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 ~~MARCH 31,~~SEPTEMBER 30, 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)

Registrant’s telephone number, including area code (559) ~~248-4943~~490-6261

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 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 accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒
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 classes of common stock, as of the latest practicable date.

Common Stock, no par value

(Title of Class)

Shares outstanding as of ~~April 30,~~October 31, 2023: ~~17,094,298~~17,136,095

Table of Contents

TABLE OF CONTENTS


PART I. Financial Information
	Item 1. Financial Statements (Unaudited)
		~~Consolidated~~C ondensed C onsolidated Balance Sheets	3
		~~Consolidated~~C ondensed C onsolidated Statements of Income	4
		~~Consolidated~~C ondensed C onsolidated Statements of Comprehensive Income (Loss)	5
		Condensed Consolidated Statements of Changes in Shareholders’ Equity	6
		~~Consolidated~~C ondensed C onsolidated Statements of Cash Flows	78
		Notes to Condensed Consolidated Financial Statements	89
	Item 2. ~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations		3433
		Overview	3433
		Results of Operations	35
		Financial Condition	4143
		Liquidity and Capital Resources	5051
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		5253
	Item 4. Controls and Procedures		5253
PART II. Other Information
	Item 1.	Legal Proceedings	5455
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5455



	Item 6.	Exhibits	5455
Signatures			5556

Table of Contents

PART I. Financial Information

Item 1 - Financial Statements (Unaudited)

United Security Bancshares and Subsidiaries

Condensed Consolidated Balance Sheets – (unaudited)

~~March 31, 2023 and December 31, 2022~~


(in thousands except shares)		March 31, 2023		December 31, 2022
(In thousands except shares)						(In thousands except shares)	September 30, 2023		December 31, 2022
Assets	Assets					Assets
Cash and noninterest-bearing deposits in other banks	Cash and noninterest-bearing deposits in other banks	$	41,949	$	31,650	Cash and noninterest-bearing deposits in other banks	$	34,329	$	31,650
Due from Federal Reserve Bank (“FRB”)		3,204		6,945
Due from Federal Reserve Bank (FRB)						Due from Federal Reserve Bank (FRB)	968		6,945
Cash and cash equivalents	Cash and cash equivalents	45,153		38,595		Cash and cash equivalents	35,297		38,595

Investment securities (at fair value)	Investment securities (at fair value)					Investment securities (at fair value)
Available-for-sale (“AFS”) securities		205,556		207,545
Available-for-sale (AFS) securities, at fair value, net of allowance for credit losses of $0 (amortized cost of $214,645 and $234,610)						Available-for-sale (AFS) securities, at fair value, net of allowance for credit losses of $0 (amortized cost of $214,645 and $234,610)	184,641		207,545
Marketable equity securities	Marketable equity securities	3,358		3,315		Marketable equity securities	3,216		3,315
Total investment securities	Total investment securities	208,914		210,860		Total investment securities	187,857		210,860
Loans	Loans	944,191		981,772		Loans	973,923		981,772
Unearned fees and unamortized loan origination costs - net	Unearned fees and unamortized loan origination costs - net	(1,464)		(1,594)		Unearned fees and unamortized loan origination costs - net	(1,052)		(1,594)
Allowance for credit losses	Allowance for credit losses	(15,622)		(10,182)		Allowance for credit losses	(15,649)		(10,182)
Net loans	Net loans	927,105		969,996		Net loans	957,222		969,996
Premises and equipment - net	Premises and equipment - net	9,486		9,770		Premises and equipment - net	9,197		9,770
Accrued interest receivable	Accrued interest receivable	7,829		8,489		Accrued interest receivable	8,095		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	14,422		12,825		Deferred tax assets - net	15,646		12,825
Cash surrender value of life insurance		23,025		22,893
Cash surrender value of life insurance, net						Cash surrender value of life insurance, net	23,299		22,893

Operating lease right-of-use assets	Operating lease right-of-use assets	1,808		1,984		Operating lease right-of-use assets	1,497		1,984
Other assets	Other assets	14,382		14,711		Other assets	25,912		14,711
Total assets	Total assets	$	1,261,194	$	1,299,193	Total assets	$	1,273,092	$	1,299,193

Liabilities & Shareholders’ Equity	Liabilities & Shareholders’ Equity					Liabilities & Shareholders’ Equity
Liabilities	Liabilities					Liabilities
Deposits	Deposits					Deposits
Non-interest-bearing	Non-interest-bearing	$	394,745	$	481,629	Non-interest-bearing	$	386,258	$	481,629
Interest-bearing	Interest-bearing	716,387		683,855		Interest-bearing	601,373		683,855
Total deposits	Total deposits	1,111,132		1,165,484		Total deposits	987,631		1,165,484
Federal funds purchased and securities sold under agreements to resell		13,200		—
Short-term borrowings						Short-term borrowings	142,000		—
Operating lease liabilities	Operating lease liabilities	1,915		2,093		Operating lease liabilities	1,599		2,093
Other liabilities	Other liabilities	11,022		8,270		Other liabilities	15,868		8,270
Junior subordinated debentures (at fair value)	Junior subordinated debentures (at fair value)	11,017		10,883		Junior subordinated debentures (at fair value)	10,966		10,883
Total liabilities	Total liabilities	1,148,286		1,186,730		Total liabilities	1,158,064		1,186,730
Commitments and contingencies (Note 17)						Commitments and contingencies (Note 17)
Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,094,298 at March 31, 2023 and 17,067,253 at December 31, 2022		60,269		60,030
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,135,595 at September 30, 2023 and 17,067,253 at December 31, 2022						Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,135,595 at September 30, 2023 and 17,067,253 at December 31, 2022	60,524		60,030
Retained earnings	Retained earnings	69,495		69,928		Retained earnings	73,654		69,928
Accumulated other comprehensive loss, net of tax	Accumulated other comprehensive loss, net of tax	(16,856)		(17,495)		Accumulated other comprehensive loss, net of tax	(19,150)		(17,495)
Total shareholders’ equity	Total shareholders’ equity	112,908		112,463		Total shareholders’ equity	115,028		112,463
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	1,261,194	$	1,299,193	Total liabilities and shareholders’ equity	$	1,273,092	$	1,299,193

Table of Contents

United Security Bancshares and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands except shares and EPS)			2023		2022
(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		$	13,000	$	9,119		Interest and fees on loans	$	13,763	$	11,514	$	40,292	$	30,363
Interest on investment securities	Interest on investment securities		1,501		790			Interest on investment securities	1,491		1,322		4,492		3,117
Interest on deposits in FRB	Interest on deposits in FRB		58		82			Interest on deposits in FRB	74		683		187		1,023

Total interest income	Total interest income		14,559		9,991			Total interest income	15,328		13,519		44,971		34,503
Interest Expense:	Interest Expense:							Interest Expense:
Interest on deposits	Interest on deposits		1,343		508			Interest on deposits	1,841		679		5,128		1,702
Interest on other borrowed funds	Interest on other borrowed funds		271		45			Interest on other borrowed funds	1,566		110		2,475		224
Total interest expense	Total interest expense		1,614		553			Total interest expense	3,407		789		7,603		1,926
Net Interest Income	Net Interest Income		12,945		9,438			Net Interest Income	11,921		12,730		37,368		32,577
(Reversal) Provision for Credit Losses			(493)		5
Net Interest Income after (Reversal) Provision for Credit Losses			13,438		9,433
Provision for Credit Losses								Provision for Credit Losses	—		607		587		1,217
Net Interest Income after Provision for Credit Losses								Net Interest Income after Provision for Credit Losses	11,921		12,123		36,781		31,360
Noninterest Income:	Noninterest Income:							Noninterest Income:
Customer service fees	Customer service fees		734		654			Customer service fees	686		899		2,187		2,328
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance		132		139			Increase in cash surrender value of bank-owned life insurance	102		89		406		343
Unrealized gain (loss) on fair value of marketable equity securities			43		(182)
Unrealized loss on fair value of marketable equity securities								Unrealized loss on fair value of marketable equity securities	(92)		(149)		(99)		(458)

Gain (Loss) on fair value of junior subordinated debentures			333		(999)
Loss on fair value of junior subordinated debentures								Loss on fair value of junior subordinated debentures	(811)		(600)		(553)		(2,469)
Gain on sale of investment securities	Gain on sale of investment securities		—		30			Gain on sale of investment securities	—		—		—		30

Other	Other		206		152			Other	229		153		633		1,015
Total noninterest income (loss)			1,448		(206)
Total noninterest income								Total noninterest income	114		392		2,574		789
Noninterest Expense:	Noninterest Expense:							Noninterest Expense:
Salaries and employee benefits	Salaries and employee benefits		3,260		3,049			Salaries and employee benefits	3,376		2,965		9,937		8,791
Occupancy expense	Occupancy expense		963		780			Occupancy expense	984		923		2,804		2,551
Data processing	Data processing		174		115			Data processing	204		215		583		475
Professional fees	Professional fees		882		949			Professional fees	1,177		1,089		2,969		2,957
Regulatory assessments	Regulatory assessments		192		231			Regulatory assessments	169		212		554		630
Director fees	Director fees		109		118			Director fees	106		110		321		345
Correspondent bank service charges	Correspondent bank service charges		19		25			Correspondent bank service charges	20		23		57		74

Net cost of operation of OREO	Net cost of operation of OREO		37		(8)			Net cost of operation of OREO	30		33		126		27
Other	Other		604		557			Other	559		641		1,731		1,755
Total noninterest expense	Total noninterest expense		6,240		5,816			Total noninterest expense	6,625		6,211		19,082		17,605
Income before provision for taxes	Income before provision for taxes		8,646		3,411			Income before provision for taxes	5,410		6,304		20,273		14,544
Provision for income taxes	Provision for income taxes		2,521		968			Provision for income taxes	1,557		1,837		5,878		4,199
Net income	Net income		$	6,125	$	2,443		Net income	$	3,853	$	4,467	$	14,395	$	10,345
Net Income per common share	Net Income per common share							Net Income per common share
Basic	Basic		$	0.36	$	0.14		Basic	$	0.22	$	0.26	$	0.84	$	0.61
Diluted	Diluted		$	0.36	$	0.14		Diluted	$	0.22	$	0.26	$	0.84	$	0.61
Weighted average common shares outstanding	Weighted average common shares outstanding							Weighted average common shares outstanding
Basic	Basic		17,076,510		17,030,409			Basic	17,132,080		17,042,479		17,103,982		17,036,460
Diluted	Diluted		17,092,460		17,051,819			Diluted	17,140,204		17,063,947		17,115,875		17,057,638

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United Security Bancshares and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

Three Months Ended March 31,
(In thousands) 2023 2022
Net Income $ 6,125 $ 2,443
Unrealized holdings gain (loss) on debt securities 1,325 (11,689)
Unrealized gain on unrecognized post-retirement costs 21 23
Unrealized (loss) gain on junior subordinated debentures (440) 1,302
Other comprehensive income (loss), before tax 906 (10,364)
Tax (expense) benefit provision related to debt securities (390) 3,455
Tax expense related to unrecognized post-retirement costs (7) (7)
Tax benefit (expense) related to junior subordinated debentures 130 (385)
Total other comprehensive income (loss) 639 (7,301)
Comprehensive income (loss) $ 6,764 $ (4,858)



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Net Income	$	3,853	$	4,467	$	14,395	$	10,345
Unrealized loss on debt securities	(4,178)		(8,799)		(2,939)		(29,232)
Unrealized gain on unrecognized post-retirement costs	23		22		66		67
Unrealized gain on junior subordinated debentures	576		825		523		3,419
Other comprehensive loss, before tax	(3,579)		(7,952)		(2,350)		(25,746)
Tax benefit related to debt securities	1,236		2,601		869		8,641
Tax expense related to unrecognized post-retirement costs	(9)		(7)		(22)		(20)
Tax expense related to junior subordinated debentures	(170)		(243)		(152)		(1,011)
Total other comprehensive loss	(2,522)		(5,601)		(1,655)		(18,136)
Comprehensive income (loss)	$	1,331	$	(1,134)	$	12,740	$	(7,791)

Table of Contents

United Security Bancshares and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands) Number of Shares Amount Total
Balance December 31, 2021 (1)
17,028,239 $ 59,635 $ 61,746 $ (1,174) $ 120,207
Other comprehensive loss — — — (7,301) (7,301)
Dividends payable ($0.11 per share) — — (1,874) — (1,874)
Restricted stock units released 6,168 — — — —
Tax benefit from restricted stock units released — (1) — — (1)
Director stock grant — 48 — — 48
Stock-based compensation expense — 53 — — 53
Net income — — 2,443 — 2,443
Balance March 31, 2022 (2)
17,034,407 59,735 62,315 (8,475) 113,575
Other comprehensive income — — — (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 (3)
17,040,549 59,835 63,875 (13,710) 110,000
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 (4)
17,046,676 59,924 66,465 (19,311) 107,078
Other comprehensive loss — — — 1,816 1,816
Dividends payable ($0.11 per share) — — (1,878) — (1,878)
Stock options exercised 5,579 29 — — 29
Restricted stock units released 14,998 — — — —
Director stock grant — 42 — — 42
Stock-based compensation expense — 35 — — 35
Net income — — 5,341 — 5,341
Balance December 31, 2022 (5)
17,067,253 60,030 69,928 (17,495) 112,463
Other comprehensive loss — — — 639 639
Dividends payable ($0.11 per share) — — (1,880) — (1,880)
Restricted stock units released 27,045 — — — —
Tax benefit from RSUs released — (10) — — (10)
Director stock grant — 208 — — 208
Stock-based compensation expense — 41 — — 41
Cumulative effect of adopting CECL — — (4,678) — (4,678)
Net income — — 6,125 — 6,125
Balance March 31, 2023 (6)
17,094,298 $ 60,269 $ 69,495 $ (16,856) $ 112,908
(1) Excludes 41,424 unvested restricted shares
(2) Excludes 27,949 unvested restricted shares
(3) Excludes 26,949 unvested restricted shares
(4) Excludes 26,949 unvested restricted shares
(5) Excludes 29,449 unvested restricted shares
(6) Excludes 13,974 unvested restricted shares
For the Three Months Ended September 30, 2023 and 2022


	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)	Number of Shares	Amount						Total
Balance June 30, 2022	17,040,549	$	59,835	$	63,875	$	(13,709)	$	110,001
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	17,046,676	$	59,924	$	66,465	$	(19,310)	$	107,079

Balance June 30, 2023	17,129,938	$	60,451	$	71,857	$	(16,628)	$	115,680
Other comprehensive loss	—	—		—		(2,522)		(2,522)
Dividends payable ($0.12 per share)	—	—		(2,056)		—		(2,056)
Restricted stock units released	5,657	—		—		—		—

Director stock grant	—	41		—		—		41

Stock-based compensation expense	—	32		—		—		32
Net income	—	—		3,853		—		3,853
Balance September 30, 2023	17,135,595	$	60,524	$	73,654	$	(19,150)	$	115,028

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United Security Bancshares and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Nine Months EndedSeptember 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	$	59,635	$	61,746	$	(1,174)	$	120,207
Other comprehensive loss	—	—		—		(18,136)		(18,136)
Dividends paid and payable ($0.11 per share)	—	—		(5,626)		—		(5,626)

Restricted stock units released	18,437	—		—		—		—
Tax benefit from restricted stock units released	—	(1)		—		—		(1)
Director stock grant	—	139		—		—		139
Stock-based compensation expense	—	151		—		—		151
Net income	—			10,345		—		10,345
Balance September 30, 2022	17,046,676	$	59,924	$	66,465	$	(19,310)	$	107,079

Balance December 31, 2022	17,067,253	$	60,030	$	69,928	$	(17,495)	$	112,463
Other comprehensive loss	—	—		—		(1,655)		(1,655)
Dividends paid ($0.11 per share)	—	—		(1,880)		—		(1,880)
Dividends paid and payable ($0.12 per share)	—	—		(4,111)		—		(4,111)
Restricted stock units released	68,342	—		—		—		—
Tax benefit from restricted stock units released	—	(10)		—		—		(10)
Director stock grant	—	290		—		—		290
Stock options exercised		106						106
Stock-based compensation expense	—	108		—		—		108
Cumulative effect of adopting Current Expected Credit Losses (CECL)	—	—		(4,678)		—		(4,678)
Net income	—	—		14,395		—		14,395
Balance September 30, 2023	17,135,595	$	60,524	$	73,654	$	(19,150)	$	115,028

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United Security Bancshares and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)


		Three months ended March 31,					Nine months ended September 30,
(In thousands)	(In thousands)	2023		2022		(In thousands)	2023		2022
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net Income	Net Income	$	6,125	$	2,443	Net Income	$	14,395	$	10,345
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:
(Reversal) provision for credit losses		(493)		5
Provision for credit losses						Provision for credit losses	587		1,217
Depreciation and amortization	Depreciation and amortization	376		311		Depreciation and amortization	1,107		965
Amortization of operating lease right-of-use assets		176		151
Noncash lease expense						Noncash lease expense	487		459
Amortization of premium/discount on investment securities, net	Amortization of premium/discount on investment securities, net	111		197		Amortization of premium/discount on investment securities, net	299		500
Gain on sale of investment securities		—		(30)
Decrease (increase) in accrued interest receivable	Decrease (increase) in accrued interest receivable	660		(271)		Decrease (increase) in accrued interest receivable	394		(936)
Decrease in accrued interest payable		(17)		(1)
Increase in accrued interest payable						Increase in accrued interest payable	20		19
Increase (decrease) in accounts payable and accrued liabilities	Increase (decrease) in accounts payable and accrued liabilities	2,539		(248)		Increase (decrease) in accounts payable and accrued liabilities	7,290		192
Decrease in unearned fees and unamortized loan origination costs, net		(130)		(219)
(Decrease) increase in unearned fees and unamortized loan origination costs, net						(Decrease) increase in unearned fees and unamortized loan origination costs, net	(542)		579
(Increase) decrease in income taxes receivable	(Increase) decrease in income taxes receivable	(355)		1,263		(Increase) decrease in income taxes receivable	(355)		104
(Gain) loss on marketable equity securities		(43)		182
Loss on marketable equity securities						Loss on marketable equity securities	99		458
Stock-based compensation expense	Stock-based compensation expense	240		100		Stock-based compensation expense	388		288
(Provision) benefit for deferred income taxes		(32)		89
(Benefit) provision for deferred income taxes						(Benefit) provision for deferred income taxes	(9)		281

Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	(132)		(139)		Increase in cash surrender value of bank-owned life insurance	(406)		(343)
(Gain) loss on fair value option of junior subordinated debentures		(333)		999
Loss on fair value option of junior subordinated debentures						Loss on fair value option of junior subordinated debentures	553		2,469

Gain on sale of investment securities						Gain on sale of investment securities	—		(30)

Net decrease (increase) in other assets		636		(2,577)
Net increase in other assets						Net increase in other assets	(9,644)		(1,540)
Net cash provided by operating activities	Net cash provided by operating activities	9,328		2,225		Net cash provided by operating activities	14,663		15,027
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)		(6)		Purchase of correspondent bank stock	(1,435)		(2,432)
Purchases of available-for-sale securities	Purchases of available-for-sale securities	—		(34,734)		Purchases of available-for-sale securities	—		(81,762)
Maturities of available-for-sale securities						Maturities of available-for-sale securities	10,000		—
Principal payments of available-for-sale securities						Principal payments of available-for-sale securities	9,666		6,726
Cash proceeds from sale of available-for-sale securities						Cash proceeds from sale of available-for-sale securities	—		15,676

Principal payments of available-for-sale securities		3,203		6,140
Cash proceeds from sale of investment securities		—		15,676

Net increase (decrease) in loans		37,146		(7,689)
Net decrease (increase) in loans						Net decrease (increase) in loans	6,480		(91,700)

Investment in limited partnership						Investment in limited partnership	(400)		(311)

Capital expenditures of premises and equipment	Capital expenditures of premises and equipment	(92)		(281)		Capital expenditures of premises and equipment	(534)		(1,500)
Net cash provided (used) in investing activities		40,255		(20,894)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	23,777		(155,303)
Cash Flows From Financing Activities:	Cash Flows From Financing Activities:					Cash Flows From Financing Activities:
Net (decrease) increase in demand deposits and savings accounts	Net (decrease) increase in demand deposits and savings accounts	(65,912)		29,178		Net (decrease) increase in demand deposits and savings accounts	(191,631)		45,316
Net increase (decrease) in time deposits		11,561		(2,952)
Net increase in time deposits						Net increase in time deposits	13,779		7,397

Net change in federal funds purchased		13,200		—
Proceeds from exercise of stock options						Proceeds from exercise of stock options	106		—
Net change in short-term borrowings						Net change in short-term borrowings	142,000		—
Dividends on common stock	Dividends on common stock	(1,874)		(1,872)		Dividends on common stock	(5,992)		(5,624)
Net cash (used) provided by financing activities		(43,025)		24,354
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(41,738)		47,089
Net change in cash and cash equivalents	Net change in cash and cash equivalents	6,558		5,715		Net change in cash and cash equivalents	(3,298)		(93,187)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	38,595		219,219		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	$	45,153	$	224,934	Cash and cash equivalents at end of period	$	35,297	$	126,032

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United Security Bancshares and Subsidiaries - Notes to Condensed 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 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.

Reclassifications:

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

Impact of New Financial Accounting Standards:

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial 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 for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In October 2019 FASB unanimously approved a vote to delay~~

On January 1, 2023, the ~~effective date of this Standard to be effective for fiscal years beginning after December 15, 2022. The~~ Company adopted ASC 326, ~~(“CECL”) as of January 1, 2023~~Financial Instruments-Credit Losses, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2023, are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of this new standard required a cumulative adjustment to the allowance for credit losses, leading to an increase in the credit loss balance of $6.4 million and an increase in the reserve for unfunded loan commitments of $273,000, resulting in a combined adjustment to retained earnings of $4.7 million, net of a $1.9 million tax adjustment.

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The following table summarized the impact of the adoption of ASU 2016-13 by loan category:


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

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 ASU was effective for all entities as of March 12, 2020, through December 31, 2022. However, the effective date was updatedAvailable-for-sale debt securities 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 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 requirementsan unrealized loss position are adopted in regard to loan refinancing and restructurings made to borrowers experiencing financial difficulties under the assumption that the CECL model will capture credit losses related to troubled debt restructurings. New disclosures regarding gross write-offs for financing receivables by year of origination are also included in the update. This update has been adopted as of January 1, 2023. The Bank will no longer report trouble debt restructures or classify loans as such. TDRs previously recognized have been incorporated into the CECL methodology in regard to loan loss reserves as of January 1, 2023.

~~Table of Contents~~

2.~~Investment Securities~~

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

March 31, 2023
(In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Carrying Amount)
Securities available-for-sale:
U.S. Government agencies $ 7,483 $ 5 $ (55) $ 7,433
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 108,407 12 (12,616) 95,803
U.S. Treasury securities 30,014 — (590) 29,424
Municipal bonds 50,630 — (9,153) 41,477
Corporate bonds 34,762 6 (3,349) 31,419
Total securities available for sale $ 231,296 $ 23 $ (25,763) $ 205,556

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 March 31, 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.

March 31, 2023
(In thousands) Amortized Cost Fair Value (Carrying Amount)
Due in one year or less $ 17,506 $ 17,272
Due after one year through five years 31,772 30,280
Due after five years through ten years 65,908 55,411
Due after ten years 7,700 6,791
Collateralized mortgage obligations 108,410 95,802
$ 231,296 $ 205,556

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~~Proceeds and gross realized gains (losses) from sales of available-for-sale investment securities are shown below:~~

~~Three Months Ended~~

~~(In thousands)~~

~~March 31, 2023~~

~~March 31, 2022~~

~~Proceeds from sales or calls~~

—

~~15,676~~

~~Gross realized gains from sales or calls~~

—

~~Gross realized losses from sales or calls~~

—

~~(48)~~

As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that better fit with the Company’s current risk profile is appropriate and beneficial to the Company. There were no losses were recorded due to credit-related factors for the three month periods ended March 31, 2023 or March 31, 2022.

At March 31, 2023, available-for-sale securities with an amortized cost of approximately $77.0 million (fair value of $66.9 million) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

~~The following summarizes temporarily impaired available-for-sale investment securities:~~

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
March 31, 2023
U.S. Government agencies $ — $ — $ 5,219 $ (55) $ 5,219 $ (55)
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 26,845 (1,168) 68,402 (11,448) 95,247 (12,616)
Corporate bonds 15,589 (2,158) 12,995 (1,191) 28,584 (3,349)
Municipal bonds — — 41,477 (9,153) 41,477 (9,153)
U.S. Treasury securities 9,908 (30) 19,516 (560) 29,424 (590)
Total impaired securities $ 52,342 $ (3,356) $ 147,609 $ (22,407) $ 199,951 $ (25,763)
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 impaired securities $ 87,106 $ (5,630) $ 114,717 $ (21,452) $ 201,823 $ (27,082)

~~Table of Contents~~

~~The following summarizes the number of temporarily impaired investment securities:~~

March 31,
2023 2022
Securities available for sale:
U.S. Government agencies 4 4
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 51 33
Municipal bonds 46 46
Corporate bonds 9 4
U.S. Treasury securities 4 3
Total temporarily impaired securities 114 90

~~Due to the adoption of ASU 2016-13, available-for-sale securities will no longer be evaluated for other-than-temporary impairment (OTTI). Instead, available-for-sale securities will be~~ evaluated when the amortized cost of a security exceeds its fair value. If it is determined that it will be necessary to sell a security before the fair value increases to the amortized cost, the amortized cost will be written down to fair value through income. At that point, any previously recorded allowance for credit loss (ACL) would be written off and any additional impairment would be recognized through earnings. If it is believed that the Company will not 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. Some of the factors which would be considered in order to determine if a credit loss exists are: (1) the extent to which the fair value is less than the amortized cost basis, (2) any adverse conditions related to the security, an industry, or geographic area, (3) failure of the issuer to make scheduled interest or principal payments, and (4) any changes to the rating of the security by a rating agency. If it is determined that the decline is due to a credit loss, the amount recognized as the 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 amortized cost basis, a credit loss exists and an allowance for credit losses would be recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been 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. This ASU was effective for all entities as of March 12, 2020, through December 31, 2022. However, the effective date was updated in ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the sunset date of Topic 848, and is currently set for December 31, 2024. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company anticipates a minimal impact to junior subordinated debt and floating rate loans tied to LIBOR.

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

2.Investment Securities

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


	September 30, 2023
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
Securities available-for-sale:
U.S. Government agencies	$	6,441	$	4	$	(49)	$	6,396
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	102,943		1		(16,739)		86,205
U.S. Treasury securities	20,034		—		(277)		19,757
Municipal bonds	50,431		—		(10,404)		40,027
Corporate bonds	34,796		19		(2,559)		32,256
Total securities available-for-sale	$	214,645	$	24	$	(30,028)	$	184,641


	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 30, 2023, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns.


	September 30, 2023
(In thousands)	Amortized Cost		Fair Value (Carrying Amount)
Due in one year or less	$	20,134	$	19,854
Due after one year through five years	28,967		27,129
Due after five years through ten years	60,141		48,998
Due after ten years	2,458		2,456
Collateralized mortgage obligations	102,945		86,204
	$	214,645	$	184,641

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Proceeds and gross realized gains (losses) from sales of available-for-sale debt securities are shown below:


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

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

At September 30, 2023, available-for-sale securities with an amortized cost of approximately $73.8 million and a fair value of $63.1 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 $78.8 million and a fair value of $69.0 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

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


	Less than 12 Months				12 Months or More				Total
(In thousands)	Fair Value (Carrying Amount)		Unrealized Losses		Fair Value (Carrying Amount)		Unrealized Losses		Fair Value (Carrying Amount)		Unrealized Losses
September 30, 2023
U.S. Government agencies	$	—	$	—	$	4,352	$	(49)	$	4,352	$	(49)
U.S. Government sponsored entities and agencies collateralized by mortgage obligations	242		(3)		85,729		(16,736)		85,971		(16,739)
U.S. Treasury securities	—		—		19,757		(277)		19,757		(277)
Municipal bonds	—		—		40,027		(10,404)		40,027		(10,404)
Corporate bonds	—		—		27,425		(2,559)		27,425		(2,559)

Total available-for-sale	$	242	$	(3)	$	177,290	$	(30,025)	$	177,532	$	(30,028)

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)
U.S. Treasury securities	14,714		(190)		14,510		(590)		29,224		(780)
Municipal bonds	—		—		40,170		(10,508)		40,170		(10,508)
Corporate bonds	24,424		(1,491)		5,443		(557)		29,867		(2,048)

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

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


	September 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	49	51
Municipal bonds	45	46
Corporate bonds	8	9
U.S. Treasury securities	3	4
Total available for sale	109	114

Management has evaluated each available-for-sale investment security in an unrealized loss position to determine if it would be required to sell the security before the fair value increases to amortized cost and whether any unrealized losses are due to credit losses or noncredit factors such as current market rates, which would not require the establishment of an allowance for credit ~~loss.~~losses. At ~~March 31,~~September 30, 2023, the decline in fair value of the available-for-sale securities is attributed to changes in interest rates and not credit quality. ~~The~~These declines are primarily the result of the fast pace and large increases in interest rates during the last ~~year~~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 their anticipated recovery, the Company does not consider it necessary to provide an allowance for any ~~securities~~available-for-sale security at ~~March 31,~~September 30, 2023.

During the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 and 2022, the Company recognized ~~$43,000~~$99,000 of unrealized ~~gains~~losses and ~~$182,000~~$458,000 of unrealized losses, respectively, related to marketable equity securities, related to one mutual fund, included in the ~~consolidated statements~~marketable equity securities. During the quarters ended September 30, 2023 and 2022, the Company recognized $92,000 and $149,000 of ~~income.~~unrealized losses related to the same mutual fund.

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

~~Table of Contents~~

3.Loans

Loans, at amortized cost, are comprised of the following:


(In thousands)	(In thousands)	March 31, 2023		December 31, 2022		(In thousands)	September 30, 2023		December 31, 2022
Commercial and industrial:	Commercial and industrial:					Commercial and industrial:
Commercial and business loans	Commercial and business loans	$	50,379	$	57,770	Commercial and business loans	$	51,772	$	57,770
Government program loans	Government program loans	132		132		Government program loans	77		132
Total commercial and industrial	Total commercial and industrial	50,511		57,902		Total commercial and industrial	51,849		57,902
Real estate mortgage:	Real estate mortgage:					Real estate mortgage:
Commercial real estate	Commercial real estate	395,669		398,115		Commercial real estate	419,916		398,115
Residential mortgages	Residential mortgages	269,991		273,357		Residential mortgages	262,420		273,357
Home improvement and home equity loans	Home improvement and home equity loans	46		49		Home improvement and home equity loans	40		49
Total real estate mortgage	Total real estate mortgage	665,706		671,521		Total real estate mortgage	682,376		671,521
Real estate construction and development	Real estate construction and development	137,257		153,374		Real estate construction and development	133,516		153,374
Agricultural	Agricultural	45,513		52,722		Agricultural	61,501		52,722
Installment and student loans	Installment and student loans	43,740		44,659		Installment and student loans	43,629		44,659
Total loans	Total loans	$	942,727	$	980,178	Total loans	$	972,871	$	980,178

The Company’s ~~directly originated~~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. The Company’s participation loans with other financial institutions are primarily in the state of California.

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Commercial and industrial loans, representing ~~5.4%~~5.3% of total loans at ~~March 31,~~September 30, 2023 and 5.9% at December 31, 2022, are generally made to support the ongoing operations of ~~small-to-medium sized~~small- to medium-sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real ~~estate. The~~estate; the remainder are ~~unsecured; however, extensions~~unsecured. Extensions of credit are predicated upon the financial capacity of the ~~borrower. Repayment of commercial loans~~borrower and repayment is generally from the cash flow of the borrower.

Real estate mortgage loans, representing ~~70.6%~~70.1% of total loans at ~~March 31,~~September 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 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 ~~14.6%~~13.7% of total loans at ~~March 31,~~September 30, 2023 and ~~15.7%~~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

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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, representing ~~4.8%~~6.3% of total loans at ~~March 31,~~September 30, 2023 and 5.4% at December 31, 2022, are generally secured by land, equipment, inventory, and receivables. Repayment is from the cash flow of the borrower.

Installment ~~loans, including student~~ loans, which represented ~~4.6%~~4.5% of total loans at ~~March 31,~~September 30, 2023 and 4.6% at December 31, 2022, 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 4 - Student 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 ~~March 31,~~September 30, 2023 and December 31, 2022, these financial instruments include commitments to extend credit of ~~$214.7~~$193.3 million and $190.2 million, respectively, and standby letters of credit of $3.1 million and $1.6 million ~~at both~~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 creditworthiness on a case-by-case ~~basis. The amount of~~basis and collateral ~~obtained, if deemed necessary, is based on management’s credit evaluation.~~may be required in some cases. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties.

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Past Due Loans

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

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The following is a summary of the amortized cost of delinquent loans at ~~March 31,~~September 30, 2023:


(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		(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	$	—	$	—	$	—	$	—	$	50,379	$	50,379	$	—	Commercial and business loans	$	—	$	—	$	—	$	—	$	51,772	$	51,772	$	—
Government program loans	Government program loans	—		—		—		—		132		132		—		Government program loans	—		—		—		—		77		77		—
Total commercial and industrial	Total commercial and industrial	—		—		—		—		50,511		50,511		—		Total commercial and industrial	—		—		—		—		51,849		51,849		—
Commercial real estate loans	Commercial real estate loans	—		—		—		—		395,669		395,669		—		Commercial real estate loans	—		—		—		—		419,916		419,916		—
Residential mortgages	Residential mortgages	2,732		—		—		2,732		267,259		269,991		—		Residential mortgages	—		—		1,008		1,008		261,412		262,420		—
Home improvement and home equity loans	Home improvement and home equity loans	7		—		—		7		39		46		—		Home improvement and home equity loans	5		—		—		5		35		40		—
Total real estate mortgage	Total real estate mortgage	2,739		—		—		2,739		662,967		665,706		—		Total real estate mortgage	5		—		1,008		1,013		681,363		682,376		—
Real estate construction and development loans	Real estate construction and development loans	—		—		11,269		11,269		125,988		137,257		—		Real estate construction and development loans	—		—		11,390		11,390		122,126		133,516		—
Agricultural loans	Agricultural loans	—		—		86		86		45,427		45,513		—		Agricultural loans	—		—		60		60		61,441		61,501		—

Installment and student loans		817		571		382		1,770		41,881		43,651		382
Overdraft protection lines		—		—		—		—		11		11		—
Overdrafts		—		—		—		—		78		78		—
Installment and student loans	Installment and student loans	817		571		382		1,770		41,970		43,740		382		Installment and student loans	1,303		679		—		1,982		41,647		43,629		—
Total loans	Total loans	$	3,556	$	571	$	11,737	$	15,864	$	926,863	$	942,727	$	382	Total loans	$	1,308	$	679	$	12,458	$	14,445	$	958,426	$	972,871	$	—

The following is a summary of the amortized cost of delinquent loans at December 31, 2022:


(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		(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	$	—	$	—	$	—	$	—	$	57,770	$	57,770	$	—	Commercial and business loans	$	—	$	—	$	—	$	—	$	57,770	$	57,770	$	—
Government program loans	Government program loans	—		—		—		—		132		132		—		Government program loans	—		—		—		—		132		132		—
Total commercial and industrial	Total commercial and industrial	—		—		—		—		57,902		57,902		—		Total commercial and industrial	—		—		—		—		57,902		57,902		—

Commercial real estate loans	Commercial real estate loans	—		—		—		—		398,115		398,115		—		Commercial real estate loans	—		—		—		—		398,115		398,115		—
Residential mortgages	Residential mortgages	—		—		—		—		273,357		273,357		—		Residential mortgages	—		—		—		—		273,357		273,357		—
Home improvement and home equity loans	Home improvement and home equity loans	8		—		—		8		41		49		—		Home improvement and home equity loans	8		—		—		8		41		49		—
Total real estate mortgage	Total real estate mortgage	8		—		—		8		671,513		671,521		—		Total real estate mortgage	8		—		—		8		671,513		671,521		—
Real estate construction and development loans	Real estate construction and development loans	—		—		12,545		12,545		140,829		153,374		—		Real estate construction and development loans	—		—		12,545		12,545		140,829		153,374		—
Agricultural loans	Agricultural loans	—		—		108		108		52,614		52,722		—		Agricultural loans	—		—		108		108		52,614		52,722		—

Installment and student loans	Installment and student loans	546		642		252		1,440		42,714		44,154		252		Installment and student loans	546		642		252		1,440		43,219		44,659		252
Overdraft protection lines		—		—		—		—		17		17		—
Overdrafts		—		—		—		—		488		488		—
Installment and student loans		546		642		252		1,440		43,219		44,659		252

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

Nonaccrual Loans

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~~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.

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- 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” Doubtful.~~grade 8 (doubtful).

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 nine months ended September 30, 2023 and 2022.

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

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days and still accruing:


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

Residential mortgages														Residential mortgages	—		1,008		—		—		—		—

Real estate construction and development loans	Real estate construction and development loans	$	13,109	$	13,109	$	—	$	14,436	$	14,436	$	—	Real estate construction and development loans	13,097		13,097		—		14,436		14,436		—
Agricultural loans	Agricultural loans	—		86		—				108		—		Agricultural loans	—		60		—		—		108		—
Installment and student loans		—		—		382						252

Total	Total	$	13,109	$	13,195	$	382	$	14,436	$	14,544	$	252	Total	$	13,097	$	14,165	$	—	$	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.

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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.

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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

- 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 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 or on management’s watch list. While still considered pass loans, ~~(loans given a grade 5),~~ the borrower’s financial condition, cash flow, or operations evidence more than average risk and short term ~~weaknesses, these~~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 rating or downgraded to a substandard rating within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent in the loan origination and loan servicing, and may

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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.

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Substandard Rating:

- Grade 7 – This grade includes substandard loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or 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, 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 loans ~~which~~that exhibit the same characteristics as ~~the~~ 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.

- Grade 9 – This grade includes loans classified 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 or salvage value, but rather that it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

The following table presents loans by ~~type,~~class, net of deferred fees, by risk rating and ~~origination year according to our internal risk ratings~~period indicated as of ~~March 31,~~September 30, 2023:

Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans
(In thousands) 2023 2022 2021 2020 2019 Prior Total
Commercial and business
Pass $ 850 $ 1,465 $ 730 $ 1,340 $ 45 $ 995 $ 44,954 $ — $ 50,379
Special Mention — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
850 1,465 730 1,340 45 995 44,954 — 50,379
Government program
Pass — — — 12 — 120 — — 132
Special Mention — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
— — — 12 — 120 — — 132
Commercial real estate
Pass 2,887 89,262 36,313 59,853 54,170 110,070 17,291 — 369,846
Special Mention — — — 4,952 7,874 9,937 3,060 — 25,823
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
2,887 89,262 36,313 64,805 62,044 120,007 20,351 — 395,669
Residential mortgages
Not graded — 27,680 213,059 3,236 — 10,149 — — 254,124
Pass — — — — — 1,746 14,121 — 15,867
Special Mention — — — — — — — —
Substandard — — — — — — — — —


	Term Loans Amortized Cost Basis by Origination Year - As of September 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	$	4,234	$	5,008	$	1,592	$	829	$	11	$	1,090	$	39,008	$	—	$	51,772
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	4,234		5,008		1,592		829		11		1,090		39,008		—		51,772
Government program
Pass	—		—		—		9		—		68		—		—		77
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	—		—		—		9		—		68		—		—		77
Commercial real estate
Pass	29,078		102,435		53,425		59,281		53,378		108,122		1,501		—		407,220
Special Mention	—		—		—		4,967		7,729		—		—		—		12,696
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	29,078		102,435		53,425		64,248		61,107		108,122		1,501		—		419,916
Residential mortgages
Not graded	—		24,956		207,665		2,312		—		10,043		—		—		244,976
Pass	3,294		1,925		5,252		1,579		3,601		1,793		—		—		17,444
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	3,294		26,881		212,917		3,891		3,601		11,836		—		—		262,420
Home improvement and home equity
Not graded	—		—		—		—		—		35		—		—		35
Pass	—		—		—		—		—		5		—		—		5

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Doubtful — — — — — — — — —
— 27,680 213,059 3,236 — 11,895 14,121 — 269,991
(Continued)
Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans
(In thousands) 2023 2022 2021 2020 2019 Prior Total
Home improvement and home equity
Not graded — — — — — 39 — — 39
Pass — — — — — 7 — — 7
Special Mention — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
— — — — — 46 — — 46
Real estate construction and development
Pass — — — 4,606 180 4,896 114,466 — 124,148
Special Mention — — — — — — — — —
Substandard — — — — — 4,836 8,273 — 13,109
Doubtful — — — — — — — — —
— — — 4,606 180 9,732 122,739 — 137,257
Agricultural
Pass — 6,865 470 2,999 1,499 11,119 20,667 — 43,619
Special Mention — — — 589 — 428 — — 1,017
Substandard — — — — — 87 790 — 877
Doubtful — — — — — — — — —
— — — 589 — 515 790 — 45,513
Installment and student loans
Not graded 237 337 244 179 1,598 40,470 675 — 43,740
Pass — — — — — — — — —
Special Mention — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
237 337 244 179 1,598 40,470 675 — 43,740
Total Loans $ 3,974 $ 118,744 $ 250,346 $ 74,767 $ 63,867 $ 183,780 $ 203,630 $ — $ 942,727

~~The following table presents loans by type, risk rating, and origination year according to our internal risk ratings as of December 31, 2022:~~

Origination Year Revolving loan amortized cost basis Revolving loan converted to term loans
(In thousands) 2022 2021 2020 2019 2018 Prior Total
Commercial and business loans
Pass $ 1,486 $ 775 $ 1,471 $ 210 $ 1,081 $ 237 $ 52,310 $ — $ 57,570
Special Mention — — — — — — 200 — 200
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
1,486 775 1,471 210 1,081 237 52,510 — 57,770
Government program loans
Pass — — 13 — — 119 — — 132

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Special Mention — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
— — 13 — — 119 — — 132
(Continued)

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		Origination Year												Revolving loan amortized cost basis		Revolving loan converted to term loans
(In thousands)		2022		2021		2020		2019		2018		Prior						Total
Commercial real estate
Pass		89,610		36,506		60,293		54,595		32,935		82,170		15,987		—			372,096
Special Mention		—		—		4,979		7,935		408		9,637		3,060		—			26,019
Substandard		—		—		—		—		—		—		—		—			—
Doubtful		—		—		—		—		—		—		—		—			—
		89,610		36,506		65,272		62,530		33,343		91,807		19,047		—			398,115
Residential mortgages
Not graded		27,746		215,326		3,255		—		—		10,908		—		—			257,235
Pass		—		—		—		—		—		1,826		14,296		—			16,122
Special Mention		—		—		—		—				—		—		—			—
Substandard		—		—		—		—		—		—		—		—			—
Doubtful		—		—		—		—		—		—		—		—			—
		27,746		215,326		3,255		—		—		12,734		14,296		—			273,357
Home improvement and home equity loans
Not graded		—		—		—		—		—		41		—		—			41
Pass		—		—		—		—		—		8		—		—			8
Special Mention	Special Mention	—		—		—		—		—		—		—		—			—		Special Mention	—		—		—		—		—		—		—		—		—
Substandard	Substandard	—		—		—		—		—		—		—		—			—		Substandard	—		—		—		—		—		—		—		—		—
Doubtful	Doubtful	—		—		—		—		—		—		—		—			—		Doubtful	—		—		—		—		—		—		—		—		—
		—		—		—		—		—		49		—		—			49			—		—		—		—		—		40		—		—		40
Real estate construction and development	Real estate construction and development																				Real estate construction and development
Pass	Pass	—		—		4,842		180		824		6,599		126,493		—			138,938		Pass	20,453		13,861		743		29,246		180		4,431		51,505		—		120,419
Special Mention	Special Mention	—		—		—		—		—		—		—		—			—		Special Mention	—		—		—		—		—		—		—		—		—
Substandard	Substandard	—		—		—		—		—		5,372		9,064		—			14,436		Substandard	—		—		—		3,524		—		9,573		—		—		13,097
Doubtful	Doubtful	—		—		—		—		—		—		—		—			—		Doubtful	—		—		—		—		—		—		—		—		—
		—		—		4,842		180		824		11,971		135,557		—			153,374			20,453		13,861		743		32,770		180		14,004		51,505		—		133,516
Agricultural	Agricultural																				Agricultural
Pass	Pass	7,051		474		3,010		3,777		—		11,421		24,924		—			50,657		Pass	2,420		6,460		461		3,023		1,591		12,617		33,610		—		60,182
Special Mention	Special Mention	—		—		589		—		428		—		—		—			1,017		Special Mention	—		—		—		513		—		356		—		—		869
Substandard	Substandard	—		—		—		—		—		258		790		—			1,048		Substandard	—		—		—		—		—		60		390		—		450
Doubtful	Doubtful	—		—		—		—		—		—		—		—			—		Doubtful	—		—		—		—		—		—		—		—		—
		7,051		474		3,599		3,777		428		11,679		25,714		—			52,722			2,420		6,460		461		3,536		1,591		13,033		34,000		—		61,501
Installment and student loans	Installment and student loans																				Installment and student loans
Not Graded		373		272		196		1,623		10,759		30,905		531		—			44,659
Not graded																					Not graded	714		289		179		86		513		39,881		686		—		42,348
Pass	Pass	—		—		—		—		—		—		—		—			—		Pass	1,281		—		—		—		—		—		—		—		1,281
Special Mention	Special Mention	—		—		—		—		—		—		—		—			—		Special Mention	—		—		—		—		—		—		—		—		—
Substandard	Substandard	—		—		—		—		—		—		—		—			—		Substandard	—		—		—		—		—		—		—		—		—
Doubtful	Doubtful	—		—		—		—		—		—		—		—			—		Doubtful	—		—		—		—		—		—		—		—		—
		373		272		196		1,623		10,759		30,905		531		—			44,659			1,995		289		179		86		513		39,881		686		—		43,629
Total Loans	Total Loans	$	126,266	$	253,353	$	78,648	$	68,320	$	46,435	$	159,501	$	247,655	$	—		$	980,178	Total Loans	$	61,474	$	154,934	$	269,317	$	105,369	$	67,003	$	188,074	$	126,700	$	—	$	972,871

Allowance for ~~Loan~~Credit Losses on Loans

The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326),effective January 1, ~~2023, and utilizes~~2023. This loss measurement, which uses the ~~CECL~~current expected credit loss (CECL) cohort methodology analysis, ~~which~~ relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using

~~Table of Contents~~

the data to determine pool loss experience. Management estimates the allowance for ~~loan~~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 ~~2022.~~2023. The Company expects that the markets in which it operates will experience a slight decline in economic conditions and an increase in unemployment ~~rate~~rates and ~~level~~levels and ~~trend~~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.

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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.

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


		Three Months Ended March 31, 2023												Three Months Ended September 30, 2023
(In thousands)	(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total			(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		720		1,025		927		6,367
Provision (recapture of provision) for credit losses		(383)		(37)		(542)		(294)		763		(493)
Beginning balance															Beginning balance	$	2,007	$	3,731	$	3,513	$	1,504	$	5,355	$	16,110
Provision (reversal) for credit losses (1)															Provision (reversal) for credit losses (1)	(202)		(932)		164		63		907		—
Charge-offs	Charge-offs	—		—		—		—		(477)		(477)			Charge-offs	—		—		—		—		(603)		(603)
Recoveries	Recoveries	—		20		—		—		23		43			Recoveries	—		2		—		—		140		142
Net recoveries (charge-offs)		—		20		—		—		(454)		(434)
Net charge-offs															Net charge-offs	—		2		—		—		(463)		(461)
Ending balance	Ending balance	$	1,908	$	3,705	$	3,587	$	1,256	$	5,166	$	15,622		Ending balance	$	1,805	$	2,801	$	3,677	$	1,567	$	5,799	$	15,649

(1) There was no provision for unfunded loan commitments during the quarter.


	Three Months Ended September 30, 2022
(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
Beginning balance	$	836	$	1,298	$	3,528	$	1,120	$	2,634	$	491	$	9,907
Provision (reversal) 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


	Nine Months Ended September 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		720		1,025		927		6,367
Provision (reversal) for credit losses (1)	(487)		(974)		(452)		17		2,348		452

Charge-offs	—		—		—		—		(1,587)		(1,587)
Recoveries	1		53		—		—		181		235
Net recoveries (charge-offs)	1		53		—		—		(1,406)		(1,352)
Ending balance	$	1,805	$	2,801	$	3,677	$	1,567	$	5,799	$	15,649

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

2220

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		Three Months Ended March 31, 2022												Nine Months Ended September 30, 2022
(In thousands)	(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Total			(In thousands)	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
Beginning balance	Beginning balance	$	597	$	1,174	$	2,840	$	1,233	$	3,489	$	9,333		Beginning balance	$	597	$	1,174	$	2,840	$	1,233	$	2,720	$	769	$	9,333
Provision (recapture of provision) for credit losses		(306)		117		57		(292)		429		5
Provision (reversal) for credit losses															Provision (reversal) for credit losses	82		141		769		(703)		674		255		1,218

Charge-offs	Charge-offs	—		—		—		—		(358)		(358)			Charge-offs	—		—		—		—		(828)		—		(828)
Recoveries	Recoveries	268		4		—		16		8		296			Recoveries	269		10		—		36		25		—		340
Net (charge-offs) recoveries		268		4		—		16		(350)		(62)
Net recoveries (charge-offs)															Net recoveries (charge-offs)	269		10		—		36		(803)		—		(488)
Ending balance	Ending balance	$	559	$	1,295	$	2,897	$	957	$	3,568	$	9,276		Ending balance	$	948	$	1,325	$	3,609	$	566	$	2,591	$	1,024	$	10,063

~~The following summarizes information with respect to the loan balances:~~

March 31, 2023 March 31, 2022
(In thousands) Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment Total Loans Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment Total Loans
Commercial and business loans $ — $ 50,379 $ 50,379 $ — $ 38,725 $ 38,725
Government program loans — 132 132 — 221 221
Total commercial and industrial — 50,511 50,511 — 38,946 38,946
Commercial real estate loans — 395,669 395,669 — 330,870 330,870
Residential mortgage loans 74 269,917 269,991 145 256,766 256,911
Home improvement and home equity loans — 46 46 — 74 74
Total real estate mortgage 74 665,632 665,706 145 587,710 587,855
Real estate construction and development loans 13,109 124,148 137,257 11,147 141,820 152,967
Agricultural loans 879 44,634 45,513 653 47,142 47,795
Installment and student loans — 43,740 43,740 — 49,400 49,400
Total loans $ 14,062 $ 928,665 $ 942,727 $ 11,945 $ 865,018 $ 876,963

~~Collateral Dependent~~Collateral-Dependent Loans

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

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


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

Real estate construction and development loans	Real estate construction and development loans	$	13,110	4		$	14,436	4		Real estate construction and development loans	$	13,096		4	$	14,436	4
Agricultural loans	Agricultural loans	790		2		108		2		Agricultural loans	390			1	108		2

Total	Total	$	13,900	6		$	14,544	6		Total	$	13,486		5	$	14,544	6

Reserve for Unfunded Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit, and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments in the same

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manner as it evaluates credit risk ~~associated with~~within the loan portfolio. The adoption of CECL as of January 1, 2023, required a cumulative adjustment of $273,000 to the reserve for unfunded loan commitments, increasing the liability balance to $805,000, post adoption. There was no provision for unfunded loan commitments ~~for~~made during the quarter ended ~~March 31,~~September 30, 2023. Year to date, the provision totaled $135,000, increasing the liability balance to $954,000. For the quarter ended September 30, 2022, a reversal of provision of $17,000 was made. For the nine months ended September 30, 2022, a reversal of provision of $210,000 was made, decreasing the liability balance to $474,000. The reserve for the unfunded loan commitments is a liability on the Company’s consolidated financial statements and is included in other liabilities.

Loan Modifications

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, anand other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is ~~charged-off~~charged off against the allowance for credit losses. ~~There were no~~

The following tables present loan modifications made to borrowers experiencing financial difficulties for the ~~quarter ended March 31, 2023.~~periods indicated:


	Three months ended September 30, 2023
(In thousands)	Principal Forgiveness	Term Extension	Interest Rate Reduction	Payment Delay	Total % of Loans Outstanding







Real estate construction and development loans	—	1,700	—	—	0.17	%

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	Nine months ended September 30, 2023
(In thousands)	Principal Forgiveness	Term Extension	Interest Rate Reduction	Payment Delay	Total % of Loans Outstanding







Real estate construction and development loans	—	1,700	—	—	0.17	%

The following table presents the financial effects of loan modifications made to borrower experiencing financial difficulties:

Three months ended September 30, 2023

Nine months ended September 30, 2023

(In thousands)

24 months term extension

Real estate construction and development loans

1,700

4.Student Loans

Included in the installment ~~and student loans segment of the~~ loan portfolio are ~~$41.4~~$39.6 million and $42.1 million in student loans at ~~March 31,~~September 30, 2023 and December 31, 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. This may be 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. At March 31, 2023 there were 858 loans within repayment, deferment, and forbearance which represented $21.4 million, $10.8 million, and $6.9 million, respectively. At December 31, 2022, there were 875 loans within repayment, deferment, and forbearance which represented $23.4 million, $11.0 million and $5.0 million, respectively. No new student loans were originated or purchased ~~during the periods ended March 31, 2023 and March 31, 2022.~~since April of 2019.

As of ~~March 31,~~September 30, 2023 and December 31, 2022, the reserve against the student loan portfolio was ~~$4.8~~$5.6 million and $2.6 million, respectively. At ~~March 31,~~September 30, 2023, there were ~~$382,000 in~~no student loans in the substandard category. At December 31, 2022, there were $252,000 in student loans included in the substandard category.

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 of professional fees within noninterest expense.

The following tables summarize the credit quality indicators for outstanding student loans:


		March 31, 2023					December 31, 2022						September 30, 2023					December 31, 2022
(Dollars in thousands)	(Dollars in thousands)	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest		(Dollars in thousands)	Number of Loans	Principal Amount		Accrued Interest		Number of Loans	Principal Amount		Accrued Interest
School	School	69	$	2,025	$	967	70	$	2,056	$	908	School	46	$	1,267	$	722	70	$	2,056	$	908
Grace	Grace	12	327		163		27	667		348		Grace	23	735		358		27	667		348
Repayment	Repayment	460	21,421		293		516	23,414		857		Repayment	418	19,547		261		516	23,414		857
Deferment	Deferment	256	10,784		1,964		268	10,974		1,732		Deferment	257	11,227		1,959		268	10,974		1,732
Forbearance	Forbearance	142	6,862		374		91	5,019		237		Forbearance	128	6,838		229		91	5,019		237
Total	Total	939	$	41,419	$	3,761	972	$	42,130	$	4,082	Total	872	$	39,614	$	3,529	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.

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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.

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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.

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 ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, ~~$28,000~~$187,000 in accrued interest receivable was reversed, due to charge-offs of ~~$406,000.~~$1.6 million. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022, ~~$14,000~~$100,000 in accrued interest receivable was reversed, due to charge-offs of ~~$353,000 within~~$810,000. For the ~~student loan portfolio.~~quarter ended September 30, 2023, $102,000 in accrued interest receivable was reversed, due to charge-offs of $603,000. For the quarter ended September 30, 2022, $86,000 in accrued interest receivable was reversed, due to charge-offs of $457,000.

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


		March 31, 2023			December 31, 2022				September 30, 2023			December 31, 2022
(Dollars in thousands)	(Dollars in thousands)	Number of Borrowers	Amount		Number of Borrowers	Amount		(Dollars in thousands)	Number of Borrowers	Amount		Number of Borrowers	Amount
Current or less than 31 days	Current or less than 31 days	239	$	26,512	251	$	26,993	Current or less than 31 days	220	$	24,403	251	$	26,993
31 - 60 days	31 - 60 days	6	817		8	546		31 - 60 days	11	1,303		8	546
61 - 90 days	61 - 90 days	7	571		5	642		61 - 90 days	5	679		5	642
91 - 120 days	91 - 120 days	4	382		4	252		91 - 120 days	—	—		4	252

Total	Total	256	$	28,282	268	$	28,433	Total	236	$	26,385	268	$	28,433

5.Deposits

Deposits include the following:


(In thousands)	(In thousands)	March 31, 2023		December 31, 2022		(In thousands)	September 30, 2023		December 31, 2022
Noninterest-bearing deposits	Noninterest-bearing deposits	$	394,745	$	481,629	Noninterest-bearing deposits	$	386,258	$	481,629
Interest-bearing deposits:	Interest-bearing deposits:					Interest-bearing deposits:
NOW and money market accounts	NOW and money market accounts	528,233		499,861		NOW and money market accounts	409,193		499,861
Savings accounts	Savings accounts	118,544		125,946		Savings accounts	120,353		125,946
Time deposits:	Time deposits:					Time deposits:
Under $250,000	Under $250,000	52,835		42,933		Under $250,000	69,875		42,933
$250,000 and over	$250,000 and over	16,775		15,115		$250,000 and over	1,952		15,115
Total interest-bearing deposits	Total interest-bearing deposits	716,387		683,855		Total interest-bearing deposits	601,373		683,855
Total deposits	Total deposits	$	1,111,132	$	1,165,484	Total deposits	$	987,631	$	1,165,484

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6.Short-term Borrowings/Other Borrowings

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


(In thousands)	(In thousands)	March 31, 2023		December 31, 2022		(In thousands)	September 30, 2023		December 31, 2022
Unsecured credit lines:	Unsecured credit lines:					Unsecured credit lines:
Credit limit	Credit limit	$	100,000	$	120,000	Credit limit	$	120,000	$	120,000
Balance outstanding	Balance outstanding	13,200		—		Balance outstanding	17,000		—
Federal Home Loan Bank:	Federal Home Loan Bank:					Federal Home Loan Bank:
Credit limit	Credit limit	2,108		2,151		Credit limit	135,302		2,151
Balance outstanding	Balance outstanding	—		—		Balance outstanding	125,000		—
Collateral pledged	Collateral pledged	2,263		2,307		Collateral pledged	238,320		2,151
Federal Reserve Bank:	Federal Reserve Bank:					Federal Reserve Bank:
Credit limit	Credit limit	432,584		435,599		Credit limit	463,556		435,599
Balance outstanding	Balance outstanding	—		—		Balance outstanding	—		—
Collateral pledged	Collateral pledged	579,777		590,427		Collateral pledged	618,147		590,427

At September 30, 2023, pledged collateral at the Federal Home Loan Bank consisted of $2.1 million in available-for-sale investment securities and $236.3 million in loan balances. Pledged collateral at the Federal Reserve Bank consisted of $4.2 million in available-for-sale investment securities and $614.0 million in loan balances. At December 31, 2022, pledged collateral at the Federal Home Loan Bank consisted of $2.2 million in available-for-sale investment securities and pledged collateral at the Federal Reserve Bank consisted of $590.4 million in loan balances.

7.Leases

The Company leases land and premises for its branch ~~banking offices,~~banking-offices, administration ~~facilities,~~facility, and ITMs. The initial terms of these leases expire at various dates through 2032. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted ~~for changes reported in~~to certain economic indices or ~~as reflected by~~ market conditions. Lease terms may also include options for termination. Under guidance from Topic 842, the discount rate applied to ~~extend or terminate~~ the lease ~~when it~~liability is ~~reasonably certain~~calculated by determining the ~~Company will exercise that option.~~Bank’s incremental borrowing rate. Current rates for fully-secured loans with amounts and terms similar to the lease amount and term at inception are used to calculate the incremental borrowing rate. The liability is reduced at each reporting period based on the discounted present value of remaining payments. As of ~~March 31,~~September 30, 2023, the Company had 1413 operating leases and no financing leases. At ~~March 31,~~September 30, 2022, the Company had 13 operating leases and no financing leases.

The components of lease expense are as follows:


		Three Months Ended					Three Months Ended					Nine Months Ended
(In thousands)	(In thousands)	March 31, 2023		March 31, 2022		(In thousands)		September 30, 2023		September 30, 2022			September 30, 2023		September 30, 2022

Operating lease expense	Operating lease expense	$	178	$	184	Operating lease expense		$	178	$	185		$	533	$	553
Variable lease expense	Variable lease expense	—		—		Variable lease expense		—		—			—		—

Total	Total	$	178	$	184	Total		$	178	$	185		$	533	$	553

Supplemental information related to leases ~~are~~is as follows:


		Three Months Ended							Nine Months Ended
(In thousands)		March 31, 2023			March 31, 2022
(Dollars in thousands)								(Dollars in thousands)	September 30, 2023			September 30, 2022

Operating cash flows from operating leases	Operating cash flows from operating leases	$	179		$	184		Operating cash flows from operating leases	$	533		$	553

Weighted-average remaining lease term in years for operating leases	Weighted-average remaining lease term in years for operating leases	4.38			4.89			Weighted-average remaining lease term in years for operating leases	4.24			4.59

Weighted-average discount rate for operating leases	Weighted-average discount rate for operating leases	5.12		%	5.13		%	Weighted-average discount rate for operating leases	5.10		%	5.12		%

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Maturities of lease liabilities are as follows:


(In thousands)	(In thousands)	March 31, 2023		(In thousands)	September 30, 2023
2023	2023	$	723	2023	$	640
2024	2024	519		2024	450
2025	2025	335		2025	218
2026	2026	159		2026	122
2027	2027	110		2027	110
Thereafter	Thereafter	291		Thereafter	237
Total undiscounted cash flows	Total undiscounted cash flows	2,137		Total undiscounted cash flows	1,777
Less: present value discount	Less: present value discount	(222)		Less: present value discount	(178)
Present value of net future minimum lease payments	Present value of net future minimum lease payments	$	1,915	Present value of net future minimum lease payments	$	1,599

8.Supplemental Cash Flow Disclosures


		Three Months Ended					Nine Months Ended
(In thousands)	(In thousands)	March 31, 2023		March 31, 2022		(In thousands)	September 30, 2023		September 30, 2022
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	1,631	$	554	Interest	$	7,853	$	1,907
Income taxes	Income taxes	—		—		Income taxes	—		4,825
Noncash investing activities:	Noncash investing activities:					Noncash investing activities:

Impact of ASC 326 CECL adoption	Impact of ASC 326 CECL adoption	6,367		—		Impact of ASC 326 CECL adoption	6,367		—
Unrealized gain on unrecognized post retirement costs, net of tax		21		23
Unrealized gain (loss) on available for sale securities, net of tax		1,325		(11,689)
Unrealized gain on junior subordinated debentures, net of tax		2,947		1,302
Unrealized gain on unrecognized post retirement costs						Unrealized gain on unrecognized post retirement costs	66		67
Unrealized loss on available for sale securities						Unrealized loss on available for sale securities	(2,939)		(29,232)
Unrealized gain on junior subordinated debentures						Unrealized gain on junior subordinated debentures	523		3,419

Cash dividend declared	Cash dividend declared	1,880		1,875		Cash dividend declared	2,056		1,874

9.Dividends on Common Stock

On ~~March 28,~~September 26, 2023, the Company’s Board of Directors declared a cash dividend of ~~$0.11~~$0.12 per share on the Company’s common stock. The dividend was payable on ~~April 21,~~October 25, 2023, to shareholders of record as of ~~April 7,~~October 10, 2023. Approximately ~~$1.9~~$2.1 million was transferred from retained earnings to dividends payable as of ~~March 31,~~September 30, 2023 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 three months and nine months ended ~~March 31,~~September 30, 2023 and ~~March 31,~~September 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				Three Months Ended				Nine Months Ended
		March 31, 2023		March 31, 2022				September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Net income (in thousands)	Net income (in thousands)	$	6,125	$	2,443		Net income (in thousands)	$	3,853	$	4,467	$	14,395	$	10,345
Weighted average shares issued	Weighted average shares issued	17,076,510		17,030,409			Weighted average shares issued	17,132,080		17,042,479		17,103,982		17,036,460
Add: dilutive effect of stock options	Add: dilutive effect of stock options	15,950		21,410			Add: dilutive effect of stock options	8,124		21,468		11,893		21,178
Weighted average shares outstanding adjusted for potential dilution	Weighted average shares outstanding adjusted for potential dilution	17,092,460		17,051,819			Weighted average shares outstanding adjusted for potential dilution	17,140,204		17,063,947		17,115,875		17,057,638
Basic earnings per share	Basic earnings per share	$	0.36	$	0.14		Basic earnings per share	$	0.22	$	0.26	$	0.84	$	0.61
Diluted earnings per share	Diluted earnings per share	$	0.36	$	0.14		Diluted earnings per share	$	0.22	$	0.26	$	0.84	$	0.61
Anti-dilutive stock options excluded from earnings per share calculation	Anti-dilutive stock options excluded from earnings per share calculation	101,000		97,000			Anti-dilutive stock options excluded from earnings per share calculation	90,000		93,000		98,000		93,000

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 ~~March 31,~~September 30, 2023 and December 31, 2022, the Company had no recorded valuation allowance. The Company is no longer subject to examinations by taxing authorities for years before 2018 and 2017 for Federal and California jurisdictions, respectively.

The Company’s policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. There were no interest or penalties recognized on uncertain tax positions during the periods ended ~~March 31,~~September 30, 2023 and 2022.

The Company recorded a provision for income taxes of $1.6 million for the three months ended September 30, 2023, and a provision of $1.8 million for the three months ended September 30, 2022. The Company reported a provision for income taxes of ~~$2,521,000~~$5.9 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 compared to ~~$968,000~~$4.2 million for the comparable period of 2022. The effective tax rate was ~~29.2%~~28.8% for the ~~quarter~~three months ended ~~March 31,~~September 30, 2023, compared to ~~28.4%~~29.1% for the comparable period of 2022. The effective tax rate was 29.0% for the nine months ended September 30, 2023, compared to 28.9% for the comparable period of 2022.

12.Junior Subordinated Debt/Trust Preferred Securities

The contractual principal balance of the Company’s debentures relating to its trust preferred securities is $12.0 million as of ~~March 31,~~September 30, 2023 and December 31, 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 ~~March 31,~~September 30, 2023, the rate paid on the junior subordinated debt issued under USB Capital Trust II is the forward 3-month ~~LIBOR~~SOFR plus 129 basis points, and is adjusted quarterly.

At ~~March 31,~~September 30, 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

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liquidity risks associated with the junior subordinated debt. The ~~6.22%~~7.23% discount rate used represents ~~what a market participant would consider under the circumstances~~an investor yield based on current market assumptions. At ~~March 31,~~September 30, 2023, the total cumulative gain recorded on the debt ~~is $1.63~~was $1.70 million.

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The net fair value calculation performed as of ~~March 31,~~September 30, 2023 resulted in a net pretax ~~loss~~gain adjustment of ~~$107,000~~$29,000 for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 compared to a net pretax gain adjustment of ~~$303,000~~$950,000 for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022.

For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, the net ~~$107,000~~$29,000 fair value ~~loss~~gain adjustment was separately presented as a ~~$333,000 gain ($235,000,~~$553,000 loss, $390,000, net of ~~tax)~~tax, recognized on the consolidated statements of income, and a ~~$440,000 loss ($310,000,~~$523,000 gain, $368,000, net of ~~tax)~~tax, associated with the instrument-specific credit risk recognized in other comprehensive income. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022, the net ~~$303,000~~$950,000 fair value gain adjustment was separately presented as a ~~$1,302,000 gain ($917,000,~~$2.5 million loss, $1.7 million, net of ~~tax)~~tax, recognized on the consolidated statements of income, and a ~~$999,000 loss ($704,000,~~$3.4 million gain, $2.4 million, net of ~~tax)~~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 30, 2023 resulted in a net pretax loss adjustment of $234,000 for the quarter ended September 30, 2023 compared to a net pretax gain adjustment of $225,000 for the quarter ended September 30, 2022.

For the quarter ended September 30, 2023, the net $234,000 fair value loss adjustment was separately presented as a $811,000 loss, $571,000, net of tax, recognized on the consolidated statements of income, and a $576,000 gain, $406,000, net of tax, associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended September 30, 2022, the net $225,000 fair value gain adjustment was separately presented as a $600,000 loss, $423,000, net of tax, recognized on the consolidated statements of income, and a $825,000 gain, $581,000, net of tax, associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods indicated.

13.Fair Value Measurements and Disclosure

The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825, Fair Value Measurements and Disclosures, 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.

~~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:

March 31, 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 $ 205,556 $ 205,556 $ — $ 205,556 $ —
Marketable equity securities 3,358 3,358 3,358
Loans, net 927,105 872,532 — — 872,532
Financial Liabilities:
Total deposits 1,111,132 1,110,363 1,041,522 — 68,841
Junior subordinated debt 11,017 11,017 — — 11,017

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		December 31, 2022											September 30, 2023
(In thousands)	(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		(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:	Financial Assets:											Financial Assets:

Investment securities	Investment securities	$	207,545	$	207,545	$	—	$	207,545	$	—	Investment securities	$	184,641	$	184,641	$	—	$	184,641	$	—
Marketable equity securities	Marketable equity securities	3,315		3,315		3,315		—		—		Marketable equity securities	3,216		3,216		3,216		—		—
Loans, net	Loans, net	969,996		906,050		—		—		906,050		Loans, net	957,222		900,462		—		—		900,462
Financial Liabilities:	Financial Liabilities:											Financial Liabilities:
Time deposits		1,165,484		1,164,492		1,107,436		—		57,056
Deposits												Deposits	987,631		985,322		915,804		—		69,518
Junior subordinated debt	Junior subordinated debt	10,883		10,883		—		—		10,883		Junior subordinated debt	10,966		10,966		—		—		10,966


	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:
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 ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 or the ~~quarter~~nine months ended ~~December 31,~~September 30, 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.

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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 ~~March 31,~~September 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 ~~March 31,~~September 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)~~advantageous, market for the ~~liability, and (c) market participants with whom the reporting entity would transact in~~

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~~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.

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 ~~March 31,~~September 30, 2023:


											September 30, 2023
(In thousands)	(In thousands)	March 31, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:	Assets:									Assets:
AFS Securities (1):
AFS Securities:										AFS Securities:
U.S. Government agencies	U.S. Government agencies	$	7,433	$	—	$	7,433	$	—	U.S. Government agencies	$	—	$	6,396	$	—
U.S. Government collateralized mortgage obligations	U.S. Government collateralized mortgage obligations	95,803		—		95,803		—		U.S. Government collateralized mortgage obligations	—		86,205		—

Municipal bonds	Municipal bonds	41,477		—		41,477		—		Municipal bonds	—		40,027		—
U.S. Treasury securities	U.S. Treasury securities	29,424				29,424				U.S. Treasury securities	—		19,757		—
Corporate bond	Corporate bond	31,419		—		31,419		—		Corporate bond	—		32,256		—
Total AFS securities	Total AFS securities	205,556		—		205,556		—		Total AFS securities	—		184,641		—
Marketable equity securities (1)		3,358		3,358		—		—

Marketable equity securities										Marketable equity securities	3,216		—		—
Total	Total	$	208,914	$	3,358	$	205,556	$	—	Total	$	3,216	$	184,641	$	—

Liabilities:
Junior subordinated debt (1) $ 11,017 — — $ 11,017
Total $ 11,017 — — $ 11,017

~~(1)Recurring~~

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


Liabilities:
Junior subordinated debt	—	—	$	10,966
Total	—	—	$	10,966

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, 2022:

(In thousands) December 31, 2022 Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:
AFS Securities (1):
U.S. Government agencies $ 8,231 $ — $ 8,231 $ —
U.S. Government collateralized mortgage obligations 97,218 — 97,218
Municipal bonds 40,170 — 40,170
Treasury securities 29,224 29,224
Corporate bonds 32,702 — 32,702 —
Total AFS securities 207,545 — 207,545 —
Marketable equity securities (1) 3,315 3,315 — —
Total $ 210,860 $ 3,315 $ 207,545 $ —

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Liabilities:
Junior subordinated debt (1) $ 10,883 $ — $ — $ 10,883
Total $ 10,883 $ — $ — $ 10,883


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

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

~~(1)~~


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

~~Recurring~~

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

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 ~~March 31,~~September 30, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022
Financial Instrument Valuation Technique Unobservable Input Weighted Average Financial Instrument Valuation Technique Unobservable Input Weighted Average
Junior Subordinated Debt Discounted cash flow Market credit risk adjusted spreads 6.22% Junior Subordinated Debt Discounted cash flow Market credit risk adjusted spreads 6.63%

September 30, 2023

December 31, 2022

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

7.23%

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 LIBOR swap~~forward three-month SOFR 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 LIBOR swap~~forward three-month SOFR 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 ~~March 31,~~September 30, 2023 and December 31, 2022, is primarily due to increases in rates for similar debt instruments.

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

Three Months Ended
(In thousands) March 31, 2023 March 31, 2022
Junior Subordinated Debt:
Beginning balance $ 10,883 $ 11,189
Gross (gain) loss included in earnings (333) 999
Gross (gain) loss related to changes in instrument specific credit risk 440 (1,302)
Change in accrued interest 27 1
Ending balance $ 11,017 $ 10,887
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 $ (333) $ 999

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	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Junior Subordinated Debt:
Beginning balance	$	10,719	$	10,489	$	10,883	$	11,189
Gross loss included in earnings	811		600		553		2,469
Gross gain related to changes in instrument specific credit risk	(576)		(825)		(523)		(3,419)
Change in accrued interest	12		$	41	53		66
Ending balance	$	10,966	$	10,305	$	10,966	$	10,305
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	$	811	$	600	$	553	$	2,469

14.Goodwill and Intangible Assets

At ~~March 31,~~September 30, 2023, the Company ~~had~~held goodwill in the amount of $4.5 million in connection with various business combinations and purchases. This amount was unchanged from the balance of $4.5 million at December 31, 2022. ~~While goodwill is not amortized, the~~The Company ~~does conduct periodic~~conducts impairment analysis on goodwill ~~at least~~both annually ~~or more often as conditions require.~~and in the event of triggering events, if any. The Company performed ~~its~~an analysis of goodwill impairment and concluded goodwill was not impaired as of December 31, 2022, with no ~~material~~triggering events occurring through the period ended ~~March 31,~~September 30, 2023.

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15.Accumulated Other Comprehensive Income (Loss)

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


		March 31, 2023						December 31, 2022							September 30, 2023						December 31, 2022
(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		(In thousands)	Net unrealized gain (loss) on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain (loss) on junior subordinated debentures		Net unrealized gain (loss) on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain (loss) on junior subordinated debentures
Beginning balance	Beginning balance	$	(19,066)	$	(194)	$	1,765	$	(236)	$	(627)	$	(311)	Beginning balance	$	(19,066)	$	(194)	$	1,765	$	(236)	$	(627)	$	(311)
Current period comprehensive income (loss), net of tax	Current period comprehensive income (loss), net of tax	933		16		(310)		(18,830)		433		2,076		Current period comprehensive income (loss), net of tax	(2,070)		44		371		(18,830)		433		2,076
Ending balance	Ending balance	$	(18,133)	$	(178)	$	1,455	$	(19,066)	$	(194)	$	1,765	Ending balance	$	(21,136)	$	(150)	$	2,136	$	(19,066)	$	(194)	$	1,765
Accumulated other comprehensive loss	Accumulated other comprehensive loss					$	(16,856)					$	(17,495)	Accumulated other comprehensive loss					$	(19,150)					$	(17,495)

16.Investment in York Monterey Properties

As of ~~March 31,~~September 30, 2023 and December 31, 2022, the Bank’s investment in York Monterey Properties, Inc., totaled ~~$5.2~~$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.

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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:


(In thousands)	(In thousands)	March 31, 2023		December 31, 2022		(In thousands)	September 30, 2023		December 31, 2022
Commitments to extend credit	Commitments to extend credit	$	214,725	$	190,183	Commitments to extend credit	$	193,269	$	190,183
Standby letters of credit	Standby letters of credit	$	1,570	$	1,570	Standby letters of credit	$	3,081	$	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 creditworthiness on a case-by-case basis, and the amount of collateral obtained ~~if deemed necessary,~~ is based on management’s credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. ~~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 March 31, 2023, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $1,570,000.~~

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) the impact of recent bank failures and other adverse developments to financial institutions and the reaction by customers and investors in the capital markets regarding the stability and ability of banks to meet ongoing liquidity developments resulting in volatility and devaluation in the securities markets, (ii) our ability to attract and retain deposits and other sources of funding and liquidity; (iii) government policies that could lead to a tightening of credit and a requirement that the Company raise additional capital; (iv) 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; (v) severe weather~~global conflict and unrest;

•Changes in general economic and financial market conditions either nationally or ~~natural disasters, such as wildfires, earthquakes, drought, or flood; (vi) competitive pressures in~~locally;

•Fiscal policies of the ~~banking industry and changes in~~U.S. government including interest rate policies of the ~~regulatory environment; (vii) exposure to changes in~~Board of Governors of the ~~interest-rate environment~~Federal Reserve System and the resulting impact on the Company’s ~~interest rate~~interest-rate sensitive assets and liabilities; ~~(viii) 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; (ix) credit~~operational and/or security systems or infrastructure;

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

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

•Adverse developments in the ~~provision for credit losses; (x)~~ 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; ~~(xi) potential impairment~~

•Changes in the accounting policies or procedures; and

•The continuing adverse impact on the U.S. economy, including the markets in which we operate due to the lingering effects of ~~goodwill and other intangible assets, and (xii) 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, 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 twelve~~maintains 12 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 ~~ITM (Intelligent Teller Machines)~~interactive teller machines (ITMs) within its geographic footprint.

Executive Summary

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

~~1st Quarter~~

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2023 Highlights:

▪Net ~~income~~interest margin increased to ~~$6.1~~4.05% for the quarter ended September 30, 2023, compared to 3.95% for the quarter ended September 30, 2022.

▪Annualized average cost of deposits was 0.71% for the quarter ended September 30, 2023, compared to 0.22% for the quarter ended September 30, 2022.

▪Net income decreased to $3.9 million for the quarter ended ~~March 31,~~September 30, 2023 compared to the ~~$2.4~~$4.5 million reported for the quarter ended ~~March 31,~~September 30, 2022.

▪Loan interest income increased ~~$3.9~~$2.2 million and investment securities income increased ~~$711,000~~$169,000 as a result of growth in loan ~~and investment securities portfolio~~ balances and increases in interest rates, when compared to the ~~first~~second quarter of 2022.

▪A loss of $811,000 was recorded on the fair value of junior subordinated debt (TRUPS) during the quarter ended September 30, 2023, compared to a loss of $600,000 recorded during the third quarter of 2022, and a loss of $75,000 during the quarter ended June 30, 2023.

▪The Company recorded no provision for credit losses for the quarter ended September 30, 2023, compared to $607,000 for the quarter ended September 30, 2022.

▪Net interest income before the provision for credit losses decreased 6.4% to $11.9 million for the quarter ended September 30, 2023, compared to $12.7 million for the quarter ended September 30, 2022.

▪Return on average assets (ROAA) was 1.21% for the quarter ended September 30, 2023, compared to 1.28% for the quarter ended September 30, 2022.

▪Return on average equity (ROAE) was 13.06% for the quarter ended September 30, 2023, compared to 15.61% for the quarter ended September 30, 2022.

▪The Company had available secured lines of credit of ~~$434.7~~$475.8 million, unsecured lines of credit of ~~$100.0~~$120.0 million, unpledged investment securities of ~~$138.7~~$121.5 million, and cash and cash equivalents of ~~$45.2~~$35.3 million as of ~~March 31,~~September 30, 2023. Total borrowings as of September 30, 2023 were $142.0 million.

▪Total assets decreased ~~2.9%~~2.0% to ~~$1.26~~$1.27 billion, compared to $1.30 billion at December 31, 2022.

▪Total loans, net of unearned fees, decreased ~~3.8%~~0.7% to ~~$942.7~~$972.9 million, compared to $980.2 million at December 31, 2022.

▪Total investments decreased ~~0.9%~~10.9%, or ~~$1.9~~$23.0 million, to ~~$208.9~~$187.9 million, compared to $210.9 million at December 31, 2022.

▪Total deposits decreased ~~4.7%~~15.3% to ~~$1.11 billion,~~$987.6 million, compared to $1.17 billion at December 31, 2022.

▪Net charge-offs totaled $467,000, compared to net charge-offs of $451,000 for the quarter ended September 30, 2022.

▪The allowance for credit losses as a percentage of gross loans increased to ~~1.65%~~1.61%, 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~~current expected credit loss methodology, or “CECL.”

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▪~~Net interest income before the provision for credit losses increased 37.2% to $12.9 million for the quarter ended March 31, 2023, compared to $9.4 million for the quarter ended March 31, 2022.~~

▪The ~~Company recorded a reversal of provision for credit losses of $493,000 for the quarter ended March 31, 2023, compared to a provision for credit losses of $5,000 for the quarter ended March 31, 2022.~~accounting standard was adopted on January 1, 2023.

▪Book value per share ~~decreased~~increased to ~~$6.61,~~$6.71, compared to $6.59 at December ~~31, 2022.~~

▪~~Net interest margin increased to 4.45% for the quarter ended March 31, 2023, compared to 3.10% for the quarter ended March 31, 2022.~~

▪~~Annualized average cost of deposits was 0.48% for the quarter ended March 31, 2023, compared to 0.17% for the quarter ended March 31, 2022.~~

▪~~Net charge-offs totaled $434,000, compared to net charge-offs of $61,000 for the quarter ended March~~ 31, 2022.

▪Capital position remains well-capitalized with a ~~10.89%~~11.36% Tier 1 Leverage Ratio compared to 10.10% as of December ~~31, 2022.~~

▪~~Return on average assets (“ROAA”) was 1.95%, compared to 0.74% for the quarter ended March 31, 2022.~~

▪~~Return on average equity (“ROAE”) was 22.05%, compared to 8.33% for the quarter ended March~~ 31, 2022.

Trends Affecting Results of Operations and Financial Position

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

Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. 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. ~~Notwithstanding~~Despite the unusually wet winter experienced in 2022/2023, ~~periodically~~ the state of California ~~experiences~~has experienced severe droughts ~~and water allocations are significantly reduced~~which have 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 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

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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.

The 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”)~~(FOMC) continued raising interest rates during 2023, with increases to the overnight benchmark rate of ~~25bps~~25 basis points in ~~both~~ February, ~~2023~~March, May, and ~~March~~July 2023. However, it is unknown what effects increases or decreases in the inflation rate and the recent banking turmoil, in 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.

Results of Operations

On a year-to-date basis, the Company reported net income of ~~$6.1~~$14.4 million, or ~~$0.36~~$0.84 per share ($~~0.36~~0.84 diluted), for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to ~~$2.4~~$10.3 million, or ~~$0.14~~$0.61 per share ($~~0.14~~0.61 diluted), for the same period in 2022. The Company’s return on average assets was ~~1.95%~~1.52% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to ~~0.74%~~1.03% for the ~~quarter~~nine months ended

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~~March 31,~~ September 30, 2022. The Company’s return on average equity was ~~22.05%~~16.64% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to ~~8.33%~~11.99% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. The increase in the return on average assets is primarily attributable to growth in interest income as a result of increased interest rates and ~~the Company’s deployment of cash into its loan and investment portfolios during 2021 and 2022.~~decreases in average assets. The increase in the return on average equity is due to decreases in equity resulting from unrealized losses in the investment portfolio, dividends declared, and an accounting adjustment due to the transition to CECL, offset by an increase in income during the period.

Net Interest Income

The following tables present condensed average balance sheet information, together with interest income and yields earned on average ~~interest earning~~interest-earning assets and interest expense and rates paid on average interest-bearing liabilities for the three and nine month periods ended ~~March 31,~~September 30, 2023 and 2022.

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

~~Interest rates and Interest Differentials~~Equity:

Three Months Ended ~~March 31,~~September 30, 2023 and 2022


		2023						2022							September 30, 2023						September 30, 2022
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)		(Dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)
Assets:	Assets:													Assets:
Interest-earning assets:	Interest-earning assets:													Interest-earning assets:
Loans (1)	Loans (1)	$	960,648	$	13,000	5.49	%	$	870,851	$	9,119	4.25	%	Loans (1)	$	958,861	$	13,763	5.69	%	$	952,518	$	11,514	4.80	%
Investment securities (3)	Investment securities (3)	211,523		1,501		2.88	%	187,761		790		1.71	%	Investment securities (3)	203,516		1,491		2.91	%	215,416		1,322		2.43	%
Interest-bearing deposits in FRB	Interest-bearing deposits in FRB	5,493		58		4.28	%	177,243		82		0.19	%	Interest-bearing deposits in FRB	5,876		74		5.00	%	111,704		683		2.43	%
Total interest-earning assets	Total interest-earning assets	1,177,664		$	14,559	5.01	%	1,235,855		$	9,991	3.28	%	Total interest-earning assets	1,168,253		$	15,328	5.21	%	1,279,638		$	13,519	4.19	%
Allowance for credit losses	Allowance for credit losses	(16,323)						(9,514)						Allowance for credit losses	(15,817)						(9,902)
Noninterest-earning assets:	Noninterest-earning assets:													Noninterest-earning assets:
Cash and due from banks	Cash and due from banks	36,008						37,288						Cash and due from banks	33,172						37,547
Premises and equipment, net	Premises and equipment, net	9,685						8,930						Premises and equipment, net	9,318						9,401
Accrued interest receivable	Accrued interest receivable	7,696						7,077						Accrued interest receivable	7,046						7,853
Other real estate owned	Other real estate owned	4,582						4,582						Other real estate owned	4,582						4,582
Other assets	Other assets	61,169						49,377						Other assets	60,090						54,038
Total average assets	Total average assets	$	1,280,481					$	1,333,595					Total average assets	$	1,266,644					$	1,383,157
Liabilities and Shareholders’ Equity:	Liabilities and Shareholders’ Equity:													Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:	Interest-bearing liabilities:													Interest-bearing liabilities:
NOW accounts	NOW accounts	$	142,222	$	40	0.11	%	$	150,120	$	47	0.13	%	NOW accounts	$	134,143	$	101	0.30	%	$	125,133	$	35	0.11	%
Money market accounts	Money market accounts	363,717		1,071		1.19	%	393,563		362		0.37	%	Money market accounts	254,964		854		1.33	%	395,665		511		0.51	%
Savings accounts	Savings accounts	124,840		33		0.11	%	116,632		31		0.11	%	Savings accounts	114,513		225		0.78	%	124,962		35		0.11	%
Time deposits	Time deposits	58,927		199		1.37	%	66,817		68		0.41	%	Time deposits	95,117		661		2.76	%	75,023		98		0.52	%
Other borrowings	Other borrowings	7,492		90		4.87	%	—		—		0.00	%	Other borrowings	99,854		1,356		5.36	%	—		—		0.00	%
Junior subordinated debentures	Junior subordinated debentures	10,801		181		6.80	%	11,156		45		1.64	%	Junior subordinated debentures	10,615		209		7.81	%	10,459		110		4.17	%
Total interest-bearing liabilities	Total interest-bearing liabilities	707,999		$	1,614	0.92	%	738,288		$	553	0.30	%	Total interest-bearing liabilities	709,206		$	3,406	1.91	%	731,242		$	789	0.43	%
Noninterest-bearing liabilities:	Noninterest-bearing liabilities:													Noninterest-bearing liabilities:
Noninterest-bearing checking	Noninterest-bearing checking	445,502						466,062						Noninterest-bearing checking	423,180						528,033
Accrued interest payable	Accrued interest payable	256						113						Accrued interest payable	239						139
Other liabilities	Other liabilities	13,758						9,857						Other liabilities	16,618						9,915
Total liabilities	Total liabilities	1,167,515						1,214,320						Total liabilities	1,149,243						1,269,329
Total shareholders’ equity	Total shareholders’ equity	112,966						119,275						Total shareholders’ equity	117,401						113,828
Total average liabilities and shareholders’ equity	Total average liabilities and shareholders’ equity	$	1,280,481					$	1,333,595					Total average liabilities and shareholders’ equity	$	1,266,644					$	1,383,157
Interest income as a percentage of average earning assets	Interest income as a percentage of average earning assets					5.01	%					3.28	%	Interest income as a percentage of average earning assets					5.21	%					4.19	%
Interest expense as a percentage of average earning assets	Interest expense as a percentage of average earning assets					0.56	%					0.18	%	Interest expense as a percentage of average earning assets					1.16	%					0.24	%
Net interest margin	Net interest margin					4.45	%					3.10	%	Net interest margin					4.05	%					3.95	%

(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 ~~$26,000~~$14,000 for the three months ended ~~March 31,~~September 30, 2023 and loan fee income of ~~$300,000~~$51,000 for the three months ended ~~March 31,~~September 30, 2022.

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

(3)Yields on 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’ equity.

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Distribution of Average Assets, Liabilities and Shareholders’ Equity:

Nine Months Ended September 30, 2023 and 2022


	September 30, 2023						September 30, 2022
(Dollars in thousands)	Average Balance		Interest		Yield/Rate (2)		Average Balance		Interest		Yield/Rate (2)
Assets:
Interest-earning assets:
Loans (1)	$	958,038	$	40,292	5.62	%	$	910,221	$	30,363	4.46	%
Investment securities (3)	207,530		4,492		2.89	%	198,658		3,117		2.10	%
Interest-bearing deposits in FRB	5,016		187		4.98	%	141,708		1,023		0.97	%
Total interest-earning assets	1,170,584		$	44,971	5.14	%	1,250,587		$	34,503	3.69	%
Allowance for credit losses	(15,986)						(9,577)
Noninterest-earning assets:
Cash and due from banks	35,111						36,581
Premises and equipment, net	9,466						9,134
Accrued interest receivable	7,364						7,513
Other real estate owned	4,582						4,582
Other assets	59,650						52,859
Total average assets	$	1,270,771					$	1,351,679
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
NOW accounts	$	138,381	$	219	0.21	%	$	135,155	$	119	0.12	%
Money market accounts	332,361		3,450		1.39	%	400,154		1,255		0.42	%
Savings accounts	118,468		98		0.11	%	122,183		101		0.11	%
Time deposits	74,854		1,361		2.43	%	70,839		227		0.43	%
Other borrowings	47,088		1,888		5.36	%	—		—		—	%
Junior subordinated debentures	10,775		586		7.27	%	10,824		224		2.77	%
Total interest-bearing liabilities	721,927		$	7,602	1.41	%	739,155		$	1,926	0.35	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	419,808						486,983
Accrued interest payable	282						123
Other liabilities	12,748						9,745
Total liabilities	1,154,765						1,236,006
Total shareholders’ equity	116,006						115,673
Total average liabilities and shareholders’ equity	$	1,270,771					$	1,351,679
Interest income as a percentage of average earning assets					5.14	%					3.69	%
Interest expense as a percentage of average earning assets					0.87	%					0.21	%
Net interest margin					4.27	%					3.48	%

(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 $182,000 for the nine months ended September 30, 2023 and loan fee income of $416,000 for the nine months ended September 30, 2022.

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

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The prime rate increased from ~~3.50%~~4.75% at ~~March 31,~~September 30, 2022 to ~~8.00%~~8.50% at ~~March 31,~~September 30, 2023. Future increases or decreases will affect both interest income and expense and the resultant net interest margin.

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

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


		Three Months Ended							Three Months Ended
		March 31, 2023 compared to March 31, 2022							September 30, 2023 compared to September 30, 2022
(In thousands)	(In thousands)	Total		Rate		Volume		(In thousands)	Total		Rate		Volume
Increase (decrease) in interest income:	Increase (decrease) in interest income:							Increase (decrease) in interest income:
Loans	Loans	$	3,881	$	2,869	$	1,012	Loans	$	2,249	$	2,172	$	77
Investment securities available for sale	Investment securities available for sale	711		600		111		Investment securities available for sale	169		245		(76)

Interest-bearing deposits in FRB	Interest-bearing deposits in FRB	(24)		1,863		(1,887)		Interest-bearing deposits in FRB	(609)		1,047		(1,656)
Total interest income	Total interest income	4,568		5,332		(764)		Total interest income	1,809		3,464		(1,655)
Increase (decrease) in interest expense:	Increase (decrease) in interest expense:							Increase (decrease) in interest expense:
Interest-bearing demand accounts	Interest-bearing demand accounts	702		732		(30)		Interest-bearing demand accounts	909		1,079		(170)
Savings and money market accounts	Savings and money market accounts	2		—		2		Savings and money market accounts	(3)		—		(3)
Time deposits	Time deposits	131		140		(9)		Time deposits	257		223		34
Other borrowings	Other borrowings	90		90		—		Other borrowings	1,356		—		1,356
Subordinated debentures	Subordinated debentures	226		227		(1)		Subordinated debentures	99		97		2
Total interest expense	Total interest expense	1,151		1,189		(38)		Total interest expense	2,618		1,399		1,219
Increase (decrease) in net interest income		$	3,417	$	4,143	$	(726)
Decrease in net interest income								Decrease in net interest income	$	(809)	$	2,065	$	(2,874)

For the three months ended ~~March 31,~~September 30, 2023, total interest income increased ~~$4.6~~$1.8 million, or ~~45.7%~~13.4%, compared to the three months ended ~~March 31,~~September 30, 2022. In comparing the two periods, average ~~interest earning~~interest-earning assets decreased ~~$58.2~~$111.4 million, with ~~an increase of $89.8 million in loan balances and an increase of $23.8 million in investment securities, partially offset by~~ a decrease of ~~$171.8~~$105.8 million in balances held at the Federal Reserve ~~Bank.~~Bank and a decrease of $11.9 million in investment securities, partially offset by an increase of $6.3 million in loan balances. The increase in loan balances is ~~partially~~ attributed primarily to growth in the commercial real estate and residential mortgage ~~portfolio, including the purchase of $26.2 million in residential mortgages, and growth in the commercial and industrial portfolio.~~portfolios. Investment securities yields increased ~~117~~48 basis points and loan yields increased ~~124~~89 basis points. The average yield on total interest-earning assets increased ~~173~~102 basis points. The increase in yields is a result of the purchases of treasury, corporate, and mortgage-backed securities at higher yields due to market rate increases, increases on loan yields, and increases in yields on overnight deposits related to the increase in the Fed Funds rate.

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	Nine Months Ended
	September 30, 2023 compared to September 30, 2022
(In thousands)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	9,929	$	8,264	$	1,665
Investment securities available for sale	1,375		1,230		145
Interest-bearing deposits in FRB	(836)		5,033		(5,869)
Total interest income	10,468		14,527		(4,059)
Increase (decrease) in interest expense:
Interest-bearing demand accounts	2,295		2,480		(185)
Savings and money market accounts	(2)		—		(2)
Time deposits	1,134		1,120		14
Other borrowings	1,888		—		1,888
Subordinated debentures	362		363		(1)
Total interest expense	5,677		3,963		1,714
Increase (decrease) in net interest income	$	4,791	$	10,564	$	(5,773)

For the nine months ended September 30, 2023, total interest income increased 5.4 million, or 17.3%, compared to the nine months ended September 30, 2022. In comparing the two periods, average interest-earning assets decreased $80.0 million, with a decrease of $136.7 million in balances held at the Federal Reserve Bank, partially offset by an increase of $47.8 million in loan balances and an increase of $8.9 million in investment securities. Investment securities yields increased 79 basis points and loan yields increased 116 basis points. The average yield on total interest-earning assets increased 145 basis points. The increase in yields is a result of increases on loan yields, investment yields, and increases in yields on overnight deposits related to the increase in the Fed Funds rate.

The overall average yield on the loan portfolio increased to ~~5.49%~~5.62% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, as compared to ~~4.25%~~4.46% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. At ~~March 31,~~September 30, 2023, ~~35.4%~~34.4% of the Company’s loan portfolio consisted of floating rate instruments, as compared to ~~40.7%~~40.3% of the portfolio at December 31, 2022, with the majority of those tied to the prime rate. Approximately ~~60.2%~~63.3%, or ~~$200.8~~$211.7 million, of the ~~floating rate~~floating-rate loans had rate floors at ~~March 31, 2023, making them effectively fixed-rate loans for certain decreases in interest rates.~~September 30, 2023.

The Company’s net interest margin increased to ~~4.45%~~4.27% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to ~~3.10%~~3.48% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 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 and an increase in loan and investment yields.

The Company’s disciplined deposit pricing efforts have helped keep the Company’s cost of funds relatively low. The rates paid on interest-bearing liabilities increased to ~~0.92%~~1.41% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to ~~0.30%~~0.35% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, total interest expense increased approximately ~~$1,061,000,~~$5.7 million, or ~~191.9%~~294.8%, as compared to the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. Between those two periods, average interest-bearing liabilities decreased by ~~$30.3~~$17.2 million due to decreases in NOW and money market accounts and savings accounts, partially offset by increases in time deposits and ~~time deposits.~~short-term borrowings. While the Company may utilize brokered deposits as an additional source of funding, the Company held no brokered deposits at ~~March~~September 30, 2023 or December 31, ~~2023.~~2022.

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~~Table 3.~~ 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 Averages
		March 31, 2023	December 31, 2022	March 31, 2022		September 30, 2023	December 31, 2022	September 30, 2022
Loans	Loans	81.57%	74.02%	70.48%	Loans	81.84%	74.02%	72.79%
Investment securities available for sale	Investment securities available for sale	17.96%	16.16%	15.19%	Investment securities available for sale	17.73%	16.16%	15.89%
Interest-bearing deposits in FRB	Interest-bearing deposits in FRB	0.47%	9.82%	14.33%	Interest-bearing deposits in FRB	0.43%	9.82%	11.32%
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	20.09%	18.49%	20.32%	NOW accounts	19.17%	18.49%	18.28%
Money market accounts	Money market accounts	51.37%	53.92%	53.31%	Money market accounts	46.04%	53.92%	54.14%
Savings accounts	Savings accounts	17.63%	16.70%	15.80%	Savings accounts	16.41%	16.70%	16.53%
Time deposits	Time deposits	8.32%	9.44%	9.05%	Time deposits	10.37%	9.44%	9.58%
Other borrowings	Other borrowings	1.06%	0.00%	0.00%	Other borrowings	6.52%	0.00%	0.00%
Subordinated debentures	Subordinated debentures	1.53%	1.45%	1.52%	Subordinated debentures	1.49%	1.45%	1.47%
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 month periods ended ~~March 31,~~September 30, 2023 and 2022:


		Three Months Ended									Three Months Ended
(In thousands)	(In thousands)	March 31, 2023		March 31, 2022		$ Change		% Change		(In thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Customer service fees	Customer service fees	$	734	$	654	$	80	12.2	%	Customer service fees	$	686	$	899	$	(213)	(23.7)	%
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	132		139		(7)		(5.0)	%	Increase in cash surrender value of bank-owned life insurance	102		89		13		14.6	%
Gain (loss) on fair value of marketable equity securities		43		(182)		225		123.6	%
Loss on fair value of marketable equity securities										Loss on fair value of marketable equity securities	(92)		(149)		57		38.3	%

Gain (loss) on fair value of junior subordinated debentures		333		(999)		1,332		133.3	%
Loss on fair value of junior subordinated debentures										Loss on fair value of junior subordinated debentures	(811)		(600)		(211)		(35.2)	%

Gain on sale of investment securities		—		30		(30)		100.0	%
Other	Other	206		152		54		35.5	%	Other	229		153		76		49.7	%
Total noninterest income	Total noninterest income	$	1,448	$	(206)	$	1,654	(802.9)	%	Total noninterest income	$	114	$	392	$	(278)	(70.9)	%

Noninterest income for the quarter ended ~~March 31,~~September 30, 2023 ~~increased $1,654,000~~decreased $278,000 to ~~$1,448,000~~$114,000 compared to the quarter ended ~~March 31,~~September 30, 2022. Included in the ~~increase~~decrease is ~~an increase~~a reduction in the ~~gain~~loss on the fair value of marketable equity securities of ~~$225,000.~~$57,000. Additionally, the change in fair value of junior subordinated debentures caused a ~~$333,000 gain for the quarter ended March 31, 2023, compared to a $999,000~~$811,000 loss for the quarter ended ~~March 31,~~September 30, 2023, compared to a $600,000 loss for the quarter ended September 30, 2022, resulting in a difference of ~~$1,332,000.~~$211,000. The change in the fair value of junior subordinated debentures was caused by fluctuations in the ~~LIBOR~~SOFR yield curve. Customer service fees ~~increased $80,000~~decreased $213,000 between the two ~~quarters.~~

quarters primarily due to decreases in account analysis fees and ATM fees. Other noninterest income increased due to increases in FHLB dividends.

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	Nine Months Ended
(In thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Customer service fees	$	2,187	$	2,328	$	(141)	(6.1)	%
Increase in cash surrender value of bank-owned life insurance	406		343		63		18.4	%
Loss on fair value of marketable equity securities	(99)		(458)		359		78.4	%
Loss on fair value of junior subordinated debentures	(553)		(2,469)		1,916		77.6	%

Gain on sale of investment securities	—		30		(30)		100.0	%
Other	633		1,015		(382)		(37.6)	%
Total noninterest income	$	2,574	$	789	$	1,785	226.2	%

Noninterest income for the nine months ended September 30, 2023 increased $1.8 million to $2.6 million compared to the nine months ended September 30, 2022. Included in the increase is a reduction in the loss on the fair value of marketable equity securities of $359,000. Additionally, the change in fair value of junior subordinated debentures caused a $553,000 loss for the quarter ended September 30, 2023, compared to a $2.5 million loss for the quarter ended September 30, 2022, resulting in an increased loss of $1.9 million. The change in the fair value of junior subordinated debentures was caused by fluctuations in the SOFR yield curve. Customer service fees decreased $141,000 between the two quarters due to decreases in account analysis fees, ATM fees, and the closure of the financial services department during the third quarter of 2022. Additionally, other noninterest income for the nine months ended September 30, 2023, included an increase of $151,000 in FHLB stock dividends. Included in other noninterest income for the nine months ended September 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.

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 month periods ended ~~March 31,~~September 30, 2023 and 2022:


		Three Months Ended									Three Months Ended
(In thousands)	(In thousands)	March 31, 2023		March 31, 2022		$ Change		% Change		(In thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	3,260	$	3,049	$	211	6.9	%	Salaries and employee benefits	$	3,376	$	2,965	$	411	13.9	%
Occupancy expense	Occupancy expense	963		780		183		23.5	%	Occupancy expense	984		923		61		6.6	%
Data processing	Data processing	174		115		59		51.3	%	Data processing	204		215		(11)		(5.1)	%
Professional fees	Professional fees	882		949		(67)		(7.1)	%	Professional fees	1,177		1,089		88		8.1	%
Regulatory assessments	Regulatory assessments	192		231		(39)		(16.9)	%	Regulatory assessments	169		212		(43)		(20.3)	%
Director fees	Director fees	109		118		(9)		(7.6)	%	Director fees	106		110		(4)		(3.6)	%
Correspondent bank service charges	Correspondent bank service charges	19		25		(6)		(24.0)	%	Correspondent bank service charges	20		23		(3)		(13.0)	%
Net cost on operation of OREO		37		(8)		45		(562.5)	%
Net cost of operation of OREO										Net cost of operation of OREO	30		33		(3)		(9.1)	%
Other	Other	604		557		47		8.4	%	Other	559		641		(82)		(12.8)	%
Total expense	Total expense	$	6,240	$	5,816	$	424	7.3	%	Total expense	$	6,625	$	6,211	$	414	6.7	%

Noninterest expense for the quarter ended ~~March 31,~~September 30, 2023 increased ~~$424,000~~$414,000 to ~~$6,240,000,~~$6.6 million, compared to the quarter ended ~~March 31,~~September 30, 2022. The increase was primarily attributed to increases in salaries and ~~employees~~employee benefits, occupancy expense, and ~~data processing~~professional fee expenses, partially offset by decreases in ~~professional~~data processing, regulatory assessments, director fees, correspondent bank service charges, and ~~regulatory assessments.~~net cost of operation of OREO. The increase in salaries and employee benefits was caused by increases in salary ~~and~~expense, group insurance ~~expense.~~expense, and accruals for bonuses.

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	Nine Months Ended
(In thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Salaries and employee benefits	$	9,937	$	8,791	$	1,146	13.0	%
Occupancy expense	2,804		2,551		253		9.9	%
Data processing	583		475		108		22.7	%
Professional fees	2,969		2,957		12		0.4	%
Regulatory assessments	554		630		(76)		(12.1)	%
Director fees	321		345		(24)		(7.0)	%
Correspondent bank service charges	57		74		(17)		(23.0)	%
Net cost of operation of OREO	126		27		99		(366.7)	%
Other	1,731		1,755		(24)		(1.4)	%
Total expense	$	19,082	$	17,605	$	1,477	8.4	%

Noninterest expense for the nine months ended September 30, 2023 increased $1.5 million to $19.1 million, compared to the nine months ended September 30, 2022. The increase was primarily attributed to increases in salaries and employee benefits, occupancy expense, and data processing expenses, partially offset by decreases in regulatory assessments, director fees, and correspondent bank service charges. The increase in salaries and employee benefits was caused by increases in salary expense, group insurance expense, and bonus accruals. Occupancy expense increased due to ~~interactive teller machine (ITM) installation~~increased depreciation expense, utility costs, and ~~increase in fixed asset depreciation expense.~~building services expenses.

Income Taxes

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

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

The Company has reviewed all of its tax positions as of ~~March 31,~~September 30, 2023, and has determined that there are no material additional amounts to be recorded under the current income tax accounting guidelines.

The Company’s effective tax rate for the ~~quarter~~three months ended ~~March 31,~~September 30, 2023 was ~~29.16%~~28.78% compared to ~~28.38%~~29.14% for the ~~quarter~~three months ended ~~March 31,~~September 30, 2022. The Company’s effective tax rate for the nine months ended September 30, 2023 was 28.99% compared to 28.87% for the nine months ended September 30, 2022.

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Financial Condition

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


								March 31, 2023 - December 31, 2022		March 31, 2023 - March 31, 2022									Year-to-Date		Prior Period Comparison
(dollars in thousands)		March 31, 2023		December 31, 2022		March 31, 2022		$ Change		$ Change
(In thousands)												(In thousands)	September 30, 2023		December 31, 2022		September 30, 2022		$ Change		$ Change
Due from Federal Reserve Bank (FRB)	Due from Federal Reserve Bank (FRB)	$	3,204	$	6,945	$	186,691	$	(3,741)	$	(183,487)	Due from Federal Reserve Bank (FRB)	$	968	$	6,945	$	88,060	$	(5,977)	$	(87,092)
Net loans	Net loans	927,105		969,996		870,103		(42,891)		57,002		Net loans	957,222		969,996		952,103		(12,774)		5,119
Investment securities	Investment securities	208,914		210,860		183,527		(1,946)		25,387		Investment securities	187,857		210,860		211,847		(23,003)		(23,990)
Total assets	Total assets	1,261,194		1,299,193		1,349,802		(37,999)		(88,608)		Total assets	1,273,092		1,299,193		1,369,252		(26,101)		(96,160)
Total deposits	Total deposits	1,111,132		1,165,484		1,214,332		(54,352)		(103,200)		Total deposits	987,631		1,165,484		1,240,818		(177,853)		(253,187)
Total liabilities	Total liabilities	1,148,286		1,186,730		1,236,228		(38,444)		(87,942)		Total liabilities	1,158,064		1,186,730		1,262,173		(28,666)		(104,109)
Average interest-earning assets	Average interest-earning assets	1,177,664		1,242,657		1,235,855		(64,993)		(58,191)		Average interest-earning assets	1,170,584		1,248,578		1,250,587		(77,994)		(80,003)
Average interest-earning liabilities		707,999		737,355		738,288		(29,356)		(30,289)
Average interest-bearing liabilities												Average interest-bearing liabilities	721,927		738,766		739,155		(16,839)		(17,228)

Total assets decreased ~~2.9%~~2.0% between ~~March 31,~~September 30, 2023 and December 31, 2022, and ~~6.6%~~7.0% between ~~March 31,~~September 30, 2023 and ~~March 31,~~September 30, 2022. Total deposits decreased ~~4.7%~~15.3% and ~~8.5%~~20.40%, respectively, during the same periods. Net loans decreased ~~$42.9~~$12.8 million, or ~~4.4%~~1.3%, and investment securities decreased ~~$1.9~~$23.0 million, or ~~0.9%~~10.9%, between ~~March 31,~~September 30, 2023 and December 31, 2022. Net loans increased on a year-over-year basis due to organic growth and the purchase of ~~real estate~~real-estate mortgage loan pools ~~and declined during the quarter due to~~offset by loan payoffs and paydowns. ~~Investments~~Investment securities ~~increased~~decreased on a year-over-year basis due to ~~securities purchases and declined during the current quarter due to~~ repayments of ~~principal.~~principal and maturities. Deposits decreased on a year-over-year basis due to decreases in ~~non-interest bearing~~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, ~~and decreased on a quarterly basis due to decreases~~partially offset by increases in ~~non-interest bearing~~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.~~securities and decreases in deposits. Short-term borrowings at September 30, 2023 totaled $142.0 million. There were no short-term borrowings during the nine months ended September 30, 2022.

Earning assets averaged ~~$1.18~~$1.17 billion during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to ~~$1.24~~$1.25 billion for the same period in 2022. Average interest-bearing liabilities decreased to ~~$708.0~~$721.9 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, from ~~$738.3~~$739.2 million for the comparative period of 2022.

Loans

The 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 ~~$944.2~~$972.9 million at ~~March 31,~~September 30, 2023, a decrease of ~~$37.6~~$7.3 million, or ~~3.8%~~0.7%, when compared to the balance of ~~$981.8~~$980.2 million at December 31, 2022, and an increase of ~~$63.3~~$12.3 million, or ~~6.7%~~1.3%, when compared to the balance of ~~$879.4~~$960.5 million reported at ~~March 31,~~September 30, 2022. Loans on average increased ~~$89.8~~$47.8 million, or ~~10.3%~~5.3%, between the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2023, with loans averaging ~~$960.6~~$958.0 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, as compared to ~~$870.9~~$910.2 million for the same period ofin 2022.

~~Table 6. Loans~~

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

March 31, 2023 December 31, 2022 March 31, 2022
(In thousands) Amount % of Loans Amount % of Loans Amount % of Loans
Commercial and industrial $ 50,511 5.4 % $ 57,902 5.9 % $ 38,950 4.4 %
Real estate – mortgage 665,706 70.6 % 671,521 68.5 % 590,920 67.3 %
RE construction & development 137,257 14.6 % 153,374 15.6 % 152,375 17.3 %
Agricultural 45,513 4.8 % 52,722 5.4 % 47,725 5.4 %
Installment and student loans 43,740 4.6 % 44,659 4.6 % 49,409 5.6 %
Total gross loans $ 942,727 100.00 % $ 980,178 100.00 % $ 879,379 100.00 %

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	September 30, 2023				December 31, 2022				September 30, 2022
(In thousands)	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Commercial and industrial	$	51,849	5.3	%	$	57,902	5.9	%	$	62,421	6.5	%
Real estate – mortgage	682,376		70.1	%	671,521		68.5	%	632,750		65.9	%
Real estate construction and development	133,516		13.7	%	153,374		15.6	%	161,571		16.8	%
Agricultural	61,501		6.3	%	52,722		5.4	%	57,296		6.0	%
Installment and student loans	43,629		4.6	%	44,659		4.6	%	46,511		4.8	%
Total gross loans	$	972,871	100.00	%	$	980,178	100.00	%	$	960,549	100.00	%

Loan volume continues to be highest in what has historically been the Bank’s primary lending emphasis: real estate mortgage and construction lending. Total loans decreased ~~$37.5~~$7.3 million during the first ~~three~~nine months of 2023. There were ~~decreases~~increases of ~~$5.8~~

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$10.9 million, or ~~0.9%~~1.6%, in real estate mortgage loans ~~$16.1~~and $8.8 million, or ~~10.5%~~16.7%, in ~~real~~agricultural loans. Real estate construction and development loans ~~and $7.4~~decreased $19.9 million, or ~~12.8% in~~12.9%, commercial and ~~industrial. Installment~~industrial loan decreased $6.1 million, or 10.5%, and installment loans decreased by ~~$0.9~~$1.0 million, or ~~2.1% and agricultural loans decreased by $7.2 million, or 13.7%~~2.3%. 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 March 31, 2023, the real estate construction and development portfolio totaled 76% of capital. Non-owner occupied commercial real estate totaled 306% of capital and had a three year growth rate of 29.1%. 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 or regulatory concentration limits in other loan segments.

The real estate mortgage loan portfolio ~~was $665.7~~totaled $682.4 million at ~~March 31,~~September 30, 2023, and ~~consists~~consisted of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting to ~~42.0%~~43.2%, 40.6%, and ~~37.6%~~39.8% of the total loan portfolio at ~~March 31,~~September 30, 2023, December 31, 2022, and ~~March 31,~~September 30, 2022, respectively. Commercial real estate balances ~~decreased~~increased to ~~$395.7~~$419.9 million at ~~March 31,~~September 30, 2023 from $398.1 million at December 31, 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 ~~$270.0~~$262.4 million, or ~~28.6%~~27.0%, of the portfolio at ~~March 31,~~September 30, 2023, $273.4 million, or 27.9%, of the portfolio at December 31, 2022, and ~~$260.1~~$250.1 million, or ~~29.6%~~26.0%, of the portfolio at ~~March 31,~~September 30, 2022. ~~Dovenmuehle Mortgage, Inc. (DMI) is~~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 ~~$241.6~~$233.5 million, ~~or 95.0%~~comprising 89.0% of the total residential mortgage portfolio at ~~March 31,~~September 30, 2023. These loans were purchased in 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 ~~March 31,~~September 30, 2023, totaled ~~259.~~254.

Real estate construction and development loans, representing ~~14.6%~~13.7%, 15.6%, and ~~17.3%~~16.8% of total loans at ~~March 31,~~September 30, 2023, December 31, 2022, and ~~March 31,~~September 30, 2022, respectively, ~~consist~~consisted 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 decreased ~~$7.4~~$6.1 million between December 31, 2022 and ~~March 31,~~September 30, 2023 and ~~increased $11.6~~decreased $10.6 million between ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2023. Agricultural loans ~~decreased $7.2~~increased $8.8 million between December 31, 2022 and ~~March 31,~~September 30, 2023 and ~~decreased $2.2~~increased $4.2 million between ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2023. Installment ~~and student~~ loans decreased ~~$0.9~~$1.03 million between December 31, 2022 and ~~March 31,~~September 30, 2023 and decreased ~~$5.7~~$2.9 million between ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2023, primarily due to decreases in student loan balances.

~~Installment and~~Included in installment loans are $39.6 million in unsecured student loans made to medical and pharmacy school students in the US and Caribbean. Student loans decreased ~~$5.7~~$4.1 million between ~~March 31,~~the nine months ended September 30, 2023 and 2022, ~~and March 31, 2023,~~ due to paydowns, consolidations with other lenders, and charge-offs within the student loan portfolio. Included in installment loans are $41.4 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.charge-offs. The outstanding balance of ~~student~~ loans ~~that~~for students who are in school or a grace period and have not entered repayment status totaled ~~$2.4~~$2.0 million at ~~March 31,~~September 30, 2023. At ~~March 31,~~September 30, 2023 there were ~~858~~803 loans within repayment, deferment, and forbearance which represented ~~$21.4~~$19.5 million, ~~$10.8~~$11.2 million, and ~~$6.9~~$6.8 million in outstanding balances, respectively. Student loans are no longer originated 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,~~borrower, 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

~~Table~~ portfolio at the time of ~~Contents~~

~~portfolio is in the mid-700s.~~loan origination was 737. 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 ~~March 31,~~September 30, 2023, iswas approximately ~~$103,000.~~$106,000. Loan interest rates ~~range~~ranged from 6.00% to ~~12.375%~~13.125%, with a weighted average rate of ~~11.385%~~12.14%.

ZuntaFi is the third-party servicer for the student loan portfolio. 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 ~~March 31,~~September 30, 2023 and December 31, 2022, reserves against the student loan portfolio totaled ~~$4,754,000~~$5.6 million and ~~$2,588,000,~~$2.6 million, respectively. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, ~~$28,000 accrued interest receivable was reversed due to $406,000 in charge-offs. For the quarter ended March 31, 2022, $14,000~~$187,000 in accrued interest receivable was reversed, due to charge-offs of ~~$353,000 within~~$1,588,000. For the ~~student loan portfolio.~~nine months ended September 30, 2022, $100,000 in accrued interest receivable was reversed, due to charge-offs of

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$810,000. For the quarter ended September 30, 2023, $102,000 in accrued interest receivable was reversed, due to charge-offs of $603,000. For the quarter ended September 30, 2022, $86,000 in accrued interest receivable was reversed, due to charge-offs of $457,000.

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


(In thousands)	Balance
Student Loan Portfolio Balance as of December 31, 2022	$	42,132
~~Disbursements~~	—
Capitalized Interest	~~1,101~~2,912
Loan Consolidations/Payoffs	— (2,629)
Payments Received	~~(1,411)~~(1,213)
Loans Charged-off	~~(406)~~(1,588)
Student Loan Portfolio Balance as of ~~March 31,~~September 30, 2023	$	~~41,416~~39,614

Loan participations purchased decreased to ~~$9.3~~$9.2 million, or ~~1.0%~~0.9% of the portfolio, at ~~March 31,~~September 30, 2023, decreased from $9.4 million, or 1.0%, of the portfolio at December 31, 2022, and decreased from ~~the $9.5 million reported at March 31, 2022. Loan participations sold increased from $3.8~~$9.4 million, or ~~0.4%~~1.0%, of the portfolio at ~~March 31,~~September 30, 2022. Loan participations sold decreased from $12.9 million, or 1.3%, of the portfolio at September 30, 2022, to $9.7 million, or 1.0%, of the portfolio, at December 31, 2022, and ~~decreased~~increased to ~~$9.3~~$38.1 million, or ~~1.0%~~3.9%, of the portfolio, at ~~March 31,~~September 30, 2023. This increase was primarily due to the addition of one real estate construction loan participation with a balance of $28.8 million at September 30, 2023.

Deposits

Deposit balances totaled ~~$1.1 billion~~$987.6 million at ~~March 31,~~September 30, 2023, representing a decrease of ~~$54.4~~$177.9 million, or ~~4.7%~~15.3%, from the balance of ~~$1.2~~$1.17 billion reported at December 31, 2022, and a decrease of ~~$103.2~~$253.2 million, or ~~8.5%~~20.4%, from the balance of ~~$1.2~~$1.24 billion at ~~March 31,~~September 30, 2022.

~~Table 7. Deposits~~

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

(In thousands) March 31, 2023 December 31, 2022 $ Change % Change
Noninterest-bearing deposits $ 394,745 $ 481,629 $ (86,884) (18.0) %
Interest-bearing deposits:
NOW and money market accounts 528,233 499,861 28,372 5.7 %
Savings accounts 118,544 125,946 (7,402) (5.9) %
Time deposits:
Under $250,000 52,835 42,933 9,902 23.1 %
$250,000 and over 16,775 15,115 1,660 11.0 %
Total interest-bearing deposits 716,387 683,855 32,532 4.8 %
Total deposits $ 1,111,132 $ 1,165,484 $ (54,352) (4.7) %

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(In thousands)	September 30, 2023		December 31, 2022		$ Change		% Change
Noninterest-bearing deposits	$	386,258	$	481,629	$	(95,371)	(19.8)	%
Interest-bearing deposits:
NOW and money market accounts	409,193		499,861		(90,668)		(18.1)	%
Savings accounts	120,353		125,946		(5,593)		(4.4)	%
Time deposits:
Under $250,000	69,875		42,933		26,942		62.8	%
$250,000 and over	1,952		15,115		(13,163)		(87.1)	%
Total interest-bearing deposits	601,373		683,855		(82,482)		(12.1)	%
Total deposits	$	987,631	$	1,165,484	$	(177,853)	(15.3)	%

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


(In thousands)	(In thousands)	March 31, 2023		December 31, 2022		(In thousands)	September 30, 2023		December 31, 2022
Uninsured deposits (1)	Uninsured deposits (1)	$	643,470	$	706,183	Uninsured deposits (1)	$	511,426	$	706,183

(1) Represents amount over insurance limit

March 31, 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)
$ 314 $ 1,686 $ 3,052 $ 972 $ 6,024

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	September 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)	$	1,240	$	1,841	$	1,726	$	6,714	$	11,521

(1) Represents amount over insurance limit


	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 principal sources of funding and liquidity. These core deposits amounted to ~~98.49%~~99.80% and 98.70% of total deposits at ~~March 31,~~September 30, 2023 and December 31, 2022, respectively. The Company held no brokered deposits at ~~March 31,~~September 30, 2023 or December 31, 2022.

On a year-to-date average basis, the Company experienced a decrease of ~~$58.0~~$131.4 million, or ~~4.9%~~10.8%, in total deposits between the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 and the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. Between these two periods, interest-bearing deposits decreased ~~$37.4~~$64.3 million, or ~~5.1%~~8.8%, and noninterest-bearing deposits decreased ~~$20.6~~$67.2 million, or ~~4.4%~~13.8%.

Short-Term Borrowings

At ~~March 31,~~September 30, 2023, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling ~~$432.6~~$463.6 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling ~~$2.1~~$135.3 million. At ~~March 31,~~September 30, 2023, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB), PNC, 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 ~~March 31,~~September 30, 2023, the Company had outstanding borrowings of ~~$13.2~~$142.0 million. At ~~March 31,~~September 30, 2022, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of $435.6 million, collateralized FHLB lines of credit totaling $2.2 million, and uncollateralized lines of credit of $50 million with PCBB, $40 million with PNC, $20 million with Zion’s Bank, and $10 million with Union Bank at December 31, 2022.

Asset Quality and Allowance for Credit Losses

Lending money is the 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.

~~Table of Contents~~

The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), effective January 1, 2023, and utilizes a current expected credit loss ~~(“CECL”)~~(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 measured on a collective (pool) basis for loans with similar characteristics. The Company estimates the appropriate level of allowance for credit losses for collateral-dependent loans by evaluating them separately. The Company also uses the CECL model to calculate the allowance for credit losses on off-balance sheet credit exposures, such as undrawn amounts on lines of credit. While the allowance for credit losses on loans is reported as a contra-asset for loans, the allowance for credit losses on off-balance sheet credit exposure is reported as a liability.

The unallocated portion of the allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.

The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy of 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 credit experience, collateral, and concentrations 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.

The specific allowance for impaired loans is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary differences between impaired loans and nonperforming loans are: i) all loan categories are considered in determining nonperforming loans while impaired loan recognition is limited to commercial and industrial loans, commercial and residential real estate loans, construction loans, and agricultural loans, and ii) impaired loan recognition considers not only loans 90 days or more past due, modified 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 allowance for credit losses through a charge to the provision, if applicable.

Real estate mortgage loans comprised approximately 0.5% of total impaired loan balances at March 31, 2023. 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 March 31, 2023, approximately $13.2 million, or 93.7%, 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.

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~~Table 9. Impaired~~Individually-Evaluated Loans and Specific ~~Reserves~~Reserves:

The following table summarizes the components of ~~impaired~~individually-evaluated loans and ~~their~~ related specific reserves:


		March 31, 2023				December 31, 2022					September 30, 2023				December 31, 2022
(In thousands)	(In thousands)	Impaired Loan Balance		Reserve		Impaired Loan Balance		Reserve		(In thousands)	Individually-Evaluated Loan Balances		Specific Reserve		Individually-Evaluated Loan Balances		Specific Reserve
Commercial and industrial	Commercial and industrial	$	—	$	—	$	—	$	—	Commercial and industrial	$	—	$	—	$	—	$	—
Real estate – mortgage	Real estate – mortgage	74		2		141		4		Real estate – mortgage	72		—		141		4
RE construction & development		13,109		—		14,436		—
Real estate construction and development										Real estate construction and development	13,130		—		14,436		—
Agricultural	Agricultural	879		48		1,051		48		Agricultural	463		34		1,051		48
Installment and student loans	Installment and student loans	—		—		—		—		Installment and student loans	—		—		—		—
Total impaired loans		$	14,062	$	50	$	15,628	$	52
Total individually-evaluated loans										Total individually-evaluated loans	$	13,665	$	34	$	15,628	$	52

~~Impaired~~Individually-evaluated loans declined ~~$1.6~~$2.0 million to ~~$14.1~~$13.7 million at ~~March 31,~~September 30, 2023 compared to $15.6 million at December 31, 2022. Included in the balance of specific reserves at ~~March 31,~~September 30, 2023, ~~are $2,000 allocated to one real estate mortgage loan and $48,000~~is $34,000 allocated to one agricultural loan. There were no reserves for real estate construction and development loans at ~~March 31,~~September 30, 2023 and December 31, 2022, due to the value of the collateral securing those loans.

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

The following table summarizes the credit quality indicators for outstanding student loans as of:


		March 31, 2023					December 31, 2022						September 30, 2023					December 31, 2022
(Dollars in thousands)	(Dollars in thousands)	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest		(Dollars in thousands)	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	School	69	$	2,025	$	967	70	$	2,056	$	908	School	46	$	1,267	$	722	70	$	2,056	$	908
Grace	Grace	12	327		163		27	667		348		Grace	23	735		358		27	667		348
Repayment	Repayment	460	21,421		293		516	23,414		857		Repayment	418	19,547		261		516	23,414		857
Deferment	Deferment	256	10,784		1,964		268	10,974		1,732		Deferment	257	11,227		1,959		268	10,974		1,732
Forbearance	Forbearance	142	6,862		374		91	5,019		237		Forbearance	128	6,838		229		91	5,019		237
Total	Total	939	$	41,419	$	3,761	972	$	42,130	$	4,082	Total	872	$	39,614	$	3,529	972	$	42,130	$	4,082

Included in installment loans are ~~$41.4~~$39.6 million and $42.1 million in student loans at ~~March 31,~~September 30, 2023 and December 31, 2022, respectively, made to medical and pharmacy school students. At March 31, 2023 there were 858 loans within repayment, deferment, and forbearance which represented $21.4 million, $10.8 million, and $6.9 million, respectively. At December 31, 2022, there were 875 loans within repayment, deferment, and forbearance which represented $23.4 million, $11.0 million and $5.0 million, respectively. As of ~~March 31,~~September 30, 2023 and December 31, 2022, the reserve against the student loan portfolio ~~was $4.8~~totaled $5.3 million and $2.6 million, respectively.

Loan interest rates on the student loan portfolio range from 6.00% to ~~12.375%~~13.125% and 5.75% to 10.75% at ~~March 31,~~September 30, 2023 and December 31, 2022, respectively.

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~~Table 12.~~ Nonperforming ~~Assets~~Assets:

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


(In thousands)	(In thousands)	March 31, 2023			December 31, 2022			(In thousands)	September 30, 2023			December 31, 2022
Nonaccrual loans	Nonaccrual loans	$	13,195		$	14,544		Nonaccrual loans	$	14,165		$	14,544
Loans past due 90 days or more, still accruing	Loans past due 90 days or more, still accruing	382			252			Loans past due 90 days or more, still accruing	—			252
Total nonperforming loans	Total nonperforming loans	13,577			14,796			Total nonperforming loans	14,165			14,796
Other real estate owned	Other real estate owned	4,582			4,582			Other real estate owned	4,582			4,582
Total nonperforming assets	Total nonperforming assets	$	18,159		$	19,378		Total nonperforming assets	$	18,747		$	19,378
Nonperforming loans to total gross loans	Nonperforming loans to total gross loans	1.44		%	1.52		%	Nonperforming loans to total gross loans	1.45		%	1.51		%
Nonperforming assets to total assets	Nonperforming assets to total assets	1.44		%	1.49		%	Nonperforming assets to total assets	1.47		%	1.48		%
Allowance for loan losses to nonperforming loans	Allowance for loan losses to nonperforming loans	115.06		%	68.17		%	Allowance for loan losses to nonperforming loans	110.48		%	68.82		%

Nonperforming assets, which are primarily related to the real estate loan and ~~other real estate owned~~other-real-estate-owned portfolio, decreased ~~$1,360,000~~$631,000 from ~~$19.5~~$19.4 million at December 31, 2022 to ~~$18.2~~$18.7 million at ~~March 31,~~September 30, 2023. ~~The~~Nonaccrual loan balances decreased to $14.2 million between the two periods, and the remaining nonaccrual loans are well collateralized and in the process of collection. The ratio of the allowance for credit losses to nonperforming loans increased from ~~68.2%~~68.82% at December 31, 2022 to ~~115.1%~~110.48% at ~~March 31,~~September 30, 2023. The percentage increase is primarily due to the adjustment for CECL and reserve increases due to student loan delinquencies and charge-offs.

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


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

RE construction & development		$	13,112	$	14,436	$	(1,324)
Real estate construction and development								Real estate construction and development	$	13,097	$	14,436	$	(1,339)
Agricultural	Agricultural	86		108		(22)		Agricultural	60		108		(48)

Total nonaccrual loans	Total nonaccrual loans	$	13,198	$	14,544	$	(1,346)	Total nonaccrual loans	$	14,165	$	14,544	$	(379)

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 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 ~~March 31,~~September 30, 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 modified loan at some future date.~~terms.

Nonaccrual loans, totaling ~~$13.2~~$14.2 million at ~~March 31,~~September 30, 2023, decreased ~~$1.3 million~~$379,000 from $14.5 million at December 31, 2022, with real estate mortgage and real estate construction loans comprising ~~99.3%~~99.6% of total nonaccrual loans at ~~March 31,~~September 30, 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 September 30, 2023 and December 31, 2022, nonaccrual loans represented 1.45% and 1.48% of total loans, respectively. The loan allowance for credit ~~issues related to~~loss represented 110.5% and 70.0% of nonaccrual loans for the ~~specific loans. Impaired loans decreased $1.6 million during the quarter ended March 31, 2023 to a balance of $14.1 million at March 31, 2023.~~ same periods.

Other real estate owned through foreclosure remained at $4.6 million for the periods ended ~~March 31,~~September 30, 2023 and December 31, 2022. Nonperforming assets as a percentage of total assets decreased from ~~1.49%~~1.48% at December 31, 2022 to ~~1.44%~~1.47% at ~~March 31,~~September 30, 2023.

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

(Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022
(Reversal) provision for credit losses year-to-date $ (493) $ 1,802 $ 5
Allowance as % of nonperforming loans 115.1 % 68.2 % 80.8 %
Nonperforming loans as % total loans 1.4 % 1.5 % 1.3 %

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 modifications.~~assets.

The following table summarizes special mention loans by type as of:


(In thousands)	(In thousands)	March 31, 2023		December 31, 2022		(In thousands)	September 30, 2023		December 31, 2022
Commercial and industrial	Commercial and industrial	$	—	$	200	Commercial and industrial	$	—	$	200

Commercial real estate mortgage	Commercial real estate mortgage	25,823		26,019		Commercial real estate mortgage	12,696		26,019

Agricultural	Agricultural	1,017		1,017		Agricultural	869		1,017

Total special mention loans	Total special mention loans	$	26,840	$	27,236	Total special mention loans	$	13,565	$	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 loan modifications when it improves collection prospects. Management recognizes the increased risk of loss due to the 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 allowance for loan credit losses, loan loss provisions, ~~made to that allowance,~~ and charge-off and recovery activity affecting the allowance for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 and ~~March 31,~~September 30, 2022.

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


(In thousands)	(In thousands)	March 31, 2023			March 31, 2022			(In thousands)	September 30, 2023			September 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	$	942,727		$	879,379		Total loans outstanding at end of period before deducting allowances for credit losses	$	972,871		$	962,166
Average loans outstanding during period	Average loans outstanding during period	960,648			870,851			Average loans outstanding during period	958,038			910,221

Balance of allowance at beginning of period	Balance of allowance at beginning of period	$	10,182		$	9,333		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			—			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	(477)			(358)			Installment and student loans	(1,587)			(828)
Total loans charged-off	Total loans charged-off	(477)			(358)			Total loans charged-off	(1,587)			(828)
Recoveries of loans previously charged-off:	Recoveries of loans previously charged-off:							Recoveries of loans previously charged-off:
Real estate	Real estate	20			4			Real estate	53			10
Commercial and industrial	Commercial and industrial	—			284			Commercial and industrial	1			305
Installment and student loans	Installment and student loans	23			8			Installment and student loans	181			25
Total loan recoveries	Total loan recoveries	43			296			Total loan recoveries	235			340
Net loans charged-off	Net loans charged-off	(434)			(62)			Net loans charged-off	(1,352)			(488)
Provision charged to operating expense	Provision charged to operating expense	(493)			5			Provision charged to operating expense	452			1,217
Balance of allowance for credit losses at end of period	Balance of allowance for credit losses at end of period	$	15,622		$	9,276		Balance of allowance for credit losses at end of period	$	15,649		$	10,062

Net loan charged-off to total average loans (annualized)	Net loan charged-off to total average loans (annualized)	0.18		%	0.03		%	Net loan charged-off to total average loans (annualized)	0.19		%	0.07		%
Net loan charged-off to loans at end of period (annualized)	Net loan charged-off to loans at end of period (annualized)	0.18		%	0.03		%	Net loan charged-off to loans at end of period (annualized)	0.56		%	0.20		%
Allowance for credit losses to total loans at end of period	Allowance for credit losses to total loans at end of period	1.65		%	1.06		%	Allowance for credit losses to total loans at end of period	1.61		%	1.05		%
Net loan charged-off to allowance for credit losses (annualized)	Net loan charged-off to allowance for credit losses (annualized)	11.11		%	2.63		%	Net loan charged-off to allowance for credit losses (annualized)	34.56		%	19.40		%
Provision for credit losses to net charged-off (annualized)	Provision for credit losses to net charged-off (annualized)	(227.19)		%	(16.13)		%	Provision for credit losses to net charged-off (annualized)	44.58		%	499.18		%

Provisions for credit losses are determined on the basis of 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 ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, a ~~$493,000 reverse~~$587,000 provision was recorded to the allowance for credit losses as compared to a ~~$5,000~~$1.2 million provision for the ~~quarter~~nine months ended ~~March 31,~~September 30, 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:


		March 31, 2023						March 31, 2022							September 30, 2023						September 30, 2022
(In thousands)	(In thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage		Net Charge-offs (Recoveries)		Average Loan Balance		Percentage		(In thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage		Net Charge-offs (Recoveries)		Average Loan Balance		Percentage
Commercial and industrial	Commercial and industrial	$	—	$	49,628	—	%	$	(268)	$	39,613	(0.68)	%	Commercial and industrial	$	(1)	$	49,063	<0.01%		$	(269)	$	58,596	(0.46)	%
Real estate mortgages	Real estate mortgages	(20)		667,376		<0.01%		(4)		576,512		<0.01%		Real estate mortgages	(53)		666,797		<0.01%		(10)		606,621		<0.01%
RE construction and development	RE construction and development	—		148,340		—	%	—		155,077		—	%	RE construction and development	—		144,205		—	%	—		183,934		—	%
Agricultural	Agricultural	—		50,332		—	%	(16)		48,695		(0.03)	%	Agricultural	—		53,201		—	%	(36)		56,122		(0.06)	%
Installment and student loans	Installment and student loans	454		44,972		1.01	%	350		50,954		0.69	%	Installment and student loans	1,406		44,772		3.14	%	803		47,245		1.70	%
Total	Total	$	434	$	960,648	0.05	%	$	62	$	870,851	0.01	%	Total	$	1,352	$	958,038	0.14	%	$	488	$	952,518	0.05	%

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Net charge-offs during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023 totaled ~~$434,000~~$1,352,000 as compared to net charge-offs of ~~$61,000~~$488,000 for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. The Company charged-off, or had partial charge-offs on 1224 loans during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, compared to 413 loans during the same period ended ~~March 31, 2022, and 24 loans during the year ended December 31,~~September 30, 2022. The annualized percentage of net charge-offs to average loans was ~~0.18%~~0.19% for the ~~quarter~~nine months ended ~~March 31, 2023. Annualized percentage net charge-offs were 0.19%~~September 30, 2023, 0.14% for the year ended December 31, ~~2022. Annualized percentage net charge-offs were 0.03%~~2022, and 0.07% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022. The Company’s loans net of unearned fees increased from ~~$879.4~~$962.2 million at ~~March 31,~~September 30, 2022 to ~~$942.7~~$972.9 million at ~~March 31,~~September 30, 2023.

The allowance for credit losses at ~~March 31,~~September 30, 2023 was ~~1.65%~~1.61% of outstanding loan balances, as compared to 1.04% at December 31, 2022, and ~~1.06%~~1.05% at ~~March 31,~~September 30, 2022.

At ~~March 31,~~September 30, 2023 and ~~March 31,~~September 30, 2022, unfunded loan commitment reserves of ~~$805,000~~$954,000 and $569,000 respectively, were reported in other liabilities.

Management believes that the ~~1.65%~~loan allowance for credit ~~loss allowance~~losses, totaling 1.61% of the loan portfolio at ~~March 31,~~September 30, 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 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.

Liquidity and Capital Resources

The 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~~Company’s principal cash outflows are for loan ~~origination,~~originations, purchases of investment securities, depositor withdrawals, and payment of operating expenses.

The 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 compared to cash.~~yields than cash balances.

The following table sets forth asset balances as of:


		March 31, 2023				December 31, 2022					September 30, 2023				December 31, 2022
(Dollars in thousands)	(Dollars in thousands)	Balance		% Total Assets		Balance		% Total Assets		(Dollars in thousands)	Balance		% Total Assets		Balance		% Total Assets
Cash and cash equivalents	Cash and cash equivalents	$	45,153	3.6	%	$	38,595	3.0	%	Cash and cash equivalents	$	35,297	2.8	%	$	38,595	3.0	%
Net loans	Net loans	927,105		73.5	%	969,996		74.7	%	Net loans	957,222		75.2	%	969,996		74.7	%
Investment securities	Investment securities	208,914		16.6	%	210,860		16.2	%	Investment securities	187,857		14.8	%	210,860		16.2	%

At ~~March 31,~~September 30, 2023, the loan to deposit ratio was ~~84.84%~~98.51%, compared to a loan to deposit ratio of 84.10% at December 31, 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 ~~98.5%~~99.8% of total deposits at ~~March 31,~~September 30, 2023, provide a significant and stable funding source for the Company. ~~At March 31, 2023, there were $13.2~~The bank held $125.0 million in borrowings ~~against~~from a secured credit line with the ~~Bank’s~~Federal Home Loan Bank and $17.0 million in borrowings from an unsecured credit line with PCBB for a total of $142.0 million in short-term borrowings at ~~PCBB.~~September 30, 2023. Unused lines of credit with the Federal ~~Home Loan Bank, Pacific Coast Banker'’ Bank, Zion’s Bank, Union~~Reserve Bank and ~~the Federal Reserve Bank~~FHLB, totaling ~~$481.5~~$453.8 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 ~~$579.8~~$614.0 million at September 30, 2023. For further detail on

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~~March 31, 2023. For a further detail of~~ the Company’s borrowing arrangements, see Note 6 - Short-term Borrowings/Other Borrowings, in the notes to the consolidated financial statements.

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


(In thousands)	Balance
December 31, 2021	$	219,219
~~March 31,~~September 30, 2022	~~224,934~~126,032
December 31, 2022	38,595
~~March 31,~~September 30, 2023	~~45,153~~35,297

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, ~~ACL,~~allowance for credit losses, current and projected growth, and projected retained earnings. The capital plan ~~also~~ contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company, on a consolidated basis. The capital plan requires the Bank to maintain a Tier 1 Leverage Ratio equal to or greater than 9%. The Bank’s Tier 1 Capital Ratio was ~~10.88%~~11.42% and 9.55% at ~~March 31,~~September 30, 2023 and 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 actual capital positions at ~~March 31,~~September 30, 2023:

Capital ~~Ratios~~Ratios:


		March 31, 2023	Ratios at December 31, 2022	Minimum Requirement to be Well Capitalized	Minimum requirement for Community Bank Leverage Ratio (1)		September 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	10.89%	10.10%	5.00%	9.00%	Company	11.36%	10.10%	5.00%	9.00%
Bank	Bank	10.88%	10.11%	5.00%	9.00%	Bank	11.42%	10.11%	5.00%	9.00%

(1) If the 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 the regulatory framework for Prompt Corrective Action if~~If the Bank’s ~~Leverage Ratio~~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 ~~March 31,~~September 30, 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.

~~Table of Contents~~

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 Holding Company from the Bank.

Table of Contents

On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to $3.0 million of the outstanding stock of the Holding Company. This amount represents ~~2.7%~~2.6% of total shareholders’ equity of ~~$112.9~~$115.0 million at ~~March 31,~~September 30, 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 ~~quarter~~nine months ended ~~March 31,~~September 30, 2023, the Company did not repurchase any of the shares available.

During the ~~quarter~~nine months ended ended ~~March 31,~~September 30, 2023, the Bank paid ~~$2.0~~$6.3 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 ~~March 28,~~September 26, 2023, the Company’s Board of Directors declared a cash dividend of ~~$0.11~~$0.12 per share on the Company’s common stock. The dividend was payable on ~~April 21,~~October 25, 2023, to shareholders of record as of ~~April 7,~~October 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.

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 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 Federal Reserve Bank may also limit dividends paid by the Bank.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

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 ~~March 31,~~September 30, 2023, ~~the end of the period covered by this report,~~ 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 not effective at ~~the~~a reasonable assurance ~~level.~~level due to the following material weakness in internal control over financial reporting.

Material Weakness in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness was identified in the Company’s internal control over financial reporting:

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The Company failed to design and maintain effective controls over the completeness and accuracy of the underlying historical data utilized in the calculation of the allowance for credit losses at the date of adoption of ASC Topic 326, Financial Instruments – Credit Losses.

Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

Remediation Efforts

Subsequent to the period covered by the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, with respect to the material weakness set forth above, management has been actively engaged in developing remediation plans to address the material weakness identified above.

The Company has devoted significant effort and resources to the remediation and will continue to design new and enhanced controls related to testing the completeness and accuracy of underlying data utilized in the calculation of the allowance for credit losses. The new and enhanced controls have not been designed and have not operated for a sufficient amount of time to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.

Changes in Internal Control over Financial Reporting

There ~~have not been any~~were no changes inmade to the Company’s internal control over financial reporting ~~that occurred~~ during the quarter ended ~~March 31,~~September 30, 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 faulty, and that breakdowns in controls or procedures can occur ~~because of~~due to simple ~~error~~errors or ~~mistake.~~mistakes. Additionally, controls can be circumvented by the individual acts of ~~some persons,~~a person, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future ~~conditions; over~~conditions. Over time, controls may become inadequate ~~because of~~due to changes in conditions or deterioration in the ~~degree~~degrees of compliance with ~~the~~ policies and/or ~~procedures may deteriorate.~~procedures. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and may not be detected.

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PART II. Other Information

Item 1. Legal Proceedings

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 ~~March 31,~~September 30, 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.

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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:	~~May~~November 15, 2023	/S/ Dennis R. Woods
		Dennis R. Woods
		President and Chief Executive Officer

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

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	March 31,
	2023	2022
Securities available for sale:
U.S. Government agencies	4	4
U.S. Government sponsored entities and agencies collateralized by mortgage obligations	51	33
Municipal bonds	46	46
Corporate bonds	9	4
U.S. Treasury securities	4	3
Total temporarily impaired securities	114	90


Doubtful	—		—		—		—		—		—		—		—		—
	—		27,680		213,059		3,236		—		11,895		14,121		—		269,991
(Continued)


	Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans
(In thousands)	2023		2022		2021		2020		2019		Prior						Total
Home improvement and home equity
Not graded	—		—		—		—		—		39		—		—		39
Pass	—		—		—		—		—		7		—		—		7
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	—		—		—		—		—		46		—		—		46
Real estate construction and development
Pass	—		—		—		4,606		180		4,896		114,466		—		124,148
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		4,836		8,273		—		13,109
Doubtful	—		—		—		—		—		—		—		—		—
	—		—		—		4,606		180		9,732		122,739		—		137,257
Agricultural
Pass	—		6,865		470		2,999		1,499		11,119		20,667		—		43,619
Special Mention	—		—		—		589		—		428		—		—		1,017
Substandard	—		—		—		—		—		87		790		—		877
Doubtful	—		—		—		—		—		—		—		—		—
	—		—		—		589		—		515		790		—		45,513
Installment and student loans
Not graded	237		337		244		179		1,598		40,470		675		—		43,740
Pass	—		—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
	237		337		244		179		1,598		40,470		675		—		43,740
Total Loans	$	3,974	$	118,744	$	250,346	$	74,767	$	63,867	$	183,780	$	203,630	$	—	$	942,727


Liabilities:
Junior subordinated debt (1)	$	11,017	—	—	$	11,017
Total	$	11,017	—	—	$	11,017


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

Municipal bonds	40,170		—		40,170
Treasury securities	29,224				29,224
Corporate bonds	32,702		—		32,702		—
Total AFS securities	207,545		—		207,545		—
Marketable equity securities (1)	3,315		3,315		—		—










Total	$	210,860	$	3,315	$	207,545	$	—