Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward- looking statements as a result of a wide variety or range of factors including, but not limited to:
● expected revenues, cost savings, synergies and other benefits from our recent acquisition of Pacific Enterprise Bancorp (the “PEB Merger”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to client and employee retention, might be greater than expected;
● potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the novel coronavirus disease 2019 (“COVID-19”) pandemic and any governmental or societal responses thereto;
● the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses;
● changes in economic conditions in general and in California, Colorado, New Mexico and Washington;
● changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates;
● the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest rate benchmarks;
● our net interest margin and funding sources;
● fluctuations in the demand for loans and the number of unsold homes, land and other properties;
● fluctuations in real estate values in our market areas;
● secondary market conditions for loans and our ability to sell loans in the secondary market;
● results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;
● risks related to our acquisition strategy, including our ability to identify future suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;
● challenges arising from attempts to expand into new geographic markets, products, or services;
● future goodwill impairment due to changes in our business, market conditions, or other factors;
● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and including changes as a result of COVID-19;
● our ability to attract and retain deposits;
● our ability to control operating costs and expenses;
● the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;
● difficulties in reducing risk associated with the loans and securities on our balance sheet;
32
Table of Contents
● staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
● the effectiveness of our risk management framework;
● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;
● an inability to keep pace with the rate of technological advances;
● our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;
● costs and effects of litigation, including settlements and judgments;
● our ability to implement our business strategies and manage our growth;
● liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
● the loss of our large loan and deposit relationships;
● increased competitive pressures among financial services companies;
● changes in consumer spending, borrowing and savings habits;
● the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
● adverse changes in the securities markets;
● inability of key third-party providers to perform their obligations to us;
● statements with respect to our intentions regarding disclosure and other changes resulting from the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”);
● changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;
● other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and
● other risks described elsewhere in this Form 10-Q and other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”).
In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. We do not undertake and specifically disclaim any obligation to revise any forward- looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.
33
Table of Contents
Executive Overview
General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 34 full-service branches, with 16 locations in California, two in Washington, five in Central New Mexico and 11 in Colorado. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relate primarily to the Bank.
Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. Since 2010, we have expanded our geographic footprint through 10 strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share. We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, Colorado, provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. At March 31, 2022, the Company had approximately $2.8 billion in total assets, $2.0 billion in total loans, $2.3 billion in total deposits and $324.7 million in shareholders’ equity.
We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At March 31, 2022, our $2.0 billion total loan portfolio included $349.8 million or 17.5 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.7 billion, or 82.5%, consisted of loans we originated.
The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for loan losses. Our net income is also affected by other factors, including the provision for credit losses on loans, noninterest income and noninterest expense.
On February 1, 2022, the Company completed its acquisition of Pacific Enterprise Bancorp (“PEB”), which was headquartered in Irvine, California. Pursuant to an Agreement and Plan of Merger, dated September 7, 2021 (the “Merger Agreement”), by and between BayCom and PEB. Under the terms of the Merger Agreement, PEB merged with and into BayCom (the “Merger”), with BayCom as the surviving corporation in the Merger. Immediately following the Merger, Pacific Enterprise Bank, a wholly-owned subsidiary of PEB, merged with and into United Business Bank, a wholly-owned subsidiary of BayCom (the “Bank Merger”), with United Business Bank as the surviving bank in the Bank Merger. For additional information regarding the Merger, see “Note 3 – Acquisitions” contained in the Notes to Condensed Consolidated Financial Statements included in “Item 1. Financial Information” of Part I this report.
Set forth below is a discussion of the primary factors affecting our results of operations:
Net interest income. Net interest income represents interest income less interest expense. We generate interest income from interest and fees received on interest earning assets, including loans and investment securities and dividends on Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) stock we own. We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest margin; and (iv) the regulatory risk weighting associated with the assets. Net interest margin is calculated as the annualized net interest income divided by average interest earning assets. Because noninterest bearing sources of funds, such as noninterest bearing deposits and
34
Table of Contents
shareholders’ equity, also fund interest earning assets, net interest margin includes the benefit of these noninterest bearing sources.
Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. In March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) commenced increasing the target range for the federal funds rate by implementing a 25 basis point increase to a range of 0.25% to 0.50%. In May 2022, the FOMC implemented a 50 basis point increase to a range of 0.75% to 1.00%. The FOMC has indicated further increases are to be expected this year. This recent March increase, however, had limited impact on the current quarter’s net interest margin as the change in rate occurred towards the end of the quarter.
Noninterest income. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) other noninterest income. Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of SBA loans, capitalized loan servicing rights and other related income.
Provision for loan losses. We established an allowance for loan losses by charging amounts to loan provision at a level required to reflect estimated credit losses in the loan portfolio. Management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors. See “Critical Accounting Policies and Estimates - Allowance for loan loss” for a description of the manner in which the provision for loan losses is established.
Noninterest expense. Noninterest expense includes, among other things: (i) salaries and related benefits; (ii) occupancy and equipment expense; (iii) data processing; (iv) Federal Deposit Insurance Corporation (“FDIC”) and state assessments; (v) outside and professional services; (vi) other general and administrative expenses, including amortization of intangible assets. Salaries and related benefits include compensation, employee benefits and employment tax expenses for our personnel. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Data processing expense includes data fees paid to our third-party data processing system provider and other data service providers. FDIC and state assessments expense represents the assessments that we pay to the FDIC for deposit insurance and other regulatory costs to various states. Outside and professional fees include legal, accounting, consulting and other outsourcing arrangements. Amortization of intangibles represents the amortization of our core deposit intangible from various acquisitions. Other general and administrative expenses include expenses associated with travel, meals, training, supplies and postage. Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased significantly over the past few years as we have grown through acquisitions and organically, and as we have built out our operational infrastructure.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the condensed consolidated financial statements included in this Form 10-Q report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. The following represent our critical accounting policies:
Allowance for loan losses . The allowance for loan losses is evaluated on a regular basis by management. Periodically, we charge current earnings with provisions for estimated probable losses of loans receivable. The provision or adjustment takes into consideration the adequacy of the total allowance for loan losses giving due consideration to specifically identified problem loans, the financial condition of the borrowers, fair value of the underlying collateral, recourse provisions, prevailing economic conditions, and other factors. Additional consideration is given to our historical loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography. Additional
35
Table of Contents
analysis was also completed on the allowance for loan losses based on the significance of loan modifications in accordance with the Coronavirus Aid, Relief, and Economic Security Act of 2020 or CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19. Our evaluation of the allowance for loan losses is inherently subjective and requires estimates that are susceptible to significant change as additional or new information becomes available. In addition, regulatory examiners may require additional allowances based on their judgments of the information regarding problem loans and credit risk available to them at the time of their examinations.
Generally, the allowance for loan losses consists of various components including a component for specifically identified weaknesses as a result of individual loans being impaired, a component for general non- specific weakness related to historical experience, economic conditions and other factors that indicate probable loss in the loan portfolio. Loans determined to be impaired are individually evaluated by management for specific risk of loss.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. We measure any loss on the TDR in accordance with the guidance concerning impaired loans set forth above. Additionally, TDRs are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.
Estimated expected cash flows related to purchased credit impaired loans . Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In situations where such PCI loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation.
The cash flows expected over the life of the PCI loan or pool are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to default rates, loss severity and prepayment speeds are utilized to calculate the expected cash flows.
Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amounts of the future cash flows of the pool are reasonably estimable. Subsequent to the acquisition date, any increase in cash flow over those expected at purchase date in excess of fair value is recorded as interest income prospectively. Any subsequent decreases in cash flow over those expected at purchase date are recognized by recording an allowance for loan losses. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the loan pool at the carrying amount.
Business combinations . We apply the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition related costs are expensed as incurred unless they are directly attributable to the issuance of the Company’s common stock in a business combination.
Loan sales and servicing of financial assets . Periodically, we sell loans and retain the servicing rights. The gain or loss on sale of loans depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. All servicing assets and liabilities are initially measured at fair value. In addition, we amortize servicing rights in proportion to and over the period of the estimated net servicing income or loss and assess the rights for impairment.
36
Table of Contents
Income taxes . Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carry forwards depends on having sufficient taxable income of an appropriate character within the carry forward periods.
We recognize that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.
Goodwill. Goodwill, which has resulted from a number of our acquisitions, is reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit being below its carrying amount. We make a qualitative assessment whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. Such indicators may include, among others: a significant adverse change in legal factors or in the general business climate; significant decline in the Company’s stock price and market capitalization; unanticipated competition; and an adverse action or assessment by a regulator. Any adverse changes in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial condition and results of operations. As of December 31, 2021, the Company concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.
37
Table of Contents
BayCom’s Response to COVID-19
The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients. As of March 31, 2022, all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
Comparison of Financial Condition at March 31, 2022 and December 31, 2021
Total assets. Total assets increased $405.3 million, or 17.2%, to $2.8 billion at March 31, 2022, from $2.4 billion at December 31, 2021. The increase primarily was due to loans receivable, net, increasing $339.0 million, primarily due to loans acquired in the PEB Merger. In addition, cash and cash equivalents increased $47.5 million or 12.5%, investment securities available for sale increased $10.2 million or 5.9% and other assets increased $9.3 million or 31.1%.
Cash and cash equivalents. Cash and cash equivalents increased $47.5 million, or 12.5%, to $427.2 million, at March 31, 2022, from $379.7 million at December 31, 2021. The increase was primarily a result of loan repayments and an increase in total deposits, which exceeded the funds required for loan originations and used for purchases of investment securities.
Securities. Investment securities, all of which are classified as available-for-sale, increased $10.2 million, or 5.9%, to $184.7 million at March 31, 2022 from $174.4 million at December 31, 2021. The increase was primarily due to the purchase of $22.7 million of investment securities during the three months ended March 31, 2022 partially offset by the routine amortization and repayment of investment principal balances and securities called and matured.
Loans receivable, net. We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Loans receivable, net of allowance for loan losses, increased $339.0 million, or 20.6%, to $2.0 billion at March 31, 2022 from $1.7 billion at December 31, 2021. The increase was primarily due to $412.9 million of net loans acquired from PEB and $81.6 million of new loan originations, partially offset by $143.3 million of loan repayments, including $51.6 million in PPP loan repayments, and $10.9 million in loan sales.
The following table provides information about our loan portfolio by type of loan, with PCI loans presented as a separate balance, at the dates presented .
March 31,
December 31,
% Change
2022
2021
(Dollars in thousands)
Commercial and industrial (1)
$
309,097
$
229,871
34.5
%
Real estate:
Residential
100,509
116,656
(13.8)
Multifamily residential
246,701
206,960
19.2
Owner occupied CRE
605,895
393,978
53.8
Non-owner occupied CRE
688,288
688,600
0.0
Construction and land
19,407
13,371
45.1
Total real estate
1,660,800
1,419,565
17.0
Consumer
3,675
5,138
(28.5)
PCI loans
30,897
12,219
152.9
Total Loans
2,004,469
1,666,793
20.3
Net deferred loan fees
(541)
(1,903)
(71.6)
Allowance for loan losses
(17,700)
(17,700)
0.0
Loans, net
$
1,986,228
$
1,647,190
20.6
%
(1) Includes $114.6 million and $69.6 million of PPP loans as of March 31, 2022 and December 31, 2021, respectively. The increase from December 31, 2021 primarily reflects PPP loans acquired in the PEB Merger.
38
Table of Contents
The following table shows as of March 31, 2022, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:
San Francisco Bay
Total in State of
Area (1)
Other California
California
All Other States (2)
Total
% of
% of
% of
% of
% of
Total in
Total in
Total in
Total in
Total in
Amount
Category
Amount
Category
Amount
Category
Amount
Category
Amount
Category
(Dollars in thousands)
March 31, 2022
Commercial and industrial
$
51,767
9.1
%
$
198,807
20.0
%
$
250,574
16.0
%
$
62,982
14.2
%
$
313,556
15.6
%
Real estate:
Residential
20,601
3.6
%
33,165
3.3
%
53,766
3.4
%
48,313
10.9
%
102,079
5.1
%
Multifamily residential
54,295
9.5
135,564
13.6
189,859
12.2
59,797
13.5
249,656
12.5
Owner occupied CRE
200,501
35.2
362,176
36.5
562,677
36.0
60,025
13.6
622,702
31.1
Non-owner occupied CRE
240,004
42.2
250,021
25.2
490,025
31.4
201,922
45.7
691,947
34.5
Construction and land
1,655
0.3
12,138
1.2
13,793
0.9
7,061
1.6
20,854
1.0
Total real estate
517,056
793,064
1,310,120
377,118
1,687,238
Consumer
7
0.0
%
1,700
0.2
%
1,707
0.1
%
1,968
0.4
%
3,675
0.2
%
Total loans
$
568,830
$
993,571
$
1,562,401
$
442,068
$
2,004,469
December 31, 2021
Commercial and industrial
$
80,457
13.6
%
$
68,586
11.8
%
$
149,043
12.7
%
$
81,134
16.3
%
$
230,177
13.8
%
Real estate:
Residential
$
23,135
3.9
%
$
42,218
7.3
%
$
65,353
5.6
%
$
53,070
10.7
%
$
118,423
7.1
%
Multifamily residential
66,425
11.3
80,328
13.8
146,753
12.5
60,207
12.1
206,960
12.4
Owner occupied CRE
185,046
31.4
143,122
24.6
328,168
28.0
65,810
13.3
393,978
23.6
Non-owner occupied CRE
233,587
39.6
243,358
41.9
476,945
40.8
221,801
44.7
698,746
41.9
Construction and land
889
0.2
1,310
0.2
2,199
0.2
11,172
2.2
13,371
0.8
Total real estate
$
509,082
$
510,336
$
1,019,418
$
412,060
$
1,431,478
Consumer
13
0.0
%
1,703
0.3
%
1,716
0.1
%
3,422
0.7
%
5,138
0.3
%
Total loans
$
589,552
$
580,625
$
1,170,177
$
496,616
$
1,666,793
(1) Includes Alameda, Contra Costa, Solano, Napa, Sonoma, Marin, San Francisco, San Joaquin, San Mateo and Santa Clara counties.
(2) Includes loans located primarily in the states of Colorado, New Mexico and Washington. At March 31, 2022, loans in Colorado, New Mexico and Washington totaled $103.6 million, $61.7 million and $85.0 million, respectively. At December 31, 2021, loans in Colorado, New Mexico and Washington totaled $123.2 million, $69.5 million and $86.6 million, respectively.
Nonperforming assets and nonaccrual loans. Nonperforming assets consists of nonaccrual loans, accruing loans that are 90 days or more past due and other real estate owned (“OREO”). Nonperforming assets increased $5.7 million, or 82.0%, to $12.6 million at March 31, 2022 from $6.9 million at December 31, 2021, primarily due to a $5.5 million increase in nonaccrual loans and $117,000 increase in accruing loans 90 days and more past due. The increase in nonaccrual loans was primarily due to one $4.9 million commercial and industrial loan which was restructured and placed on non-accrual during the current quarter. The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling 62% of total loans, of which $800,000 were guaranteed by governmental agencies at March 31, 2022, compared to $6.9 million or 0.41% of total loans, of which $822,000 were SBA guaranteed at December 31, 2021. Included in nonperforming loans at March 31, 2022 and December 31, 2021, were $6.4 million and $1.6 million, respectively, of TDR loans. At March 31, 2022 and December 31, 2021, nonaccrual loans included $5.6 million and $6.9 million of loans 30-89 days past due and $2.2 million and $2.5 million of loans less than 30 days past due, respectively. At March 31, 2022, nonaccrual loans 30-89 days past due of $5.6 million primarily was comprised of one $4.9 million commercial and industrial loan restructured as a TDR during the three months ended March 31, 2022 and seven smaller loans, and the $2.2 million of loans less than 30 days past due are comprised of two loans. All of these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There was one loan totaling $117,000 that was 90 days or more past due and still accruing at March 31, 2022, compared to no loans at December 31, 2021.
In general, loans are placed on nonaccrual status after being contractually delinquent for more than 90 days, or earlier, if management believes full collection of future principal and interest on a timely basis is unlikely. When a loan is placed on nonaccrual status, all interest accrued but not received is charged against interest income. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the
39
Table of Contents
loan until such time as full collection of the remaining recorded balance is expected. Generally, loans with temporarily impaired values and loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are categorized as performing nonaccrual loans and are reflected in nonperforming assets. Interest received on such loans is recognized as interest income when received. A nonaccrual loan is restored to an accrual basis when principal and interest payments are paid current, and full payment of principal and interest is probable. Loans that are well secured and in the process of collection will remain on accrual status .
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date, without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality, and impaired loans with evidence of significant credit deterioration .
● Pass rated loans (typically performing loans) are accounted for in accordance with ASC Topic 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.
● Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if they display at least some level of credit deterioration since origination.
● Impaired loans (typically substandard loans on nonaccrual status) are accounted for in accordance with ASC Topic 310-30 as they display significant credit deterioration since origination.
For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.
In accordance with ASC Topic 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows .
Troubled debt restructured loans. Troubled debt restructured loans, or TDR loans, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity . TDR loans as of March 31, 2022 totaled $7.2 million, of which $794,000 were accruing and performing according to their restructuring terms. TDR loans as of December 31, 2021 totaled $2.4 million, of which $805,000 were accruing and performing according to their restructuring terms. The accruing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. The related allowance for loan losses on TDR loans totaled of $878,000 and $31,000 at March 31, 2022 and December 31, 2021, respectively.
The Company provided payment and financial relief programs for borrowers impacted by COVID-19. All loans modified due to COVID-19 were separately monitored and any request for continuation of relief beyond the initial modification was reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating was appropriate. At both March 31, 2022 and December 31, 2021, the Company had two commercial real estate loans totaling $2.7 million operating under forbearance agreements due to COVID-19. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be TDRs at March 31, 2022, pursuant to applicable accounting and regulatory guidance.
40
Table of Contents
The following table sets forth the nonperforming loans, nonperforming assets and TDR loans as of the dates indicated:
March 31,
December 31,
2022
2021
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial
$
5,682
$
753
Real estate:
Residential
1,759
1,587
Multifamily residential
200
200
Owner occupied CRE
4,349
3,990
Non-owner occupied CRE
408
322
Construction and land
36
36
Total real estate
6,752
6,135
Consumer
—
—
Total nonaccrual loans
12,434
6,888
Accruing loans 90 days or more past due
117
—
Total nonperforming loans (1)
12,551
6,888
Real estate owned
21
21
Total nonperforming assets (2)
$
12,572
$
6,909
Troubled debt restructurings – performing
794
805
PCI loans
$
30,897
$
12,219
Nonperforming assets to total assets (2)
0.46
%
0.29
%
Nonperforming loans to total loans (2)
0.63
%
0.41
%
(1)
Includes $6.4 million and $1.6 million of nonaccrual TDR loans at March 31, 2022 and December 31, 2021, respectively. Excludes the performing (accruing) TDR loans which are set forth separately in the table.
(2) PCI and performing TDR loans are neither included in nonperforming loans above nor are they included in the numerators used to calculate this ratio.
Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above. At March 31, 2022 we had $117,000 and no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing compared to none at December 31, 2021.
Interest foregone on nonaccrual loans was approximately $84,600 and $88,300 for the three months ended March 31, 2022 and March 31, 2021, respectively, none of which was included in interest income.
Allowance for loan losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with GAAP. It is our estimate of loan losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios. Management and the Board of Directors sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. Management and the Board of Directors also considers credit quality and trends relating to delinquency, nonperforming and classified loans within our loan portfolio when evaluating qualitative loss factors. Additionally, management and the Board of Directors adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy, capitalization rates, commodity prices and other pertinent economic data specific to our primary market area and lending portfolios.
41
Table of Contents
For the specific component, the allowance for loan losses is established for impaired loans. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
At March 31, 2022, the Company’s allowance for loan losses was $17.7 million, or 0.88% of total loans, compared to $17.7 million, or 1.06% of total loans, at December 31, 2021. Based on our review of the appropriateness of the allowance for loan losses at March 31, 2022, the Company recorded a provision for loan losses of $7,000 for the three months ended March 31, 2022, compared to none for the three months ended March 31, 2022. The decline in the allowance for loan losses as a percentage of total loans outstanding was due to our acquisition of loans in the PEB Merger and related acquisition accounting on those loans. As discussed in more detail below, acquired loans are recorded at their estimated fair value at acquisition and no allowance for loan losses is recorded on the acquired loans. We recorded net charge-offs of $7,000 for the first quarter of 2022 compared to no charge-offs in the same quarter in 2021. The calculation of the allowance for loan losses at March 31, 2022 and December 31, 2021 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven .
In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts. Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. As of March 31, 2022 , acquired loans net of their discount, totaled $349.8 million and the remaining net discount on these acquired loans was $603,000, compared to $51.3 million of acquired loans and $2.1 million of net discounts at December 31 , 2021 . The net discount includes a credit discount based on estimated losses in the acquired loans partially offset a premium, if any, based market interest rates on the date of acquisition. The decrease in the net discount on acquired loans from December 31, 2021 was due to a net premium on the PEB loans given the higher yielding portfolio compared to current market interest rates.
As part of the acquisition of PEB, the Company acquired loans under various state guarantee programs which PEB was a participant. PEB was approved by, and the Company has been approved by the California Pollution Control Financing Authority ("CalCAP") to originate loans to qualified small businesses. Under the program, the borrower, CalCAP and the Company contribute funds to a loss reserve account that is held in a demand deposit account at the Company. Losses on qualified loans will be charged to this account after approval by CalCAP. The funds are the property of CalCAP, however, in the event that the Company leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the Company and there are no pending claims for reimbursement, will be distributed to CalCAP and the Company based on their contributions to the program. The borrower contributions are included in the Company share. The Company opted out of this CalCAP Small Business loan program in 2017. Funds contributed by the Company to the reserve account are treated as a receivable from CalCAP, and evaluated for impairment. The Company had a receivable from CalCAP of $4,023,000 as of March 31, 2022. The Company had a loss reserve account of $14,723,000 as of March 31, 2022.
In addition, the Company has been approved by the CalCAP in partnership with the California Air
Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program. Under the program, the CalCAP solely contributes funds to a loss reserve account that is held in a demand
42
Table of Contents
deposit account at the Company. Losses are handled in the same manner as noted above. The funds are the property of CalCAP and are payable upon termination of the program. When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to the CalCAP. The Company had a loss reserve account of $5,925,000 as of March 31, 2022.
The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations:
Three months ended March 31,
2022
2021
(Dollars in thousands)
Allowance for loan losses as a percentage of total loans outstanding at period end
0.88
%
1.10
%
Allowance for loan losses
$
17,700
$
17,500
Total loans outstanding
$
2,003,928
$
1,584,202
Non-accrual loans as a percentage of total loans outstanding at period end
0.62
%
0.53
%
Total non-accrual loans
$
12,434
$
8,421
Total loans outstanding
$
2,003,928
$
1,584,202
Allowance for loan losses as a percentage of non-accrual loans at period end
142.35
%
207.81
%
Allowance for loan losses
$
17,700
$
17,500
Total non-accrual loans
$
12,434
$
8,421
Net charge-offs/(recoveries) during period to average loans outstanding:
Commercial and industrial:
—
%
—
%
Net (recoveries)/charge-offs
$
(3)
$
—
Average loans outstanding
$
310,602
$
311,123
Construction and land:
—
%
—
%
Net charge-offs
$
—
$
—
Average loans outstanding
$
20,030
$
21,987
Commercial estate:
—
%
—
%
Net charge-offs
$
1
$
—
Average loans outstanding
$
1,472,445
$
1,134,895
Residential:
0.01
%
—
%
Net charge-offs
$
5
$
—
Average loans outstanding
$
98,423
$
156,050
Consumer:
0.14
%
—
%
Net charge-offs
$
3
$
—
Average loans outstanding
$
2,185
$
5,196
Total loans:
—
%
—
%
Total net charge-offs
$
6
$
—
Total average loans outstanding
$
1,903,685
$
1,629,251
As of March 31, 2022, the Company identified $13.4 million in impaired loans, inclusive of $12.6 million of nonperforming loans and $753,000 of accruing TDR loans. Of these impaired loans, only $5.9 million had a specific allowance of $1.5 million as of March 31, 2022. As of December 31, 2021, the Company identified $7.7 million in impaired loans, inclusive of $6.9 million of nonperforming loans and $765,000 of performing (accruing) TDR loans. Of these impaired loans, only $1.1 million had a specific allowance of $931,000 as of December 31, 2021.
Management considers the allowance for loan losses at March 31, 2022 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. Uncertainties relating to our allowance for loan losses remain heightened as a result of the risks surrounding the lingering effects of COVID-19. A further decline in national and local economic conditions, as a result of the COVID-19 or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for
43
Table of Contents
loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.
Deposits. Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.
Total deposits increased $345.2 million, or 17.4%, to $2.3 billion at March 31, 2022 from $2.0 billion at December 31, 2021. The increase in deposits from the prior quarter is primarily attributable to the $376.7 million of deposits acquired from PEB. At March 31, 2022, noninterest bearing demand deposits totaled $783.1 million or 33.6% of total deposits, compared to $710.1 million or 35.8% of total deposits at December 31, 2021.
The following table sets forth the dollar amount of deposits in the various types of deposit programs offer at the dates indicated.
March 31,
December 31,
2022
2021
% Change
(Dollars in thousands)
Noninterest bearing demand deposits
$
783,110
$
710,137
10.3
%
NOW accounts and savings
476,077
484,847
(1.8)
Money market
760,359
568,094
33.8
Time deposits
310,849
222,161
39.9
Total
$
2,330,395
$
1,985,239
17.4
%
Borrowings. Although deposits are our primary source of funds, we may from time to time utilize borrowings as a cost effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. We are a member of and may obtain advances from the FHLB of San Francisco, which is part of the Federal Home Loan Bank System. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.
At March 31, 2022 and December 31, 2021, we had the ability to borrow up to $454.4 million and $483.1 million, respectively, from the FHLB of San Francisco. In addition to the availability of liquidity from the FHLB of San Francisco, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco, with available credit capacity of $114.6 million and $135.6 million as of March 31, 2022 and December 31, 2021, respectively, based on loans that qualify as collateral for the FRB line of credit. At both March 31, 2022 and December 31, 2021, there were no FRB borrowings outstanding. At both March 31, 2022, and December 31, 2021, the Company had no FHLB advances outstanding.
If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At both March 31, 2022 and December 31, 2021, we had a total of $65.0 million in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.
At March 31, 2022 and December 31, 2021, the Company had outstanding junior subordinated debt, net of market-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.4 million compared to $8.3 million at March 31, 2021.
At March 31, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.5 million at December 31, 2021.
44
Table of Contents
We are required to provide collateral for certain local agency deposits. At both March 31, 2022 and December 31, 2021, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $42.0 million as collateral for local agency deposits.
Shareholders’ equity. Shareholders’ equity increased $62.5 million, to $324.7 million at March 31, 2022 from $262.6 million at December 31, 2021. The increase in shareholders’ equity was primarily due to issuance of stock related to our acquisition of PEB and net income, partially offset by the repurchase of $1.3 million of common stock and $685,000 of accrued cash dividends payable. In addition, shareholder’s equity was adversely impacted by a $7.0 million decrease in accumulated other comprehensive income resulting in a total comprehensive loss of $464,000 due to an increase in the unrealized loss on available for sale securities reflecting the increase in market interest rates during the current quarter. During the three months ended March 31, 2022, the Company repurchased a total of 57,177 shares of its common stock at a total cost of $1.3 million, or $22.18 per share, leaving 685,355 shares available for future purchases under the current stock repurchase plan. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”.
Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021
Earnings summary. Net income was $6.5 million for the three months ended March 31, 2022, compared to $4.5 million for the three months ended March 31, 2021, an increase of $2.0 million or 43.2%. The increase was the result of a $4.3 million increase in net interest income and a $2.2 million increase in noninterest income, partially offset by a $4.2 million increase in noninterest expense. Diluted earnings per share were $0.51 for the three months ended March 31, 2022, an increase of $0.11 from diluted earnings per share of $0.40 for the three months ended March 31, 2021.
Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, was 68.48% and 69.31% for the three months ended March 31, 2022 and 2021, respectively. The improvement in the efficiency ratio during the three months ended March 31, 2022 compared to the same period in 2021 was due to higher revenues.
Interest income. Interest income for the three months ended March 31, 2022 was $24.8 million, compared to $20.3 million for the three months ended March 31, 2021, an increase of $4.5 million or 22.4%. The increase in interest income between the periods reflects increases in interest income on loans and, to a lesser extent, investment securities due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.
Interest income on loans, including fees, increased $3.7 million, or 19.5%, to $22.9 million during the three months ended March 31, 2022, compared to $19.2 million for the three months ended March 31, 2021 primarily due to $275.8 million increase in average loan balance, as well as the higher average yield earned on loans. The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended March 31, 2022 was 4.89%, compared to 4.79% for the same period in 2021. Interest income on loans for the quarters ended March 31, 2022 and 2021 included $1.3 million and $675,000, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts. The remaining net discount on these acquired loans was $603,000 and $2.7 million at March 31, 2022 and March 31, 2021, respectively. Interest income for the three months ended March 31, 2022 included $1.3 million in fees earned related to PPP loans compared to $1.2 million during the same period in 2021. As of March 31, 2022, total unrecognized fees on PPP loans were $735,000. Interest income on loans for the quarters ended March 31, 2022 and 2021, included $235,000 and $562,000, respectively, in fees related to prepayment penalties.
For the three months ended March 31, 2022, average PPP loans were $108.8 million and the average yield, including fees, was 5.89%. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but will cease completely after the maturity of the loans. Approximately two-thirds of the PPP loans are set to mature by the end of 2022, while the remaining loans have a five-year maturity date.
45
Table of Contents
Interest income on investment securities and interest-bearing deposits in banks increased $740,000, or 85.3% to $1.6 million during the three months ended March 31, 2022, compared to $868,000 for the three months ended March 31, 2021, primarily due a $68.1 million increase in the average balance of investment securities, as well as a higher average yield earned on investment securities. The average yield on investment securities increased 43 basis point to 3.15% for the three months ended March 31, 2022 compared to 2.72% for the same period prior year.
Interest expense. Interest expense increased $264,000, or 12.1%, to $2.5 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021. The increase was due to the $293.7 million increase in the average balance of deposits. Total average interest bearing liabilities increased $289.0 million, or 23.0%, to $1.5 billion for the three months ended March 31, 2022, compared to $1.3 billion for the three months ended March 31, 2021. The average rate paid on interest bearing liabilities decreased by seven basis points to 0.64% for the three months ended March 31, 2022, compared to 0.71% for the same period prior year.
Interest expense on deposits increased $264,000, or 24.9%, to $1.5 million for the three months ended March 31, 2022 compared to $1.2 million for the three months ended March 31, 2021, primarily due to increases in the average balance in all interest bearing deposit categories. The average balance of deposits totaled $2.2 billion for the three months ended March 31, 2022, compared to $1.9 billion for the same quarter a year ago, respectively. The average rate paid on interest bearing deposits decreased by one basis point to 0.41% for the three months ended March 31, 2022, from 0.42% for the three months ended March 31, 2021. The overall average cost of deposits for the three months ended March 31, 2022, increased to 0.27%, compared to 0.26% for the three months ended March 31, 2021. The average balance of noninterest bearing deposits increased $61.9 million, or 8.51%, to $789.1 million for the three months ended March 31, 2022 compared to $727.4 million for the same period in 2021.
Interest expense on borrowings was $982,000 for both the three months ended March 31, 2022 and 2021, due to decreases in borrowings outstanding offset by increases in the average cost of borrowings. The average balance of borrowings outstanding decreased $4.8 million to $72.0 million during the three months ended March 31, 2022, compared to $76.7 million during the three months ended March 31, 2021. The average cost of borrowing increased to 5.53% for the three months ended March 31, 2022, compared to 5.19% for the three months ended March 31, 2021.
Net interest income and net interest margin. Net interest income increased $4.3 million, or 23.6%, to $22.4 million for the three months ended March 31, 2022, compared to $18.1 million for the three months ended March 31, 2021. The increase in net interest income primarily was due to increases in interest income on loans and, to a lesser extent, investment securities due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.
The average yield on interest earning assets for the three months ended March 31, 2022 was 4.03%, a 12 basis point increase from 3.91% for the three months ended March 31, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the three months ended March 31, 2022 decreased to 0.64%, or seven basis points from 0.71% for the three months ended March 31, 2021.
The annualized net interest margin for the three months ended March 31, 2022 was 3.63%, compared to 3.49% for first quarter of 2021. The comparable quarter over quarter increase in net interest margin primarily reflects an improved mix of interest-bearing assets, including increased balances of higher yielding loans and investment securities available for sale. During the quarter, the recognition of deferred loan fees related to PPP loans and accretion on acquired loans, also had a positive impact on the net interest margin. PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 5.89%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of eight basis points during the three months ended March 31, 2022, compared to 4.51% with a positive impact of three basis points during the comparable periods in 2021. The impact of PPP loans on net interest margin will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are net, but will cease completely after the maturity of the loans. Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased our net interest margin by 21 basis points during the three months ended March 31, 2022 and 17 basis points during the three months ended March 31, 2021.
46
Table of Contents
Average Balances, Interest and Average Yields/Cost. The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average yields; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.
Three months ended March 31,
2022
2021
Annualized
Annualized
Average
Average
Average
Average
Balance(1)
Interest
Yield
Balance(1)
Interest
Yield
(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks
$
396,631
$
211
0.22
%
$
349,677
$
119
0.14
%
Investments securities available-for-sale
179,855
1,397
3.15
111,766
749
2.72
FHLB Stock
9,889
149
6.13
7,737
99
5.20
FRB Stock
8,258
121
5.94
7,612
112
5.99
Total loans
1,899,679
22,927
4.89
1,623,888
19,193
4.79
Total interest earning assets
2,494,312
24,805
4.03
%
2,100,680
20,272
3.91
%
Noninterest earning assets
144,164
137,041
Total average assets
$
2,638,476
$
2,237,721
Interest bearing liabilities
Savings
$
125,701
$
43
0.14
%
$
114,130
$
40
0.14
%
NOW accounts
354,398
82
0.09
298,294
66
0.09
Money market
699,895
803
0.47
527,061
515
0.40
Time deposits
292,116
542
0.75
238,883
585
0.99
Total interest bearing deposit accounts
1,472,110
1,470
0.41
1,178,368
1,206
0.42
Subordinated debt, net
63,558
896
5.71
63,388
895
5.73
Junior subordinated debentures, net
8,411
86
4.16
8,330
87
4.22
Other borrowings
—
—
—
5,000
—
—
Total interest bearing liabilities
1,544,079
2,452
0.64
%
1,255,086
2,188
0.71
%
Noninterest bearing deposits
768,305
701,982
Other noninterest bearing liabilities
20,915
25,369
Noninterest bearing liabilities
789,220
727,351
Total average liabilities
2,333,299
1,982,437
Average equity
305,177
255,284
Total average liabilities and equity
$
2,638,476
$
2,237,721
Net interest income
$
22,353
$
18,084
Interest rate spread (2)
3.39
%
3.20
%
Net interest margin (3)
3.63
%
3.49
%
Ratio of average interest earning assets to average interest bearing liabilities
161.54
%
167.37
%
(1) Average balances are computed using average daily balances.
(2) Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.
(3) Net interest margin is calculated as net interest income divided by total average interest earning assets.
47
Table of Contents
Rate/Volume Analysis. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.
Three months ended March 31,
2022 compared to 2021
Increase/(Decrease)
Attributable to
Rate
Volume
Total
(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks
$
76
$
16
$
92
Investments available-for-sale
192
456
648
FHLB stock and FRB stock
21
38
59
Total loans
501
3,233
3,734
Total interest income
790
3,743
4,533
Interest bearing liabilities
Savings
(1)
4
3
NOW accounts
4
12
16
Money market accounts
119
169
288
Time deposits
(173)
130
(43)
Total deposit accounts
(51)
315
264
Subordinated debt, net
(1)
2
1
Junior subordinated debentures, net
(2)
1
(1)
Total interest expense
(54)
318
264
Net interest income
$
844
$
3,425
$
4,269
Provision for loan losses. We recorded $7,000 provision for loan losses for the three months ended March 31, 2022, compared to no provision for the three months ended March 31, 2021. The provision for loan losses recorded in the first quarter March 31, 2022 related primarily to new loan production. We had net charge-offs on loans of $7,000 for the three months ended March 31, 2022 , compared to zero net charge-offs on loans for the three months ended March 31, 2021.
Noninterest income. Noninterest income increased $2.2 million, or 96.6%, to $4.4 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021. The increase in noninterest income primarily was due to the $1.6 million bargain purchase gain related to the PEB Merger and a $561,000 increase in gain on sale of loans due to an increase in the volume of loans sold, partially offset by $66,000 decrease in income from our investment in a SBIC fund. During the three months ended March 31, 2022, the Company sold $10.9 million of SBA loans (guaranteed portion), resulting in a gain on sale of $1.1 million, compared to the sale of $6.8 million of SBA loans (guaranteed portion) resulting in a gain on sale of $643,000 during the three months ended March 31, 2021.
48
Table of Contents
The following table presents the key components of noninterest income for the periods indicated:
Three months ended March 31,
2022
2021
$ Change
% Change
(Dollars in thousands)
Gain on sale of loans
$
1,137
$
576
$
561
97.4
%
Service charges and other fees
630
604
26
4.3
Loan servicing and other loan fees
574
529
45
8.5
Income on investment in SBIC fund
197
263
(66)
(25.1)
Gain on sale of OREO
—
36
(36)
(100.0)
Bargain purchase gain
1,665
—
1,665
100.0
Other income and fees
196
229
(33)
(14.4)
Total noninterest income
$
4,399
$
2,237
$
2,162
96.6
%
Noninterest expense. Noninterest expense increased $4.2 million, or 30.1%, to $18.3 million for the three months ended March 31, 2022 compared to $14.1 million for the three months ended March 31, 2021. Noninterest expense for the first quarter of 2022 included $3.1 million of nonrecurring acquisition-related expenses related to the PEB Merger, which were comprised of $555,000 in salary and employee benefits, $1.1 million in data processing expenses, $725,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 in other expenses.
Excluding acquisition-related expenses for each of the periods, noninterest expense for the first quarter of 2022 increased $1.2 million, or 8.2%, compared to the same quarter a year ago primarily due to an $870,000 increase in salary and employee benefits as a result of normal year end salary increases and an increase in the number of full time equivalent employees, a $236,000 increase in occupancy and equipment expense and a $340,000 increase in other noninterest expense, partially offset by a $284,000 decrease in data processing expense.
The following table details the components of noninterest expense for the periods indicated:
Three months ended March 31,
2022
2021
$ Change
% Change
(Dollars in thousands)
Salaries and employee benefits
$
10,310
$
8,885
$
1,425
16.0
%
Occupancy and equipment
2,426
1,815
611
33.7
Data processing
2,273
1,484
789
53.2
Other
3,312
1,901
1,411
74.2
Total noninterest expense
$
18,321
$
14,085
$
4,236
30.1
%
Income taxes. The provision for income taxes increased $232,000, or 13.6%, to $1.9 million for the three months ended March 31, 2022 compared to $1.7 million for the three months ended March 31, 2021. The Company’s effective tax rate was 23.0% for three months ended March 31, 2022 compared to 27.3% for the three months ended March 31, 2021. The effective tax rate was lower for the first quarter of 2022 compared same quarter a year ago primarily due to the non-taxable bargain purchase gain in the current quarter.
Liquidity and Capital Resources
Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis, it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. During the three months ended March 31, 2022, the Bank sold $10.9 million in loans and loan participation interests and received $129.4 million in principal loan repayments.
49
Table of Contents
While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition.
Recently, the Bank’s liquidity has been positively impacted by an increase in deposit levels. During the three months ended March 31, 2022, deposits increased by $345.2 million due to the closing of the PEB Merger. As a result, our liquid assets in the form of cash and cash equivalents, interest bearing deposits in banks, and investment securities available for sale increased to $615.2 million at March 31, 2022 from $557.7 million at December 31, 2021. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. Securities purchased during the three months ended March 31, 2022, totaled $22.7 million and securities repayments, maturities and sales in the period were $2.5 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2022, totaled $241.1 million. It is management’s policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.
In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of March 31, 2022, the Bank had an available borrowing capacity of $454.4 million with the FHLB of San Francisco and $114.6 million with the FRB of San Francisco, with no borrowings outstanding at that date. Federal Funds lines with available commitments totaling $65.0 million with four correspondent banks. There were no amounts outstanding under these facilities at March 31, 2022 and December 31, 2021. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.
Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $89.1 million, including $3.4 million of undisbursed construction and development loan commitments, at March 31, 2022. For information regarding our commitments, see “Note 18 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1. Financial Information” of Part I of this report.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities for the three months ended March 31, 2022 was $2.8 million, compared to $651,000 provided by operating activities for the three months ended March 31, 2021. During the three months ended March 31, 2022, net cash provided by investing activities was $77.5 million, which consisted primarily of net change in loans receivable, compared to $70.4 million of cash provided by investing activities for the three months ended March 31, 2021. Net cash used in financing activities for the three months ended March 31, 2022 was $32.8 million, which was comprised primarily of net change in deposits, compared to $87.4 million provided by financing activities during the three months ended March 31, 2021. Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our liquidity and capital resources since the information disclosed in our 2021 Annual Form 10-K other than set forth above. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, 2022, the Company, on an unconsolidated basis, had liquid assets of $30.4 million. In addition to its operating expenses, the Company is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on trust-preferred securities and subordinated notes held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.
In February 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s outstanding common stock, payable on April 15, 2022 to shareholders of record as of the close of business on March 11, 2022. The Company expects to continue to pay quarterly cash dividends on its common stock subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason
50
Table of Contents
without prior notice. Assuming continued payment of the cash dividend at this rate of $0.05 per share, our average total dividend paid each quarter would be approximately $686,000 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). The dividends, if any, we may pay may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I. Item 1. Business” of the 2021 Annual Report.
From time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company may repurchase up to seven percent of the Company’s common stock, or approximately 747,000 shares, of which 685,355 shares remained available for repurchase at March 31, 2022. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares. For additional information on the Company’s stock repurchases, see "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.
Regulatory Capital
The Bank, as a state-chartered, federally insured commercial bank, and member of the Board of Governors of the Federal Reserve System is subject to capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “Well Capitalized” status under the Federal Reserve regulations. Based on capital levels at March 31, 2022 and 2021, the Bank was considered to be Well Capitalized.
51
Table of Contents
The table below shows the capital ratios under the Basel III capital framework as of the dates indicated:
At March 31, 2022
At December 31, 2021
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Leverage Ratio
BayCom Corp
$
283,526
10.44
%
$
213,787
9.60
%
Minimum requirement for "Well Capitalized"
135,820
5.00
%
111,349
5.00
%
Minimum regulatory requirement
108,656
4.00
%
89,079
4.00
%
United Business Bank
322,095
11.77
%
250,624
10.87
%
Minimum requirement for "Well Capitalized"
136,792
5.00
%
115,295
5.00
%
Minimum regulatory requirement
109,434
4.00
%
92,236
4.00
%
Common Equity Tier 1 Ratio
BayCom Corp
283,526
13.94
%
213,787
12.31
%
Minimum requirement for "Well Capitalized"
132,161
6.50
%
112,856
6.50
%
Minimum regulatory requirement
91,496
4.50
%
78,131
4.50
%
United Business Bank
322,095
16.03
%
250,624
14.60
%
Minimum requirement for "Well Capitalized"
130,640
6.50
%
111,543
6.50
%
Minimum regulatory requirement
90,443
4.50
%
77,222
4.50
%
Tier 1 Risk-Based Capital Ratio
BayCom Corp
293,011
14.41
%
223,272
12.86
%
Minimum requirement for "Well Capitalized"
162,660
8.00
%
138,900
8.00
%
Minimum regulatory requirement
121,995
6.00
%
104,175
6.00
%
United Business Bank
322,095
16.03
%
250,624
14.60
%
Minimum requirement for "Well Capitalized"
160,788
8.00
%
137,283
8.00
%
Minimum regulatory requirement
120,591
6.00
%
102,962
6.00
%
Total Risk-Based Capital Ratio
BayCom Corp
376,026
18.49
%
306,287
17.64
%
Minimum requirement for "Well Capitalized"
203,325
10.00
%
173,625
10.00
%
Minimum regulatory requirement
162,660
8.00
%
138,900
8.00
%
United Business Bank
340,110
16.92
%
268,639
15.65
%
Minimum requirement for "Well Capitalized"
200,985
10.00
%
171,604
10.00
%
Minimum regulatory requirement
160,788
8.00
%
137,283
8.00
%
In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At March 31, 2022, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be Well Capitalized under the prompt corrective action regulations. If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2022, the Company would have exceeded all regulatory capital requirements.
52
Table of Contents
For additional information, see “Item 1. Business — Supervision and Regulation — United Business Bank — Capital Requirements” and Note 19, “Regulatory Matters” in the Notes to the Consolidated Financial Statements, included in “Item 8. Financial Statements and Supplementary Data” in the 2021 Annual Report.
53
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.