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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.
−Removed: Since 2010, we have expanded our geographic footprint through ten strategic acquisitions, which includes our most recent acquisition of PEB which closed in February 2022.
+Added: Since 2010, we have expanded our geographic footprint through ten strategic acquisitions, which includes our most recent acquisition of PEB
+Added: which closed in February 2022.
We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency.
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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 the provision for loan losses.
−Removed: The significant 150 basis point reduction in the targeted federal funds rate during the quarter ended March 31, 2020, resulted in a larger impact to our interest earning assets than to our interest bearing liabilities, thereby decreasing our net interest margin to 3.34% for the year ended December 31, 2021, as compared to 3.84% for the year ended December 31, 2020.
−Removed: The decrease in net interest margin during 2021 primarily reflects lower yields on average interest earning assets, partially offset by decreases in the average cost of interest bearing liabilities.
−Removed: The lower yields on average interest earning assets compared to a year earlier was largely due to the impact of the continuing low targeted Fed Funds Rate resulting in lower yields on new loan originations and further declines on floating rate loan yields as well as excess liquidity being invested in low yielding short term investments and interest bearing deposits.
−Removed: yields in 2021 were, however, impacted favorably as a result of recognition of unamortized deferred fee income on PPP loans forgiven and repaid by the SBA.
−Removed: If market interest rates remain near historic lows, the Company expects continued downward pressure on loan yields.
−Removed: Further, because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures put in place to address its economic consequences are unknown, until the pandemic subsides, the Company’s net interest income and net interest margin may be adversely affected in 2022 and possibly longer.
+Added: The significant increase in the targeted federal funds rate during the period ended December 31, 2022, resulted in a larger impact to our interest earning assets than to our interest-bearing liabilities, thereby increasing our net interest margin to 3.90% for the year ended December 31, 2022, as compared to 3.34% for the year ended December 31, 2021.
+Added: The increase in net interest margin during 2022 primarily reflects higher yields on average interest earning assets and average cost of interest-bearing liabilities.
+Added: The higher yields on average interest earning assets compared to a year earlier was largely due to the impact of the higher targeted Fed Funds Rate resulting in higher yields on new loan originations, offset by higher cost of funds.
+Added: Loan yields in 2022 were also impacted favorably as a result of recognition of unamortized deferred fee income on PPP loans forgiven and repaid by the SBA.
+Added: 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.
+Added: Since March 2022, in response to inflationary pressures, the FOMC of the Federal Reserve Board has increased the target range for the federal funds rate 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022.
+Added: As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are expected during 2023.
+Added: If the FOMC increases the targeted federal funds rates, overall interest rates will likely rise, which will positively impact our net interest income, but may negatively impact the U.S.
+Added: The increase in the average yield on interest-earning assets during the current year reflects the lagging benefit of variable rate interest-earnings assets beginning to reprice higher.
+Added: We believe our balance sheet is structured to enhance our net interest margin if the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent Federal Reserve communications and interest rate forecasts.
The provision for loan losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio, as well as prevailing economic and market conditions.
−Removed: We recorded a $466,000 provision for loan losses in the year ended December 31, 2021, primarily reflecting a decrease in the probable loan losses due to an improvement in the forecasted economic indicators used to calculate the allowance for loan losses since December 31, 2020 and new loan production, compared to a $10.3 million provision for loan losses recorded in 2020.
+Added: We recorded a $4.4 million provision for loan losses for the year ended December 31, 2022, primarily due to $3.2 million in net charge-offs during the year ended December 31, 2022, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan losses, compared to a $466,000 provision for loan losses recorded in 2021.
Our net income is also affected by noninterest income and noninterest expenses.
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and (iii) other noninterest income.
−Removed: Our noninterest income increased $2.5 million during the year ended December 31, 2021, as compared to 2020, primarily attributable to a $3.0 million increase in gain on sale of loans.
+Added: Our noninterest income decreased $595,000 during the year ended December 31, 2022, as compared to 2021, primarily
+Added: attributable to a $2.0 million decrease in gain on sale of loans.
Noninterest expense includes, among other things:
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and (vii) other general and administrative expenses.
−Removed: Our noninterest expenses decreased $3.4 million during the year ended December 31, 2021, as compared to 2020.
−Removed: The decrease was primarily attributable to a $2.7 million decrease in data processing expense related to reversing over accrued merger data processing expense related to our GMB acquisition as actual expenses were lower than original estimates.
−Removed: Noninterest income and noninterest expenses are impacted by the growth of our banking operations and growth in the number of loan and deposit accounts both organically and through strategic acquisitions.
+Added: Our noninterest expenses increased $10.8 million during the year ended December 31, 2022, as compared to 2021.
+Added: The increase was primarily attributable to a $6.7 million increase in salaries and employee benefits as a result of an increase in the number of full-time equivalent employees, reflecting our acquisition of PEB in February 2022, coupled with retention incentives and salary adjustments due to upward market pressure on wages in 2022.
+Added: Noninterest income and noninterest expenses are impacted by the growth of our banking operations and growth in the number of loan and deposit accounts.
Business Strategy
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We believe that our presence in smaller communities gives us a relatively stable source of low-cost core deposits, while our more metropolitan markets represent strong long term growth opportunities to expand our commercial client base and increase our current market share through organic growth.
−Removed: In acquiring United Business Bank, FSB in 2017, we acquired a large deposit base from the local and regional unionized labor community.
−Removed: As of December 31, 2021, our top ten depositors, which included six labor unions accounted for roughly 5.9% of our total deposits.
+Added: United Business Bank, FSB in 2017, we acquired a large deposit base from the local and regional unionized labor community.
+Added: As of December 31, 2022, our top ten depositors, which included nine labor unions accounted for roughly 6.8% of our total deposits.
At that date, nearly 37.1% of our deposit base was comprised of noninterest bearing demand deposit accounts, significantly lowering our aggregate cost of funds.
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We believe we have built a scalable platform that will support our recent growth as well as efficiently and effectively manage our anticipated growth in the future, both organically and through acquisitions.
−Removed: In July 2020, we implemented a new core processing system that strengthened our control environment, improved the efficiency of our financial systems and enhanced our capabilities with regards to future acquisitions.
● Preserve Our Asset Quality Through Disciplined Lending Practices.
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We believe our success in managing asset quality is illustrated by our aggregate net charge-off history.
−Removed: Critical Accounting Policies and Estimates
+Added: Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP.
+Added: In doing so, we have to make estimates and assumptions.
+Added: Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
+Added: Accordingly, actual results could differ materially from our estimates.
+Added: We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
+Added: We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.
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 financial statements included in this annual report on Form 10-K, 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.
−Removed: The following represent our critical accounting policies:
+Added: See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.
Allowance for loan losses.
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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.
−Removed: Additional consideration is given to our historical loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography.
−Removed: Additional analysis was also completed on the allowance for loan losses during 2021 based on the significance of loan modifications in accordance with the CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19.
+Added: Additional consideration is given to our historical
+Added: loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography.
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.
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We measure any loss on the TDR in accordance with the guidance concerning impaired loans set forth above.
−Removed: Additionally, TDRs are generally placed on non-accrual status at the time of restructuring and included in impaired loans.
+Added: 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.
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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.
−Removed: 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.
BayCom’s Response to COVID-19
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Total assets increased $162.6 million, or 6.9%, to $2.5 billion at December 31, 2022 from $2.4 billion at December 31, 2021.
−Removed: The increase was primarily due to an $80.4 million, or 26.8%, increase in cash and cash equivalents, a $58.8 million, or 50.9%, increase in total investment available for sale securities and a $21.4 million, or 1.3%, increase in loans, net of allowance for loan losses.
−Removed: These increases in total assets were primarily funded by deposit growth.
+Added: The increase was primarily due to loans receivable, net, increasing $355.0 million, or 21.6%, as a result of the PEB Merger and new loan originations, partially offset by loan repayments and sales during the year.
+Added: In addition, other assets increased $15.7 million or 52.5% and right-of-use assets (“ROU”) increased $4.4 million or 36.6%, partially offset by decreases in cash and cash equivalent of $202.9 million or 53.4% and investment securities available-for-sale of $6.7 million or 3.8%.
Cash and cash equivalents.
−Removed: Cash and cash equivalents increased $80.4 million, or 26.8%, to $379.7 million at December 31, 2021 from $299.3 million at December 31, 2020.
−Removed: 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.
−Removed: We intend to invest our excess cash in loans and marketable securities until such funds are needed to support acquisitions or other growth oriented operating or strategic initiatives.
−Removed: Our investment policy is established by the Board of Directors and monitored by the board’s risk committee.
−Removed: It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements our lending activities.
−Removed: The policy dictates the criteria for
−Removed: classifying securities as either available for sale or held to maturity.
−Removed: The policy permits investment in various types of liquid assets permissible under applicable regulations, which include U.S.
−Removed: Treasury obligations, U.S.
−Removed: Government agency obligations, some certificates of deposit of insured banks, mortgage backed and mortgage related securities, corporate notes and municipal bonds.
−Removed: Investment in non-investment grade bonds and stripped mortgage-backed securities is not permitted under the policy.
−Removed: Investment securities, all of which are classified as available-for-sale, increased $58.8 million, or 50.9%, to $174.4 million at December 31, 2021 from $115.6 million at December 31, 2020.
+Added: Cash and cash equivalents decreased $202.9 million, or 53.4%, to $176.8 million at December 31, 2022 from $379.7 million at December 31, 2021.
+Added: The decrease primarily was due to $208.7 million decrease in federal funds sold and interest-bearing balances in banks, which was used to fund new loan originations and the managed run-off of higher cost time deposits.
+Added: Investment securities, all of which are classified as available-for-sale, decreased $6.7 million, or 3.8%, to $167.8 million at December 31, 2022 from $174.4 million at December 31, 2021.
+Added: The decrease primarily was due to a $23.8 million fair value adjustment related to unrealized losses on investment securities available-for-sale and $11.0 million in routine amortization and repayment of investment principal balances and securities called and matured, partially offset by the purchase of $28.9 million of investment securities during the year ended December 31, 2022.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as of December 31, 2022.
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(Dollars in thousands)
−Removed: Preferred equity securities
Government Agencies
+Added: Preferred equity securities
Municipal securities
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Corporate bonds
−Removed: See “Note 3 – Investment Securities” in the Notes to Consolidated Financial Statements contained in “Part II.
−Removed: Financial Statements and Supplementary Data” of this report on Form 10-K for additional information on our investment securities.
−Removed: We originate a wide variety of loans with a focus on commercial real estate loans and commercial and industrial loans.
+Added: See “Note 3 – Investment Securities” in the Notes to Consolidated Financial Statements contained in “Item 8.
+Added: Financial Statements and Supplementary Data” of this Form 10-K for additional information on our investment securities.
+Added: 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 $355.0 million, or 21.6%, to $2.0 billion at December 31, 2022, from $1.7 billion at December 31, 2021.
−Removed: The increase was primarily due to loan originations totaling $532.7 million including $98.7 million in PPP loans partially offset by loan repayments totaling $467.5 million, including $164.8 million in PPP loan forgiveness repayments from the SBA.
−Removed: We also sold $45.8 million of the guaranteed portion of SBA loans during 2021.
−Removed: Loan originations in 2021 were concentrated in California markets, primarily Los Angeles, San Francisco Bay Area and Sacramento/Northern California with commercial and multifamily real estate secured loans accounting for the majority of the originations.
+Added: The increase was primarily due to $412.9 million of net loans acquired in the PEB Merger and $442.8 million of new loan originations and purchases, partially offset by $469.6 million of loan repayments, including $155.1 million in PPP loans, and $34.0 million in loan sales.
+Added: Loan originations in 2022 were concentrated in California markets, primarily Los Angeles, Irvine/Southern California, San Francisco Bay Area and Sacramento/Northern California with commercial and multifamily real estate secured loans accounting for the majority of the originations.
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.
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(1) Includes Alameda, Contra Costa, Solano, Sonoma, Marin, San Francisco, San Joaquin, San Mateo and Santa Clara counties.
+Added: (2) Includes loans located in Sacramento and Northern California counties totaling $507.7 million and loans located in Los Angeles and Orange counties totaling $189.6 million.
(3) Includes loans located in the states of Colorado, New Mexico, Washington and other states.
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Total loans originated
−Removed: Loans purchased
−Removed: Net loans purchased in acquisitions
+Added: Loans purchased or acquired through acquisitions
+Added: Loans acquired through acquisitions, net
Other loans purchased
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Transfer to real estate owned
−Removed: (Increase)/decrease in allowance for loan losses and other items, net
+Added: Increase in allowance for loan losses and other items, net
Net increase in loans receivable and loans held for sale
Nonperforming assets and nonaccrual loans.
−Removed: Nonperforming assets consist of nonaccrual loans, accruing loans more than 90 days delinquent and other real estate owned.
−Removed: Nonperforming assets decreased $2.2 million to $6.9 million at December 31, 2021 from $9.1 million at December 31, 2020, primarily due to a decrease in nonaccrual loans.
−Removed: The Company had nonaccrual loans totaling $6.9 million or 0.41% of total loans, of which $822,000 are guaranteed by governmental agencies at December 31, 2021, compared to $8.4 million or 0.51% of total loans at December 31, 2020.
−Removed: Included in nonaccrual loans at December 31, 2021 and December 31, 2020, are $1.6 million and $567,000, respectively, of TDRs.
−Removed: This decrease in nonaccrual loans during 2021 was primarily driven by an $830,000 decline in nonaccrual commercial real estate loans and a $608,000 decline in nonaccrual consumer loans.
−Removed: There were no loans that were 90 days or more past due and still accruing at December 31, 2021, compared to one loan totaling $233,000 at December 31, 2020.
−Removed: At December 31, 2021, accruing loans past due 30 to 89 days totaled $2.6 million, compared to $734,000 at December 31, 2020.
−Removed: The increase in past due 30 to 89 days at December 31, 2021 primarily related to five loans totaling $1.4 million that were less than 60 days past due and have since been brought current.
−Removed: At December 31, 2021, there were no loans which were past due 90 days or more and still accruing interest, compared to $233,000 at December 31, 2020.
−Removed: Other real estate owned totaled $21,000 and $429,000 at December 31, 2021, and December 31, 2020, respectively.
+Added: Nonperforming assets consist of nonaccrual loans, accruing loans more than 90 days delinquent and other real estate owned (“OREO”).
+Added: Nonperforming assets increased $8.3 million to $15.2 million, or 0.75% of total loans, at December 31, 2022 compared to $6.9 million, or 0.41% of total loans, at December 31, 2021, due to a $7.4 million increase in nonaccrual loans and a $934,000 increase in accruing loans 90 days and more past due.
+Added: The increase in nonperforming loans was primarily due to a $5.1 million multi-family real estate loan which was placed on nonaccrual status during the third quarter of 2022 and $934,000 in accruing SBA guaranteed PPP loans which were 90 days or more past due and in the process of forgiveness at December 31, 2022.
+Added: At December 31, 2022 and 2021, $839,000 and $822,000 of the Company’s nonperforming loans were guaranteed by governmental agencies, respectively.
+Added: Other real estate owned totaled $21,000 at both December 31, 2022, and December 31, 2021.
+Added: Accruing loans past due 30 to 89 days totaled $1.5 million at December 31, 2022, compared to $2.6 million at December 31, 2021.
+Added: The decrease in past due 30 to 89 days at December 31, 2022 primarily related loans which have since been brought current.
+Added: At December 31, 2022 and December 31, 2021, nonaccrual loans included $2.5 million and $113,000 of loans 30-89 days past due and $4.0 million and $2.5 million of loans less than 30 days past due, respectively.
+Added: At December 31, 2022, the $4.0 million of loans less than 30 days past due was comprised of 14 loans all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.
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.
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Interest received on such loans is recognized as interest income when received.
−Removed: 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.
+Added: 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.
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● 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.
−Removed: ● Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC Topic 310-30, as they display significant credit deterioration since origination.
+Added: ● 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.
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Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity.
−Removed: TDR loans of December 31, 2021 totaled $2.4 million, of which $805,000 were accruing and performing according to their restructured terms.
−Removed: TDR loans of December 31, 2020 totaled $1.4 million, of which $798,000 were accruing and performing according to their restructured terms.
+Added: TDR loans at December 31, 2022 totaled $6.3 million, of which $759,000 were accruing and performing according to their restructured terms compared to $2.4 million, of which $805,000 were accruing and performing according to their restructured terms at December 31, 2021.
The accruing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status.
−Removed: There was a related allowance for loan losses on the TDR loans of none and $35,000 at December 31, 2021 and December 31, 2020, respectively.
−Removed: The Company provided payment and financial relief programs for borrowers impacted by COVID-19.
−Removed: 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.
−Removed: As December 31, 2021, the Company had two commercial real estate loans totaling $2.7 million operating under forbearance agreements due to COVID-19, compared to 43 loans totaling $66.7 million at December 31, 2020.
−Removed: Since these loans were performing loans that were current on their payments prior to COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings at December 31, 2021, pursuant to applicable accounting and regulatory guidance.
−Removed: All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.
−Removed: Loan modifications in accordance with the CARES Act and related banking agency guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.
−Removed: Past due loans totaled $7.0 million at December 31, 2021, as compared to $5.3 million at December 31, 2020.
+Added: There was a related allowance for loan losses on the TDR loans totaled $393,000 and zero at December 31, 2022 and 2021, respectively.
The following table sets forth the nonperforming loans, nonperforming assets and troubled debt restructured loans as of the dates indicated:
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Nonperforming loans to total loans (1)
−Removed: (1) Performing TDRs are neither included in nonperforming loans above nor are they included in the numerators used to calculate this ratio.
+Added: (1) Performing TDRs are neither included in nonperforming loans above nor are they included in the numerators used to calculate these ratios.
Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above.
−Removed: At both December 31, 2021, and December 31, 2020, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.
+Added: At December 31, 2022 and December 31, 2021, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.
Allowance for loan losses.
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Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
−Removed: In accordance with acquisition accounting, loans acquired in our acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses.
+Added: The calculation of the allowance for loan losses at both December 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.
+Added: 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.
−Removed: Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisition.
−Removed: As of December 31, 2021, acquired loans, net of their discounts, totaled $51.3 million compared to $164.0 million at December 31, 2020, due to regular amortization, repayments, renewals of loans, coupled with the migration of acquired loans out of the discounted acquired loan portfolio.
−Removed: The remaining net discount on these acquired loans was $2.1 million and $3.3 million at December 31, 2021 and 2020, respectively.
−Removed: The $69.6 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at December 31, 2021 as these loans are fully guaranteed by the SBA.
+Added: 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.
+Added: The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios.
+Added: As of December 31, 2022, acquired loans net of their discount totaled $257.4 million with a remaining net discount on these loans of $522,000, and $51.3 million of acquired loans with a remaining net discount on these loans of $2.1 million at December 31, 2021.
+Added: 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.
+Added: The decrease in the net discount on acquired loans at December 31, 2022, compared to December 31, 2021, was due to a net premium on the PEB loans given the higher yielding portfolio compared to current market interest rates.
The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations.
−Removed: Years ended December 31,
+Added: Year ended December 31,
(Dollars in thousands)
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Total loans outstanding
−Removed: Non-accrual loans as a percentage of total loans outstanding at period end
−Removed: Total non-accrual loans
+Added: Nonaccrual loans as a percentage of total loans outstanding at period end
+Added: Total nonaccrual loans
Total loans outstanding
−Removed: Allowance for loan losses as a percentage of non-accrual loans at period end
+Added: Allowance for loan losses as a percentage of nonaccrual loans at period end
Allowance for loan losses
−Removed: Total non-accrual loans
+Added: Total nonaccrual loans
Net charge-offs/(recoveries) during period to average loans outstanding:
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Average loans outstanding
−Removed: Net charge-offs
−Removed: Average loans outstanding
Total net charge-offs
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Total real estate
−Removed: The allowance for loan losses increased $200,000, or 1.1%, to $17.7 million at December 31, 2021, from $17.5 million at December 31, 2020.
−Removed: The increase in the allowance for loan losses at December 31, 2021 was primarily due to the increase in total loans, partially offset by the continued improvement since December 31, 2020 in the national and local economy associated with the recovery from the COVID-19 pandemic, which reduced the loss rates utilized to calculate the allowance for loan losses at December 31, 2021 as compared to the uncertain economic outlook and loss rates utilized at December 31, 2020, as well as net charge offs of $226,000 during 2021.
−Removed: PPP loans were omitted from the calculation of the required allowance for loan losses at December 31, 2021 and December 31, 2020 as these loans are fully guaranteed by the SBA and management expects that a majority of SBA PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA, which in turn, the SBA will reimburse the Bank for the amount forgiven.
+Added: The allowance for loan losses increased $1.2 million, or 6.8%, to $18.9 million, or 0.94% of total loans at December 31, 2022, compared $17.7 million, or 1.06% of total loans, at December 31, 2021.
+Added: The decrease in the allowance for loan losses as a percentage of total loans outstanding at December 31, 2022, as compared to December 31, 2021, was due to the Company’s acquisition of PEB and related acquisition accounting as acquired loans were recorded at their estimate fair value at acquisition and no allowance for loan losses was recorded.
+Added: We recorded net charge-offs of $3.2 million for the year ended December 31, 2022, compared to net charge-offs of $266,000 for the year ended December 31, 2021.
+Added: The increase in net charge-offs was primarily due to one $4.5 million participation interest in a national shared credit, with total cumulative net charge-offs of $3.1 million during the year.
Included in the carrying value of loans are net discounts on acquired loans which may reduce the need for an allowance for loan losses on these loans because they are carried at their estimated fair value on the date on which they were acquired.
−Removed: As of December 31, 2021, we identified $7.7 million in impaired loans, inclusive of $6.9 million of nonperforming loans and $765,000 of accruing TDR loans.
−Removed: Of these impaired loans, only $1.1 million had a specific allowance of $931,000 recorded as of December 31, 2021.
−Removed: As of December 31, 2020, we identified $9.2 million in impaired loans, inclusive of $8.4 million of nonperforming loans and $798,000 of accruing TDR loans.
+Added: As of December 31, 2022, we identified $15.0 million in impaired loans, inclusive of $14.3 million of nonperforming loans and $759,000 of performing (accruing) TDR loans.
+Added: Of these impaired loans, only $1.3 million had a specific allowance of $1.2 million recorded as of December 31, 2022.
+Added: As of December 31, 2021, we 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 recorded as of December 31, 2021.
1 unchanged sentence
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.
−Removed: Uncertainties relating to our allowance for loan losses are heightened as a result of the risks surrounding the COVID-19 pandemic, including whether government programs will provide adequate relief to borrowers.
−Removed: The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
−Removed: A further decline in national and local economic conditions, as a result of the COVID-19 pandemic 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.
+Added: A further decline in national and local economic conditions as a result the effects of inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the COVID- 19 pandemic, among 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 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.
Right-of-use assets and lease liabilities.
−Removed: On January 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the Consolidated Balance Sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments.
−Removed: Lessor accounting is largely unchanged.
−Removed: Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 7 — Leases in the Notes to the Condensed Consolidated Financial Statements included in “Item 8 — Financial Statements” within this report.
−Removed: The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified.
−Removed: The recognition of leases existing on January 1, 2019 did not require an adjustment to beginning retained earnings.
−Removed: Upon adoption of the accounting standards, the Company recognized right-of-use assets and lease liabilities of $7.8 million and $8.2 million respectively.
−Removed: Adoption of these accounting standards did not have a significant effect on the Company’s regulatory capital measures.
−Removed: Right-of-use assets increased $78,000, or 0.6%, to $12.1 million at December 31, 2021 from $12.1 million at December 31, 2020.
−Removed: Lease liabilities increased $329,000, or 2.7%, to $12.7 million at December 31, 2021 from $12.3 million at December 31, 2020.
+Added: The Company recognizes operating leases on the Consolidated Balance Sheet as ROU assets and lease liabilities based on the value of the discounted future lease payments.
+Added: ROU assets increased $4.4 million, or 36.6%, to $16.6 million at December 31, 2022 from $12.1 million at December 31, 2021.
+Added: Lease liabilities increased $4.5 million, or 35.4%, to $17.1 million at December 31, 2022 from $12.7 million at December 31, 2021.
+Added: increase in right-of-use assets and lease liabilities was due to leases acquired in the PEB Merger and modifications to existing leases during the year.
Premises and Equipment.
−Removed: Premises and equipment decreased $769,000, or 5.1%, to $14.4 million at December 31, 2021 from $15.1 million at December 31, 2020.
−Removed: This decrease in premises and equipment was driven by an increase in amortization and depreciation expenses associated with these assets.
+Added: Premises and equipment decreased $1.1 million, or 7.6%, to $13.3 million at December 31, 2022 from $14.4 million at December 31, 2021.
+Added: This decrease in premises and equipment was driven by normal amortization and depreciation expenses associated with these assets.
Deposits are our primary source of funding and consists of core deposits from the communities served by our branch and office locations.
3 unchanged sentences
Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.
−Removed: Total deposits increased $146.8 million, or 8.0%, to $2.0 billion at December 31, 2021 from $1.8 billion at December 31, 2020, primarily due to organic growth in client relationships, proceeds from PPP loans and government stimulus checks deposited directly into client accounts, and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.
+Added: Total deposits increased $100.2 million, or 5.0%, to $2.1 billion at December 31, 2022 from $2.0 billion at December 31, 2021, primarily due to the $376.7 million of deposits acquired in the PEB Merger, partially offset by the managed run- off of higher cost time deposits and competitive pricing.
Noninterest bearing deposits totaled $773.3 million, or 37.1% of total deposits, at December 31, 2022 compared to $710.1 million, or 35.8% of total deposits, at December 31, 2021.
1 unchanged sentence
(Dollars in thousands)
−Removed: Noninterest bearing demand
+Added: Demand deposits
NOW accounts and savings
4 unchanged sentences
3.00% and above
−Removed: As of December 31, 2021 and 2020, approximately $1.0 billion and $843.0 million, respectively, of our total deposit portfolio was uninsured.
+Added: As of December 31, 2022 and 2021, approximately $1.1 billion and $1.0 billion, respectively, of our total deposit portfolio was uninsured.
The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements.
The following table sets forth the portion of our time deposits that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2022.
−Removed: 3 months or less
+Added: (In thousands)
+Added: Less than 3 months
Over 3 through 6 months
1 unchanged sentence
Over 12 months
−Removed: For additional information regarding our deposits, see “Note 11 – Deposits” of the Notes to Consolidated Financial Statements contained in “Part II.
−Removed: Financial Statements and Supplementary Data” of this report on Form 10-K.
+Added: For additional information regarding our deposits, see “Note 11 – Deposits” of the Notes to Consolidated Financial Statements contained in “Item 8.
+Added: Financial Statements and Supplementary Data” of this Form 10-K.
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.
3 unchanged sentences
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.
−Removed: At December 31, 2021, the Company had no FHLB advances outstanding, compared to $5.0 million of FHLB advances outstanding at December 31, 2020.
−Removed: At December 31, 2021 and December 31, 2020, we had the ability to borrow from the FHLB up to $483.1 million and $421.2 million, respectively.
−Removed: 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 $69.6 million and $135.6 million as of December 31, 2021 and December 31, 2020, respectively, based on loans that qualify as collateral for the FRB line of credit.
−Removed: At both December 31, 2021 and December 31, 2020, there were no FRB borrowings outstanding.
−Removed: On August 6, 2020, the Company issued and sold the Notes in an underwritten offering, resulting in net proceeds, after underwriting discounts and offering expenses, $63.4 million.
−Removed: For additional information, see “Item 1–Business – Sources of Funds”, contained in this report.
−Removed: If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding.
−Removed: At December 31, 2021 and December 31, 2020, we had a total of $65.0 million and $75.0 million, respectively, in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.
−Removed: We are required to provide collateral for certain local agency deposits.
−Removed: As of December 31, 2021 and December 31, 2020, the FHLB had issued a letter of credit on behalf of the Bank totaling $42.0 million and $30.1 million, respectively as collateral for local agency deposits.
−Removed: At December 31, 2021, we had $8.4 million in aggregate principal (net of mark-to-market adjustments) of junior subordinated debentures issued in connection with the sale of trust preferred securities by two statutory business trusts, which we assumed in our acquisitions.
−Removed: The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement.
−Removed: The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company.
−Removed: The Debentures are the sole assets of the trusts.
−Removed: The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts.
−Removed: The trust preferred securities are mandatorily redeemable upon maturity of the Debentures or upon earlier redemption as provided in the indentures.
−Removed: The Company has the right to redeem the Debentures in whole or in part on or after specific dates, at a redemption price specified in the indentures governing the Debentures, plus any accrued but unpaid interest to the redemption date.
−Removed: The Company also has the right to defer the payment of interest on each of the Debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity.
−Removed: During such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company may not pay cash dividends to the holders of shares of the Company’s common stock.
−Removed: The common securities issued by the grantor trusts are held by the Company, and the Company’s investment in the common securities was $484,000 at December 31, 2021, which is included under “Interest receivable and other assets” in the Consolidated Balance Sheets included in our Consolidated Financial Statements contained in “Item 8.
+Added: At December 31, 2022 and 2021, we had the ability to borrow from the FHLB up to $473.6 million and $483.1 million, respectively.
+Added: At both December 31, 2022 and 2021, there were no FHLB advances outstanding.
+Added: In addition to the availability of liquidity from the FHLB, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco based on PPP loans pledged as collateral.
+Added: This line was closed during 2022, with no FRB borrowings outstanding at December 31, 2022.
+Added: The Bank also has uncommitted Federal Funds lines with four corresponding banks.
+Added: Cumulative available commitments totaled $65.0 million at both December 31, 2022 and December 31, 2021.
+Added: There are no amounts outstanding under these facilities at both December 31, 2022 and 2021.
+Added: At December 31, 2022 and 2021, the Company had outstanding junior subordinated debt, net of marked-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.5 million and $8.4 million, respectively.
+Added: For additional information, see “Note 13 — Junior Subordinated Deferrable Interest Debentures” in the Notes to the Consolidated Financial Statements contained in “Item 8.
Financial Statements and Supplementary Data” of this Form 10-K.
−Removed: Also, see Note 13 — Junior Subordinated Deferrable Interest Debentures in the Notes to the Consolidated Financial Statements contained in “Item 8.
+Added: At December 31, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.7 million compared to $63.5 million at December 31, 2021.
+Added: For additional information, see “Item 1–Business – Sources of Funds”, contained in this Form 10-K.
+Added: See also, “Note 14 — Subordinated Debt” in the Notes to the Consolidated Financial Statements contained in “Item 8.
Financial Statements and Supplementary Data” of this Form 10-K.
−Removed: Shareholders’ equity.
+Added: We are required to provide collateral for certain local agency deposits.
+Added: At December 31, 2022 and December 31, 2021, the FHLB of San Francisco had issued a letter of credits on behalf of the Bank totaling $40.6 million and $42.0 million, respectively as collateral for local agency deposits.
+Added: Shareholders’ equit y.
Shareholders’ equity increased $54.5 million, or 20.8%, to $317.1 million at December 31, 2022 from $262.6 million at December 31, 2021.
−Removed: The increase in shareholders’ equity was primarily due to $20.7 million of net income, partially offset by the repurchase of $11.6 million of our common stock during 2021.
−Removed: During the year ended December 31, 2021, the Company repurchased a total of 648,734 shares of its common stock at a total cost of $11.6 million, or $17.81 per share.
+Added: The increase in shareholders’ equity was primarily due to the issuance of $64.1 million in Company common stock in PEB Merger and $27.0 million of net income, partially offset by the repurchase of $18.0 million of our common stock during 2022 and cash dividends of $2.7 million.
+Added: In addition, shareholder’s equity was adversely impacted by increased unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in $17.0 million accumulated other comprehensive loss, net of tax for the year ended December 31, 2022.
+Added: During the year ended December 31, 2022, the Company repurchased a total of 905,740 shares of its common stock at a total cost of $19.83 per share.
At December 31, 2022, 481,792 shares remain available for future purchases under the current stock repurchase plan.
−Removed: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Stock Repurchases” contained in this report.
+Added: For additional information related to our stock repurchases, see “Item 5.
+Added: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Stock Repurchases” contained in this Form 10-K.
Comparison of Operating Results for the Years Ended December 31, 2022 and 2021
1 unchanged sentence
We reported net income of $27.0 million for the year ended December 31, 2022, compared to $20.7 million for the year ended December 31, 2021, an increase of $6.3 million, or 30.4%.
−Removed: Net income for the year ended December 31, 2021 primarily reflects a $9.9 million, or 95.5%, decrease in the provision for loan losses, a $3.4 million, or 6.0%, decrease in noninterest expense and a $2.5 million, or 28.4%, increase in noninterest income, partially offset by a $5.6 million, or 7.0%, decrease in interest income and a $3.3 million, or 73.0%, increase in the provision for income taxes.
−Removed: The $9.9 million decrease in the provision for loan losses was primarily due to continued improvements in the economic forecasts during 2021, as compared to last year when the uncertainty surrounding the COVID-19 pandemic significantly impacted economic conditions.
−Removed: The increase in noninterest income was related to increases in gain on sale of loans of $3.0 million, and increased income from an investment in a Small Business Investment Company (“SBIC”) fund of $399,000, partially offset by a decrease in loan servicing and other fees of $145,000.
−Removed: Noninterest expense during the year ended December 31, 2020, included $3.0 million of acquisition-related expenses for the acquisition of GMB and its wholly owned subsidiary Grand Mountain Bank.
+Added: Net income for the year ended December 31, 2022 reflects a $23.9 million increase in net interest income, offset by a $4.0 million increase in provision for loan losses, a $595,000 decrease in noninterest income, a $10.8 million increase in noninterest expense and a $2.2 million increase in provision for income taxes.
Diluted earnings per share were $2.06 for the year ended December 31, 2022, an increase of $0.15 from diluted earnings per share of $1.90 for the year ended December 31, 2021.
Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, was 61.40% for the year ended December 31, 2022, compared to 65.57% for the year ended December 31, 2021.
−Removed: The improvement in the efficiency ratio during the year ended December 31, 2021 was primarily due the reduced noninterest expense during 2021.
+Added: The improvement in the efficiency ratio during the year ended December 31, 2022 was primarily due the increase net interest income during 2022, partially offset by higher noninterest expense.
Interest income.
−Removed: Interest income for the year ended December 31, 2021 was $81.6 million, compared to $87.2 million for the year ended December 31, 2020, a decrease of $5.6 million, or 6.4%.
−Removed: The decrease in interest income primarily was due to a decrease in both the average balance and yield for interest earning assets, principally loans.
−Removed: Interest income on loans decreased $6.1 million as a result of a $39.6 million decrease in the average balance of loans outstanding and a 25 basis point decrease in the average loan yield during the year ended December 31, 2021 as compared to 2020 .
−Removed: The average yield earned on loans for the year ended December 31, 2021 was 4.69%, compared to 4.94% for the year ended December 31, 2020.
+Added: Interest income for the year ended December 31, 2022 was $107.1 million, compared to $81.6 million for the year ended December 31, 2021, an increase of $25.5 million or 31.2%.
+Added: The increase in interest income primarily was due to an increase in both the average balance of and yield on interest earning assets, principally loans, partially offset by a decrease in the recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.
+Added: Interest income on loans increased $19.6 million as a result of a $355.4 million increase in the average balance of loans outstanding and a 15 basis point increase in the average loan yield during the year ended December 31, 2022 as compared to the year ended December 31, 2021 .
+Added: The average yield earned on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the year ended December 31, 2022 was 4.84%, compared to 4.69% for the year ended December 31, 2021.
Interest income included $2.0 million in fees earned related to PPP loans during the year ended December 31, 2022, compared to $5.4 million in same period a year ago.
−Removed: As of December 31, 2021, total unrecognized fees on PPP loans were $2.1 million.
−Removed: For the year ended December 31, 2021, the average balance of PPP loans was $78.4 million and the average yield was 7.83%.
−Removed: 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, and will cease completely after the maturity of these loans.
−Removed: 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.
−Removed: Interest income on loans for the year ended December 31, 2021 included $2.7 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $5.1 million for the year ended December 31, 2020.
−Removed: The remaining net discount on these acquired loans was $2.1 million and $3.3 million at December 31, 2021 and 2020, respectively.
−Removed: Interest income on investment securities increased $930,000 as a result of a $9.7 million, increase in the average balance of investment securities and 46 basis point increase in the yield on such securities to 3.02% for the year ended December 31, 2021 from 2.56% for the year ended December 31, 2020.
−Removed: Interest income on interest bearing deposits in banks decreased $585,000 due to a 35 basis point decline in the yield on interest bearing deposits to 0.16% for the year ended December 31, 2021 from 0.51% for the year ended December 31, 2020, partially offset by a $9.7 million increase in the average balance of interest bearing deposits in banks during 2021 compared to 2020.
+Added: As of December 31, 2022, total unrecognized fees on PPP loans were $94,000.
+Added: Interest income on loans for the year ended December 31, 2022 and 2021, included $1.3 million and $1.2 million respectively, in fees related to prepayment penalties.
+Added: Interest income on loans for the year ended December 31, 2022 and December 31, 2021 included $2.3 million and $2.7 million respectively, in accretion of purchase accounting fair value adjustments and revenue from purchase credit impaired loans in excess of discounts.
+Added: The remaining net discount on these acquired loans was $522,000 and $2.1 million at December 31, 2022 and 2021, respectively.
+Added: Interest income on investment securities increased $2.2 million, or 56.3%, to $6.1 million for the year ended December 31, 2022 from $3.9 million for the year ended December 31, 2021.
+Added: The increase was primarily due to a $58.3 million increase in the average balance of investment securities and a 23 basis point increase in the yield on investment securities available-for-sale to 3.25% for the year ended December 31, 2022 from 3.02% for the year ended December 31, 2021.
+Added: Interest income on fed funds sold and interest-bearing balances in banks increased $3.4 million, or 505.3% to $4.0 million for the year ended December 31, 2022 from $665,000 for the year ended December 31, 2021.
+Added: The increase was primarily due to a 119 basis point increase in the yield on fed funds sold and interest-bearing balance in banks to 1.35% for the year ended December 31, 2022 from 0.16% for the year ended December 31, 2021, partially offset by a
+Added: $116.2 million decrease in the average balance of federal funds sold and interest-bearing balances in banks for the year ended December 31, 2022 compared to the same period in 2021.
Interest expense.
−Removed: Interest expense decreased by $97,000, or 1.1%, to $8.8 million for the year ended December 31, 2021 from $8.9 million for the year ended December 31, 2020.
−Removed: The decrease was driven by a $2.1 million decrease in interest expense on deposits, primarily time deposits and money market accounts, and to a lesser extent a $196,000 decrease in interest expense paid on junior subordinated debentures, net and other borrowings.
−Removed: These decreases were partially offset by a $2.2 million increase in interest expense on subordinated debt, net.
−Removed: T he average rate paid on interest bearing liabilities decreased six basis points to 0.67% during the year ended December 31, 2021 from 0.73% during the same period in 2020.
−Removed: The total average balance of interest bearing liabilities increased by $91.7 million, or 7.5%, to $1.3 billion for the year ended December 31, 2021, from $1.2 billion for the year ended December 31, 2020, primarily due to the issuance of our Notes.
−Removed: Interest expense on deposits decreased $2.1 million, or 29.9%, to $4.9 million during the year ended December 31, 2021 from $7.0 million in 2020, primarily due to decreases in the average rate paid on interest bearing deposits and a $46.0 million, or 16.7%, decrease in the average balance of higher costing time deposits.
−Removed: The average rate paid on interest bearing deposits decreased to 0.39% for the year ended December 31, 2021, from 0.59% for the year ended December 31, 2020.
−Removed: The overall average cost of deposits for the year ended December 31, 2021 declined to 0.25%, compared to 0.38% for the prior period of 2020 due to an increase in noninterest bearing deposits and a reduction in market interest rates over the last year.
−Removed: The average balance of noninterest bearing deposits increased $55.3 million, or 8.25%, to $725.4 million for the year ended December 31, 2021 compared to $670.1 million during the comparable period during 2020.
−Removed: The decrease in the cost of interest-bearing deposits between the years was driven by market and competitive factors following decreases in the target Fed Funds Rate during the first quarter of 2020 as well as a higher percentage of our interest-bearing deposits being lower costing non-time deposits.
−Removed: Interest expense on borrowings increased $2.0 million, or 101.9%, to $3.9 million for the year ended December 31, 2021, from $1.9 million for the year ended December 31, 2020, as a result of the issuance of the Notes which were outstanding for the entire year in 2021 compared to five months during 2020.
−Removed: The average balance of borrowings outstanding increased $35.1 million to $73.6 million during the year ended December 31, 202 1, compared to $38.5 million during 2020 for the same reason.
−Removed: The average cost of borrowings increased to 5.34% for the year ended December 31, 2021, from 5.06% for the year ended December 31, 2020.
−Removed: Net interest income.
−Removed: Net interest income decreased $5.5 million, or 7.0%, to $72.8 million for the year ended December 31, 2021 compared to $78.3 million for the year ended December 31, 2020.
−Removed: Net interest margin for the year ended December 31, 2021 decreased 50 basis point to 3.34% from 3.84% for 2020.
−Removed: During the year ended December 31, 2021, the net interest margin was impacted by lower yielding loans, including PPP loans and resetting adjustable rate instruments as well as reduced interest rates on new fixed-rate real estate loan and adjustable-rate commercial loan originations and the increase in low yielding overnight cash balances causing a decrease in the average yield on interest-earning assets that outweighed the contribution to net interest margin from the decrease in the average cost of interest-bearing liabilities.
−Removed: The decrease in net interest margin was offset partially by an increase in deferred PPP loan fees
−Removed: recognized due to the volume of forgiven SBA PPP loans during 2021, which benefited net interest margin compared to a reduction in net interest margin from the Company’s origination of low yielding PPP loans during the same period in 2020.
+Added: Interest expense increased by $1.5 million, or 17.6%, to $10.4 million for the year ended December 31, 2022 from $8.8 million for the year ended December 31, 2021.
+Added: The increase was driven by a $1.4 million increase in interest expense on deposits, primarily time deposits and money market accounts, and to a lesser extent a $151,000 increase in interest expense paid on junior subordinated debentures, net.
+Added: T he average rate paid on interest bearing liabilities increased three basis points to 0.70% for the year ended December 31, 2022 from 0.67% for the year ended December 31, 2021.
+Added: The total average balance of interest-bearing liabilities increased by $170.2 million, or 13.0%, to $1.4 billion for the year ended December 31, 2022, from $1.3 billion for the year ended December 31, 2021, primarily due to an increase in total interest bearing deposits.
+Added: Interest expense on deposits increased $1.4 million, or 28.7%, to $6.3 million for the year ended December 31, 2022 from $4.9 million for the year ended December 31, 2021, primarily due to increases in the average rate paid on interest bearing deposits, principally higher costing money market accounts, and increases in the average balances of money market and time deposits.
+Added: The average rate paid on interest bearing deposits increased to 0.44% for the year ended December 31, 2022, from 0.39% for the year ended December 31, 2021, with the average rate paid on money market deposits increasing nine basis points to 0.49% during 2022 compared to 0.40% during 2021.
+Added: The overall average cost of deposits for the year ended December 31, 2022 increased to 0.29%, compared to 0.25% for the year ended December 31, 2021.
+Added: The average balance of noninterest bearing deposits increased $64.4 million, or 8.87%, to $789.8 million for the year ended December 31, 2022 compared to $725.4 million for the year ended December 31, 2021.
+Added: The increase in the cost of interest bearing deposits between the years was driven by market and competitive factors following increases in the target Fed Funds Rate.
+Added: Interest expense on borrowings increased $151,000, or 3.8%, to $4.1 million for the year ended December 31, 2022, from $3.9 million for the year ended December 31, 2021 due to rising interest rates.
+Added: The average balance of borrowings outstanding decreased $1.5 million to $72.1 million for the year ended December 31, 202 2, compared to $73.6 million for the year ended December 31, 2021.
+Added: The average cost of borrowings increased 32 basis points to 5.66% for the year ended December 31, 2022, from 5.34% for the year ended December 31, 2021.
+Added: Net interest income and net interest margin.
+Added: Net interest income increased $23.9 million, or 32.8%, to $96.7 million for the year ended December 31, 2022 compared to $72.8 million for the year ended December 31, 2021.
+Added: The increase between periods primarily was the result of an increase in interest income on loans and investments driven by higher average balances and, to a lesser extent, higher yields earned on those portfolios, as well as higher yields earned on fed funds sold and cash and cash equivalents, partially offset by higher funding costs.
+Added: Net interest margin for the year ended December 31, 2022 was 3.90%, a 56 basis point increase from 3.34% for the year ended December 31, 2021.
+Added: The increase in net interest margin primarily reflects an improved mix of interest-earning assets, including increased balances of higher yielding loans and investment securities available for sale.
+Added: During these periods, 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.
−Removed: The average yield on PPP loans was 4.52%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of 20 basis points during the year ended December 31, 2021, compared to an average yield of 2.71% and positive impact of 11 basis points during 2020.
+Added: The average yield on PPP loans was 4.88%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of eight basis for the year ended December 31, 2022, compared to an average yield of 4.52% and positive impact of 20 basis points for the year ended December 31, 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.
−Removed: Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 17 basis points and 31 basis points during years ended December 31, 2021 and 2020, respectively.
+Added: Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 11 basis points and 17 basis points for the years ended December 31, 2022 and 2021, respectively.
+Added: The average yield on interest earning assets for the year ended December 31, 2022 was 4.31%, a 57 basis point increase from 3.74% for the year ended December 31, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the year ended December 31, 2022 was 0.70%, a three basis point increase from 0.67% for the year ended December 31, 2021.
Average Balances, Interest and Average Yields/Cost.
9 unchanged sentences
Interest earning assets
−Removed: Interest bearing deposits in banks
+Added: Fed Funds sold and interest-bearing balances in banks
Investments securities available-for-sale
39 unchanged sentences
Interest earning assets
−Removed: Interest bearing deposits in banks
+Added: Fed funds sold and interest bearing balances in banks
Investments available-for-sale
13 unchanged sentences
In evaluating the level of the allowance for loan losses, management considers, among other factors, historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions and current risk factors specifically related to each loan type.
−Removed: See “Critical Accounting Policies and Estimates — Allowance for loan losses” above for a description of the manner in which the provision for loan losses is established.
−Removed: Based on management’s evaluation of the foregoing factors, we recorded a provision for loan losses of $466,000 for the year ended December 31, 2021, compared to a provision for loan losses of $10.3 million for the year ended December 31, 2020, a decrease of $9.9 million.
−Removed: The decrease in the provision for loan losses was primarily due to an adjustment to the qualitative factors utilized to calculate the allowance for loan losses resulting from improvements in the economic forecast since December 31, 2020.
−Removed: Our allowance for loan losses specific reserves was $930,000 at December 31, 2021, compared to $521,000 at December 31, 2020.
+Added: See “Critical Accounting Estimates — Allowance for loan losses” above for a description of the manner in which the provision for loan losses is established.
+Added: Based on management’s evaluation of the foregoing factors, we recorded a provision for loan losses of $4.4 million for the year ended December 31, 2022, compared to a provision for loan losses of $466,000 for the year ended December 31, 2021, an increase of $4.0 million.
+Added: The provision for loan losses for the year ended December 31, 2022 was primarily due to net charge-offs during the year, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan losses.
We recorded no provision for loan losses for acquired loans related to the acquired non-purchased credit impaired loans as accounted for in accordance with ASC Topic 310-20, for both the years ended December 31, 2022 and 2021.
−Removed: We recorded $107,000 of reversal provisions on the purchase credit impaired loans accounted for in accordance with ASC Topic 310-30 during the year ended December 31, 2021, compared to none during 2020.
−Removed: We had a net charge-offs of $226,000 for the year ended December 31, 2021 compared to net charge-offs of $220,000 for the year ended December 31, 2020.
+Added: We recorded $18,000 provision on the PCI loans accounted for in accordance with ASC Topic 310-30 during the year ended December 31, 2022, compared to $107,000 reversal of provision during the year ended December 31, 2021.
+Added: We had a net charge-offs of $3.2 million for the year ended December 31, 2022 compared to net charge-offs of $266,000 for the year ended December 31, 2021.
+Added: The increase in net charge-offs was primarily due to one $4.5 million participation interest in a national shared credit, with total cumulative net charge-offs of $3.1 million during the year.
+Added: The Company received final settlement from the lead lender during the fourth quarter of 2022, with no additional charge-offs required.
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.
−Removed: However, the allowance for loan loss includes an estimate for credit deterioration of
−Removed: acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred.
+Added: 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.
−Removed: The allowance for loan losses to total loans was 1.06% at both December 31, 2021 and 2020.
−Removed: Management considers the allowance for loan losses at December 31, 2021 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio.
−Removed: 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.
−Removed: A further decline in national and local economic conditions, as a result of the COVID-19 pandemic 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.
−Removed: In addition, the determination of the amount of our allowance for 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.
Noninterest income.
−Removed: Noninterest income increased $2.5 million, or 28.2%, to $11.3 million for the year ended December 31, 2021 compared to $8.8 million for the year ended December 31, 2020.
−Removed: The increase in noninterest income was primarily due to a $3.0 increase in gain on sale of loans and a $399,000 increase in income from our investment in the SBIC fund, partially offset by a $632,000 decrease in loan servicing and other loan fees and a $45,000 decrease in service charges and other fees.
−Removed: During the year ended December 31, 2021, the Company sold $45.8 million of SBA loans (the guaranteed portion), which generated a gain on sale of $4.8 million , compared to the sale of $24.0 million of SBA loans and a gain of $1.8 million during the year ended December 31, 2020 .
−Removed: SBIC income increased due to improved operating results throughout 2021 after sustaining COVID-19 related losses in 2020.
−Removed: Loan servicing and other loan fees, and service charges and other fees decreased primarily due to lower transaction volume.
+Added: Noninterest income decreased $595,000, or 5.3%, to $10.7 million for the year ended December 31, 2021 compared to $11.3 million for the year ended December 31, 2021.
+Added: The decrease in noninterest income was primarily due to a $2.0 million decrease in gain on sale of loans as a result of a decrease in the volume of loans sold and decrease in premiums realized and a $1.3 million decrease in income from our investment in a SBIC fund as a result of declining operating results throughout 2022, partially offset by a $1.7 million bargain purchase gain related to the PEB Merger, a $704,000 increase in service charges and other fees and a $343,000 increase in loan servicing and other loan fees due to higher transaction volumes.
+Added: During the year ended December 31, 2022, the Company sold $34.0 million of SBA loans (the guaranteed portion), which generated a gain on sale of $2.7 million , compared to the sale of $45.8 million of SBA loans (the guaranteed portion) with a gain on sale of $4.8 million for the year ended December 31, 2021 .
The following table presents the key components of noninterest income for the years ended December 31, 2022 and 2021.
3 unchanged sentences
Loan servicing and other loan fees
−Removed: Gain (loss) on sale of premises
Income on investment in SBIC fund
−Removed: Gain on sale of OREO
+Added: Bargain purchase gain
Other income and fees
Total noninterest income
+Added: N/M - Not meaningful
Noninterest expense.
−Removed: Noninterest expense decreased $3.4 million, or 5.8%, to $55.1 million for the year ended December 31, 2021 compared to $58.5 million for the year ended December 31, 2020.
−Removed: The decrease was primarily attributable to a $2.7 million or 32.3% decrease in data processing expense related to reversing over accrued merger data processing expense related to our GMB acquisition as actual expenses were lower than original estimates.
−Removed: In addition, other non-interest expense decreased slightly for the year ended December 31, 2021 compared to last year reflecting decreased fees paid for employee recruiting and internal auditing and compliance related expenses, and an increase in FDIC insurance premiums as the application of $369,000 in FDIC small bank assessment credits reduced expenses in 2020.
−Removed: Salaries and employee benefits decreased slightly during the year ended December 31, 2021 compared to 2020, primarily due to a decrease in staffing levels.
−Removed: Partially offsetting these decreases was a $296,000 or 4.2% increase in occupancy and equipment expense primarily as a result of normal increases in rent.
−Removed: N oninterest expense for the year ended December 31, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses.
+Added: Noninterest expense increased $10.8 million, or 19.6%, to $65.9 million for the year ended December 31, 2022 compared to $55.1 million for the year ended December 31, 2021 .
+Added: The increase was primarily attributable to a $6.7 million or 19.9% increase in salaries and employee benefits as a result of an increase in the number of full-time equivalent employees, reflecting our acquisition of PEB in February 2022, coupled with retention incentives and salary adjustments due to upward market pressure on wages in 2022.
+Added: The increase was also a result of increases in occupancy and equipment expense of $1.0 million, data processing fees of $1.4 million and other noninterest expenses of $1.7 million.
+Added: Noninterest expense for the year ended December 31, 2022 included $3.1 million of nonrecurring acquisition-related expenses associated with the PEB Merger recorded in the first quarter of 2022, which were comprised of $556,000 in salary and employee benefits, $1.1 million in data processing expenses, $724,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 other expenses.
+Added: Excluding acquisition-related expense, noninterest expense for the year ended December 31, 2022 increased $7.7 million compared to year ended December 31, 2021 primarily as a result of a $6.2 million increase in salary and employee benefits due to increase in the number of full-time equivalent employees due to the PEB Merger and open positions that were filled during the year, as well as increases in salaries and wages due to upward market pressure on wages.
+Added: In addition, occupancy costs increased $625,000 primarily due to the PEB Merger, revaluing the right-of-use asset for the renewal of four lease agreements and increased utilities and lease related expenses.
+Added: Data processing expenses increased $331,000 due to higher transaction activity, and other noninterest expense increased $612,000 reflecting increased operating expenses, increased professional and other services as businesses reopened from COVID-19 related closures.
The following table presents the key components of noninterest expense for the periods indicated:
−Removed: Year ended December 31,
(Dollars in thousands)
4 unchanged sentences
Income taxes.
−Removed: Income tax expense increased $3.3 million, or 73.0%, to $7.8 million for the year ended December 31, 2021 from $4.5 million for the year ended December 31, 2020, reflecting an increase in pre-tax income for the period ended December 31, 2021 and an increase in our effective tax rate.
+Added: Income tax expense increased $2.2 million, or 28.7%, to $10.0 million for the year ended December 31, 2022 from $7.8 million for the year ended December 31, 2021, reflecting an increase in pre-tax income for the period ended December 31, 2022.
The Company’s effective tax rate was 27.1% for the year ended December 31, 2022 compared to 27.3% for 2021.
−Removed: The increase in the effective tax rate during the year ended December 31, 2020 was primarily due to reduction in favorable permanent adjustments as compared to the prior year.
+Added: The effective tax rate for the year ended December 31, 2022 was impacted by the non-taxable bargain purchase gain in the first quarter 2022, partially offset by accrual for non-deductible compensation expenses that were not present in 2021.
Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
Earnings summary.
−Removed: We reported net income of $13.7 million for the year ended December 31, 2020, compared to $17.3 million for the year ended December 31, 2019, a decrease of $3.6 million, or 20.7%.
−Removed: Net income for the year ended December 31, 2020 was significantly impacted by the higher provision for loan losses primarily related to the consideration of probable loan losses as a result of the COVID-19 pandemic.
−Removed: Diluted earnings per share were $1.15 for the year ended December 31, 2020, a decrease of $0.32 from diluted earnings per share of $1.47 for the year ended December 31, 2019.
+Added: We reported net income of $20.7 million for the year ended December 31, 2021, compared to $13.7 million for the year ended December 31, 2020, an increase of $7.0 million, or 50.7%.
+Added: Net income for the year ended December 31, 2021 primarily reflects a $9.9 million, or 95.5%, decrease in the provision for loan losses, a $3.4 million, or 6.0%, decrease in noninterest expense and a $2.5 million, or 28.4%, increase in noninterest income, partially offset by a $5.6 million, or 7.0%, decrease in interest income and a $3.3 million, or 73.0%, increase in the provision for income taxes.
+Added: Diluted earnings per share were $1.90 for the year ended December 31, 2021, an increase of $0.75 from diluted earnings per share of $1.15 for the year ended December 31, 2020.
Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, was 65.57% for the year ended December 31, 2021, compared to 67.21% for the year ended December 31, 2020.
−Removed: Increases in noninterest expenses, primarily reflecting growth in our operations from recent acquisitions, outpaced net interest income and noninterest income which were negatively impacted by the effects of the COVID-19 pandemic.
−Removed: Noninterest income decreased during the year ended December 31, 2020, primarily due to lower gains on sale of loans as SBA loans originated for sale and sold have declined because of the pandemic.
+Added: The improvement in the efficiency ratio during the year ended December 31, 2021 was primarily due the reduced noninterest expense during 2021.
Interest income.
−Removed: Interest income for the year ended December 31, 2020 was $87.2 million, compared to $76.5 million for the year ended December 31, 2019, an increase of $10.7 million, or 13.9%.
−Removed: The increase in interest income primarily was due to an increase in average interest earning assets, principally loans, which was driven primarily by our recent acquisitions and PPP lending .
−Removed: Interest income on loans increased $16.7 million as a result of a $509.3 million increase in the average total loan balance, partially offset by a 74 basis point decrease in the average loan yield during the year ended December 31, 2020 as compared to this same period in 2019 .
+Added: Interest income for the year ended December 31, 2021 was $81.6 million, compared to $87.2 million for the year ended December 31, 2020, a decrease of $5.6 million, or 6.4%.
+Added: The decrease in interest income primarily was due to a decrease in both the average balance and yield for interest earning assets, principally loans.
+Added: Interest income on loans decreased $6.1 million as a result of a $39.6 million decrease in the average balance of loans outstanding and a 25 basis point decrease in the average loan yield during the year ended December 31, 2021 as compared to 2020.
The average yield earned on loans for the year ended December 31, 2021 was 4.69%, compared to 4.94% for the year ended December 31, 2020.
−Removed: Interest income included $1.7 million in fees earned related to PPP loans during the year ended December 31, 2020, compared to none in same period a year ago.
+Added: Interest income included $5.4 million in fees earned related to PPP loans during the year ended December 31, 2021, compared to $1.7 million in same period a year ago.
As of December 31, 2021, total unrecognized fees on PPP loans were $2.1 million.
For the year ended December 31, 2021, the average balance of PPP loans was $78.4 million and the average yield was 7.83%.
−Removed: Although the average balance of loans increased, the average yield on net loans decreased compared to the same period in the prior year due primarily to decreases in interest rates on adjustable rate instruments following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic, and secondarily due to the impact of PPP loans.
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, and will cease completely after the maturity of these loans.
2 unchanged sentences
The remaining net discount on these acquired loans was $2.1 million and $3.3 million at December 31, 2021 and 2020, respectively.
−Removed: Interest income on interest bearing deposits decreased $6.2 million as a result of a $90.5 million decrease in the average balance of interest earning deposits and a 171 basis point decrease in the yield on interest earning deposits to 0.51% for the year ended December 31, 2020 from 2.22% for the year ended December 31, 2019.
−Removed: Interest income on investment securities increased slightly by $134,000 as a result of a $10.8 million increase in the average balance of investment securities, partially offset by a 14 basis point decrease in the yield on investment securities to 2.56% for the year ended December 31, 2020 from 2.70% for the year ended December 31, 2019.
−Removed: Like yields on loans, yields on investments were significantly impacted by declines in short-term rates over the last year.
+Added: Interest income on investment securities increased $930,000 as a result of a $9.7 million, increase in the average balance of investment securities and 46 basis point increase in the yield on such securities to 3.02% for the year ended December 31, 2021 from 2.56% for the year ended December 31, 2020.
+Added: Interest income on fed funds sold and interest-
+Added: bearing balances in banks decreased $585,000 due to a 35 basis point decline in the yield on interest bearing deposits to 0.16% for the year ended December 31, 2021 from 0.51% for the year ended December 31, 2020, partially offset by a $9.7 million increase in the average balance of fed funds sold and interest bearing balances in banks during 2021 compared to 2020.
Interest expense.
−Removed: Interest expense increased by $167,000, or 1.9%, to $8.9 million for the year ended December 31, 2020 from $8.7 million for the year ended December 31, 2019.
−Removed: The increase was primarily driven by the issuance of the $65.0 million of Notes during 2020, partially offset by a decrease in deposit interest expense.
−Removed: Total average interest bearing liabilities increased by $254.9 million, or 26.4%, to $1.2 billion for the year ended December 31, 2020, from $966.5 million for the year ended December 31, 2019.
−Removed: Interest expense on deposits decreased $1.2 million, or 14.8%, to $7.0 million during the year ended December 31, 2020 from $8.2 million in 2019, primarily due to decreases in the targeted federal funds rate, earlier in the year, and despite an increase in the average balance of deposits .
−Removed: The average rate paid on interest bearing deposits decreased to 0.59% for the year ended December 31, 2020, from 0.85% for the year ended December 31, 2019.
−Removed: The overall average cost of deposits for the year ended December 31, 2020 declined to 0.38%, compared to 0.85% for the prior period of 2019 due to an increase in noninterest bearing deposits and a reduction in market interest rates over the last year.
−Removed: The average balance of noninterest bearing deposits increased $171.3 million, or 34.4%, to $670.1 million for the year ended December 31, 2020 compared to $498.8 million during the comparable period during 2019.
−Removed: The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decreases over the past year typically lags declines in the yield on interest earning assets.
−Removed: T he average rate paid on interest bearing liabilities decreased 17 basis points to 0.73% during the year ended December 31, 2020 from 0.90% during the same period in 2019.
−Removed: Interest expense on borrowings increased $1.3 million, or 243.1%, to $1.9 million for the year ended December 31, 2020, from $567,000 for the year ended December 31, 2019, as a result of the issuance of the Notes on August 10, 2020, which currently have a 5.25% interest rate.
−Removed: The average balance of borrowing outstanding increased $29.0 million to $38.5 million during the year ended December 31, 202 0, compared to $9.5 million during the comparable period in 2019.
−Removed: The increase in the average balance of borrowings outstanding was partially offset by a decline in the average cost of borrowing to 5.06% for the year ended December 31, 2020, from 5.98% for the year ended December 31, 2019.
+Added: Interest expense decreased by $97,000, or 1.1%, to $8.8 million for the year ended December 31, 2021 from $8.9 million for the year ended December 31, 2020.
+Added: The decrease was driven by a $2.1 million decrease in interest expense on deposits, primarily time deposits and money market accounts, and to lesser extent a $196,000 decrease in interest expense paid on junior subordinated debentures, net and other borrowings.
+Added: These decreases were partially offset by a $2.2 million increase in interest expense on subordinated debt, net.
+Added: The average rate paid on interest bearing liabilities decreased six basis points to 0.67% during the year ended December 31, 2021 from 0.73% during the same period in 2020.
+Added: The total average balance of interest bearing liabilities increased by $91.7 million, or 7.5%, to $1.3 billion for the year ended December 31, 2021, from $1.2 billion for the year ended December 31, 2020, primarily due to the issuance of our Notes.
+Added: Interest expense on borrowings increased $2.0 million, or 101.9%, to $3.9 million for the year ended December 31, 2021, from $1.9 million for the year ended December 31, 2020, as a result of the issuance of the Notes which were outstanding for the entire year in 2021 compared to five months during 2020.
+Added: The average balance of borrowings outstanding increased $35.1 million to $73.6 million during the year ended December 31, 2021, compared to $38.5 million during 2020 for the same reason.
+Added: The average cost of borrowings increased to 5.34% for the year ended December 31, 2021, from 5.06% for the year ended December 31, 2020.
Net interest income.
−Removed: Net interest income increased $10.5 million, or 15.5%, to $78.3 million for the year ended December 31, 2020 compared to $67.8 million for the year ended December 31, 2019.
+Added: Net interest income decreased $5.5 million, or 7.0%, to $72.8 million for the year ended December 31, 2021 compared to $78.3 million for the year ended December 31, 2020.
Net interest margin for the year ended December 31, 2021 decreased 50 basis point to 3.34% from 3.84% for 2020.
−Removed: During the year, the combination of low interest rate environment putting downward pressure on adjustable rate instruments and the impact of the low loan yields of the PPP loan portfolio, adversely affected net interest margin.
+Added: During the year ended December 31, 2021, the net interest margin was impacted by lower yielding loans, including PPP loans and resetting adjustable rate instruments as well as reduced interest rates on new fixed-rate real estate loan and adjustable-rate commercial loan originations and the increase in low yielding overnight cash balances causing a decrease in the average yield on interest-earning assets that outweighed the contribution to net interest margin from the decrease in the average cost of interest-bearing liabilities.
+Added: The decrease in net interest margin was offset partially by an increase in deferred PPP loan fees recognized due to the volume of forgiven SBA PPP loans during 2021, which benefited net interest margin compared to a reduction in net interest margin from the Company’s origination of low yielding PPP loans during the same period in 2020.
+Added: 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.
+Added: The average yield on PPP loans was 4.52%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of 20 basis points during the year ended December 31, 2021, compared to an average yield of 2.71% and positive impact of 11 basis points during 2020.
+Added: 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 purchase credit impaired loans in excess of discounts increased our net interest margin by 17 basis points and 31 basis points during years ended December 31, 2021, and 2020, respectively.
−Removed: The average yield on interest earning assets for the year ended December 31, 2020 was 4.27%, a 50 basis point decrease from 4.77% for the year ended December 31, 2019.
−Removed: The average cost of interest bearing liabilities for the year ended December 31, 2020 was 0.73%, down 17 basis points from 0.90% the year ended December 31, 2019, due primarily to lower market interest rates during most of the year .
Provision for loan losses.
−Removed: We recorded a provision for loan losses of $10.3 million for the year ended December 31, 2020, compared to a provision for loan losses of $2.2 million for the year ended December 31, 2019, an increase of $8.1 million.
−Removed: T he provision for loan losses includes a provision related to the migration of acquired loans out of the discounted acquired loan portfolio and gives consideration of probable loan losses due to changes in economic conditions driven by the impact of COVID-19 on the U.S.
−Removed: and global economies .
−Removed: In addition, the provision for loan losses also reflects risk rating downgrades on loans that are considered at risk due to the COVID-19 pandemic.
−Removed: Our allowance for loan losses specific reserves increased to $521,000 at December 31, 2020, from $171,000 at December 31, 2019.
+Added: We recorded a provision for loan losses of $466,000 for the year ended December 31, 2021, compared to a provision for loan losses of $10.3 million for the year ended December 31, 2020, a decrease of $9.9 million.
+Added: The decrease in the provision for loan losses was primarily due to an adjustment to the qualitative factors utilized to calculate the allowance for loan losses resulting from improvements in the economic forecast since December 31, 2020.
+Added: Our allowance for loan losses specific reserves was $930,000 at December 31, 2021, compared to $521,000 at December 31, 2020.
We recorded no provision for loan losses for acquired loans related to the acquired non-purchased credit impaired loans as accounted for in accordance with ASC Topic 310-20, for both the years ended December 31, 2021 and 2020.
−Removed: $107,000 of additional provisions on the purchase credit impaired loans accounted for in accordance with ASC Topic 310-30 during the year ended December 31, 2020, compared to none during 2019.
−Removed: We had a net charge-offs of $220,000 for the year ended December 31, 2020 compared to net recoveries of $36,000 for the year ended December 31, 2019.
−Removed: For the year ended December 31, 2020, charge-offs increased due primarily to $184,000 of charge-offs related to a single commercial and industrial loan.
+Added: We recorded $107,000 or reversal provisions on the purchase credit impaired loans accounted for in accordance with ASC Topic 310-30 during the year ended December 31, 2021, compared to none during 2020.
+Added: We had a net charge-offs of $226,000 for the year ended December 31, 2021 compared to net charge-offs of $220,000 for the year ended December 31, 2020.
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.
2 unchanged sentences
The discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios.
−Removed: The allowance for loan losses to total loans was 1.06% at December 31, 2020 compared to 0.51% at December 31, 2019.
+Added: The allowance for loan losses to total loans was 1.06% at both December 31, 2021 and 2020.
Noninterest income.
−Removed: Noninterest income decreased $794,000, or 8.3%, to $8.8 million for the year ended December 31, 2020 compared to $9.6 million for the year ended December 31, 2019.
−Removed: The decrease in noninterest income was primarily due to a $1.2 million decrease in gain on sale of loans as our SBA loans originated for sale and sold have declined because of the COVID-19 pandemic, partially offset by increases in loan servicing and other loan fees and increases in income from our investment in a Small Business Investment Company (“SBIC”) fund.
+Added: Noninterest income increased $2.5 million, or 28.2%, to $11.3 million for the year ended December 31, 2021 compared to $8.8 million for the year ended December 31, 2020.
+Added: The increase in noninterest income was primarily due to a $3.0 million increase in gain on sale of loans and a $399,000 increase in income from our investment in the SBIC fund, partially offset by a $632,000 decrease in loan servicing and other loan fees and a $45,000 decrease in service charges and other fees.
During the year ended December 31, 2021, the Company sold $45.8 million of SBA loans (the guaranteed portion), which generated a gain on sale of $4.8 million, compared to the sale of $24.0 million of SBA loans and a gain of $1.8 million during the year ended December 31, 2020.
−Removed: Loan servicing and other loan fees increased $520,000, or 26.7%, to $2.4 million for the year ended December 31, 2020, compared to $1.9 million for the year ended December 31, 2019, primarily due to an increase in deposit accounts acquired in our recent acquisitions.
−Removed: SBIC income increased $206,000, or 30.8%, to $875,000 for the year ended December 31, 2020, compared to $669,000 for the year ended December 31, 2019, showing continued improved operating results throughout the year after sustaining COVID-19 related losses earlier in 2020.
+Added: SBIC income increased due to improved operating results throughout 2021 after sustaining COVID-19 related losses in 2020.
+Added: Loan servicing and other loan fees, and service charges and other fees decreased primarily due to lower transaction volume.
The following table presents the key components of noninterest income for the years ended December 31, 2021 and 2020.
−Removed: Years ended December 31,
+Added: Year ended December 31,
(Dollars in thousands)
2 unchanged sentences
Loan servicing and other loan fees
−Removed: Gain on sale of premises
Income on investment in SBIC fund
2 unchanged sentences
Noninterest expense.
−Removed: Noninterest expense increased $7.0 million, or 13.7%, to $58.5 million for the year ended December 31, 2020 compared to $51.5 million for the year ended December 31, 2019.
−Removed: The increase was primarily due to a $5.1 million, or 17.8%, increase in salary and benefits as a result of an i ncrease in the number of full-time equivalent employees and severance benefits paid in connection with the GMB merger and to a lesser extent normal salary increase .
−Removed: Occupancy and equipment expense increased $1.9 million, or 37.7%, due to our recent acquisitions.
−Removed: Data processing expense was slightly down for the year ended December 31, 2020 compared to the same period in 2019 due to lower acquisition-related expenses compared to the same period in 2019, partially offset by higher transaction volumes from the increase in the number of deposit accounts.
−Removed: Other non-interest expense increased slightly for the year ended December 31, 2020 compared to last year reflecting increased fees paid for employee recruiting and internal auditing and compliance related expenses, an increase in FDIC insurance premiums) as the application of $369,000 in FDIC small bank assessment credits reduced expenses in 2019 and the Bank utilized all of its remaining small bank assessment credits in 2020, and increased office expenses due to COVID-19 pandemic related expenses.
−Removed: These increases were partially offset by lower marketing and travel expenses due to a reduction in direct mail and marketing campaigns, sponsored events and other
−Removed: meeting limitations imposed in response to the COVID-19 pandemic.
−Removed: N oninterest expense for the year ended December 31, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses;
−Removed: compared to $6.6 million of UFC and TIG acquisition-related expenses for the year ended December 31, 2019, comprised of $835,000 in salaries and benefits, $4.4 million in data processing expenses, $938,000 in professional fees and $480,000 in all other expenses.
−Removed: Excluding all acquisition-related expenses, noninterest expenses increased $10.7 million, or 23.8%, from the same period of 2019, comprised of increases of $5.7 million in salary and benefits, $1.9 million in occupancy and equipment, $2.2 million in data processing, $610,000 in professional fees and $177,000 in other noninterest expenses.
+Added: Noninterest expense decreased $3.4 million, or 5.8%, to $55.1 million for the year ended December 31, 2021 compared to $58.5 million for the year ended December 31, 2020.
+Added: The decrease was primarily attributable to a $2.7 million or 32.3% decrease in data processing expense related to reversing over accrued merger data processing expense related to our GMB acquisition as actual expenses were lower than original estimates.
+Added: In addition, other non-interest expense decreased slightly for the year ended December 31, 2021 compared to last year reflecting decreased fees paid for employee recruiting and internal auditing and compliance related expenses, and an increase in FDIC insurance premiums as the application of $369,000 in FDIC small bank assessment credits reduced expenses in 2020.
+Added: Salaries and employee benefits decreased slightly during the year ended December 31, 2021 compared to 2020, primarily due to a decrease in staffing levels.
+Added: Partially offsetting these decreases was a $296,000 or 4.2% increase in occupancy and equipment expense primarily as a result of normal increases in rent.
+Added: Noninterest expense for the year ended December 31, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses.
The following table presents the key components of noninterest expense for the periods indicated:
−Removed: Years ended December 31,
+Added: Year ended December 31,
(Dollars in thousands)
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Income taxes.
−Removed: Income tax expense decreased $1.9 million, or 29.3%, to $4.5 million for the year ended December 31, 2020 from $6.4 million for the year ended December 31, 2019, reflecting a decrease in pre-tax income for the period ended December 31, 2020 and a decrease in our effective tax rate.
+Added: Income tax expense increased $3.3 million, or 73.0%, to $7.8 million for the year ended December 31, 2021 from $4.5 million for the year ended December 31, 2020, reflecting an increase in pre-tax income for the period ended December 31, 2021 and an increase in our effective tax rate.
The Company’s effective tax rate was 27.3% for the year ended December 31, 2021 compared to 24.7% for 2020.
−Removed: The decrease in the effective tax rate during the year ended December 31, 2020 was primarily due to higher proportion of favorable permanent adjustments relative to taxable income.
+Added: The increase in the effective tax rate during the year ended December 31, 2020 was primarily due to reduction in favorable permanent adjustments as compared to the prior year.
Liquidity and Capital Resources
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We rely on a number of different sources in order to meet our potential liquidity demands.
−Removed: Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans.
+Added: Our primary sources of funds are deposits, principal and interest payments on loans and proceeds from sale of loans.
During the years ended December 31, 2022, 2021 and 2020, the Bank sold $34.0 million, $45.8 million and $24.0 million in loans and loan participation interests, respectively.
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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.
−Removed: Recently, the Bank’s liquidity has been positively impacted by increases in deposit levels.
−Removed: During the years ended December 31, 2021 and 2020, deposits increased by $146.8 million, and $137.2 million, respectively.
−Removed: 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 $135.1 million at December 31, 2021 from $5.6 million at December 31, 2020.
+Added: During the years ended December 31, 2022 and 2021, deposits increased by $100.2 million, and $146.8 million, respectively, partially offset by a decrease in liquid assets in the form of cash and cash equivalents, time deposit in banks and investment securities available-for-sale to $346.8 million at December 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.
−Removed: Securities purchased during the years ended December 31, 2021, and 2020 totaled $86.2 million, and $28.4 million, respectively, and securities repayments, maturities and sales in those periods were $15.9 million, and $10.9 million, respectively.
+Added: Securities purchased during the years ended December 31, 2022 and 2021, excluding FHLB and FRB stock, totaled $28.9 million and $91.0 million, respectively, and securities repayments, maturities and sales in those periods were $11.1 million, and $28.0 million, respectively.
Certificates of deposit scheduled to mature in one year or less at December 31, 2022, totaled $221.4 million.
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In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements.
−Removed: As of December 31, 2021, the Bank had an available borrowing capacity of $483.1 million with the FHLB of San Francisco and $69.6 million with the FRB of San Francisco.
−Removed: Federal Funds lines with available commitments totaling $65.0 million with three correspondent banks.
−Removed: There were no amounts outstanding under these facilities at December 31, 2021 and December 31, 2020.
+Added: As of December 31, 2022, the Bank had an available borrowing capacity of $473.6 million with the FHLB of San Francisco, with no borrowings outstanding at that date.
+Added: The Bank also had Federal Funds lines with available commitments totaling $65.0 million with four correspondent banks.
+Added: There were no amounts outstanding under these facilities at both December 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.
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Net cash provided by operating activities was $39.9 million and $10.4 million for the years ended December 31, 2022 and 2021, respectively.
−Removed: During the year ended December 31, 2021, net cash used in investing activities, which consisted primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $60.4 million, compared to $73.7 million of cash used in investing activities for the year ended December 31, 2020.
−Removed: Net cash provided by financing activities, which is comprised primarily of net change in deposits, proceeds from the issuance of the Notes and other borrowings, was $130.3 million for the year ended December 31, 2021, compared to $67.6 million for the year ended December 31, 2020.
+Added: During the year ended December 31, 2022, net cash provided by investing activities, which consisted primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $53.7 million, compared to $60.4 million of cash used in investing activities for the year ended December 31, 2021.
+Added: Net cash used in financing activities, comprised primarily of net change in deposits, was $296.4 million for the year ended December 31, 2022, compared to $130.3 million of cash provided by financing activities for the year ended December 31, 2021.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets.
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In addition, at December 31, 2022, we had other future obligations and accrued expenses of $33.7 million.
−Removed: For the year ending December 31, 2022, we project that our commitments will include $12.7 million of operating lease payments.
+Added: As of December 31, 2023, we project that our future commitments will include $17.2 million of operating lease payments.
There are $4.1 million of scheduled interest payments due on Notes and junior subordinate debentures in 2023 (excluding any other borrowings that may be made after December 31, 2022).
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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.
−Removed: As of December 31, 2021, the Company had not paid any cash dividends on its common stock.
−Removed: Subsequent to year end, however, 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.
+Added: As of December 31, 2022, the Company declared $2.7 million of cash dividends on its common stock, of with $644,000 remained to be paid on January 13, 2023.
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 without prior notice.
−Removed: Assuming continued payment during 2022 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).
+Added: On February 23, 2023 the Company declared a quarterly cash dividend of $0.10 per share on the Company’s outstanding common stock payable on April 14, 2023 to shareholders of record as of the close of business on March 10, 2023.
+Added: Assuming continued payment during 2023 at this rate of $0.10 per share, our average total dividend paid each quarter would be approximately $1.3 million based on the number of our current outstanding shares at December 31, 2022.
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.
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Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.
−Removed: 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 742,532 shares remain available for repurchase at December 31, 2021.
+Added: In October 2022, the Company’s board of directors approved its sixth stock repurchase program pursuant to which the Company may repurchase up to five percent of the Company’s common stock, or approximately 645,000 shares, of which 481,792 shares remain available for repurchase at December 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.
−Removed: See "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Item 5, Part II of this Form 10-K for additional information relating to stock.
+Added: See "Item 5.
+Added: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Form 10-K for additional information relating to stock.
Regulatory capital.
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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.
−Removed: If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2021, the Company would have exceeded all regulatory capital requirements.
+Added: If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2022, the Company would have exceeded all regulatory capital requirements.
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.
−Removed: Financial Statements and Supplementary Data”, within this report.
+Added: Financial Statements and Supplementary Data”, within this Form 10-K.
Quantitative and Qualitative Disclosures About Market and Interest Rate Risk
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No rates in the model are allowed to go below zero.
−Removed: Given that the current targeted federal funds rate is between 0.00% and 0.25%, a decline by 200 and 300 basis points is not reported.
The following table sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates noted, as of the dates indicated.
20 unchanged sentences
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.