Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward- looking statements as a result of a wide variety or range of factors including, but not limited to:
● potential adverse impacts to economic conditions in general and in California, Nevada, Colorado, New Mexico and Washington specifically, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession, or slowed economic growth caused by increasing political instability from acts of war, as well as supply chain disruptions;
● changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;
● the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto;
● the effects of any federal government shutdown;
● the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for credit losses and provision for credit losses;
● changes in the levels of general interest rates and the relative differences between short and long-term interest rates and loan and deposit interest rates;
● the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;
● our net interest margin and funding sources;
● fluctuations in the demand for loans and the number of unsold homes, land and other properties;
● fluctuations in real estate values in our market areas;
● secondary market conditions for loans and our ability to sell loans in the secondary market;
● results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for credit losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;
● risks related to our acquisition strategy, including our ability to identify future suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;
● challenges arising from attempts to expand into new geographic markets, products, or services;
● future goodwill impairment due to changes in our business, market conditions, or other factors;
● the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;
● review of the Company’s accounting, accounting policies and internal control over financial reporting;
● risks and uncertainties related to the recent restatement of certain of our historical consolidated financial statements;
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● the subsequent discovery of additional adjustments to the Company’s previously issued financial statements;
● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry;
● our ability to attract and retain deposits;
● our ability to control operating costs and expenses;
● the use of estimates in determining the fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;
● difficulties in reducing risk associated with the loans and securities on our balance sheet;
● staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
● the effectiveness of our risk management framework;
● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;
● an inability to keep pace with the rate of technological advances;
● risks associated with dependence on our Chief Executive Officer and other members of our senior management team and our ability to attract, motivate and retain qualified personnel;
● costs and effects of litigation, including settlements and judgments;
● our ability to implement our business strategies and manage our growth;
● liquidity issues, including our ability to borrow funds or raise additional capital, if necessary or desired;
● the loss of our large loan and deposit relationships;
● increased competitive pressures among financial services companies;
● changes in consumer spending, borrowing and savings habits;
● the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
● our ability to pay dividends on our common stock;
● the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;
● the inability of key third-party providers to perform their obligations to us;
● changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;
● the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest and other external events on our business;
● other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and
● risks described in other reports filed with or furnished to the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Annual Report”) and this Form 10-Q.
In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for the remainder of 2024 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.
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Executive Overview
General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 35 full-service branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related data, relate primarily to the Bank.
Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. Since 2010, we have expanded our geographic footprint through 10 strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share. We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Las Vegas, Nevada, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, Colorado, provides us with access to low cost, stable core deposits that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. At March 31, 2024, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $1.9 billion in total loans, $2.1 billion in total deposits and $314.2 million in shareholders’ equity.
We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At March 31, 2024, our $1.9 billion total loan portfolio included $370.8 million, or 19.7 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.5 billion, or 80.3%, consisted of loans we originated.
The profitability of our operations depends primarily on our net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses. Our net income is also affected by other factors, including the provision for credit losses on loans, noninterest income and noninterest expense.
Set forth below is a discussion of the primary factors affecting our results of operations:
Net interest income. Net interest income represents interest income less interest expense. We generate interest income from interest and fees received on interest earning assets, including loans and investment securities and dividends on Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) stock we own. We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest margin; and (iv) the regulatory risk weighting associated with our assets. Net interest margin is calculated as the annualized net interest income divided by average interest earning assets. Because noninterest bearing sources of funds, such as noninterest bearing deposits and shareholders’ equity, also fund interest earning assets, net interest margin reflects the benefit of these noninterest bearing sources.
Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since January 1, 2023 through the quarter ended March 31, 2024, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) has increased the target range for the federal funds rate 100 basis points to a
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range of 5.25% to 5.50%. The increase in the average yield on interest-earning assets during the three months ended March 31, 2024 reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher. We believe our balance sheet is structured to enhance our net interest margin if the FOMC continues to raise the targeted federal funds rate.
Noninterest income. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) gain (loss) on equity securities; and (iv) other noninterest income. Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of Small Business Administration (“SBA”) loans, capitalized loan servicing rights and other related income.
Provision for credit losses. We established an allowance for credit losses by charging amounts to provision for credit losses at a level required to reflect estimated credit losses in the loan and available-for sale investment securities portfolios. For loans, management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors. See “Critical Accounting Policies and Estimates - Allowance for Credit Losses” for a description of the manner in which the provision for credit losses is established.
For investments, the Company evaluates investment available-for-sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Such situations may result from either a decline in the financial condition of the issuing entity or in the case of fixed interest rate investments, from rising interest rates. In making this assessment, management considers the length of time and the extent to which fair value is less than amortized cost, the nature of the security, the underlying collateral, and the financial condition and prospects of the issuer, among other factors. This assessment also includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for credit losses for available-for-sale securities is recognized in other comprehensive income. Changes in the allowance for credit losses for available-for-sale securities are recorded as provision for (or reversal of) credit loss. Losses are charged against the allowance for credit losses for available-for-sale securities, with a corresponding adjustment to the security's amortized cost basis, when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.
Noninterest expense. Noninterest expense includes, among other things: (i) salaries and related benefits; (ii) occupancy and equipment expense; (iii) data processing; (iv) Federal Deposit Insurance Corporation (“FDIC”) and state assessments; (v) outside and professional services; and (vi) other general and administrative expenses, including amortization of intangible assets. Salaries and related benefits include compensation, employee benefits and employment tax expenses for our personnel. Occupancy and equipment expense includes depreciation expense on our owned properties and equipment, lease expense on our leased properties and other occupancy-related expenses. Data processing expense includes fees paid to our third-party data processing system provider and other data service providers. FDIC and state assessments expense represents the assessments that we pay to the FDIC for deposit insurance and other regulatory costs to various states. Outside and professional fees include legal, accounting, consulting and other outsourcing arrangements. Amortization of intangibles represents the amortization of our core deposit intangible from various acquisitions. Other general and administrative expenses include expenses associated with travel, meals, training, supplies and postage. Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased significantly over the past few years as we have grown through acquisitions and organically, and as we have built out our operational infrastructure.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the Banking industry. To prepare financial statements and interim
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financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes; and are based on information available as of the date of the financial statements. As this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.
These critical accounting policies and estimates include determining the allowance for credit losses and related provision. The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K. For a detailed discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2023 Form 10-K filed with the SEC on March 15, 2024.
Comparison of Financial Condition at March 31, 2024 and December 31, 2023
Total assets. Total assets increased $8.7 million, or 0.3%, to $2.6 billion at March 31, 2024, from December 31, 2023. The increase primarily was due to cash and cash equivalents increasing $40.8 million, or 13.3% and investment securities available-for-sale increasing $4.8 million, or 2.9%, partially offset by decreases in loans receivable, net, of $38.0 million or 2.0%. In addition, interest receivable and other assets decreased $848,000 or 1.8%, equity securities increased $573,000 or 4.6%, and loans held for sale increased $1.7 million.
Cash and cash equivalents. Cash and cash equivalents increased $40.8 million, or 13.3%, to $348.3 million, at March 31, 2024, from $307.5 million at December 31, 2023. The increase primarily was due to a $38.3 million increase in federal funds sold and interest bearing balances in banks due to repayment on loans coupled with decline in loan demand.
Investment securities available-for-sale. Investment securities available-for-sale increased $4.8 million, or 2.9%, to $167.9 million at March 31, 2024 from $163.2 million at December 31, 2024. The increase primarily was due to the purchase of $7.1 million of investment securities and unrealized gains on investment securities available-for-sa le of $696,000 as a result of fair value adjustments, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured of $3.0 million during the three months ended March 31, 2024.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as of March 31, 2024. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.
Amount Due or Repricing Within:
One Year
Over One
Over Five
Over
or Less
to Five Years
to Ten Years
Ten Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
(Dollars in thousands)
Municipal securities
$
2,503
2.34
%
$
7,462
1.47
%
$
10,919
2.94
%
$
2,196
3.90
%
$
23,080
2.49
%
Mortgage-backed securities
1,379
2.51
3,366
3.19
10,352
2.46
25,402
3.98
40,499
3.47
Collateralized mortgage obligations
6
2.50
2,175
4.00
2,501
2.56
33,105
4.07
37,787
3.96
SBA securities
—
—
282
6.88
2,199
5.02
2,473
6.57
4,954
5.90
Corporate bonds
992
9.55
3,000
5.00
76,650
4.44
749
3.37
81,391
4.51
Total
$
4,880
3.86
%
$
16,285
2.91
%
$
102,621
4.05
%
$
63,925
4.11
%
$
187,711
3.97
%
Equity securities. Equity securities increased $573,000, or 0.6%, to $13.2 million at March 31, 2024 from $12.6 million at December 31, 2023, primarily due to a $573,000 mark-to-market upward adjustment recorded during the three months ended March 31, 2024.
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Loans receivable, net. We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Loans receivable, net decreased $38.0 million, or 2.0%, to $1.9 billion at March 31, 2024 from December 31, 2023. The decrease was due to $72.4 million of loan repayments, partially offset by $32.0 million of new loan originations.
The following table provides information about our loan portfolio by type of loan, with purchase credit deteriorated (“PCD”) loans presented as a separate balance, at the dates presented .
March 31,
December 31,
2024
2023
% Change
(Dollars in thousands)
Commercial and industrial (1)
$
160,401
$
162,691
(1.4)
%
Real estate:
Residential
83,472
85,555
(2.4)
Multifamily residential
240,995
246,840
(2.4)
Owner occupied CRE
483,218
497,360
(2.8)
Non-owner occupied CRE
882,751
899,332
(1.8)
Construction and land
9,596
9,534
0.7
Total real estate
1,700,032
1,738,621
(2.2)
Consumer
570
738
(22.8)
PCD loans
25,735
25,723
0.0
Total Loans
1,886,738
1,927,773
(2.1)
Net deferred loan fees
(8)
56
(114.0)
Allowance for credit losses
(18,890)
(22,000)
(14.1)
Loans, net
$
1,867,840
$
1,905,829
(2.0)
%
(1) Includes $2.9 million and $3.8 million of Paycheck Protection Program (“PPP”) loans as of March 31, 2024 and December 31, 2023, respectively.
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The following table shows as of March 31, 2024, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:
San Francisco Bay
Total in State of
Area (1)
Other California (2)
California
All Other States (3)
Total
% of
% of
% of
% of
% of
Total in
Total in
Total in
Total in
Total in
Amount
Category
Amount
Category
Amount
Category
Amount
Category
Amount
Category
(Dollars in thousands)
March 31, 2024
Commercial and industrial
$
36,615
8.8
%
$
70,790
8.8
%
$
107,405
8.8
%
$
53,189
8.0
%
$
160,594
8.5
%
Real estate:
Residential
12,909
3.1
43,022
5.3
55,931
4.6
27,937
4.2
83,868
4.4
Multifamily residential
43,948
10.5
105,954
13.1
149,902
12.2
93,743
14.2
243,645
12.9
Owner occupied CRE
167,446
40.2
284,518
35.2
451,964
36.9
42,627
6.4
494,591
26.2
Non-owner occupied CRE
156,019
37.4
296,754
36.7
452,773
37.0
441,081
66.7
893,854
47.4
Construction and land
—
—
7,210
0.9
7,210
0.6
2,406
0.4
9,616
0.5
Total real estate
380,322
737,458
1,117,780
607,794
1,725,574
Consumer
18
—
%
1
—
%
19
—
%
551
0.1
%
570
—
%
Total loans
$
416,955
$
808,249
$
1,225,204
$
661,534
$
1,886,738
December 31, 2023
Commercial and industrial
$
35,954
8.5
%
$
75,549
9.0
%
$
111,503
8.8
%
$
51,386
7.7
%
$
162,889
8.4
%
Real estate:
Residential
13,876
3.3
43,157
5.1
$
57,033
4.5
28,969
4.3
86,002
4.5
Multifamily residential
46,129
10.9
109,214
13.0
155,343
12.3
94,180
14.1
249,523
12.9
Owner occupied CRE
168,977
40.1
292,880
34.9
461,857
36.6
47,296
7.1
509,153
26.4
Non-owner occupied CRE
156,411
37.1
312,362
37.2
468,773
37.2
441,136
66.2
909,909
47.2
Construction and land
—
—
7,217
0.9
7,217
0.6
2,342
0.4
9,559
0.5
Total real estate
385,393
764,830
1,150,223
613,923
1,764,146
Consumer
4
—
%
1
—
%
5
—
%
733
0.1
%
738
—
%
Total loans
$
421,351
$
840,380
$
1,261,731
$
666,042
$
1,927,773
(1) Includes Alameda, Contra Costa, Solano, Sonoma, Marin, San Francisco, San Mateo and Santa Clara counties.
(2) Includes loans located in Sacramento and Northern California counties totaling $94.7 million and loans located in Los Angeles and Orange counties totaling $488.9 million at March 31, 2024. At December 31, 2023, loans in Sacramento and Northern California counties and loans in Los Angeles and Orange counties totaled $95.6 million and $506.6 million, respectively.
(3) Includes loans located primarily in the states of Colorado, New Mexico and Washington. At March 31, 2024, loans in Colorado, New Mexico and Washington totaled $80.4 million, $47.9 million and $102.6 million, respectively. At December 31, 2023, loans in Colorado, New Mexico and Washington totaled $87.1 million, $43.9 million and $103.8 million, respectively.
Acquired loans. As of March 31, 2024, acquired non-PCD loans totaled $173.3 million with a remaining net premium of $2.1 million, compared to $187.7 million with a remaining net premium of $2.1 million as of December 31, 2023. The net premium for acquired non-PCD loans includes a credit discount based on estimated losses in the acquired loans, partially offset by any premium based on market interest rates on the date of acquisition.
As of March 31, 2024 acquired PCD loans totaled $27.1 million with a remaining net non-credit discount of $1.7 million, compared to $27.5 million with a remaining net non-credit discount of $1.8 million as of December 31, 2023.
Nonperforming assets and loans. Nonperforming assets generally consists of nonaccrual loans, accruing loans that are 90 days or more past due and other real estate owned (“OREO”). Nonperforming loans generally consist of nonaccrual loans and accruing loans that are 90 days or more past due. There were no accruing loans 90 days or more past due or other real estate owned (“OREO”) at both March 31, 2024 and December 31, 2023.
Nonperforming loans, consisting solely of non-accrual loans, totaled $16.5 million, or 0.87% of total loans, at March 31, 2024, compared to $13.0 million, or 0.67% of total loans, at December 31, 2023. The increase in nonperforming loans was primarily due to six new loans placed on non-accrual during the current quarter totaling $7.3 million, partially offset by partial charge-offs of two non-accrual loans totaling $2.9 million, charge-offs of five non-accrual loans totaling $435,000 and, to a lesser extent, pay-offs of five non-accrual loans totaling $305,000. At March 31, 2024, nonperforming loans totaling $2.2 million were guaranteed by governmental agencies, compared to $740,000 at December 31, 2023. At
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March 31, 2024 and December 31, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.
At March 31, 2024 and December 31, 2023, nonaccrual loans included $4.0 million and $927,000 of loans 30-89 days past due, and $1.1 million and $2.1 million of loans less than 30 days past due, respectively. At March 31, 2024, the $1.1 million of nonaccrual 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. When a loan is placed on nonaccrual status, all interest accrued but not received is charged against interest income. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Interest received on such loans is recognized as interest income when received. A nonaccrual loan is restored to an accrual basis when principal and interest payments are paid current, and full payment of principal and interest is probable. Loans that are well secured and in the process of collection will remain on accrual status .
Loans may be acquired at a premium or discount to par value, in which case the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay-off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.
Modified loans to borrowers experiencing financial difficulty. Occasionally, the Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or any combination of these. When principal forgiveness is provided, the amount of the forgiveness is charged-off against the allowance for credit losses for loans. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses for loans is adjusted by the same amount.
Loan modifications to borrowers experiencing financial difficulty as of March 31, 2024 totaled $3.0 million, of which none were accruing and performing according to their modified terms, compared to $4.3 million, of which none were accruing and performing according to their modified terms, at December 31, 2023. Modified loans that are accruing and performing according to their modified terms are not considered nonperforming loans as they continue to accrue interest despite their modified status. The related allowance for credit losses on individually evaluated modified loans totaled $42,000 and $1.3 million at March 31, 2024 and December 31, 2023, respectively.
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The following table provides information regarding nonperforming loans, nonperforming assets and modified loans as of the dates indicated:
March 31,
December 31,
2024
2023
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial
$
1,667
$
2,072
Real estate:
Residential
1,463
1,496
Multifamily residential
8,075
5,305
Owner occupied CRE
4,687
3,573
Non-owner occupied CRE
233
165
Construction and land
366
366
Total real estate
14,824
10,905
Consumer
—
—
Total nonaccrual loans
16,491
12,977
Accruing loans 90 days or more past due
—
—
Total nonperforming loans
16,491
12,977
Real estate owned
—
—
Total nonperforming assets (1)
$
16,491
$
12,977
Modified loans to borrowers experiencing financial difficulty – performing
$
—
$
—
PCD loans
$
25,735
$
25,723
Nonperforming assets to total assets (1)
0.64
%
0.51
%
Nonperforming loans to total loans (1)
0.87
%
0.67
%
(1)
Performing modified loans to borrowers experiencing financial difficulty are neither included in nonperforming loans above nor are they included in the numerators used to calculate these ratios.
Interest foregone on nonaccrual loans was approximately $483,000 and $235,000 for the three months ended March 31, 2024 and 2023, respectively, none of which was included in interest income. Interest income recognized on nonaccrual loans was approximately $7,200 and $65,000 for the three months ended March 31, 2024 and 2023, respectively.
Allowance for credit losses for loans. The allowance for credit losses is determined by us on a quarterly basis, although we are engaged in monitoring the appropriate level of the allowance on a more frequent basis. We assess the allowance for credit losses based on three categories: (i) originated loans, (ii) acquired non-PCD loans, and (iii) acquired PCD loans. The allowance for credit losses reflects management’s estimate of current expected credit losses inherent in the loan portfolios. The computation includes elements of judgment and high levels of subjectivity.
At March 31, 2024, the Company’s allowance for credit losses for loans was $18.9 million, or 1.00% of total loans, compared to $22.0 million, or 1.14% of total loans, at December 31, 2023. Based on the current conditions of the loan portfolio, management believes that the $18.9 million allowance for credit losses at March 31, 2024 is adequate to absorb expected credit losses inherent in the Company’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
We recorded net charge-offs of $3.4 million and $315,000 for the three months ended March 31, 2024 and 2023, respectively. The calculation of the allowance for credit losses for loans at March 31, 2024 and December 31, 2023, excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA. The increase in activity in net charge-offs during the first quarter of 2024 involved partial charge-offs of two non-accrual loans totaling $2.9 million, as well as complete write-offs of five non-accrual loans totaling $435,000. At December 31, 2023, $3.2 million of the nonaccrual loan charge-offs were specifically reserved for. These actions were taken due to collateral shortfalls deemed uncollectable.
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The following table presents certain credit ratios at the dates and for the periods indicated and each component of the ratio’s calculations:
The following table presents certain credit ratios at the dates and for the periods indicated and each component of the ratio’s calculations:
Three months ended March 31,
2024
2023
(Dollars in thousands)
Allowance for credit losses on loans as a percentage of total loans outstanding at period end
1.00
%
1.00
%
Allowance for credit losses on loans
$
18,890
$
20,400
Total loans outstanding
1,886,730
2,044,536
Nonaccrual loans as a percentage of total loans outstanding at period end
0.87
%
0.64
%
Total nonaccrual loans
$
16,491
$
13,090
Total loans outstanding
1,886,730
2,044,536
Allowance for credit losses on loans as a percentage of nonaccrual loans at period end
114.55
%
155.84
%
Allowance for credit losses on loans
$
18,890
$
20,400
Total nonaccrual loans
16,491
13,090
Net charge-offs/(recoveries) during period to average loans outstanding:
Commercial and industrial:
0.10
%
0.07
%
Net charge-offs
$
165
$
142
Average loans outstanding
162,978
199,807
Construction and land:
—
%
—
%
Net charge-offs
$
—
$
—
Average loans outstanding
9,588
17,887
Commercial estate:
—
%
—
%
Net charge-offs
$
3,206
$
—
Average loans outstanding
1,652,506
1,714,792
Residential:
—
%
0.18
%
Net charge-offs
$
—
$
175
Average loans outstanding
85,130
98,237
Consumer:
0.13
%
(0.09)
%
Net charge-offs/(recoveries)
$
1
$
(2)
Average loans outstanding
769
2,223
Total loans:
0.18
%
0.02
%
Total net charge-offs
$
3,372
$
315
Total average loans outstanding
1,910,971
2,032,945
As of March 31, 2024, the Company individually evaluated $20.2 million in loans, inclusive of $16.5 million of nonperforming loans. Of these individually evaluated loans, $6.8 million had a specific allowance of $1.4 million as of March 31, 2024. As of December 31, 2023, the Company individually evaluated $13.0 million in loans, all of which were on nonaccrual status. Of these individually evaluated loans, $9.7 million had a specific allowance of $4.4 million as of December 31, 2023.
Management considers the allowance for credit losses for loans at March 31, 2024 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for credit losses for loans or that any increased allowance for credit losses for loans that may be required will not adversely impact our financial condition and results of operations. A further decline in national and local economic conditions due to employment levels, labor shortages, the effects of inflation, a potential recession, slowed economic growth or otherwise, could result in a material increase in the allowance for credit losses for loans and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for credit losses for loans is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for credit losses based upon their judgment of information available to them at the time of their examination.
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Deposits. Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.
Total deposits increased $10.2 million, or 0.5%, to $2.1 billion at March 31, 2024 from December 31, 2023. At March 31, 2024, noninterest bearing demand deposits totaled $630.0 million, or 29.4% of total deposits, compared to $646.3 million, or 30.3% of total deposits, at December 31, 2023 . At March 31, 2023, uninsured deposits totaled $949.3 million, or 44.3% of total deposits, compared to $969.2 million, or 45.5% of total deposits at December 31, 2023. Estimated uninsured deposits, excluding collateralized public deposits and affiliate deposits, were approximately 41.4% and 42.1% of total deposits at March 31, 2024 and December 31, 2023, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements.
We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. We also offer an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insurance limits. At March 31, 2024, our average deposit account size (excluding public funds), calculated by dividing period-end deposits by the population of accounts with balances, was approximately $58,000. See Note 17 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our top ten depositors.
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered at the dates indicated.
March 31,
December 31,
2024
2023
% Change
(Dollars in thousands)
Noninterest bearing demand deposits
$
629,962
$
646,278
(2.5)
%
NOW accounts
276,907
283,089
(2.2)
Saving
97,015
102,073
(5.0)
Money market
624,806
624,066
0.1
Time deposits
514,217
477,244
7.7
Total
$
2,142,907
$
2,132,750
0.5
%
Borrowings. Although deposits are our primary source of funds, we may from time to time utilize borrowings as a cost-effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. We are a member of and may obtain advances from the FHLB of San Francisco, which is part of the Federal Home Loan Bank System. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.
At March 31, 2024 and December 31, 2023, we had the ability to borrow up to $508.2 million and $576.9 million, respectively, from the FHLB of San Francisco. At both March 31, 2024 and December 31, 2023, there were no FHLB advances outstanding.
During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans. At March 31, 2024, we had the ability to borrow up to $46.7 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.
We may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At both March 31, 2024 and December 31, 2023, we had a total of $65.0 million in federal funds line available from third-party financial institutions and no balances outstanding at these dates.
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At both March 31, 2024 and December 31, 2023, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, assumed in connection with its previous acquisitions totaling $8.6 million.
At March 31, 2024, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.9 million at December 31, 2023.
We are required to provide collateral for certain local agency deposits. At both March 31, 2024 and December 31, 2023, the FHLB of San Francisco had issued letters of credit on behalf of the Bank totaling $40.6 million, as collateral for local agency deposits.
Shareholders’ equity. Shareholders’ equity increased $1.4 million, to $314.2 million at March 31, 2024 from $312.9 million at December 31, 2023. The increase in shareholders’ equity primarily was due to $5.9 million of net income earned and a $484,000 decrease in accumulated other comprehensive loss, net of taxes, partially offset by the repurchase of $4.0 million of Company common stock and cash dividends paid or accrued payable totaling $1.2 million, during the first three months of 2024. During the three months ended March 31, 2024, the Company repurchased a total of 198,120 shares of its common stock at a total cost of $4.0 million, or $20.20 per share, leaving 161,632 shares available for future purchases under the current stock repurchase plan. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”
Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023
Earnings summary. Net income was $5.9 million for the three months ended March 31, 2024, compared to $7.2 million for the three months ended March 31, 2023, a decrease of $1.3 million or 18.3%. The decrease was the result of a $2.9 million decrease in net interest income, partially offset by a $501,000 increase in noninterest income, a $458,000 decrease in noninterest expenses, and a $554,000 decrease in provision for income taxes. Diluted earnings per share were $0.51 for the three months ended March 31, 2024, compared to $0.57 for the three months ended March 31, 2023.
Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for credit losses and noninterest income, was 65.68% and 61.63% for the three months ended March 31, 2024 and 2023, respectively. The deterioration in the efficiency ratio during the three months ended March 31, 2024 compared to the same period in 2023 was primarily due to lower overall revenues.
Interest income. Interest income for the three months ended March 31, 2024 was $31.7 million, compared to $30.1 million for the three months ended March 31, 2023, an increase of $1.6 million or 5.6%. The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, except loans. Increased yields earned on interest-earning assets, along with an increase in the average balance of fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income, partially offset by a decrease in the average balance of loans.
Interest income on loans, including fees, decreased $998,000, or 3.8%, to $25.3 million for the three months ended March 31, 2024, compared to $26.3 million for the three months ended March 31, 2023, due a $121.5 million decrease in the average balance of loans, partially offset by an eight basis point increase in the average loan yield. The average balance of loans was $1.9 billion for the first quarter of 2024, compared to $2.0 billion for the first quarter of 2023. The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended March 31, 2024, was 5.32%, compared to 5.24% for the three months ended March 31, 2023. The increase in the average yield on loans from the first quarter of 2023 was due to the impact of increased rates on variable rate loans as well as new loans being originated at higher market interest rates.
Interest income on loans for three months ended March 31, 2024 and 2023 included $98,000 and $97,000 respectively, in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts. The remaining net discount on acquired loans was $392,000 and $371,000 at March 31, 2024 and 2023, respectively. Interest income on loans for the three months ended March 31, 2024 and 2023, included $176,000 and $269,000, respectively, in fees related to prepayment penalties.
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Table of Contents
Interest income on investment securities increased $316,000, or 19.3%, to $2.0 million for the three months ended March 31, 2024, compared to $1.6 million for the three months ended March 31, 2023, due to a 72 basis point increase in the average yield earned on investment securities, partially offset by a $3.3 million decrease in the average balance of investment securities. The average yield on investment securities was 4.24% for the three months ended March 31, 2024 compared to 3.52% for the three months ended March 31, 2023. In addition, during the first quarter of 2024, we received $416,000 in cash dividends on our FRB and FHLB stock, up 25.3% from $332,000 received in the first quarter of 2023.
Interest income on federal funds sold and interest-bearing balances in banks increased $2.3 million, or 125.0%, to $4.1 million for the three months ended March 31, 2024, compared to $1.8 million for the three months ended March 31, 2023. The increase was due to a 92 basis point increase in the average yield earned on federal funds sold and, to a lesser extent, a $139.3 million increase in the average balance of federal funds sold and interest-bearing balances in banks. The average yield on federal funds sold and interest-bearing balances in banks was 5.48% for the three months ended March 31, 2024 compared to 4.56% for the three months ended March 31, 2023.
Interest expense. Interest expense increased $4.5 million, or 94.6%, to $9.3 million for the three months ended March 31, 2024, compared to $4.8 million for the three months ended March 31, 2023, reflecting higher funding costs primarily related to increased market rates of interest payable on money market and time deposits. The average rate paid on interest-bearing liabilities for three months ended March 31, 2024 was 2.40% compared to 1.35% for three months ended March 31, 2023. Total average interest-bearing liabilities increased $126.2 million, or 1.05%, to $1.6 billion for the three months ended March 31, 2024, compared to $1.4 billion for the three months ended March 31, 2023.
Interest expense on deposits increased $4.5 million, or 122.4%, to $8.2 million for the three months ended March 31, 2024 compared to $3.7 million for the three months ended March 31, 2023. The increase was driven by higher rates paid on money market accounts and time deposits and, to a lesser extent, an increase in the average balance of time deposits. Specifically, rates on money market accounts and time deposits increased by 103 basis points and 159 basis points, respectively, during the three months ended March 31, 2024, compared to the same period in 2023. The average balance of time deposits also increased, rising by $163.5 million, or 50.3%, to $488.7 million during the three months ended March 31, 2024, compared to $325.3 million during the same period in 2023.
The average rate paid on all interest-bearing deposits increased by 112 basis points to 2.22% for the three months ended March 31, 2024, compared to 1.10% for the three months ended March 31, 2023. The average balance of interest-bearing deposits totaled $1.5 billion for the three months ended March 31, 2024, compared to $1.4 billion for the three months ended March 31, 2023. The overall average cost of deposits for the three months ended March 31, 2024 and 2023 was 1.55% and 0.71%, respectively. Meanwhile, t he average balance of noninterest-bearing deposits decreased $102.3 million, or 13.8%, to $639.7 million for the three months ended March 31, 2024 compared to $742.0 million for the same period in 2022.
Interest expense on borrowings increased $11,000, or 1.00%, to $1.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, due to a 98 basis point increase in the average rate paid on junior subordinated debentures. The average cost of total borrowings increased to 6.18% for the three months ended March 31, 2024, compared to 6.05% for the three months ended March 31, 2023. The average balance of borrowings decreased $654,000 to $72.3 million during the three months ended March 31, 2024, compared to $72.9 million during the three months ended March 31, 2023.
Net interest income and net interest margin. Net interest income decreased $2.9 million, or 11.3%, to $22.4 million for the three months ended March 31, 2024, compared to $25.3 million for the three months ended March 31, 2023. The decrease in net interest income primarily was due to an increase in interest expense on deposits and a decrease in interest income on loans, partially offset by increases in interest income on federal funds sold and interest-bearing balances in banks, interest income on investment securities and dividends on FHLB stock.
The average yield (annualized) on interest earning assets for the three months ended March 31, 2024 increased to 5.28%, a 21 basis point increase from 5.07% for the three months ended March 31, 2023, while the average cost of interest bearing liabilities increased 105 basis points to 2.40% for the three months ended March 31, 2024, compared to 1.35% for the three months ended March 31, 2023. The increases in average yields on interest-earning assets and
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average rates paid on interest-bearing liabilities during the three months ended March 31, 2024, compare to the same periods in 2023, were due to higher market interest rates generally.
The annualized net interest margin was 3.72% and 4.26%, for the three months ended March 31, 2024 and 2023, respectively. Net interest margin in the first quarter of 2024 as compared to the first quarter of 2023 was negatively impacted by increasing funding costs, due to shifts towards higher yielding deposits, which outpaced, on a percentage basis, increasing yields on interest-earning assets.
Average Balances, Interest and Average Yields/Cost. The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average costs; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Nonaccrual loans have been included in the table as loans carrying a zero yield. Yields have been calculated on a pre-tax basis. Loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.
Three months ended March 31,
2024
2023
(Dollars in thousands)
Annualized
Annualized
Average
Average
Average
Average
Balance (1)
Interest
Yield/Cost
Balance(1)
Interest
Yield/Cost
(Dollars in thousands)
Interest earning assets
Fed Funds sold and interest-bearing balances in banks
$
302,120
$
4,115
5.48
%
$
162,796
$
1,829
4.56
%
Investments securities
185,704
1,956
4.24
%
188,974
1,640
3.52
%
FHLB Stock
11,313
272
9.68
%
10,679
188
7.16
%
FRB Stock
9,633
144
6.01
%
9,606
144
6.08
%
Total loans
1,910,971
25,257
5.32
%
2,032,442
26,255
5.24
%
Total interest earning assets
2,419,741
31,744
5.28
%
2,404,497
30,056
5.07
%
Noninterest earning assets
131,293
128,432
Total average assets
$
2,551,034
$
2,532,929
Interest bearing liabilities
Savings
$
97,519
31
0.13
%
$
119,597
40
0.14
%
NOW accounts
284,005
64
0.09
%
316,307
74
0.10
%
Money market
621,509
3,397
2.20
%
603,784
1,737
1.17
%
Time deposits
488,745
4,735
3.90
%
325,286
1,849
2.31
%
Total interest bearing deposit accounts
1,491,778
8,227
2.22
%
1,364,974
3,700
1.10
%
Subordinated debt, net
63,715
893
5.64
%
63,728
896
5.70
%
Junior subordinated debentures, net
8,572
217
10.20
%
8,491
193
9.22
%
Other borrowings
—
—
—
%
722
10
—
%
Total interest bearing liabilities
1,564,065
9,337
2.40
%
1,437,915
4,799
1.35
%
Noninterest bearing deposits
639,737
742,037
Other noninterest bearing liabilities
31,222
34,101
Noninterest bearing liabilities
670,959
776,138
Total average liabilities
2,235,024
2,214,053
Average equity
316,010
318,876
Total average liabilities and equity
$
2,551,034
$
2,532,929
Net interest income
$
22,407
$
25,257
Interest rate spread (2)
2.88
%
3.72
%
Net interest margin (3)
3.72
%
4.26
%
Ratio of average interest earning assets to average interest bearing liabilities
154.71
%
167.22
%
(1) Average balances are computed using average daily balances.
(2) Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.
(3) Net interest margin is calculated as net interest income divided by total average interest earning assets.
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Table of Contents
Rate/Volume Analysis. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume.
Three months ended March 31,
2024 compared to 2023
Increase/(Decrease)
Attributable to
Rate
Volume
Total
(Dollars in thousands)
Interest earning assets
Fed funds sold and interest bearing balances in banks
$
742
$
1,544
$
2,286
Investments securities
344
(28)
316
FHLB stock and FRB stock
73
11
84
Total loans
550
(1,548)
(998)
Total interest income
1,709
(21)
1,688
Interest bearing liabilities
Savings
(2)
(7)
(9)
NOW accounts
(2)
(8)
(10)
Money market accounts
1,610
50
1,660
Time deposits
1,969
917
2,886
Total deposit accounts
3,575
952
4,527
Subordinated debt, net
(3)
—
(3)
Junior subordinated debentures, net
22
2
24
Other borrowings
(10)
—
(10)
Total interest expense
3,584
954
4,538
Net interest income
$
(1,875)
$
(975)
$
(2,850)
Provision for credit losses. We recorded a $262,000 and a $315,000 provision for credit losses for loans for the three months ended March 31, 2024 and 2023, respectively. The provision for credit losses for loans in the first quarter of 2024 was mainly driven by a replenishment of the allowance due to net charge-offs during the period, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves. Net chares-offs totaled $3.4 million during the first quarter of 2024, of which $3.2 million was specifically reserved for at December 31, 2023. No changes were made to the qualitative risk factor conclusions during the first quarter of 2024. The quantitative reserve was impacted by improvement in forecasted economic conditions, specifically, national unemployment and national gross domestic product, both of which are key indicators utilized to estimate credit losses.
Noninterest income. Noninterest income increased $501,000, or 32.1%, to $2.1 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023. The increase was primarily due to a $1.5 million increase in gain on equity securities, partially offset by a $519,000 decrease in income on an investment in a Small Business Investment Company (“SBIC”) fund and a $412,000 decrease in gain on sale of loans.
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Table of Contents
The following table presents the key components of noninterest income for the periods indicated:
Three months ended March 31,
2024
2023 (As Restated)
$ Change
% Change
(Dollars in thousands)
Gain on sale of loans
$
—
$
412
$
(412)
(100.0)
%
Gain (loss) on equity securities
573
(896)
1,469
(164.0)
%
Service charges and other fees
839
885
(46)
(5.2)
%
Loan servicing and other loan fees
392
410
(18)
(4.4)
%
(Loss) income on investment in SBIC fund
(30)
489
(519)
106.1
%
Other income and fees
288
261
27
10.3
%
Total noninterest income
$
2,062
$
1,561
$
501
32.1
%
Noninterest expense. Noninterest expense decreased $458,000, or 2.8%, to $16.1 million for the three months ended March 31, 2024 compared to $16.5 million for the three months ended March 31, 2023. The decrease primarily was due to a $1.0 million decrease in salaries and employee benefits as a result of a $675,000 decrease in bonus accrual, a decrease in full-time equivalent employees, and a reduction in deferred loan origination expenses, partially offset by wage increases during 2024. This decrease was partially offset by a $288,000 increase in data processing expense due to decline in pricing credits offered and expenses relating to enhancements to the Bank’s network, a $127,000 increase in other expense due to increased FDIC insurance costs and professional fees, and a $127,000 increase in occupancy and equipment expense.
The following table details the components of noninterest expense for the periods indicated:
Three months ended March 31,
2024
2023
$ Change
% Change
(Dollars in thousands)
Salaries and employee benefits
$
10,036
$
11,036
$
(1,000)
(9.1)
%
Occupancy and equipment
2,154
2,027
127
6.3
%
Data processing
1,753
1,465
288
19.7
%
Other
2,128
2,001
127
6.3
%
Total noninterest expense
$
16,071
$
16,529
$
(458)
(2.8)
%
Income taxes. The provision for income taxes decreased $554,000, or 19.6%, to $2.3 million the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023 due to lower taxable income. The Company’s effective tax rate was 27.9% and 28.2% for three months ended March 31, 2024 and 2023, respectively. The effective tax rate was lower for the three months ended March 31, 2024, compared to the same period in 2023, due to higher low income housing tax credits .
Liquidity and Capital Resources
Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis, it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources to meet our potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. During the three months ended March 31, 2024, the Bank sold no loans or loan participation interests and received $72.4 million in principal loan repayments. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.
Deposits increased $15.1 million to $2.1 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities, increased $165.0 million to $517.2 million at March 31, 2024 from December
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31, 2023. Management believes that our securities portfolio is of high quality and the securities would therefore be marketable. Securities purchased during the three months ended March 31, 2024, totaled $7.1 million and securities repayments, maturities and sales during the period were $3.0 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2024, totaled $266.5 million. It is management’s policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.
In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of March 31, 2024, the Bank had an available borrowing capacity of $508.2 million with the FHLB of San Francisco, with no borrowings outstanding at that date or at December 31, 2023. During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans. At March 31, 2024, we had the ability to borrow up to $46.7 million, from the FRB of San Francisco, with no borrowings outstanding at that date. The Bank also had, as of that date, federal funds lines with available commitments totaling $65.0 million with four correspondent banks. There were no amounts outstanding under these facilities at March 31, 2024 and December 31, 2023. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.
Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $73.8 million, including $48,000 of undisbursed construction and development loan commitments, at March 31, 2024. For information regarding our commitments, see “Note 17 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1. Financial Information” of Part I of this report.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities for the three months ended March 31, 2024 was $5.1 million, compared to $8.2 million provided by operating activities for the three months ended March 31, 2023. During the three months ended March 31, 2024, net cash provided by investing activities was $31.0 million, which consisted primarily of net decrease in loans receivable, compared to $21.0 million of cash used in investing activities for the three months ended March 31, 2023. Net cash provided by financing activities for the three months ended March 31, 2024 was $4.7 million, which was comprised primarily of net increase in deposits, compared to $33.6 million provided by financing activities during the three months ended March 31, 2023. Management believes our capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements. There has not been a material change in our liquidity and capital resources since the information disclosed in our 2023 Annual Report other than set forth above. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.
BayCom Corp is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, 2024, BayCom Corp had liquid assets of $18.8 million. In addition to its operating expenses, BayCom Corp is responsible for paying to its shareholders any dividends that have been declared, funding stock repurchases, and making payments on its junior subordinated debentures and subordinated notes. BayCom Corp can receive dividends and other capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends and make other capital distributions.
On March 6, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share on the Company’s outstanding common stock, payable on April 12, 2024 to shareholders of record as of the close of business on March 16, 2024. The Company expects to continue to pay quarterly cash dividends on its common stock, subject to the Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment of the cash dividend at this rate of $0.10 per share, our average total dividend paid each quarter would be approximately $1.2 million based on the number of our outstanding shares at March 31, 2024. The dividends we pay if any, may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I. Item 1. Business” of the 2023 Annual Report.
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From time to time, our Board of Directors has authorized stock repurchase programs. In general, stock repurchases allow us to proactively manage our capital position and return excess capital to shareholders. Stock repurchases also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. In August 2023, our Board of Directors announced a new stock repurchase program, to commence following completion of the existing stock repurchase program (which was completed during the quarter ended September 30, 2023), for the repurchase of up to 588,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one year period. Purchases under the Company’s stock repurchase programs may be made through open market purchases, privately negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The repurchase programs 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 Company’s stock repurchase programs do not obligate the Company to purchase any particular number of shares. As of March 31, 2024, there remained 161,632 shares available for repurchase under the Company’s existing stock repurchase program. For additional information on the Company’s stock repurchases, see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.
Regulatory Capital
The Bank, as a state-chartered, federally insured commercial bank, and member of the Board of Governors of the Federal Reserve System, is subject to capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain levels of capital adequacy that generally parallel the FDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “Well Capitalized” status under the Federal Reserve regulations. Based on capital levels at March 31, 2024 and December 31, 2023, the Bank was considered Well Capitalized at both of those dates.
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The table below shows the capital ratios under the Basel III capital framework as of the dates indicated:
At March 31, 2024
At December 31, 2023
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Leverage Ratio
BayCom Corp
$
284,598
11.66
%
$
282,402
11.56
%
Minimum requirement for “Well Capitalized”
122,037
5.00
%
122,135
5.00
%
Minimum regulatory requirement
97,629
4.00
%
97,708
4.00
%
United Business Bank
335,964
13.41
%
328,303
13.08
%
Minimum requirement for “Well Capitalized”
125,244
5.00
%
125,479
5.00
%
Minimum regulatory requirement
100,195
4.00
%
100,383
4.00
%
Common Equity Tier 1 Ratio
BayCom Corp
284,598
14.17
%
282,402
14.41
%
Minimum requirement for “Well Capitalized”
130,572
6.50
%
127,400
6.50
%
Minimum regulatory requirement
90,396
4.50
%
8,820
4.50
%
United Business Bank
335,964
16.91
%
328,303
16.94
%
Minimum requirement for “Well Capitalized”
129,136
6.50
%
125,987
6.50
%
Minimum regulatory requirement
89,402
4.50
%
87,222
4.50
%
Tier 1 Risk-Based Capital Ratio
BayCom Corp
294,083
14.64
%
291,887
14.89
%
Minimum requirement for “Well Capitalized”
160,704
8.00
%
156,800
8.00
%
Minimum regulatory requirement
120,528
6.00
%
117,600
6.00
%
United Business Bank
335,964
16.91
%
328,303
16.94
%
Minimum requirement for “Well Capitalized”
158,936
8.00
%
155,062
8.00
%
Minimum regulatory requirement
119,202
6.00
%
116,296
6.00
%
Total Risk-Based Capital Ratio
BayCom Corp
377,873
18.81
%
379,112
19.34
%
Minimum requirement for “Well Capitalized”
200,880
10.00
%
196,000
10.00
%
Minimum regulatory requirement
160,704
8.00
%
156,800
8.00
%
United Business Bank
355,069
17.87
%
350,528
18.08
%
Minimum requirement for “Well Capitalized”
198,670
10.00
%
193,827
10.00
%
Minimum regulatory requirement
158,936
8.00
%
155,062
8.00
%
In addition to the minimum capital ratios, the Bank must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At March 31, 2024, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary bank(s) to be Well Capitalized under the prompt corrective action regulations. If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2023, 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. Financial Statements and Supplementary Data” in the 2023 Annual Report.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.