034
Classified loans not considered impaired — 1,645
Total classified and impaired loans $ 11,829 $ 13,679
Special mention loans not considered impaired $ 35,807 $ 40,289


	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

~~Impaired~~Individually-evaluated loans ~~decreased $205,000 between December 31, 2021 and September~~declined $2.0 million to $13.7 million at June 30, ~~2022, and the specific allowance related~~2023 compared to impaired loans decreased $60,000 between December 31, 2021 and September 30, 2022. The decrease in impaired loans is primarily due to a decrease in non-performing loans. The formula allowance related to classified and special mention unimpaired loans decreased by $760,000 between December 31, 2021 and September 30, 2022. The unallocated allowance increased from $769,000$15.6 million at December 31, ~~2021 to $1,024,000 at September 30,~~ 2022. The level of “pass” loans increased approximately $98.0 million between December 31, 2021 and September 30, 2022. The related formula allowance increased $1,295,000 during the same period. The formula allowance for "pass loans" is derived from loss factors using migration analysis and management's consideration of qualitative factors. The increase in formula allowance for "pass loans" was partially attributed to an adjustmentIncluded in the ~~qualitative factor for economic uncertainty.~~

~~The Company’s methodology includes features that~~balance of specific reserves at June 30, 2023, are ~~intended~~$2,000 allocated 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. Our 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 and better capture an entire economic cycle. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and the economic environment.

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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 residentialone real estate ~~loans, construction loans,~~mortgage loan and $41,000 allocated to one 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 loan discounted at the loan's stated interest rate. 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 allowanceloan. There were no reserves 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, 2022, included in impaired loans, were troubled debt restructures totaling $2.3 million, of which $2.1 million were on nonaccrual. The remaining $142,000 in troubled debt restructures were considered current with regards to payments, and were performing according to their modified contractual terms.

Real estate mortgage loans comprised approximately 1.2% of total impaired loan balances at September 30, 2022. 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, 2022, approximately $11.2 million, or 94.3%, 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.

~~Table 9. Impaired Loans and Specific Reserves~~

~~The following table summarizes the components of impaired loans and their related specific reserves~~ at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~

Impaired Loan Balance Reserve Impaired Loan Balance Reserve
(in 000’s) September 30, 2022 September 30, 2022 December 31, 2021 December 31, 2021
Commercial and industrial $ — $ — $ — $ —
Real estate – mortgage 142 3 146 3
RE construction & development 11,015 — 11,226 —
Agricultural 672 67 662 127
Installment and student loans — — — —
Total impaired loans $ 11,829 $ 70 $ 12,034 $ 130

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Included in impaired loans are loans modified in troubled debt restructurings (TDRs), where concessions have been granted 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, 2022, approximately $142,000 of the total $2.3 million in TDRs was comprised of real estate mortgages. An additional $2.0 million was related to real estate construction and development loans. There were no reserve amounts for real estate construction and development impaired loans at December 31, 2021 and September 30, 2022, due to the value of the collateral securing those loans.

Total troubled debt restructurings decreased 12.6% between September 30, 2022 and December 31, 2021. Nonaccrual TDRs decreased by 12.1% and accruing TDRs decreased by 19.3% over the same period. Total residential mortgages and real estate construction TDRs decreased $215,000 for a percentage total of 9.1%.

~~Table 10. TDRs~~

~~The following tables summarize TDRs by type, classified separately as nonaccrual or accrual, which are included in impaired loans at September 30, 2022 and December 31, 2021.~~

Total TDRs Nonaccrual TDRs Accruing TDRs
(in 000's) September 30, 2022 September 30, 2022 September 30, 2022
Commercial and industrial $ — $ — $ —
Real estate mortgage:
Commercial real estate — — —
Residential mortgages 142 — 142
Total real estate mortgage 142 — 142
RE construction & development 1,995 1,995 —
Agricultural 130 130 —
Total troubled debt restructurings $ 2,267 $ 2,125 $ 142

Total TDRs Nonaccrual TDRs Accruing TDRs
(in 000's) December 31, 2021 December 31, 2021 December 31, 2021
Commercial and industrial $ — $ — $ —
Real estate mortgage:
Commercial real estate — — —
Residential mortgages 146 — 146
Total real estate mortgage 146 — 146
RE construction & development 2,206 2,206 —
Agricultural 242 212 30
Total troubled debt restructurings $ 2,594 $ 2,418 $ 176

Of the $2.3 million in total TDRs at September 30, 2022, $2.1 million were on nonaccrual status at period-end. Of the $2.6 million in total TDRs at December 31, 2021, $2.4 million were on nonaccrual status at period-end. As of September 30, 2022, the Company had no commercial real estate (CRE) workouts whereby an existing loan was restructured into multiple new loans.

A restructured loan may return to accrual status after 6 months successful payment history if continued satisfactory performance is expected. The Company typically 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 a 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.

~~Table 11.~~ Credit Quality Indicators for Outstanding Student ~~Loans~~Loans:

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The following table summarizes the credit quality indicators for outstanding student loans as ~~of September 30, 2022 and December 31, 2021 (in 000's, except for number of borrowers):~~of:


		September 30, 2022					December 31, 2021						June 30, 2023					December 31, 2022
		Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
(Dollars in thousands)												(Dollars in thousands)	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	School	82	$	2,370	$	1,015	185	$	6,555	$	2,021	School	63	$	1,719	$	914	70	$	2,056	$	908
Grace	Grace	75	2,781		952		28	912		317		Grace	15	459		205		27	667		348
Repayment	Repayment	414	18,888		418		500	23,834		715		Repayment	452	21,373		250		516	23,414		857
Deferment	Deferment	253	10,498		1,444		224	8,984		508		Deferment	196	8,471		1,536		268	10,974		1,732
Forbearance	Forbearance	190	9,161		833		177	8,172		1,077		Forbearance	185	8,943		593		91	5,019		237
Total	Total	1,014	$	43,698	$	4,662	1,114	$	48,457	$	4,638	Total	911	$	40,965	$	3,498	972	$	42,130	$	4,082

Included in installment loans are ~~$43.7~~$41.0 million and ~~$48.5~~$42.1 million in student loans at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, made to medical and pharmacy school students. At September 30, 2022 there were 857 loans within repayment, deferment, and forbearance which represented $18.9 million, $10.5 million, and $9.2 million, respectively. At December 31, 2021, there were 901 loans within repayment, deferment, and forbearance which represented $23.8 million, $9.0 million and $8.2 million, respectively. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, the reserve against the student loan portfolio ~~was $2.5~~totaled $5.3 million and $2.6 million, respectively.

Loan interest rates on the student loan portfolio range from ~~4.25%~~6.00% to ~~9.25%~~12.125% and ~~2.625%~~5.75% to ~~7.625%~~10.75% at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Table ~~12.~~ of Contents

Nonperforming ~~Assets~~Assets:

The following table summarizes the components of nonperforming assets as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021 (in 000's),~~2022, and the percentage of nonperforming assets to total gross loans, total assets, and the percentage of nonperforming assets to allowance for loan losses:

(in 000's) September 30, 2022 December 31, 2021
Nonaccrual loans (1) $ 11,145 $ 11,438
Restructured loans 142 176
Loans past due 90 days or more, still accruing — 453
Total nonperforming loans 11,287 12,067
Other real estate owned 4,582 4,582
Total nonperforming assets $ 15,869 $ 16,649
Nonperforming loans to total gross loans 1.18 % 1.39 %
Nonperforming assets to total assets 1.16 % 1.25 %
Allowance for loan losses to nonperforming loans 89.16 % 77.34 %

~~(1) Included in nonaccrual loans at September 30, 2022 and December 31, 2021 are restructured loans totaling $2,124 and $2,418, respectively.~~


(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		%

Nonperforming assets, which are primarily related to the real estate loan and ~~other real estate owned~~other-real-estate-owned portfolio, decreased ~~$780,000~~$1,422,000 from ~~a balance of $16.6~~$19.4 million at December 31, ~~2021~~2022 to ~~a balance of $15.9~~$18.0 million at ~~September~~June 30, ~~2022. The nonaccrual loans~~2023. Nonaccrual loan balances decreased to $13.2 million between the two periods and are well collateralized and in the process of collection. Loans past due 90 days or more and still accruing at June 30, 2023, consist of student loans which will be charged off if delinquency continues past 120 days. The ratio of the allowance for ~~loan~~credit losses to nonperforming loans increased from ~~77.3%~~68.82% at December 31, ~~2021~~2022 to ~~89.2%~~120.46% at ~~September~~June 30, ~~2022.~~2023. The percentage increase is primarily due to the adjustment for CECL and reserve increases due to student loan delinquencies.

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The following table summarizes the nonaccrual totals by loan category for the periods shown:

Balance at Balance at Change from
(in 000's) September 30, 2022 December 31, 2021 December 31, 2021
Nonaccrual Loans:
Commercial and industrial $ — $ — $ —
Real estate - mortgage — — —
RE construction & development 11,015 11,226 (211)
Agricultural 130 212 (82)
Installment and student loans — — —
Total nonaccrual loans $ 11,145 $ 11,438 $ (293)


(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)

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, ~~2022~~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 at some future date.~~terms.

Nonaccrual loans, totaling ~~$11.1~~$13.2 million at ~~September~~June 30, ~~2022,~~2023, decreased ~~$293,000~~$1.3 million from ~~the balance of $11.4~~$14.5 million ~~reported~~ at December 31, ~~2021,~~2022, with real estate mortgage and real estate construction loans comprising ~~98.8%~~99.4% of total nonaccrual loans at ~~September~~June 30, ~~2022.~~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 $205,000 during the nine months ended September 30, 2022 to a balance of $11.8 million at September 30, 2022.~~ same periods.

Other real estate owned through foreclosure remained at $4.6 million for the periods ended ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. Nonperforming assets as a percentage of total assets decreased from ~~1.25%~~1.48% at December 31, ~~2021~~2022 to ~~1.16%~~1.39% at ~~September~~June 30, ~~2022.~~2023.

~~The following table summarizes various nonperforming components~~

Table of ~~the loan portfolio, the related allowance for credit losses and provision for credit losses for the periods shown.~~Contents

(in 000's) September 30, 2022 December 31, 2021 September 30, 2021
Provision for credit losses year-to-date $ 1,217 $ 2,107 $ 1,654
Allowance as % of nonperforming loans 89.2 % 77.3 % 7.6 %
Nonperforming loans as % total loans 1.2 % 1.4 % 1.5 %
Restructured loans as % total loans 0.2 % 0.3 % 0.3 %

Management continues to monitor economic conditions in the real estate market for signs of 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. Focus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including loan restructures. Restructured loan balances are comprised of 4 loans totaling $2.27 million at September 30, 2022, compared to 5 loans totaling $2.59 million at December 31, 2021.assets.

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The following table summarizes special mention loans by type ~~at September 30, 2022 and December 31, 2021.~~as of:

(in thousands) September 30, 2022 December 31, 2021
Real estate mortgage:
Commercial real estate 34,790 29,092
Total real estate mortgage 34,790 29,092
Agricultural 1,017 11,197
Total special mention loans $ 35,807 $ 40,289


(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. ~~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 enters into ~~troubled debt restructurings,~~loan modifications when it improves collection prospects. While business and consumer spending have shown improvement over the last several years, it is difficult to forecast the impact COVID-19 will have on the economy. Local unemployment rates in the San Joaquin Valley have improved as businesses return to pre-pandemic operations. 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, ~~2022~~2023 and ~~September~~June 30, ~~2021.~~2022.

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~~Table 13.~~ Allowance for Credit Losses - Summary of ~~Activity~~Activity:


(in 000's)		September 30, 2022			September 30, 2021
(In thousands)								(In thousands)	June 30, 2023			June 30, 2022
Total loans outstanding at end of period before deducting allowances for credit losses	Total loans outstanding at end of period before deducting allowances for credit losses	$	962,166		$	809,114		Total loans outstanding at end of period before deducting allowances for credit losses	$	960,121		$	948,031
Average loans outstanding during period	Average loans outstanding during period	910,221			753,424			Average loans outstanding during period	957,620			888,722

Balance of allowance at beginning of period	Balance of allowance at beginning of period	9,333			8,522			Balance of allowance at beginning of period	$	10,182		$	9,333
Impact of adoption of ASU 2016-13								Impact of adoption of ASU 2016-13	6,367			—
Loans charged-off:	Loans charged-off:							Loans charged-off:

Installment and student loans	Installment and student loans	(828)			(1,199)			Installment and student loans	(995)			(364)
Total loans charged-off	Total loans charged-off	(828)			(1,199)			Total loans charged-off	(995)			(364)
Recoveries of loans previously charged-off:	Recoveries of loans previously charged-off:							Recoveries of loans previously charged-off:
Real estate	Real estate	10			15			Real estate	51			6
Commercial and industrial	Commercial and industrial	305			41			Commercial and industrial	1			304
Installment and student loans	Installment and student loans	25			111			Installment and student loans	41			17
Total loan recoveries	Total loan recoveries	340			167			Total loan recoveries	93			327
Net loans charged-off	Net loans charged-off	(488)			(1,032)			Net loans charged-off	(902)			(37)

Provision charged to operating expense	Provision charged to operating expense	1,217			1,654			Provision charged to operating expense	463			417
Balance of allowance for credit losses at end of period	Balance of allowance for credit losses at end of period	$	10,062		$	9,144		Balance of allowance for credit losses at end of period	$	16,110		$	9,713

Net loan charged-off to total average loans (annualized)	Net loan charged-off to total average loans (annualized)	0.07		%	0.18		%	Net loan charged-off to total average loans (annualized)	0.19		%	0.01		%
Net loan charged-off to loans at end of period (annualized)	Net loan charged-off to loans at end of period (annualized)	0.20		%	0.13		%	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	Allowance for credit losses to total loans at end of period	1.05		%	1.13		%	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)	Net loan charged-off to allowance for credit losses (annualized)	19.40		%	2.82		%	Net loan charged-off to allowance for credit losses (annualized)	22.40		%	1.49		%
Provision for credit losses to net charged-off (annualized)	Provision for credit losses to net charged-off (annualized)	499.18		%	320.54		%	Provision for credit losses to net charged-off (annualized)	102.66		%	(3,302.70)		%

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, ~~2022,~~2023, a ~~$1.2 million~~$598,000 provision was recorded to the allowance for credit losses as compared to a ~~$1.7 million~~$417,000 provision ~~recorded~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~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 charge-offs during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 totaled ~~$488,000~~$902,000 as compared to net charge-offs of ~~$1,032,000~~$37,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The Company charged-off, or had partial charge-offs on 1324 loans during the ~~nine~~six months ended ~~September~~June 30, ~~2022, as~~2023, compared to 144 loans during the same period ended ~~September~~June 30, ~~2021, and 39 loans during the year ended December 31, 2021.~~2022. The annualized percentage of net charge-offs to average loans was ~~0.07%~~0.19% for the ~~nine~~six months ended ~~September~~June 30, ~~2022. Annualized percentage net charge-offs were 0.17%~~2023, 0.14% for the year ended December 31, ~~2021. Annualized percentage net recoveries were 0.18%~~2022, and 0.01% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The ~~Company's~~Company’s loans net of unearned fees increased from ~~$809.1~~$950.0 million at ~~September~~June 30, ~~2021~~2022 to ~~$962.2~~$960.1 million at ~~September~~June 30, ~~2022.~~2023.

The allowance at ~~September~~June 30, ~~2022~~2023 was ~~1.05%~~1.68% of outstanding loan balances, ~~at September 30, 2022,~~ as compared to ~~1.07%~~1.04% at December 31, ~~2021, and 1.13% at September 30, 2021.~~

~~At September 30,~~ 2022, and ~~September~~1.05% at June 30, ~~2021,~~2022. At June 30, 2023 and June 30, 2022, unfunded loan commitment reserves of ~~$459,000~~$935,000 and ~~$538,000~~$569,000 respectively, were reported in other liabilities.

Management believes that the ~~1.05%~~loan allowance for credit ~~loss allowance~~losses, totaling 1.68% of the loan portfolio at ~~September~~June 30, ~~2022~~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 ~~resulting~~and result in ~~increased~~ losses in the loan portfolio not captured by the current allowance for ~~loan~~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.

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Liquidity and Capital Resources

The ~~Company's~~Company’s asset/liability management, liquidity strategy, and capital planning isare guided by policies formulated and monitored by the Asset and Liability Management Committee ~~("ALCO")~~(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's~~Company’s liquid asset base, which generally consists of cash and due from banks, federal funds sold, and investment securities, is maintained at levels deemed sufficient to provide the cash necessary to fund loan growth, unfunded loan commitments, and deposit 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 ~~are~~typically provide higher ~~yielding assets~~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 June 30, 2023, the loan to deposit ratio was 91.74%, compared to ~~cash. At September 30, 2022, loans represented 70.3% of total assets and accounted for~~ a loan to deposit ratio of ~~77.5%, as compared to 65.5% of total assets and a loan to deposit ratio of 73.4%~~84.10% at December 31, 2021. Investment securities represented 15.5% of total assets at September 30, 2022, compared to 13.7% at December 31, 2021. Liquid assets at September 30, 2022 include cash and cash equivalents totaling $126.0 million, as compared to $219.2 million at December 31, 2021.2022.

Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term ~~borrowings capability.~~borrowing capabilities. Core deposits, which comprised approximately ~~98.3%~~98.2% of total deposits at ~~September~~June 30, ~~2022,~~2023, provide a significant and stable funding source for the Company. ~~At September~~The bank held $75 million in borrowings from a secured credit line with the Federal Reserve Bank and $25.6 million in borrowings from an unsecured credit line with PCBB for a total of $100.6 million in borrowings at June 30, ~~2022, unused~~2023. Unused lines of credit with the Federal ~~Home Loan Bank, Pacific Coast Banker's Bank, Zion's Bank, Union~~Reserve Bank and ~~the Federal Reserve Bank~~FHLB, totaling ~~$501.5~~$605.7 million, were collateralized ~~in part~~ by investment securities and certain qualifying loans in the Company’s ~~loan~~ portfolio. The carrying value of loans pledged on these ~~used and unused~~ borrowing lines totaled ~~$571.1~~$592.1 million at ~~September~~June 30, ~~2022.~~2023. For a further detail of the Company’s borrowing arrangements, see Note 6 of- Short-term Borrowings/Other Borrowings, in the notes to the consolidated financial statements.

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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 000's)~~(In thousands)			Balance
December 31, ~~2020~~	$	~~294,069~~
~~September 30,~~ 2021	$		~~259,428~~
~~December 31, 2021~~	$	219,219
~~September~~June 30, 2022			$107,246
~~126,032~~December 31, 2022			38,595
June 30, 2023			58,403

Capital and Dividends

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, 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.

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

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the Bank to maintain a Tier 1 Leverage Ratio equal to or greater than 9%. The Bank’s Tier 1 Capital Ratio was ~~9.60%~~11.18% and ~~9.80%~~9.55% at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. The following table sets forth the Company’s and the ~~Bank's~~Bank’s actual capital positions at ~~September~~June 30, ~~2022:~~2023:

Capital ~~Ratios~~Ratios:


		September 30, 2022	Ratios at December 31, 2021	Minimum Requirement to be Well Capitalized	Minimum requirement for Community Bank Leverage Ratio (1)		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")
Tier 1 capital to adjusted average assets (“Leverage Ratio”)						Tier 1 capital to adjusted average assets (“Leverage Ratio”)
Company	Company	9.56%	9.79%	5.00%	9.00%	Company	11.16%	10.10%	5.00%	9.00%
Bank	Bank	9.60%	9.64%	5.00%	9.00%	Bank	11.18%	10.11%	5.00%	9.00%

(1) If the ~~subsidiary bank’s~~Bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework (CBLR), it is deemed to be “well capitalized” under all other regulatory capital requirements. ~~The Company may revert back to~~If the ~~regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio~~Bank’s leverage ratio falls below the minimum ~~under~~required, it would no longer be eligible to elect use of the ~~Community Bank Leverage Ratio Framework.~~CBLR framework.

As of ~~September~~June 30, ~~2022,~~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 retained earnings 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 ~~2.8%~~2.6% of total ~~shareholders'~~shareholders’ equity of ~~$107.1~~$115.7 million at ~~September~~June 30, ~~2022.~~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 ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the Company did not repurchase any of the shares available.

During the ~~nine~~six months ended ended ~~September~~June 30, ~~2022,~~2023, the Bank paid ~~$5.9~~$2.0 million in cash dividends to the Holding Company which funded the Holding Company’s operating costs, payments of interest on its junior subordinated debt, and dividend payments to shareholders.

On ~~September~~June 27, ~~2022,~~2023, the Company’s Board of Directors declared a cash dividend of ~~$0.11~~$0.12 per share on the ~~Company's~~Company’s common stock. The dividend was payable on ~~October 25, 2022,~~July 24, 2023, to shareholders of record as of ~~October 11, 2022.~~July 10, 2023. Approximately ~~$1.9~~$2.1 million was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

On June 28, 2022, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 22, 2022, to shareholders of record as of July 8, 2022. Approximately $1.9 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

On March 22, 2022, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 18, 2022, to shareholders of record as of April 6, 2022. Approximately $1.9 million was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.

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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 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.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of September 30, 2022 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2021.This item is not applicable to 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, ~~2022, 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, ~~2022,~~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

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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.

6353

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PART II. Other Information

Item 1. Legal Proceedings

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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None during the quarter ended ~~September~~June 30, ~~2022.~~

~~Item 3.Defaults Upon Senior Securities~~

~~Not applicable~~

~~Item 4.Mine Safety Disclosures~~

~~Not applicable~~

~~Item 5.Other Information~~

~~Not applicable~~2023.

Item 6. Exhibits:

(a)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 10 to the consolidated financial statements in this report.

6454

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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 4, 2022~~August 14, 2023	/S/ Dennis R. Woods
		Dennis R. Woods
		President and Chief Executive Officer

		/S/ ~~Steven Leen~~David A. Kinross
		~~Steven Leen~~David A. Kinross
		~~Interim~~Senior Vice President and Chief Financial Officer

6555


September 30, 2022	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	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Government program loans	—		—		—		—		—		—		—
Total commercial and industrial	—		—		—		—		—		—		—

Commercial real estate loans	—		—		—		—		—		—		—
Residential mortgages	142		—		142		142		3		144		5
Home improvement and home equity loans	—		—		—		—		—		—		—
Total real estate mortgage	142		—		142		142		3		144		5

Real estate construction and development loans	11,015		11,015		—		11,015		—		11,114		165
Agricultural loans	670		542		130		672		67		665		25
Installment and student loans	—		—		—		—		—		—		—

Total impaired loans	$	11,827	$	11,557	$	272	$	11,829	$	70	$	11,923	$	195


Three Months Ended September 30, 2022	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	—	$	—	$	143	$	—	$	2,047	$	161	$	—	$	2,351

Additions	—		—		—		—		—		—		—		—

Principal reductions	—		—		(1)		—		(53)		(31)		—		(85)
Charge-offs	—		—		—		—		—		—		—		—

Ending balance	$	—	$	—	$	142	$	—	$	1,994	$	130	$	—	$	2,266

Allowance for loan loss	$	—	$	—	$	3	$	—	$	—	$	67	$	—	$	70
Defaults	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


Three Months Ended September 30, 2021	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	—	$	—	$	359	$	—	$	2,335	$	379	$	—	$	3,073

Additions	—		—		—		—		—		—		—		—

Principal reductions	—		—		(212)		—		(50)		(49)		—		(311)
Charge-offs	—		—		—		—		—		—		—		—

Ending balance	$	—	$	—	$	147	$	—	$	2,285	$	330	$	—	$	2,762

Allowance for loan loss	$	—	$	—	$	4	$	—	$	—	$	144	$	—	$	148
Defaults	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


Nine Months Ended September 30, 2022	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	—	$	—	$	146	$	—	$	2,206	$	242	$	—	$	2,594

Additions	—		—		—		—		—		—		—		—

Principal reductions	—		—		(4)		—		(212)		(112)		—		(328)
Charge-offs	—		—		—		—		—		—		—		—

Ending balance	$	—	$	—	$	142	$	—	$	1,994	$	130	$	—	$	2,266

Allowance for loan loss	$	—	$	—	$	3	$	—	$	—	$	67	$	—	$	70
Defaults	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


Nine Months Ended September 30, 2021	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Home Improvement and Home Equity		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total
Beginning balance	$	—	$	—	$	365	$	—	$	2,452	$	609	$	—	$	3,426

Additions	—		—		—		—		—		—		—		—

Principal reductions	—		—		(218)		—		(167)		(279)		—		(664)
Charge-offs	—		—		—		—		—		—		—		—

Ending balance	$	—	$	—	$	147	$	—	$	2,285	$	330	$	—	$	2,762

Allowance for loan loss	$	—	$	—	$	4	$	—	$	—	$	144	$	—	$	148
Defaults	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	September 30, 2022						September 30, 2021
	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	$	—	$	62,333	$	62,333	$	—	$	44,713	$	44,713
Government program loans	—		88		88		—		6,422		6,422
Total commercial and industrial	—		62,421		62,421		—		51,135		51,135

Commercial real estate loans	—		382,607		382,607		—		309,727		309,727
Residential mortgage loans	142		249,949		250,091		148		171,972		172,120
Home improvement and home equity loans	—		52		52		—		83		83
Total real estate mortgage	142		632,608		632,750		148		481,782		481,930

Real estate construction and development loans	11,015		150,556		161,571		11,273		154,097		165,370

Agricultural loans	672		56,624		57,296		330		55,761		56,091

Installment and student loans	—		46,511		46,511		—		53,411		53,411

Total loans	$	11,829	$	948,720	$	960,549	$	11,751	$	796,186	$	807,937


Description of Liabilities	September 30, 2022		Quoted Prices in Active Markets for Identical Liabilities (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Junior subordinated debt (1)	$	10,305	—	—	$	10,305
Total	$	10,305	—	—	$	10,305


	Impaired Loan Balance		Reserve		Impaired Loan Balance		Reserve
(in 000’s)	September 30, 2022		September 30, 2022		December 31, 2021		December 31, 2021
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate – mortgage	142		3		146		3
RE construction & development	11,015		—		11,226		—
Agricultural	672		67		662		127
Installment and student loans	—		—		—		—
Total impaired loans	$	11,829	$	70	$	12,034	$	130


	Total TDRs		Nonaccrual TDRs		Accruing TDRs
(in 000's)	September 30, 2022		September 30, 2022		September 30, 2022
Commercial and industrial	$	—	$	—	$	—
Real estate mortgage:
Commercial real estate	—		—		—
Residential mortgages	142		—		142

Total real estate mortgage	142		—		142
RE construction & development	1,995		1,995		—
Agricultural	130		130		—

Total troubled debt restructurings	$	2,267	$	2,125	$	142


	Balance at		Balance at		Change from
(in 000's)	September 30, 2022		December 31, 2021		December 31, 2021
Nonaccrual Loans:
Commercial and industrial	$	—	$	—	$	—
Real estate - mortgage	—		—		—
RE construction & development	11,015		11,226		(211)
Agricultural	130		212		(82)
Installment and student loans	—		—		—
Total nonaccrual loans	$	11,145	$	11,438	$	(293)