UNITED SECURITY BANCSHARES - Quarter Report: 2022 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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


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

Commission file number: 000-32897

UNITED SECURITY BANCSHARES

(Exact name of registrant as specified in its charter)


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

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

Registrants telephone number, including area code (559) 248-4943

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of "large 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 ☒
Small 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 October 31, 2022: 17,049,061

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TABLE OF CONTENTS

Facing Page

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PART I. Financial Information

	Item 1. Financial Statements (Unaudited)

		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Changes in Shareholders' Equity	6
		Consolidated Statements of Cash Flows	8
		Notes to Consolidated Financial Statements	9

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		39

		Overview	39
		Results of Operations	41
		Financial Condition	49
		Liquidity and Capital	61

	Item 3. Quantitative and Qualitative Disclosures about Market Risk		63

	Item 4. Controls and Procedures		63

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

Signatures			65

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PART I. Financial Information

Item 1 - Financial Statements (Unaudited)

United Security Bancshares and Subsidiaries

Consolidated Balance Sheets – (unaudited)

September 30, 2022 and December 31, 2021


(in thousands except shares)	September 30, 2022		December 31, 2021
Assets
Cash and noninterest-bearing deposits in other banks	$	37,972	$	31,057
Due from Federal Reserve Bank ("FRB")	88,060		188,162
Cash and cash equivalents	126,032		219,219

Investment securities (at fair value)
Available-for-sale ("AFS") securities	208,560		178,902
Marketable equity securities	3,287		3,744
Total investment securities	211,847		182,646
Loans	960,549		869,314
Unearned fees and unamortized loan origination costs - net	1,617		2,219
Allowance for credit losses	(10,063)		(9,333)
Net loans	952,103		862,200
Premises and equipment - net	9,485		8,950
Accrued interest receivable	8,466		7,530
Other real estate owned	4,582		4,582
Goodwill	4,488		4,488
Deferred tax assets - net	11,956		3,615
Cash surrender value of life insurance	22,680		22,338

Operating lease right-of-use assets	2,135		2,594
Other assets	15,478		12,782
Total assets	$	1,369,252	$	1,330,944

Liabilities & Shareholders' Equity
Liabilities
Deposits
Non-interest-bearing	$	517,230	$	476,749
Interest-bearing	723,588		711,357
Total deposits	1,240,818		1,188,106

Operating lease liabilities	2,245		2,705
Other liabilities	8,805		8,737
Junior subordinated debentures (at fair value)	10,305		11,189
Total liabilities	1,262,173		1,210,737
Shareholders' Equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,046,676 at September 30, 2022 and 17,028,239 at December 31, 2021	59,924		59,636
Retained earnings	66,465		61,745
Accumulated other comprehensive loss	(19,310)		(1,174)
Total shareholders' equity	107,079		120,207
Total liabilities and shareholders' equity	$	1,369,252	$	1,330,944

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United Security Bancshares and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands except shares and EPS)	2022		2021		2022		2021
Interest Income:
Interest and fees on loans	$	11,514	$	9,163	$	30,363	$	25,942
Interest on investment securities	1,322		650		3,117		1,691
Interest on deposits in FRB	683		64		1,023		168

Total interest income	13,519		9,877		34,503		27,801

Interest Expense:
Interest on deposits	679		496		1,702		1,391
Interest on other borrowed funds	110		44		224		136
Total interest expense	789		540		1,926		1,527

Net Interest Income	12,730		9,337		32,577		26,274
Provision for Credit Losses	607		453		1,217		1,654
Net Interest Income after Provision for Credit Losses	12,123		8,884		31,360		24,620

Noninterest Income:
Customer service fees	899		745		2,328		2,094
Increase in cash surrender value of bank-owned life insurance	89		139		343		408
Unrealized loss on fair value of marketable equity securities	(149)		(14)		(458)		(75)


Loss on fair value of junior subordinated debentures	(600)		(35)		(2,469)		(691)
Gain on sale of investment securities	—		—		30		—
(Loss) gain on sale of assets	—		(5)		—		8
Other	153		100		1,015		349
Total noninterest income	392		930		789		2,093

Noninterest Expense:
Salaries and employee benefits	2,965		2,888		8,791		8,804
Occupancy expense	923		1,013		2,551		2,705
Data processing	215		147		475		382
Professional fees	1,089		833		2,957		2,524
Regulatory assessments	212		258		630		547
Director fees	110		91		345		275
Correspondent bank service charges	23		22		74		65

Net cost on operation and sale of OREO	33		24		27		67
Other	641		888		1,755		1,964
Total noninterest expense	6,211		6,164		17,605		17,333

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

Net Income per common share
Basic	$	0.26	$	0.15	$	0.61	$	0.40
Diluted	$	0.26	$	0.15	$	0.61	$	0.40
Weighted average shares on which net income per common shares were based
Basic	17,042,479		17,010,288		17,036,460		17,010,236
Diluted	17,063,947		17,035,533		17,057,638		17,027,671

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United Security Bancshares and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands except shares and EPS)	2022		2021		2022		2021
Net Income	$	4,467	$	2,611	$	10,345	$	6,727

Unrealized holdings loss on debt securities	(8,799)		(60)		(29,232)		(307)
Unrealized gains on unrecognized post-retirement costs	22		24		67		74
Unrealized gain (loss) on junior subordinated debentures	825		(8)		3,419		317
Other comprehensive (loss) income, before tax	(7,952)		(44)		(25,746)		84
Tax benefit provision related to debt securities	2,601		18		8,641		91
Tax expense related to unrecognized post-retirement costs	(7)		(7)		(20)		(22)
Tax expense (benefit) related to junior subordinated debentures	(243)		3		(1,011)		(93)
Total other comprehensive (loss) income	(5,601)		(30)		(18,136)		60
Comprehensive (loss) income	$	(1,134)	$	2,581	$	(7,791)	$	6,787

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United Security Bancshares and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)


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

Balance December 31, 2020 (1)	17,009,883	$	59,397	$	59,138	$	(728)	$	117,807
(1) Excludes 11,924 unvested restricted shares

Other comprehensive loss						(55)		(55)
Dividends payable ($0.11 per share)				(1,876)				(1,876)

Restricted stock units released	405							—

Stock-based compensation expense		46						46
Net income				1,411				1,411
Balance March 31, 2021 (2)	17,010,288	$	59,443	$	58,673	$	(783)	$	117,333
(2) Excludes 41,424 unvested restricted shares

Other comprehensive income						145		145
Dividends payable ($0.11 per share)				(1,870)				(1,870)



Stock-based compensation expense		53						53
Net income				2,705				2,705
Balance June 30, 2021 (3)	17,010,288	$	59,496	$	59,508	$	(638)	$	118,366
(3) Excludes 41,424 unvested restricted shares

Other comprehensive loss						(30)		(30)
Dividends payable ($0.11 per share)				(1,871)				(1,871)



Stock-based compensation expense		53						53
Net income				2,611				2,611
Balance September 30, 2021 (4)	17,010,288	$	59,549	$	60,248	$	(668)	$	119,129
(4) Excludes 41,424 unvested restricted shares

Other comprehensive loss						(506)		(506)
Dividends payable ($0.11 per share)				(1,872)				(1,872)


Restricted stock units released	17,951							—
Tax benefit from RSUs released		(10)						(10)
Director stock grant		44						44
Stock-based compensation expense		52						52
Net income				3,370				3,370
Balance December 31, 2021 (5)	17,028,239	$	59,635	$	61,746	$	(1,174)	$	120,207
(5) Excludes 27,949 unvested restricted shares

Other comprehensive loss						(7,300)		(7,300)
Dividends payable ($0.11 per share)				(1,874)				(1,874)


Restricted stock units released	6,168							—
Tax benefit from RSUs released		(1)						(1)
Director stock grant		48						48
Stock-based compensation expense		53						53
Net income				2,443				2,443
Balance March 31, 2022 (6)	17,034,407	$	59,735	$	62,315	$	(8,474)	$	113,576

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(6) Excludes 26,949 unvested restricted shares

Other comprehensive loss						(5,235)		(5,235)
Dividends payable ($0.11 per share)				(1,875)				(1,875)
Restricted stock units released	6,142							—

Director stock grant		47						47
Stock-based compensation expense		53						53
Net income				3,435				3,435
Balance June 30, 2022 (7)	17,040,549	$	59,835	$	63,875	$	(13,709)	$	110,001
(7) Excludes 26,949 unvested restricted shares

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

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United Security Bancshares and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


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




Increase in cash surrender value of bank-owned life insurance	(343)		(408)
Loss on fair value option of junior subordinated debentures	2,469		691






Net (increase) decrease in other assets	(622)		367
Net cash provided by operating activities	15,027		8,881

Cash Flows From Investing Activities:


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

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

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

Investment in limited partnership	(311)		(248)


Purchase of bank-owned life insurance	—		(920)
Capital expenditures of premises and equipment	(1,500)		(1,061)
Net cash used in investing activities	(155,303)		(235,969)

Cash Flows From Financing Activities:
Net increase in demand deposits and savings accounts	45,316		189,191
Net increase in time deposits	7,397		8,873


Dividends on common stock	(5,624)		(5,617)
Net cash provided by financing activities	47,089		192,447

Net decrease in cash and cash equivalents	(93,187)		(34,641)
Cash and cash equivalents at beginning of period	219,219		294,069
Cash and cash equivalents at end of period	$	126,032	$	259,428

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

1.Organization and Summary of Significant Accounting and Reporting Policies

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

These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited consolidated financial statements of the Company included in its 2021 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 of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

Impact of New Financial Accounting Standards:

In June 2016, FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326). The FASB is issuing this Update to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. 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 the effective date of this Standard to be effective for fiscal years beginning after December 15, 2022. The Company has formed a project team that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard (current expected credit losses or CECL). An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and the Company continues to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. The Company has begun to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loan portfolio as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on the Company's consolidated financial statements.

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 is effective for all entities as of March 12, 2020 through December 31, 2022. 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 requirements 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 trouble debt restructurings. New disclosures regarding gross write-offs for financing receivables by year of origination are also included in the update. This update will be incorporated along with the implementation of CECL and the Company is currently evaluating the impact this update will have on its consolidated financial statements.

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2.Investment Securities

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


(in 000's)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
September 30, 2022
Securities available-for-sale:
U.S. Government agencies	$	8,784	$	11	$	(44)	$	8,751
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	113,893		3		(15,374)		98,522
U.S. Treasury securities	29,994		—		(844)		29,150
Municipal bonds	50,727		—		(11,025)		39,702
Corporate bonds	34,728		4		(2,297)		32,435
Total securities available for sale	$	238,126	$	18	$	(29,584)	$	208,560


(in 000's)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Carrying Amount)
December 31, 2021
Securities available-for-sale:
U.S. Government agencies	$	33,206	$	260	$	(90)	$	33,376
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	64,880		184		(329)		64,735
U.S. Treasury securities	15,186		1		—		15,187
Asset-backed securities	4,092		38		—		4,130
Municipal bonds	50,872		86		(906)		50,052
Corporate bonds	11,000		429		(7)		11,422
Total securities available for sale	$	179,236	$	998	$	(1,332)	$	178,902

The amortized cost and fair value of securities available for sale at September 30, 2022, 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.


	September 30, 2022
	Amortized Cost		Fair Value (Carrying Amount)
(in 000's)
Due in one year or less	$	9,975	$	9,971
Due after one year through five years	39,245		36,924
Due after five years through ten years	65,056		54,911
Due after ten years	9,956		8,232
Collateralized mortgage obligations	113,894		98,522
	$	238,126	$	208,560

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


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

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As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that better fit with the Company’s current risk profile is appropriate and beneficial to the Company. There were no other-than-temporary impairment losses for the three and nine month periods ended September 30, 2022 and September 30, 2021.

At September 30, 2022, available-for-sale securities with an amortized cost of approximately $80.4 million (fair value of $69.8 million) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.

The following summarizes temporarily impaired investment securities:


(in 000's)	Less than 12 Months				12 Months or More				Total
September 30, 2022	Fair Value (Carrying Amount)		Unrealized Losses		Fair Value (Carrying Amount)		Unrealized Losses		Fair Value (Carrying Amount)		Unrealized Losses
Securities available for sale:
U.S. Government agencies	$	—	$	—	$	6,327	$	(44)	$	6,327	$	(44)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	71,123		(8,533)		27,093		(6,841)		98,216		(15,374)
Corporate bonds	29,600		(2,297)		—		—		29,600		(2,297)
Municipal bonds	7,986		(2,298)		31,716		(8,728)		39,702		(11,026)
U.S. Treasury securities	29,151		(843)		—		—		29,151		(843)

Total impaired securities	$	137,860	$	(13,971)	$	65,136	$	(15,613)	$	202,996	$	(29,584)

December 31, 2021
Securities available for sale:
U.S. Government agencies	$	—	$	—	$	9,699	$	(90)	$	9,699	$	(90)
U.S. Government sponsored entities & agencies collateralized by mortgage obligations	37,258		(329)		23		—		37,281		(329)
Corporate bonds	5,993		(7)		—		—		5,993		(7)
Municipal bonds	39,551		(896)		228		(10)		39,779		(906)
U.S. Treasury securities	7,416		—		—		—		7,416		—

Total impaired securities	$	90,218	$	(1,232)	$	9,950	$	(100)	$	100,168	$	(1,332)

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

The Company evaluates investment securities for other-than-temporary impairment (OTTI) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC Topic 320, Investments – Debt and Equity Instruments.

The Company considers many factors in determining OTTI, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-

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temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at the time of the evaluation.

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

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

At September 30, 2022, the decline in fair value of the securities available for sale is attributable to changes in interest rates, and not credit quality. Because the Company does not intend to sell these impaired securities, and it is more likely than not that it will not be required to sell these securities before its anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2022.

During the nine months ended September 30, 2022 and 2021, the Company recognized $458,000 and $75,000 of unrealized holding losses on marketable equity securities, related to one mutual fund, in the consolidated statements of income. During the quarters ended September 30, 2022 and September 30, 2021, the Company recognized $149,000 and $14,000 of unrealized holding losses, respectively, related to the same mutual fund.

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

3.Loans

Loans are comprised of the following:


(in 000's)	September 30, 2022		December 31, 2021
Commercial and industrial:
Commercial and business loans	$	62,333	$	42,194
Government program loans	88		3,310
Total commercial and industrial	62,421		45,504
Real estate mortgage:
Commercial real estate	382,607		331,050
Residential mortgages	250,091		226,926
Home improvement and home equity loans	52		80
Total real estate mortgage	632,750		558,056
Real estate construction and development	161,571		154,270
Agricultural	57,296		60,239
Installment and student loans	46,511		51,245
Total loans	$	960,549	$	869,314

The Company's directly originated loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. Although the Company purchases residential mortgage loans and participates in loans with other financial institutions, they are primarily in the state of California.

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Commercial and industrial loans represent 6.5% of total loans at September 30, 2022 and are generally made to support the ongoing operations of 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 remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower. Included within the balance of Commercial and industrial loans is $14,000 in Paycheck Protection Program ("PPP") loans administrated by the SBA. PPP loans have a two or five year term and earn interest at 1%. In addition to interest, the Company receives a processing fee ranging from 3%-5% of the loan balance for each PPP loan. The fees are recognized as income over the contractual life of the loan. The Company believes that the nearly all of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

Real estate mortgage loans, representing 65.9% of total loans at September 30, 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 and non-income producing commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Commercial real estate loans are made under the premise that the loan will be 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 and Home Equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.

Real estate construction and development loans, representing 16.8% of total loans at September 30, 2022, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or 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 completion of the project or from the sale of the constructed homes to individuals.

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

Installment loans, including student loans, represent 4.8% of total loans at September 30, 2022 and generally consist of student loans, loans to individuals for household, family and other personal 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 September 30, 2022 and December 31, 2021, these financial instruments include commitments to extend credit of $164.0 million and $239.1 million, respectively, and standby letters of credit of $1.7 million at both period ends. 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 financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies as it does for on-balance sheet instruments.

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includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties.

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.

The following is a summary of delinquent loans at September 30, 2022 (in 000's):


September 30, 2022	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and business loans	$	—	$	—	$	—	$	—	$	62,333	$	62,333	$	—
Government program loans	—		—		—		—		88		88		—
Total commercial and industrial	—		—		—		—		62,421		62,421		—

Commercial real estate loans	—		—		—		—		382,607		382,607		—
Residential mortgages	—		—		—		—		250,091		250,091		—
Home improvement and home equity loans	9		—		—		9		43		52		—
Total real estate mortgage	9		—		—		9		632,741		632,750		—

Real estate construction and development loans	—		—		9,021		9,021		152,550		161,571		—
Agricultural loans	—		—		130		130		57,166		57,296		—




Installment and student loans	585		56		—		641		45,870		46,511		—

Total loans	$	594	$	56	$	9,151	$	9,801	$	950,748	$	960,549	$	—

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


December 31, 2021	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and business loans	$	—	$	—	$	—	$	—	$	42,194	$	42,194	$	—
Government program loans	—		—		—		—		3,310		3,310		—
Total commercial and industrial	—		—		—		—		45,504		45,504		—

Commercial real estate loans	—		—		—		—		331,050		331,050		—
Residential mortgages	6,745		—		—		6,745		220,181		226,926		—
Home improvement and home equity loans	12		—		—		12		68		80		—
Total real estate mortgage	6,757		—		—		6,757		551,299		558,056		—

Real estate construction and development loans	—		—		9,021		9,021		145,249		154,270		—
Agricultural loans	—		—		209		209		60,030		60,239		—




Installment and student loans	1,628		328		453		2,409		48,836		51,245		453

Total loans	$	8,385	$	328	$	9,683	$	18,396	$	850,918	$	869,314	$	453

Nonaccrual Loans

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

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

- When principal and/or interest on the loan has been in default for a period of 90-days 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.

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

All loans, outside of student loans, where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. See Note 4 - Student Loans for specific information on the student loan portfolio.

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

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

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

Loans on non-accrual status are usually not returned to accrual status unless all delinquent principal and/or interest has been brought current, there is no identified element of loss, and 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 were no remaining undisbursed commitments to extend credit on nonaccrual loans at September 30, 2022 or December 31, 2021.

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


	September 30, 2022		December 31, 2021









Real estate construction and development loans	11,015		11,226
Agricultural loans	130		212


Total nonaccrual loans	$	11,145	$	11,438

Impaired Loans

The Company applies its normal loan review procedures in making judgments regarding probable losses and loan impairment.

The Company evaluates for impairment those loans on nonaccrual status, graded doubtful, graded substandard or those that are troubled debt restructures. The primary basis for inclusion in impaired status under generally accepted accounting pronouncements is that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

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

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

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

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

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

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

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

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

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The following is a summary of impaired loans at September 30, 2022 (in 000's).


September 30, 2022	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance (1)		Recorded Investment With Allowance (1)		Total Recorded Investment		Related Allowance		Average Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Government program loans	—		—		—		—		—		—		—
Total commercial and industrial	—		—		—		—		—		—		—

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

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

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

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

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

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


December 31, 2021	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance (1)		Recorded Investment With Allowance (1)		Total Recorded Investment		Related Allowance		Average Recorded Investment (2)		Interest Recognized (2)
Commercial and business loans	$	—	$	—	$	—	$	—	$	—	$	156	$	—
Government program loans	—		—		—		—		—		110		—
Total commercial and industrial	—		—		—		—		—		266		—

Commercial real estate loans	—		—		—		—		—		538		—
Residential mortgages	146		—		146		146		3		377		6

Total real estate mortgage	146		—		146		146		3		915		6

Real estate construction and development loans	11,226		11,226		—		11,226		—		11,133		272
Agricultural loans	660		453		209		662		127		499		41



Total impaired loans	$	12,032	$	11,679	$	355	$	12,034	$	130	$	12,813	$	319

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

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

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

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

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

Troubled Debt Restructurings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Additions	—		—		—		—		—		—		—		—

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

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

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


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

Additions	—		—		—		—		—		—		—		—

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

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

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


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

Additions	—		—		—		—		—		—		—		—

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

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

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

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

Additions	—		—		—		—		—		—		—		—

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

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

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

Credit Quality Indicators

As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The 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:

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 risk rating 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, 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 to the borrower who offer only modest support.

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

Borrower Rating:

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

- Quality of management

- Liquidity

- Leverage/capitalization

- Profit margins/earnings trend

- Adequacy of financial records

- Alternative funding sources

- Geographic risk

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- Industry risk

- Cash flow risk

- Accounting practices

- Asset protection

- Extraordinary risks

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

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

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

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

- Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. 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.

- Grade 8 – This grade includes “doubtful” loans which exhibit the same characteristics as the "substandard" loans. Additionally, 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 pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

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

The Company did not carry any loans graded as loss at September 30, 2022 or December 31, 2021.

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


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


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

The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse. Within the student loan portfolio, the Company does not grade these loans individually, but monitors credit quality indicators such as delinquency and program defined status codes such as forbearance.

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


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

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Allowance for Loan Losses

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. The following summarizes some of the key risk characteristics for the ten segments of the loan portfolio (Consumer loans include three segments):

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 is 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 the vulnerability of commercial businesses to economic cycles as well as the exposure to fluctuations in real estate prices because most of these loans are secured by real estate. Losses in this segment have however been historically low because most of the loans are real estate secured, and the bank maintains appropriate loan-to-value ratios.

Residential mortgages – This segment is considered to have low risk factors both from the Company and peer statistics. These loans 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 segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks.

Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk. Additionally, from time to time, California experiences 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 loan portfolio are also monitored in an effort to manage credit quality and work with borrowers where possible to mitigate any losses.

Installment and student loans (Includes consumer loans, student loans, overdrafts, and overdraft protection lines) – This segment is higher risk because many 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.

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

The following summarizes the activity in the allowance for credit losses by loan category for the three months ended September 30, 2022 and 2021 (in 000's)

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Three Months Ended	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
September 30, 2022
Beginning balance	$	836	$	1,298	$	3,528	$	1,120	$	2,634	$	491	$	9,907
Provision (recapture of provision) for credit losses	111		23		81		(554)		413		533		607

Charge-offs	—		—		—		—		(464)		—		(464)
Recoveries	1		4		—		—		8		—		13
Net recoveries (charge-offs)	1		4		—		—		(456)		—		(451)

Ending balance	$	948	$	1,325	$	3,609	$	566	$	2,591	$	1,024	$	10,063
Period-end amount allocated to:
Loans individually evaluated for impairment	—		3		—		67		—		—		70
Loans collectively evaluated for impairment	948		1,322		3,609		499		2,591		1,024		9,993
Ending balance	$	948	$	1,325	$	3,609	$	566	$	2,591	$	1,024	$	10,063


Three Months Ended	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
September 30, 2021
Beginning balance	$	632	$	1,087	$	3,213	$	1,106	$	2,789	$	373	$	9,200
Provision (recapture of provision) for credit losses	5		(20)		(83)		314		402		(165)		453

Charge-offs	—		—		—		—		(533)		—		(533)
Recoveries	2		4		—		—		18		—		24
Net recoveries (charge-offs)	2		4		—		—		(515)		—		(509)

Ending balance	$	639	$	1,071	$	3,130	$	1,420	$	2,676	$	208	$	9,144
Period-end amount allocated to:
Loans individually evaluated for impairment	—		4		—		144		—		—		148
Loans collectively evaluated for impairment	639		1,067		3,130		1,276		2,676		208		8,996
Ending balance	$	639	$	1,071	$	3,130	$	1,420	$	2,676	$	208	$	9,144


Nine Months Ended	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
September 30, 2022
Beginning balance	$	597	$	1,174	$	2,840	$	1,233	$	2,720	$	769	$	9,333
Provision (recapture of provision) for credit losses	82		141		769		(703)		674		255		1,218

Charge-offs	—		—		—		—		(828)		—		(828)
Recoveries	269		10		—		36		25		—		340
Net recoveries (charge-offs)	269		10		—		36		(803)		—		(488)

Ending balance	$	948	$	1,325	$	3,609	$	566	$	2,591	$	1,024	$	10,063
Period-end amount allocated to:
Loans individually evaluated for impairment	—		3		—		67		—		—		70
Loans collectively evaluated for impairment	948		1,322		3,609		499		2,591		1,024		9,993
Ending balance	$	948	$	1,325	$	3,609	$	566	$	2,591	$	1,024	$	10,063

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Nine Months Ended	Commercial and Industrial		Real Estate Mortgage		Real Estate Construction Development		Agricultural		Installment and Student Loans		Unallocated		Total
September 30, 2021
Beginning balance	$	625	$	575	$	3,722	$	711	$	2,614	$	275	$	8,522
Provision (recapture of provision) for credit losses	(27)		481		(592)		709		1,150		(67)		1,654

Charge-offs	—		—		—		—		(1,199)		—		(1,199)
Recoveries	41		15		—		—		111		—		167
Net (charge-offs) recoveries	41		15		—		—		(1,088)		—		(1,032)

Ending balance	$	639	$	1,071	$	3,130	$	1,420	$	2,676	$	208	$	9,144
Period-end amount allocated to:
Loans individually evaluated for impairment	—		4		—		144		—		—		148
Loans collectively evaluated for impairment	639		1,067		3,130		1,276		2,676		208		8,996
Ending balance	$	639	$	1,071	$	3,130	$	1,420	$	2,676	$	208	$	9,144

The following summarizes information with respect to the loan balances at September 30, 2022 and 2021.


	September 30, 2022						September 30, 2021
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
(in 000's)
Commercial and business loans	$	—	$	62,333	$	62,333	$	—	$	44,713	$	44,713
Government program loans	—		88		88		—		6,422		6,422
Total commercial and industrial	—		62,421		62,421		—		51,135		51,135

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

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

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

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

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

4.Student Loans

Included in the installment and student loans segment of the loan portfolio are $43.7 million and $48.5 million in student loans at September 30, 2022 and December 31, 2021, respectively, made to medical and pharmacy school students. Upon graduation the loan is automatically placed on grace for 6 months. Deferment may be granted up to 48 months for graduates enrolling in Internship, Medical Residency or Fellowship programs. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months throughout the life of the loan. Accrued interest on student loans that are in school or grace totaled $1,967,000 at September 30, 2022 and $2,338,000 at December 31, 2021. At September 30, 2022 there were 857 loans within repayment, deferment, and forbearance which represented $18.9 million, $10.5 million, and $9.2 million, respectively. At December 31, 2021, there were 901 loans within repayment, deferment, and forbearance which represented $23.8 million, $9.0 million and $8.2 million, respectively. As of September 30, 2022 and December 31, 2021, the reserve against the student loan portfolio was $2,561,000 and $2,647,000, respectively. There were no TDRs within the portfolio as of September 30, 2022 or December 31, 2021. At September 30,

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

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

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


	September 30, 2022					December 31, 2021
	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	82	$	2,370	$	1,015	185	$	6,555	$	2,021
Grace	75	2,781		952		28	912		317
Repayment	414	18,888		418		500	23,834		715
Deferment	253	10,498		1,444		224	8,984		508
Forbearance	190	9,161		833		177	8,172		1,077
Total	1,014	$	43,698	$	4,662	1,114	$	48,457	$	4,638

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

Grace - A six month period of time granted to the borrower immediately upon graduation, or if deemed no longer an active student. Interest continues to accrue. Upon completion of the six month grace period the loan is transferred to repayment status. Additionally, if applicable, this status may represent a 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. The borrower must return to an at least half time status within six months of the active duty end date in order to return to an in-school status.

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

Deferment - May be granted up to 48 months for borrowers who have begun the repayment period on their loans but are (1) actively enrolled in an eligible school at least half time, or (2) are actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.

Forbearance - The period of time during which the borrower may postpone making principal and interest payments, which may be granted for either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance. If the borrower is delinquent at the time the forbearance is granted, the delinquency will 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 loan will not change and payments 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 is standard industry practice, and is consistent with the succession of students migrating to employed medical professionals. However, additional risk is associated with this designation. In addition to forbearance granted for hardship or administrative reasons, the Company provided up to 18 months of additional disaster forbearance to those borrowers impacted by Hurricane Maria in 2017 and additional forbearance related to COVID-19.

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

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

Student Loan Aging

Student loans are generally charged off at the end of the quarter during which an account becomes 120 days contractually past due. Accrued but unpaid interest related to charged off student loans is reversed and charged against interest income. For the nine months ended September 30, 2022, $100,000 in accrued interest receivable was reversed, due to charge-offs of $810,000 within the student loan portfolio. For the quarter ended September 30, 2022, $86,000 in accrued interest receivable was reversed, due to charge-offs of $457,000. For the three and nine months period ended September 30, 2021, $54,000 and $97,000 in accrued interest receivable was reversed, due to charge-offs of $530,000 and $1,183,000 within the student loan portfolio.

The following tables summarize the student loan aging for loans in repayment and forbearance as of September 30, 2022 and December 31, 2021 (in 000's, except for number of borrowers):


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

Total	253	$	28,050	290	$	32,005

5.Deposits

Deposits include the following:


(in 000's)	September 30, 2022		December 31, 2021
Noninterest-bearing deposits	$	517,230	$	476,749
Interest-bearing deposits:
NOW and money market accounts	517,820		529,841
Savings accounts	130,786		113,930
Time deposits:
Under $250,000	53,492		46,631
$250,000 and over	21,490		20,955
Total interest-bearing deposits	723,588		711,357
Total deposits	$	1,240,818	$	1,188,106

6.Short-term Borrowings/Other Borrowings

At September 30, 2022, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $419.3 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $2.2 million. At September 30, 2022, the Company had uncollateralized lines of credit with PNC Bank of $40 million, with Pacific Coast Bankers Bank (PCBB) totaling $50 million, $20 million with Zions First National Bank and $10 million with Union Bank. All uncollateralized lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.

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

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At December 31, 2021, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $320.6 million, as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling $3.1 million. At December 31, 2021, the Company had uncollateralized lines of credit with PNC of $40 million, with Pacific Coast Bankers Bank ("PCBB") totaling $50 million, $20 million with Zions First National Bank, and $10 million with Union Bank. All uncollateralized lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.

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

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7.Leases

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

The components of lease expense were as follows:


	Three Months Ended				Nine Months Ended
(in 000's)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021



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

Total	$	185	$	279	$	553	$	771

Supplemental balance sheet information related to leases was as follows:


(in 000's)	September 30, 2022




Operating cash flows from operating leases	$	553



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

Weighted-average discount rate for operating leases	5.12		%

Maturities of lease liabilities were as follows:


(in 000's)	September 30, 2022
2023	$	742
2024	640
2025	450
2026	218
2027	122
Thereafter	348
Total undiscounted cash flows	2,520
Less: present value discount	(275)
Present value of net future minimum lease payments	$	2,245

8.Supplemental Cash Flow Disclosures


	Nine months ended September 30,
(in 000's)	2022		2021
Cash paid during the period for:
Interest	$	1,907	$	1,529
Income taxes	4,825		3,030
Noncash investing activities:


Unrealized gain on unrecognized post retirement costs, net of tax	47		52
Unrealized loss on available for sale securities, net of tax	(20,591)		(216)
Unrealized gain on junior subordinated debentures, net of tax	2,408		223

Cash dividend declared	1,874		1,871

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9.Dividends on Common Stock

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

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

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

The Company has a program to repurchase up to $3 million of its outstanding common stock. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. For the nine months ended 2022 and 2021, no shares have been repurchased.

10.Net Income per Common Share

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


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

Weighted average shares issued	17,042,479		17,010,288		17,036,460		17,010,236
Add: dilutive effect of stock options	21,468		25,245		21,178		17,435
Weighted average shares outstanding adjusted for potential dilution	17,063,947		17,035,533		17,057,638		17,027,671

Basic earnings per share	$	0.26	$	0.15	$	0.61	$	0.40
Diluted earnings per share	$	0.26	$	0.15	$	0.61	$	0.40
Anti-dilutive stock options excluded from earnings per share calculation	93,000		60,000		93,000		101,000

11.Taxes on Income

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

The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. At September 30, 2022 and December 31, 2021, the Company had no recorded valuation allowance. The Company is no longer subject to examinations by taxing authorities for years before 2018 and 2017 for Federal and California jurisdictions, respectively.

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The Company's policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest and penalties recognized on uncertain tax positions during the periods ended September 30, 2022 and 2021 were insignificant.

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

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

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 September 30, 2022 and December 31, 2021. The Company may redeem the junior subordinated debentures at any time at par.

The Company accounts for its junior subordinated debt issued under USB Capital Trust II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the consolidated balance sheet. As of September 30, 2022, the rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.

At September 30, 2022, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month LIBOR curve to estimate future quarterly interest payments due over the life of the debt instrument. These cash flows were discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for additional credit and liquidity risks associated with the junior subordinated debt. The 7.09% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At September 30, 2022, the total cumulative gain recorded on the debt is $1.55 million.

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

For the nine months ended September 30, 2022, the net $950,000 fair value gain adjustment was separately presented as a $2,469,000 loss ($1,739,000, net of tax) recognized on the consolidated statements of income, and a $3,419,000 gain ($2,408,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the nine months ended September 30, 2021, the net $373,000 fair value loss adjustment was separately presented as a $691,000 loss ($487,000, net of tax) recognized on the consolidated statements of income, and a $317,000 gain ($223,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.

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

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. For the quarter ended September 30, 2021, the net $43,000 fair value loss adjustment was separately presented as a $35,000 loss ($25,000, net of tax) recognized on the consolidated statements of income, and a $8,000 loss ($6,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.

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 both on- and off-balance sheet financial instruments where it is practicable to estimate that value.

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GAAP 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 other accounting pronouncements require or permit fair value measurements.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 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 assumptions about risk).

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


September 30, 2022
(in 000's)	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:


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


December 31, 2021
(in 000's)	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:


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

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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 investment securities and junior subordinated debt are performed on a recurring basis, while others, such as impairment 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 Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers between fair value measurements during the nine months ended 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 and marketable equity securities are valued based upon open-market price quotes obtained from reputable third-party brokers that actively make a market in those securities. 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 fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing approach based on comparable securities in the market is utilized. Level 2 pricing may include using a forward spread from the last observable trade or may use a proxy bond like a TBA mortgage to come up with a price for the security being valued. Changes in fair market value are recorded through other comprehensive loss as the securities are available for sale.

Impaired Loans - Fair value measurements for collateral dependent impaired 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 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 loans measured at fair value as of September 30, 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 were no OREO measured at fair value as of September 30, 2022.

Junior Subordinated Debt – The fair value of the junior subordinated debt was determined based upon a discounted cash flows model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company used characteristics that market participants generally use, and considered factors specific to (a) the liability, (b) the principal (or most advantageous) market for the liability, and (c) market participants with whom the reporting entity would transact in that market. 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 the observability of the market spreads, require the junior subordinated debt to be classified as a Level 3 fair value.

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The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of September 30, 2022 (in 000’s):


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

Municipal bonds	39,702		—		39,702		—
U.S. Treasury securities	29,150				29,150
Corporate bond	32,435		—		32,435		—
Total AFS securities	208,560		—		208,560		—

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











Total	$	211,847	$	3,287	$	208,560	$	—


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

(1)Recurring

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

The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, 2021 (in 000’s):


Description of Assets	December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
AFS Securities (1):
U.S. Government agencies	$	33,376	$	—	$	33,376	$	—
U.S. Government collateralized mortgage obligations	64,735		—		64,735
Asset-backed securities	4,130		—		4,130
Municipal bonds	50,052		—		50,052
Treasury securities	15,187				15,187
Corporate bonds	11,422		—		11,422		—
Total AFS securities	178,902		—		178,902		—

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










Total	$	182,646	$	3,744	$	178,902	$	—

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

(1)Recurring

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021:

September 30, 2022

December 31, 2021

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

7.09%

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

3.90%

Management believes that the credit 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 market conditions, that is, the inactive market. 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 curve will result in positive fair value adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement). The increase in discount rate between the periods ended September 30, 2022 and December 31, 2021 is primarily due to increases in rates for similar debt instruments.

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


	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Reconciliation of Liabilities:	Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt		Junior Subordinated Debt
Beginning balance	$	10,489	$	11,253	$	11,189	$	10,924
Gross loss included in earnings	600		35		2,469		691
Gross (gain) loss related to changes in instrument specific credit risk	(825)		8		(3,419)		(317)
Change in accrued interest	41		$	(1)	66		(3)
Ending balance	$	10,305	$	11,295	$	10,305	$	11,295
The amount of total loss for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date	$	600	$	35	$	2,469	$	691

14.Goodwill and Intangible Assets

At September 30, 2022, the Company had goodwill in the amount of $4,488,000 in connection with various business combinations and purchases. This amount was unchanged from the balance of $4,488,000 at December 31, 2021. While goodwill is not amortized, the Company does conduct periodic impairment analysis on goodwill at least annually or more often

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

15.Accumulated Other Comprehensive Income

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


	September 30, 2022						December 31, 2021
(in 000's)	Net unrealized (loss) on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized (loss) gain on junior subordinated debentures		Net unrealized (loss) gain on available for sale securities		Unfunded status of the supplemental retirement plans		Net unrealized gain (loss) on junior subordinated debentures
Beginning balance	$	(236)	$	(627)	$	(311)	$	630	$	(770)	$	(588)
Current period comprehensive (loss) income, net of tax	(20,591)		47		2,408		(866)		143		277
Ending balance	$	(20,827)	$	(580)	$	2,097	$	(236)	$	(627)	$	(311)
Accumulated other comprehensive loss					$	(19,310)					$	(1,174)

16.Investment in York Monterey Properties

As of September 30, 2022 and December 31, 2021, the Bank's investment in York Monterey Properties Inc. totaled $5.3 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 on the consolidated balance sheets.

17.Commitments and Contingent Liabilities

Financial Instruments with Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risk which arise in the normal course of business. These instruments 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 associated with these instruments is essentially the same as that involved in extending credit to customers and is represented by the contractual amount indicated in the table below:


	Contractual Amount
(In thousands)	September 30, 2022		December 31, 2021
Commitments to extend credit	$	164,030	$	239,095
Standby letters of credit	$	1,719	$	1,719

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Substantially all of these commitments are at floating interest rates based on the prime rate, and most 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 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 years. At September 30, 2022, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $1,719,000.

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In the ordinary course of business, the Company becomes 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 forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: i) 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 and labor shortages; (ii) the COVID-19 global pandemic, including the effects of the steps being taken to address the pandemic and their impact on the Company’s market and employees; iii) Severe weather or natural disasters, such as wildfires, earthquakes, drought, or flood; iv) competitive pressures in the banking industry and changes in the regulatory environment; v) exposure to changes in the interest rate environment and the resulting impact on the Company’s interest rate sensitive assets and liabilities; vi) decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company’s loans; vii) credit quality deterioration that could cause an increase in the provision for loan losses; viii) Asset/Liability matching risks and liquidity risks; ix) volatility and devaluation in the securities markets, x) potential impairment of goodwill and other intangible assets, and xi) technology implementation problems and information security breaches. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The Company

United Security Bancshares, a California corporation, is a bank holding company registered under the 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 banking branches, which provide banking services in Fresno, Madera, Kern, and Santa Clara counties in the state of California. In addition to full-service branches, the Bank has several stand-alone ATM and ITM (Intelligent Teller Machines) within its geographic footprint.

Executive Summary

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

2022 Highlights as of September 30, 2022

▪Total assets increased 2.9% to $1.37 billion, compared to $1.33 billion at December 31, 2021.

▪Total loans, net of unearned fees, increased 10.4% to $962.2 million, compared to $871.5 million at December 31, 2021.

▪Total investments increased 16.0%, or $29.2 million, to $211.8 million, compared to $182.6 million at December 31, 2021.

▪Total deposits increased 4.4% to $1.24 billion, compared to $1.19 billion at December 31, 2021.

▪Net interest income before the provision for credit losses increased 24.0% to $32.6 million for the nine months ended September 30, 2022, compared to $26.3 million for the nine months ended September 30, 2021.

▪Book value per share decreased to $6.28, compared to $7.06 at December 31, 2021.

▪Net charge-offs totaled $488,000, compared to net charge-offs of $1,032,000 for the nine months ended September 30, 2021.

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

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

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

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Trends Affecting Results of Operations and Financial Position

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

Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. Business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in the Central Valley, and declines in economic conditions can have adverse material effects upon the Bank. In addition, the Central Valley remains largely dependent on 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, by the agricultural industry. While a great number of our borrowers are not directly involved in agriculture, they would likely be impacted by difficulties in the agricultural industry since many jobs in our market areas are ancillary to the regular production, processing, marketing and sale of agricultural commodities. The state of California is experiencing a severe drought and water allocations have been significantly reduced for farmers in the Central Valley. Due to these water issues the impact on businesses and consumers located in the Company's market areas is not possible to quantify. In response, the California state legislature passed the Sustainable Groundwater Management Act with the purpose to ensure better local and regional management of groundwater use and sustainable groundwater management in California by 2042. The local districts began to develop, prepare, and begin implementation of the Groundwater Sustainability Plans in 2020. The effect of such plans to Central Valley agriculture, if any, is still unknown.

The Company's earnings are impacted by monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank ("FRB") has, and is likely to continue to have, an important 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 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 subject. The Federal Open Market Committee (" FOMC") has indicated that due to rising inflation it expects to raise interest rates during 2022 and 2023. The FOMC increased the overnight benchmark rate 25bps in March 2022, 50bps in May 2022, 75bps in June 2022, 75bps in July 2022, and 75 bps in September 2022, for an increase of 300bps during the year. Further rate hikes are expected during the year in order to combat record high inflation.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance.

COVID-19

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

Financial position and results of operations

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

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

Capital and liquidity

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

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

Lending operations and accommodations to borrowers

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

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

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

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

Results of Operations

On a year-to-date basis, the Company reported net income of $10.3 million or $0.61 per share ($0.61 diluted), for the nine months ended September 30, 2022, as compared to $6.7 million, or $0.40 per share ($0.40 diluted), for the same period in 2021. The Company’s return on average assets was 1.03% for the nine months ended September 30, 2022, as compared to 0.75% for the nine months ended September 30, 2021. The Company’s return on average equity was 11.99% for the nine months ended September 30, 2022, as compared to 7.55% for the nine months ended September 30, 2021. The increase is primarily attributed to growth in interest income as a result of increased interest rates and the Company deploying cash into its loan and investment portfolios during 2021 and 2022.

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Net Interest Income

The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and nine month periods ended September 30, 2022 and 2021.

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

Interest rates and Interest Differentials

Three Months Ended September 30, 2022 and 2021


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

Assets:
Interest-earning assets:
Loans (1)	$	952,518	$	11,514	4.80	%	$	826,754	$	9,163	4.40	%
Investment securities (3)	215,416		1,322		2.43	%	170,408		650		1.51	%
Interest-bearing deposits in FRB	111,704		683		2.43	%	172,073		64		0.15	%
Total interest-earning assets	1,279,638		$	13,519	4.19	%	1,169,235		$	9,877	3.35	%
Allowance for credit losses	(9,902)						(9,203)
Noninterest-earning assets:
Cash and due from banks	37,547						44,804
Premises and equipment, net	9,401						9,139
Accrued interest receivable	7,853						7,848
Other real estate owned	4,583						4,716
Other assets	54,037						43,784
Total average assets	$	1,383,157					$	1,270,323
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	125,133	$	35	0.11	%	$	160,496	$	59	0.15	%
Money market accounts	395,665		511		0.51	%	339,378		309		0.36	%
Savings accounts	124,962		35		0.11	%	108,067		30		0.11	%
Time deposits	75,023		98		0.52	%	67,478		98		0.58	%

Junior subordinated debentures	10,459		110		4.17	%	11,225		44		1.56	%
Total interest-bearing liabilities	731,242		$	789	0.43	%	686,644		$	540	0.31	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	528,033						453,159
Accrued interest payable	139						109
Other liabilities	9,915						9,859
Total liabilities	1,269,329						1,149,771

Total shareholders' equity	113,828						120,552
Total average liabilities and shareholders' equity	$	1,383,157					$	1,270,323
Interest income as a percentage of average earning assets					4.19	%					3.35	%
Interest expense as a percentage of average earning assets					0.24	%					0.18	%
Net interest margin					3.95	%					3.17	%

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(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately $51,000 for the three months ended September 30, 2022 and loan fee income of $269,000 for the three months ended September 30, 2021.

(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.

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

Interest rates and Interest Differentials

Nine months ended September 30, 2022 and 2021

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

Assets:
Interest-earning assets:
Loans (1)	$	910,221	$	30,363	4.46	%	$	753,424	$	25,942	4.60	%
Investment securities (3)	198,658		3,117		2.10	%	146,434		1,691		1.54	%
Interest-bearing deposits in FRB	141,708		1,023		0.97	%	203,366		168		0.11	%
Total interest-earning assets	1,250,587		$	34,503	3.69	%	1,103,224		$	27,801	3.37	%
Allowance for credit losses	(9,577)						(8,762)
Noninterest-earning assets:
Cash and due from banks	36,581						44,968
Premises and equipment, net	9,134						9,043
Accrued interest receivable	7,513						7,825
Other real estate owned	4,582						4,917
Other assets	52,859						47,367
Total average assets	$	1,351,679					$	1,208,582
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts	$	135,155	$	119	0.12	%	$	156,912	$	174	0.15	%
Money market accounts	400,154		1,255		0.42	%	304,090		812		0.36	%
Savings accounts	122,183		101		0.11	%	105,431		87		0.11	%
Time deposits	70,839		227		0.43	%	64,390		318		0.66	%

Junior subordinated debentures	10,824		224		2.77	%	11,029		136		1.65	%
Total interest-bearing liabilities	739,155		$	1,926	0.35	%	641,852		$	1,527	0.32	%
Noninterest-bearing liabilities:
Noninterest-bearing checking	486,983						437,482
Accrued interest payable	123						103
Other liabilities	9,745						9,686
Total liabilities	1,236,006						1,089,123

Total shareholders' equity	115,673						119,459
Total average liabilities and shareholders' equity	$	1,351,679					$	1,208,582
Interest income as a percentage of average earning assets					3.69	%					3.37	%
Interest expense as a percentage of average earning assets					0.21	%					0.19	%
Net interest margin					3.48	%					3.18	%

(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately $416,000 for the nine months ended September 30, 2022 and loan fee income of $1,208,000 for nine months ended September 30, 2021.

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

(3)Yields on investments securities, 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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The prime rate increased from 3.25% at September 30, 2021 to 6.25% at September 30, 2022. Future increases or decreases will affect both interest income and expense and the resultant net interest margin.

Both the Company's net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume 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 and interest-bearing liability, and the amount of change attributable to volume and rate changes for the periods indicated.

Table 2. Rate and Volume Analysis


	Increase (decrease) for the three months ended
	September 30, 2022 compared to September 30, 2021
(in 000's)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	2,351	$	860	$	1,491
Investment securities available for sale	672		468		204

Interest-bearing deposits in FRB	619		995		(376)
Total interest income	3,642		2,323		1,319
Increase (decrease) in interest expense:
Interest-bearing demand accounts	178		162		16
Savings and money market accounts	5		—		5
Time deposits	—		(11)		11

Subordinated debentures	66		69		(3)
Total interest expense	249		220		29
Increase (decrease) in net interest income	$	3,393	$	2,103	$	1,290

For the three months ended September 30, 2022, total interest income increased $3.6 million, or 36.9%, as compared to the three months ended September 30, 2021. In comparing the two periods, average interest earning assets increased $110.4 million, with an increase of $125.8 million in loan balances and an increase of $45.0 million in investment securities, partially offset by a decrease of $60.4 million in balances held at the Federal Reserve Bank. The increase in loan balances is primarily attributed to purchases of residential mortgage pools. Investment securities yields increased 92 basis points and loan yields increased 40 basis points. The average yield on total interest-earning assets increased 84 basis points. The increase in yields is a result of the purchases of investment securities at higher yields due to market rate increases, increases on loan yields and yields on overnight deposits related to the increase in the Fed Funds rate.


	Increase (decrease) for the nine months ended
	September 30, 2022 compared to September 30, 2021
(in 000's)	Total		Rate		Volume
Increase (decrease) in interest income:
Loans	$	4,421	$	(892)	$	5,313
Investment securities available for sale	1,426		711		715

Interest-bearing deposits in FRB	855		1,314		(459)
Total interest income	6,702		1,133		5,569
Increase (decrease) in interest expense:
Interest-bearing demand accounts	388		213		175
Savings and money market accounts	14		—		14
Time deposits	(91)		(121)		30

Subordinated debentures	88		91		(3)
Total interest expense	399		183		216
Increase (decrease) in net interest income	$	6,303	$	950	$	5,353

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For the nine months ended September 30, 2022, total interest income increased $6.7 million, or 24.1%, as compared to the nine months ended September 30, 2021. In comparing the two periods, average interest earning assets increased $147.4 million, with an increase of $156.8 million in loan balances and an increase of $52.2 million in investment securities, partially offset by a decrease of $61.7 million in balances held at the Federal Reserve Bank. Investment securities yields increased 56 basis points while loan yields decreased 14 basis points. The decrease in loan yields is attributed to the purchased residential mortgage pools, which have a lower yield compared to the rest of the loan portfolio, and lower yields on real estate construction loans. Interest-bearing deposits in FRB, the Company's lowest-yielding interest-earning asset, comprised 11.3% of the average interest-earning assets for period ended September 30, 2022, compared to 18.4% for the same period ended 2021.

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

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

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

Table 3. Interest-Earning Assets and 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 Average September 30, 2022	YTD Average December 31, 2021	YTD Average September 30, 2021
Loans	72.79%	68.99%	68.30%
Investment securities available for sale	15.89%	13.35%	13.30%
Interest-bearing deposits in FRB	11.32%	17.66%	18.40%
Total interest-earning assets	100.00%	100.00%	100.00%

NOW accounts	18.28%	23.77%	24.50%
Money market accounts	54.14%	48.44%	47.40%
Savings accounts	16.53%	16.20%	16.40%
Time deposits	9.58%	9.90%	10.00%

Subordinated debentures	1.47%	1.69%	1.70%
Total interest-bearing liabilities	100.00%	100.00%	100.00%

Noninterest Income

Table 4. Changes in Noninterest Income

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

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(in 000's)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Amount of Change		Percent Change
Customer service fees	$	899	$	745	$	154	20.7	%
Increase in cash surrender value of bank-owned life insurance	89		139		(50)		(36.0)	%
Unrealized loss on fair value of marketable equity securities	(149)		(14)		(135)		(964.3)	%

(Loss) on fair value of junior subordinated debentures	(600)		(35)		(565)		(1,614.3)	%


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

Other	153		100		53		53.0	%
Total noninterest income	$	392	$	930	$	(538)	(57.8)	%

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


(in 000's)	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Amount of Change		Percent Change
Customer service fees	$	2,328	$	2,094	$	234	11.2	%
Increase in cash surrender value of bank-owned life insurance	343		408		(65)		(15.9)	%
Unrealized loss on fair value of marketable equity securities	(458)		(75)		(383)		(510.7)	%

Loss on fair value of junior subordinated debentures	(2,469)		(691)		(1,778)		(257.3)	%

Gain on sale of assets	—		8		(8)		(100.0)	%
Gain on sale of investment securities	30		—		30		100.0	%
Other	1,015		349		666		190.8	%
Total noninterest income	$	789	$	2,093	$	(1,304)	(62.3)	%

Noninterest income for the nine months ended September 30, 2022 decreased $1,304,000 to $789,000 when compared to the nine months ended September 30, 2021. Included in the change is the decrease of a loss on the fair value of marketable equity securities of $383,000. The change in fair value of junior subordinated debentures caused a $2,469,000 loss for the nine months ended September 30, 2022, compared to a $691,000 loss for the nine months ended September 30, 2021, resulting in a difference of $1,778,000. The change in the fair value of junior subordinated debentures was caused by fluctuations in the LIBOR yield curve. Generally, an increase in the three month LIBOR yield curve will result in negative fair value adjustments. Conversely, a decrease in the three month LIBOR yield curve will result in positive fair value adjustments. Also included in noninterest income for the nine months ended September 30, 2022 was $566,000 in nonrecurring income received from The Central Valley Fund II (Small Business Investment Corporation or SBIC), Limited Partnership.

Noninterest Expense

Table 5. Changes in Noninterest Expense

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

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(in 000's)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Amount of Change		Percent Change
Salaries and employee benefits	$	2,965	$	2,888	$	77	2.7	%
Occupancy expense	923		1,013		(90)		(8.9)	%
Data processing	215		147		68		46.3	%
Professional fees	1,089		833		256		30.7	%
Regulatory assessments	212		258		(46)		(17.8)	%
Director fees	110		91		19		20.9	%
Correspondent bank service charges	23		22		1		4.5	%
Net cost on operation of OREO	33		24		9		37.5	%
Other	641		888		(247)		(27.8)	%
Total expense	$	6,211	$	6,164	$	47	0.8	%

Noninterest expense for the quarter ended September 30, 2022 increased $47,000 to $6,211,000, compared to the quarter ended September 30, 2021. The increase was primarily attributed to increases in professional fees, salaries and employees benefits, and data processing expenses, partially offset by decreases in occupancy expense and other expenses, which included a decrease of $228,000 in the provision for unfunded loans. The increase in professional fees was related to increases in expenses related to consulting fees and services contracts.


(in 000's)	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Amount of Change		Percent Change
Salaries and employee benefits	$	8,791	$	8,804	$	(13)	(0.1)	%
Occupancy expense	2,551		2,705		(154)		(5.7)	%
Data processing	475		382		93		24.3	%
Professional fees	2,957		2,524		433		17.2	%
Regulatory assessments	630		547		83		15.2	%
Director fees	345		275		70		25.5	%
Correspondent bank service charges	74		65		9		13.8	%
Net cost on operation of OREO	27		67		(40)		(59.7)	%
Other	1,755		1,964		(209)		(10.6)	%
Total expense	$	17,605	$	17,333	$	272	1.6	%

Noninterest expense for the nine months ended September 30, 2022 increased $272,000 to $17,605,000, compared to the nine months ended September 30, 2021. The increase was attributed to increases in professional fees, regulatory assessments, and data processing expenses, offset by decreases in occupancy expense and other expenses. The increase in regulatory assessments was the result of an increase in the assessment rate and the increase in professional fees was the result of increases in consulting fees and servicing fees for purchased real estate loans. The decrease in other fees was related to the decrease in the provision for unfunded loans.

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 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 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

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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.

The Company has reviewed all of its tax positions as of September 30, 2022, and has determined that, there are no material amounts to be recorded under the current income tax accounting guidelines.

The Company's effective tax rate for the nine months ended September 30, 2022 was 28.87% compared to 28.28% for the nine months ended September 30, 2021.

Financial Condition

Total assets increased $38.3 million, or 2.9%, to a balance of $1.37 billion at September 30, 2022, from the balance of $1.33 billion at December 31, 2021, and increased $76.5 million, or 5.9%, from the balance of $1.29 billion at September 30, 2021. Total deposits of $1.24 billion at September 30, 2022, reflected an increase of $52.7 million, or 4.4%, from the balance reported at December 31, 2021, and $90.1 million, or 7.8%, from the balance of $1.15 billion reported at September 30, 2021. Cash and cash equivalents decreased $93.2 million, or 42.5%, between December 31, 2021 and September 30, 2022. Net loans increased $89.9 million, or 10.4%, to a balance of $952.1 million, and investment securities increased $29.2 million, or 16.0%, to a balance of $211.8 million during the first nine months of 2022.

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

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 $960.5 million at September 30, 2022, an increase of $91.2 million, or 10.5%, when compared to the balance of $869.3 million at December 31, 2021, and an increase of $152.6 million, or 15.9%, when compared to the balance of $807.9 million reported at September 30, 2021. Loans on average increased $156.8 million, or 20.8%, between the nine months ended September 30, 2021 and September 30, 2022, with loans averaging $910.2 million for the nine months ended September 30, 2022, as compared to $753.4 million for the same period of 2021.

Table 6. Loans

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


	September 30, 2022				December 31, 2021				September 30, 2021
(in 000's)	Dollar Amount		% of Loans		Dollar Amount		% of Loans		Dollar Amount		% of Loans
Commercial and industrial	$	62,421	6.5	%	$	45,504	5.2	%	$	51,135	6.3	%
Real estate – mortgage	632,750		65.9	%	558,056		64.2	%	481,930		59.7	%
RE construction & development	161,571		16.8	%	154,270		17.7	%	165,370		20.5	%
Agricultural	57,296		6.0	%	60,239		6.9	%	56,091		6.9	%
Installment and student loans	46,511		4.8	%	51,245		6.0	%	53,411		6.6	%
Total gross loans	$	960,549	100.00	%	$	869,314	100.00	%	$	807,937	100.00	%

Loan volume continues to be highest in what has historically been the primary lending emphasis: real estate mortgage, and construction lending. Total loans increased $91.2 million during the first nine months of 2022. There were increases of $74.7 million, or 13.4%, in real estate mortgage loans, $7.3 million, or 4.7%, in real estate construction and development loans, $16.9 million, or 37.2% in commercial and industrial. Installment loans decreased by $4.7 million, or 9.2% and agricultural loans decreased by $2.9 million, or 4.9%. The Bank is subject to internal limits of 115% of capital on the real estate construction and development portfolio and 345% of capital for the non-owner occupied commercial real estate portfolio, which also includes construction and development loans. In addition, there is also a limit of 50% growth over the three years for the non-owner occupied commercial real estate portfolio. At September 30, 2022, the real estate construction and development portfolio totaled 88% of capital. Non-owner occupied commercial real estate totaled 329% of capital and had a three year growth rate of

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63.2%. The current limits may affect the ability of the Bank to significantly grow these segments of the loan portfolio. The Bank is not approaching internal or regulatory concentration limits in other loan segments.

The real estate mortgage loan portfolio, totaling $632.8 million at September 30, 2022, consists of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting to 39.8%, 38.1%, and 38.3% of the total loan portfolio at September 30, 2022, December 31, 2021, and September 30, 2021, respectively. Commercial real estate balances increased to $382.6 million at September 30, 2022 from $331.1 million at December 31, 2021. Commercial real estate loans are generally a mix of short to medium-term, fixed and floating rate instruments and are mainly secured by commercial income and multi-family residential properties.

Residential mortgage loans are generally 30-year amortizing loans with an average life of six to eight years. These loans totaled $250.1 million, or 26.0%, of the portfolio at September 30, 2022, $226.9 million, or 26.1%, of the portfolio at December 31, 2021, and $172.1 million, or 21.3%, of the portfolio at September 30, 2021. Dovenmuehle Mortgage, Inc. (“DMI”) is the third-party sub-servicer for the Company's purchased residential mortgage portfolio, with aggregate balances of $219.2 million or 87.6% of the total residential mortgage portfolio at September 30, 2022. These loans were purchased in whole loan form, in several pools, beginning in May 2021, through March 2022. DMI’s services include administration, modification (with the Company's approval), escrow management, monitoring and collection. DMI is paid a monthly servicing fee primarily based on the number of loans being serviced, which at September 30, 2022 totaled 233.

Real estate mortgage loans in total increased $74.7 million during 2022 and increased $150.8 million between September 30, 2021 and September 30, 2022. As part of the strategy to deploy excess liquidity, the Company purchased residential mortgage portfolios totaling $201.0 million in 2021 and $36.6 million in 2022. Real estate construction and development loans, representing 16.8%, 17.7%, and 20.5% of total loans at September 30, 2022, December 31, 2021, and September 30, 2021, respectively, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or 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 completion of the project or from the sale of the constructed homes to individuals.

Commercial and industrial loans increased $16.9 million between December 31, 2021 and September 30, 2022 and increased $11.3 between September 30, 2021 and September 30, 2022. Included in commercial and industrial loans as of September 30, 2022 are $14,000 in SBA PPP loans. Agricultural loans decreased $2.9 million between December 31, 2021 and September 30, 2022 and increased $1.2 million between September 30, 2021 and September 30, 2022. Installment and student loans decreased $4.7 million between December 31, 2021 and September 30, 2022 and decreased $6.9 million between September 30, 2021 and September 30, 2022, primarily due to decreases in student loan balances.

Installment and student loans decreased $6.9 million between September 30, 2021 and September 30, 2022, due to paydowns, consolidations with other lenders, and charge-offs within the student loan portfolio. Included in installment loans are $43.7 million in student loans made to medical and pharmacy school students. The student loan portfolio consists of unsecured loans to medical and pharmacy students currently enrolled in medical and pharmacy schools in the US and the Caribbean. The medical student loans are made to US citizens attending medical schools in the US and Caribbean, while the pharmacy student loans are made to pharmacy students attending pharmacy school in the US. Upon graduation the loan is automatically placed on grace for six months. This may be extended as a deferment up to 48 months for graduates enrolling in internship, medical residency or fellowship. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months throughout the life of the loan. The outstanding balance of student loans that are in school or grace and have not entered repayment status totaled $5.2 million at September 30, 2022. Accrued interest on student loans that are in school or grace totaled $2.0 million at September 30, 2022. At September 30, 2022 there were 857 loans within repayment, deferment, and forbearance which represented $18.9 million, $10.5 million, and $9.2 million in outstanding balances, respectively. There were no new student loans originated in 2021 and 2022.

Repayment of the unsecured student loans is reliant on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelines repayment terms can vary per borrower, however repayment occurs on average within 10 to 20 years. Underwriting is premised on qualifying credit scores. The weighted average credit score for the portfolio is in the mid-700s. In addition, there are non-student co-borrowers for roughly one-third of the portfolio that provide additional repayment capacity. Graduation and employment placement rates are high for both medical and pharmacy students. The average student loan balance per borrower as of September 30, 2022 is approximately $99,000. Loan interest rates range from 4.25% to 9.25%, with a weighted average rate of 8.24%.

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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 is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance.

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

The following table sets forth the Bank's student loan portfolio with activity from December 31, 2021 to September 30, 2022:


(In thousands)
Student Loan Portfolio Balance as of December 31, 2021	$	48,456
Disbursements	—
Capitalized Interest	1,400
Loan Consolidations/Payoffs	(4,538)
Payments Received	(808)
Loans Charged-off	(810)
Student Loan Portfolio Balance as of September 30, 2022	$	43,700

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

Deposits

Deposit balances totaled $1.24 billion at September 30, 2022, representing an increase of $52.7 million, or 4.4%, from the balance of $1.19 billion reported at December 31, 2021, and an increase of $90.1 million, or 7.8%, from the balance of $1.15 billion reported at September 30, 2021.

Table 7. Deposits

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


(in 000's)	September 30, 2022		December 31, 2021		Net Change		Percentage Change
Noninterest-bearing deposits	$	517,230	$	476,749	$	40,481	8.5	%
Interest-bearing deposits:
NOW and money market accounts	517,820		529,841		(12,021)		(2.3)	%
Savings accounts	130,786		113,930		16,856		14.8	%
Time deposits:
Under $250,000	53,492		46,631		6,861		14.7	%
$250,000 and over	21,490		20,955		535		2.6	%
Total interest-bearing deposits	723,588		711,357		12,231		1.7	%
Total deposits	$	1,240,818	$	1,188,106	$	52,712	4.4	%

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

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

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 the Company's principal sources of funding and liquidity. These core deposits amounted to 98.27% and 98.24% of total deposits at September 30, 2022 and December 31, 2021, respectively. The Company held no brokered deposits at September 30, 2022 or December 31, 2021.

On a year-to-date average, the Company experienced an increase of $147.0 million, or 13.8%, in total deposits between the nine months ended September 30, 2022 and the nine months ended September 30, 2021. Between these two periods, interest-bearing deposits increased $97.5 million, or 15.5%, and noninterest-bearing deposits increased $49.5 million, or 11.3%, on a year-to-date average basis.

Short-Term Borrowings

At September 30, 2022, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $419.3 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $2.2 million. At September 30, 2022, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB), PNC, Zion's Bank, and Union 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, short-term U.S. Treasury rates, or LIBOR. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. At September 30, 2022 and September 30, 2021, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of $320.6 million, collateralized FHLB lines of credit totaling $3.1 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, 2021.

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.

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. When determining the adequacy of the allowance for credit losses, the Company follows, in accordance with GAAP, the guidelines set forth in the Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (Statement) issued by banking regulators in December 2006. The Statement is a revision of the previous guidance released in July 2001, and outlines characteristics that should be used in segmentation of the loan portfolio for purposes of the analysis including risk classification, past due status, type of loan, industry or collateral. It also outlines factors to consider when adjusting the loss factors for various segments of the loan portfolio, and updates previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the allowance for credit losses. Securities and Exchange Commission Staff Accounting Bulletin No. 102 was released during July 2001, and represents the SEC staff’s view relating to the incurred loss methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations. It is also generally consistent with the guidance published by the banking regulators.

The allowance for loan losses includes an asset-specific component, as well as a general or formula-based component. The Company segments the loan and lease portfolio into eight (8) segments, primarily by loan class homogeneity and commonality of purpose for analysis under the formula-based component of the allowance. Those loans which are determined to be impaired under current accounting guidelines are not subject to the formula-based reserve analysis, and evaluated individually for specific impairment under the asset-specific component of the allowance.

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

•The formula allowance

•Specific allowances for problem graded loans identified as impaired; and

•The unallocated allowance

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

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

•Trends in volumes and term of loans;

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

•Fluctuation in the valuation of underlying collateral securing loans;

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

•National and local economic trends and conditions and;

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

Management determines the loss factors for problem graded loans (substandard, doubtful, and loss), special mention loans, and pass graded loans, based on a loss migration model. The migration analysis incorporates loan losses over the previous quarters as determined by management (time horizons adjusted as business cycles or environment changes) and loss factors are adjusted to recognize and quantify the loss exposure from changes in market conditions and trends in the Company’s loan portfolio. For purposes of this analysis, loans are grouped by internal risk classifications and categorized as pass, special mention, substandard, doubtful, or loss. Certain loans are homogeneous in nature and are therefore pooled by risk grade. These homogeneous loans include consumer installment and home equity loans. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize repayment of the loan and result in further downgrades. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as doubtful has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include impaired loans and loans categorized as substandard, doubtful, and loss which are not considered impaired. At September 30, 2022, impaired and classified loans totaled $11.8 million, or 1.2%, of gross loans as compared to $13.7 million, or 1.6%, of gross loans at December 31, 2021.

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

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

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

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

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

Table 8. Allowance for Loan Losses

The following table summarizes the specific allowance, formula allowance, and unallocated allowance at September 30, 2022 and December 31, 2021, as well as classified loans at those period-ends.


(in 000's)	September 30, 2022		December 31, 2021
Specific allowance – impaired loans	$	70	$	130
Formula allowance – classified loans not impaired	—		523
Formula allowance – special mention loans	266		503
Total allowance for special mention and classified loans	336		1,156

Formula allowance for pass loans	8,703		7,408
Unallocated allowance	1,024		769
Total allowance for loan losses	$	10,063	$	9,333

Impaired loans	11,829		12,034
Classified loans not considered impaired	—		1,645
Total classified and impaired loans	$	11,829	$	13,679

Special mention loans not considered impaired	$	35,807	$	40,289

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

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

The general reserve requirements (ASC 450-70) decreased with the continued strengthening of local, state, and national economies and their impact on our local lending base, which has resulted in a lower qualitative component for the general reserve calculation. Our stake-in-the-ground methodology requires the Company to use December 31, 2005 as the starting point of the look back period to capture loss history and better capture an entire economic cycle. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and the economic environment.

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

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

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans, troubled debt restructures, and performing loans in which full payment of principal or interest is not expected. Management bases the measurement of these impaired loans either on the fair value of the loan's collateral or the expected cash flows on the 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.

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring, for which the loan has been performing for a prescribed period of time under the current contractual terms, income is recognized under the accrual method. At September 30, 2022, included in impaired loans, were troubled debt restructures totaling $2.3 million, of which $2.1 million were on nonaccrual. The remaining $142,000 in troubled debt restructures were considered current with regards to payments, and were performing according to their modified contractual terms.

Real estate mortgage loans comprised approximately 1.2% of total impaired loan balances at September 30, 2022. Specific collateral related to impaired loans is reviewed for current appraisal information, economic trends within geographic markets, loan-to-value ratios, and other factors that may impact the value of the loan collateral. Adjustments are made to collateral values as needed for these factors. Of total impaired loans at September 30, 2022, approximately $11.2 million, or 94.3%, are secured by real estate. The majority of impaired real estate construction and development loans are for the purpose of residential construction, residential and commercial acquisition and development, and land development. Residential construction loans are made for the purpose of building residential 1-4 single family homes. Residential and commercial acquisition and development loans are made for the purpose of purchasing land, developing that land if required, and developing real estate or commercial construction projects on those properties. Land development loans are made for the purpose of converting raw land into construction-ready building sites.

Table 9. Impaired Loans and Specific Reserves

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


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

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Included in impaired loans are loans modified in troubled debt restructurings (TDRs), where concessions have been granted to borrowers experiencing financial difficulties in an attempt to maximize collection. The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At September 30, 2022, approximately $142,000 of the total $2.3 million in TDRs was comprised of real estate mortgages. An additional $2.0 million was related to real estate construction and development loans. There were no reserve amounts for real estate construction and development impaired loans at December 31, 2021 and September 30, 2022, due to the value of the collateral securing those loans.

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

Table 10. TDRs

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


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

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

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


	Total TDRs		Nonaccrual TDRs		Accruing TDRs
(in 000's)	December 31, 2021		December 31, 2021		December 31, 2021
Commercial and industrial	$	—	$	—	$	—
Real estate mortgage:
Commercial real estate	—		—		—
Residential mortgages	146		—		146

Total real estate mortgage	146		—		146
RE construction & development	2,206		2,206		—
Agricultural	242		212		30

Total troubled debt restructurings	$	2,594	$	2,418	$	176

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

A restructured loan may return to accrual status after 6 months successful payment history if continued satisfactory performance is expected. The Company typically performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and a cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans will the restructured credit be considered for accrual status.

Table 11. Credit Quality Indicators for Outstanding Student Loans

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


	September 30, 2022					December 31, 2021
	Number of Loans	Amount		Accrued Interest		Number of Loans	Amount		Accrued Interest
School	82	$	2,370	$	1,015	185	$	6,555	$	2,021
Grace	75	2,781		952		28	912		317
Repayment	414	18,888		418		500	23,834		715
Deferment	253	10,498		1,444		224	8,984		508
Forbearance	190	9,161		833		177	8,172		1,077
Total	1,014	$	43,698	$	4,662	1,114	$	48,457	$	4,638

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

Loan interest rates on the student loan portfolio range from 4.25% to 9.25% and 2.625% to 7.625% at September 30, 2022 and December 31, 2021, respectively.

Table 12. Nonperforming Assets

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


(in 000's)	September 30, 2022			December 31, 2021
Nonaccrual loans (1)	$	11,145		$	11,438
Restructured loans	142			176
Loans past due 90 days or more, still accruing	—			453
Total nonperforming loans	11,287			12,067
Other real estate owned	4,582			4,582
Total nonperforming assets	$	15,869		$	16,649

Nonperforming loans to total gross loans	1.18		%	1.39		%
Nonperforming assets to total assets	1.16		%	1.25		%
Allowance for loan losses to nonperforming loans	89.16		%	77.34		%

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

Nonperforming assets, which are primarily related to the real estate loan and other real estate owned portfolio, decreased $780,000 from a balance of $16.6 million at December 31, 2021 to a balance of $15.9 million at September 30, 2022. The nonaccrual loans are well collateralized and in the process of collection. The ratio of the allowance for loan losses to nonperforming loans increased from 77.3% at December 31, 2021 to 89.2% at September 30, 2022.

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


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

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 loans, nonaccrual and restructured 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 loan totals, there were no loans at September 30, 2022 where the known credit problems of a borrower caused the Company to have serious doubts as to the ability of such borrower to comply with the present loan repayment terms and which would result in such loan being included as a nonaccrual, past due, or restructured loan at some future date.

Nonaccrual loans, totaling $11.1 million at September 30, 2022, decreased $293,000 from the balance of $11.4 million reported at December 31, 2021, with real estate mortgage and real estate construction loans comprising 98.8% of total nonaccrual loans at September 30, 2022. 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 issues related to the specific loans. Impaired loans decreased $205,000 during the nine months ended September 30, 2022 to a balance of $11.8 million at September 30, 2022. Other real estate owned through foreclosure remained at $4.6 million for the periods ended September 30, 2022 and December 31, 2021. Nonperforming assets as a percentage of total assets decreased from 1.25% at December 31, 2021 to 1.16% at September 30, 2022.

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


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

Nonperforming loans as % total loans	1.2		%	1.4		%	1.5		%
Restructured loans as % total loans	0.2		%	0.3		%	0.3		%

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

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


(in thousands)	September 30, 2022		December 31, 2021

Real estate mortgage:
Commercial real estate	34,790		29,092


Total real estate mortgage	34,790		29,092

Agricultural	1,017		11,197

Total special mention loans	$	35,807	$	40,289

The Company focuses 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 emphasis on reducing both the level of nonperforming assets and the level of losses on the disposition of these assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure in an effort to reduce the impacts on the real estate market. As part of this strategy, the Company enters into troubled debt restructurings, when it improves collection prospects. While business and consumer spending have shown improvement over the last several years, it is difficult to forecast the impact COVID-19 will have on the economy. Local unemployment rates in the San Joaquin Valley have improved as businesses return to pre-pandemic operations. Management recognizes the increased risk of loss due to the Company's 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.

The following table provides a summary of the Company's allowance for possible credit losses, provisions made to that allowance, and charge-off and recovery activity affecting the allowance for the nine months ended September 30, 2022 and September 30, 2021.

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Table 13. Allowance for Credit Losses - Summary of Activity


(in 000's)	September 30, 2022			September 30, 2021
Total loans outstanding at end of period before deducting allowances for credit losses	$	962,166		$	809,114
Average loans outstanding during period	910,221			753,424

Balance of allowance at beginning of period	9,333			8,522
Loans charged-off:



Installment and student loans	(828)			(1,199)
Total loans charged-off	(828)			(1,199)
Recoveries of loans previously charged-off:
Real estate	10			15
Commercial and industrial	305			41
Installment and student loans	25			111
Total loan recoveries	340			167
Net loans charged-off	(488)			(1,032)

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

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

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, current and future economic conditions, and other pertinent factors. Management believes its estimate of the allowance for credit losses adequately covers estimated losses inherent in the loan portfolio and, based on the condition of the loan portfolio, management believes the allowance is sufficient to cover risk elements in the loan portfolio. For the nine months ended September 30, 2022, a $1.2 million provision was recorded to the allowance for credit losses as compared to a $1.7 million provision recorded for the nine months ended September 30, 2021.

Net charge-offs during the nine months ended September 30, 2022 totaled $488,000 as compared to net charge-offs of $1,032,000 for the nine months ended September 30, 2021. The Company charged-off, or had partial charge-offs on 13 loans during the nine months ended September 30, 2022, as compared to 14 loans during the same period ended September 30, 2021, and 39 loans during the year ended December 31, 2021. The annualized percentage of net charge-offs to average loans was 0.07% for the nine months ended September 30, 2022. Annualized percentage net charge-offs were 0.17% for the year ended December 31, 2021. Annualized percentage net recoveries were 0.18% for the nine months ended September 30, 2021. The Company's loans net of unearned fees increased from $809.1 million at September 30, 2021 to $962.2 million at September 30, 2022.

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

At September 30, 2022 and September 30, 2021, unfunded loan commitment reserves of $459,000 and $538,000 respectively, were reported in other liabilities. Management believes that the 1.05% credit loss allowance at September 30, 2022 is adequate to absorb known and inherent risks in the loan portfolio. No assurance can be given, however, regarding economic conditions or other circumstances which may adversely affect the Company's service areas resulting in increased losses in the loan portfolio not captured by the current allowance for loan losses. Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company’s loan portfolio.

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Liquidity and Capital Resources

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

Liquidity

Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill both on- and off-balance sheet financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the Company relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The Company's principal cash outflows are for loan origination, 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 higher yielding assets compared to cash. At September 30, 2022, loans represented 70.3% of total assets and accounted for a loan to deposit ratio of 77.5%, as compared to 65.5% of total assets and a loan to deposit ratio of 73.4% at December 31, 2021. Investment securities represented 15.5% of total assets at September 30, 2022, compared to 13.7% at December 31, 2021. Liquid assets at September 30, 2022 include cash and cash equivalents totaling $126.0 million, as compared to $219.2 million at December 31, 2021.

Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowings capability. Core deposits, which comprised approximately 98.3% of total deposits at September 30, 2022, provide a significant and stable funding source for the Company. At September 30, 2022, unused lines of credit with the Federal Home Loan Bank, Pacific Coast Banker's Bank, Zion's Bank, Union Bank and the Federal Reserve Bank totaling $501.5 million were collateralized in part by certain qualifying loans in the Company’s loan portfolio. The carrying value of loans pledged on these used and unused borrowing lines totaled $571.1 million at September 30, 2022. For a further detail of the Company’s borrowing arrangements, see Note 6 of 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 000’s):


(in 000's)	Balance
December 31, 2020	$	294,069
September 30, 2021	$	259,428
December 31, 2021	$	219,219
September 30, 2022	$	126,032

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 quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Company has adopted a capital plan that includes guidelines and trigger points to ensure sufficient capital is maintained at the Bank and the Company, and that capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the level of classified assets, concentrations of credit, ALLL, current and projected growth, and projected retained earnings. The capital plan also contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company on a consolidated basis. The capital plan requires

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

Capital Ratios


	September 30, 2022	Ratios at December 31, 2021	Minimum Requirement to be Well Capitalized	Minimum requirement for Community Bank Leverage Ratio (1)









Tier 1 capital to adjusted average assets ("Leverage Ratio")
Company	9.56%	9.79%	5.00%	9.00%
Bank	9.60%	9.64%	5.00%	9.00%

(1) If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, 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 the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

As of September 30, 2022, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.

Dividends

Dividends paid to shareholders by the Holding Company are subject to restrictions set forth in 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 retained earnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution or if immediately after 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 dividends will be paid to shareholders will come from cash dividends received by the Company from the Bank.

On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to $3,000,000 of the outstanding stock of the Holding Company. This amount represents 2.8% of total shareholders' equity of $107.1 million at September 30, 2022. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. During the nine months ended September 30, 2022, the Company did not repurchase any of the shares available.

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

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

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

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

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

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of September 30, 2022 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2021.

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. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2022, 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. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2022, that have materially affected, or are 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, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the 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 simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, 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 time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and 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 September 30, 2022.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits:

(a)Exhibits:


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:	November 4, 2022	/S/ Dennis R. Woods
		Dennis R. Woods
		President and Chief Executive Officer

		/S/ Steven Leen
		Steven Leen
		Interim Chief Financial Officer