BAYCOM CORP This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations ofBayCom Corp and its subsidiary,United Business Bank . Because we conduct all of our material business operations through the Bank, the entire discussion relates to activities primarily conducted by the Bank.
History and Overview
BayCom is a bank holding company headquartered inWalnut Creek, California . The Company's wholly owned banking subsidiary,United Business Bank , provides a broad range of financial services primarily to businesses and business owners, as well as individuals, through its network of 34 full-service branches atDecember 31, 2022 , with 16 locations inCalifornia , two inWashington , five inNew Mexico and 11 inColorado . 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 ten strategic acquisitions, which includes our most recent acquisition of PEB 47
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which closed inFebruary 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. 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 organic growth, expense management and believe the markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase our current market share. We believe our geographic footprint, which includes theSan Francisco Bay Area and the metropolitan markets ofLos Angeles, California ,Seattle, Washington ,Denver , andColorado and community markets includingAlbuquerque, New Mexico , andCuster ,Delta andGrand counties,Colorado , provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. AtDecember 31, 2022 , the Company, on a consolidated basis, had assets of$2.5 billion , deposits of$2.1 billion and shareholders' equity of$317.1 million . We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. AtDecember 31, 2022 , we had$2.0 billion in total loans. Of this amount$527.8 million , or 26.1%, consisted of loans we acquired (all of which were recorded to their estimated fair values at the time of acquisition), and$1.5 billion , or 73.9%, consisted of loans we originated. The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less the provision for loan losses. The significant increase in the targeted federal funds rate during the period endedDecember 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 endedDecember 31, 2022 , as compared to 3.34% for the year endedDecember 31, 2021 . The increase in net interest margin during 2022 primarily reflects higher yields on average interest earning assets and average cost of interest-bearing liabilities. 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. 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. 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. SinceMarch 2022 , in response to inflationary pressures, theFOMC of theFederal 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 ofDecember 31, 2022 . As it seeks to control inflation without creating a recession, theFOMC has indicated further increases are expected during 2023. If theFOMC increases the targeted federal funds rates, overall interest rates will likely rise, which will positively impact our net interest income, but may negatively impact theU.S. economy. 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. We believe our balance sheet is structured to enhance our net interest margin if theFOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recentFederal 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. We recorded a$4.4 million provision for loan losses for the year endedDecember 31, 2022 , primarily due to$3.2 million in net charge-offs during the year endedDecember 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. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) other noninterest income. Our noninterest income decreased$595,000 during the year endedDecember 31, 2022 , as compared to 2021, primarily 48
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attributable to a$2.0 million decrease in gain on sale of loans. Noninterest expense includes, among other things: (i) salaries and related benefits; (ii) occupancy and equipment expense; (iii) data processing; (iv)FDIC and state assessments; (v) outside and professional services; (vi) amortization of intangibles; and (vii) other general and administrative expenses. Our noninterest expenses increased$10.8 million during the year endedDecember 31, 2022 , as compared to 2021. 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 inFebruary 2022 , coupled with retention incentives and salary adjustments due to upward market pressure on wages in 2022. 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
Our strategy is to continue to make strategic acquisitions of financial institutions within theWestern United States , grow organically and preserve our strong asset quality through disciplined lending practices. We seek to achieve these results by focusing on the following:
Strategic Consolidation of
selectively acquiring and integrating community banks has provided us with
economies of scale and improved our overall franchise efficiency. We expect to
continue to pursue strategic acquisitions of financial institutions and believe
our target market areas present us with numerous acquisition opportunities as
many of these financial institutions will continue to be burdened and
challenged by new and more complex banking regulations, resource constraints,
competitive limitations, rising technological and other business costs,
management succession issues and liquidity concerns. In addition, we believe
that the breadth of our operating experience and successful track record of
integrating prior acquisitions increases the potential acquisition
opportunities available to us. We will continue to employ a disciplined
approach to our acquisition strategy and only seek to identify and partner with
financial institutions that possess attractive market share, low-cost deposit
funding and compelling noninterest income generating businesses. Our
? disciplined approach to acquisitions, consolidations and integrations, includes
the following: (i) selectively acquiring community banking franchises only at
appropriate valuations, after taking into account risks that we perceive with
respect to the targeted bank; (ii) completing comprehensive due diligence and
developing an appropriate plan to address any non-acquired credit problems of
the targeted institution; (iii) identifying an achievable cost savings
estimate; (iv) executing definitive acquisition agreements that we believe
provide adequate protections to us; (v) installing our credit procedures, audit
and risk management policies and procedures, and compliance standards upon
consummation of the acquisition; (vi) collaborating with the target's
management team to execute on synergies and cost saving opportunities related
to the acquisition; and (vii) involving a broader management team across
multiple departments in order to help ensure the successful integration of all
business functions. We believe this approach allows us to realize the benefits
of our acquisition and consolidation strategy. We also expect to continue to
manage our branch network in order to ensure effective coverage for clients
while minimizing any geographic overlap and driving corporate efficiency.
Enhance the Performance of the Banks We Acquire. We strive to successfully
integrate the banks we acquire into our existing operational platform and
enhance shareholder value through the creation of efficiencies within the
combined operations. We seek to realize operating efficiencies from our
recently completed acquisitions by utilizing technology to streamline our
? operations. We continue to centralize the back-office functions of our acquired
banks, as well as realize cost savings through the use of third-party vendors
and technology, in order to take advantage of economies of scale as we continue
to grow. We intend to focus on initiatives that we believe will provide
opportunities to enhance earnings, including the continued rationalization of
our retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.
Focus on Lending Growth in Our Metropolitan Markets While Increasing Deposits
in Our Community Markets. Our banking footprint has given us experience
operating in small communities and large cities. 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. In acquiring
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local and regional unionized labor community. As of
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.
Our Team of Seasoned Bankers Represents an Important Driver of our Organic
Growth by Expanding Banking Relationships with Current and Potential Clients.
We expect to continue to make opportunistic hires of talented and
entrepreneurial bankers, to further augment our growth. Our bankers are
incentivized to increase the size of their loan and deposit portfolios and
? generate fee income while maintaining strong credit quality. We also seek to
cross sell our various banking products, including our deposit products, to our
commercial loan clients, which provides a basis for expanding our banking
relationships as well as a stable, low-cost deposit base. 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.
Preserve Our Asset Quality Through Disciplined Lending Practices. Our approach
to credit management uses well defined policies and procedures, disciplined
underwriting criteria and ongoing risk management. We believe we are a
competitive and effective commercial lender, supplementing ongoing and active
loan servicing with early-stage credit review provided by our bankers. This
approach has allowed us to maintain loan growth with a diversified portfolio of
? assets. We believe our credit culture supports accountability amongst our
bankers, who maintain an ability to expand our client base as well as make
sound decisions for our Company. As of
nonperforming assets to total assets was 0.61% and our ratio of nonperforming
loans to total loans was 0.75%. In the 18 years since our inception, which
timeframe includes the recent recession in the
have cumulative net charge-offs of
managing asset quality is illustrated by our aggregate net charge-off history.
Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP. In doing so, we have to make estimates and assumptions. 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. Accordingly, actual results could differ materially from our estimates. 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. 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.
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. The allowance for loan losses is evaluated on a
regular basis by management. Periodically, we charge current earnings with
provisions for estimated probable losses of loans receivable. The provision or
adjustment takes into consideration the adequacy of the total allowance for loan
losses giving due consideration to specifically identified problem loans, the
financial condition of the borrowers, fair value of the underlying collateral,
recourse provisions, prevailing economic conditions, and other factors.
Additional consideration is given to our historical
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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. In
addition, regulatory examiners may require additional allowances based on their
judgments of the information regarding problem loans and credit risk available
to them at the time of their examinations.
Generally, the allowance for loan losses consists of various components
including a component for specifically identified weaknesses as a result of
individual loans being impaired, a component for general non- specific weakness
related to historical experience, economic conditions and other factors that
indicate probable loss in the loan portfolio. Loans determined to be impaired
are individually evaluated by management for specific risk of loss.
In situations where, for economic or legal reasons related to a borrower's
financial difficulties, we grant a concession to the borrower that we would not
otherwise consider, the related loan is classified as a troubled debt
restructuring, or TDR. We measure any loss on the TDR in accordance with the
guidance concerning impaired loans set forth above. Additionally, TDRs are
generally placed on nonaccrual status at the time of restructuring and included
in impaired loans. These loans are returned to accrual status after the borrower
demonstrates performance with the modified terms for a sustained period of time
(generally six months) and has the capacity to continue to perform in accordance
with the modified terms of the restructured debt.
Estimated expected cash flows related to purchased credit impaired loans
("PCI"). Loans purchased with evidence of credit deterioration since
origination for which it is probable that all contractually required payments
will not be collected are accounted for under Accounting Standards Codification
("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit
Quality. In situations where such PCI loans have similar risk characteristics,
loans may be aggregated into pools to estimate cash flows. A pool is accounted
for as a single asset with a single interest rate, cumulative loss rate and cash
flow expectation.
The cash flows expected over the life of the PCI loan or pool are estimated
using an internal cash flow model that projects cash flows and calculates the
carrying values of the pools, book yields, effective interest income and
impairment, if any, based on pool level events. Assumptions as to default rates,
loss severity and prepayment speeds are utilized to calculate the expected cash
flows.
Expected cash flows at the acquisition date in excess of the fair value of loans
are considered to be accretable yield, which is recognized as interest income
over the life of the loan or pool using a level yield method if the timing and
amounts of the future cash flows of the pool are reasonably estimable.
Subsequent to the acquisition date, any increase in cash flow over those
expected at purchase date in excess of fair value is recorded as interest income
prospectively. Any subsequent decreases in cash flow over those expected at
purchase date are recognized by recording an allowance for loan losses. Any
disposals of loans, including sales of loans, payments in full or foreclosures
result in the removal of the loan from the loan pool at the carrying amount.
Business combinations. We apply the acquisition method of accounting for
business combinations. Under the acquisition method, the acquiring entity in a
business combination recognizes all of the identifiable assets acquired and
liabilities assumed at their acquisition date fair values. Management utilizes
prevailing valuation techniques appropriate for the asset or liability being
measured in determining these fair values. Any excess of the purchase price over
amounts allocated to assets acquired, including identifiable intangible assets,
and liabilities assumed is recorded as goodwill. Where amounts allocated to
assets acquired and liabilities assumed is greater than the purchase price, a
bargain purchase gain is recognized. Acquisition related costs are expensed as
incurred unless they are directly attributable to the issuance of the Company's
common stock in a business combination.
Loan sales and servicing of financial assets. Periodically, we sell loans and
retain the servicing rights. The gain or loss on sale of loans depends in part
on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer. All servicing assets and
liabilities are initially measured at fair value. In addition, we amortize
servicing rights in proportion to and over the period of the estimated net
servicing income or loss and assess the rights for impairment.
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Income taxes. Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carry forwards depends on having sufficient taxable income of an appropriate character within the carry forward periods.
We recognize that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.
Goodwill .Goodwill , which has resulted from a number of our acquisitions, is reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit below its carrying amount. We make a qualitative assessment whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. Such indicators may include, among others: a significant adverse change in legal factors or in the general business climate; significant decline in the Company's stock price and market capitalization; unanticipated competition; and an adverse action or assessment by a regulator. Any adverse changes in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial condition and results of operations.
The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients. As ofDecember 31, 2022 , all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
Comparison of Financial Condition at
Total assets. Total assets increased$162.6 million , or 6.9%, to$2.5 billion atDecember 31, 2022 from$2.4 billion atDecember 31, 2021 . 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. 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. Cash and cash equivalents decreased$202.9 million , or 53.4%, to$176.8 million atDecember 31, 2022 from$379.7 million atDecember 31, 2021 . 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. Securities. Investment securities, all of which are classified as available-for-sale, decreased$6.7 million , or 3.8%, to$167.8 million atDecember 31, 2022 from$174.4 million atDecember 31, 2021 . 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$28.9 million of investment securities during the year endedDecember 31, 2022 . The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as ofDecember 31, 2022 . Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis. 52 Table of Contents Amount Due or Repricing Within: One Year Over One Over Five Over or Less to Five Years to Ten Years Ten Years Total Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield (Dollars in thousands) U.S. Government Agencies$ 1,505 4.28 % $ - - % $ - - % $ - - %$ 1,505 4.28 % Preferred equity securities - - 18,330 0.05 - - - - 18,330 0.05 Municipal securities 1,155 2.20 5,902 2.11 10,888 1.37 3,154 4.27 21,099
2.06
Mortgage-backed securities 23 3.48 5,103
3.03 6,081 1.69 25,992 2.83 37,199
2.67
Collateralized mortgage obligations 2,310 3.23 4,623 3.63 3,658 2.26 17,562 2.04 28,153 2.43 SBA securities 1 4.12 264 5.96 1,044 2.77 3,072 4.76 4,381 4.36 Corporate bonds - - 3,000 5.00 73,400 4.28 1,500 5.69 77,900 4.33 Total$ 4,994 3.31 %$ 37,222 3.29 %$ 95,071 3.68 %$ 51,280 2.85 %$ 188,567 3.42 %
See "Note 3 -
Loans, net. We originate a wide variety of loans with a focus on commercial
real estate ("CRE") loans and commercial and industrial loans. Loans receivable,
net of allowance for loan losses, increased $355.0 million , or 21.6%, to $2.0
billion at December 31, 2022 , from $1.7 billion at December 31, 2021 . 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 $34.0 million in loan sales. Loan originations in 2022 were
concentrated in California markets, primarily Los Angeles , Irvine /Southern
California , San Francisco Bay Area and Sacramento /Northern California with
commercial and multifamily real estate secured loans accounting for the majority
of the originations.
The following table provides information about our loan portfolio by type of
loan, with PCI loans presented as a separate balance, at the dates presented.
As of December 31,
2022 2021
Percent Percent
of of
Amount Total Amount Total
(Dollars in thousands)Commercial and industrial (1)$ 184,521 9.1 %$ 229,871
13.8 % Real estate: Residential 109,927 5.4 116,656 7.0 Multifamily residential 234,868 11.6 206,960 12.4 Owner occupied CRE 641,815 31.8 393,978 23.6 Non-owner occupied CRE 807,996 40.0 688,600 41.3 Construction and land 9,109 0.5 13,371 0.8 Total real estate 1,803,715 89.3 1,419,565 85.2 Consumer 4,183 0.2 5,138 0.3 PCI loans 28,787 1.4 12,219 0.7 Total Loans 2,021,206 100.0 % 1,666,793 100.0 % Net deferred loan fees (82) (1,903) Allowance for loan losses (18,900) (17,700) Loans, net$ 2,002,224 $ 1,647,190
(1) Includes
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The following table shows at
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)
Commercial and industrial $ 54,056 7.8 % $ 92,546 10.1 % $ 146,602 9.1 % $ 41,936 10.2 % $ 188,538 9.3 %
Real estate:
Residential 17,112 2.5 % 52,081 5.7 % 69,193 4.3 % 41,413 10.1 % 110,606 5.5 %
Multifamily residential 58,533 8.4 % 108,198 11.8 % 166,731 10.4 % 70,974 17.3 % 237,705 11.8 %
Owner occupied CRE 242,755 35.0 % 363,210 39.7 % 605,965 37.6 % 52,191 12.7 % 658,156 32.6 %
Non-owner occupied CRE 321,523 46.3 % 289,528 31.6 % 611,051 37.9 % 197,804 48.1 % 808,855 40.0 %
Construction and land - - % 8,678 0.9 % 8,678 0.5 % 4,485 1.1 % 13,163 0.7 %
Total real estate 639,923 821,695 1,461,618 366,867 1,828,485
Consumer 391 0.1 % 1,672 0.2 % 2,063 0.1 % 2,120 0.5 % 4,183 0.2 %
Total loans $ 694,370 $ 915,913 $ 1,610,283 $ 410,923 $ 2,021,206 (1) Includes Alameda,
(2) Includes loans located in
(3) Includes loans located in the states of
The following table provides information about our loan portfolio segregated by legacy and acquired loans, net of their discounts at the dates presented.
As of December 31,
2022 2021
Non- Non-
Acquired Acquired Total Acquired Acquired Total
(Dollars in thousands)Commercial and industrial$ 156,363 $ 28,158 $ 184,521 $ 226,499 $ 3,372 $ 229,871 Real estate: Residential 101,077 8,850 109,927 98,707 17,949 116,656 Multifamily residential 234,610 258 234,868 203,599 333 203,932 Owner-occupied CRE 488,904 152,911 641,815 384,778 4,087 388,865 Non-owner occupied CRE 770,021 37,975 807,996 683,997 12,744 696,741 Construction and land 5,739 3,370 9,109 12,809 562 13,371 Total real estate 1,600,351 203,364 1,803,715 1,383,890 35,675 1,419,565 Consumer 4,183 - 4,183 5,118 20 5,138 PCI loans 2,930 25,857 28,787 - 12,219 12,219 Total Loans 1,763,827 257,379 2,021,206 1,615,507 51,286 1,666,793
Deferred loan fees and (82) - (82) (1,907) 4 (1,903) costs, net Allowance for loan losses (18,900) - (18,900)
(17,700) - (17,700) Loans, net$ 1,744,845 $ 257,379 $ 2,002,224 $ 1,595,900 $ 51,290 $ 1,647,190 54 Table of Contents The following table schedules illustrate the contractual maturity and repricing information for our loan portfolio atDecember 31, 2022 . Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. Purchased credit impaired loans are reported at their contractual interest rate. The schedule does not reflect the effects of possible prepayments or enforcement of due on sale clauses. Maturing Maturing Maturing After One After Five Maturing Within to Five to Fifteen After Fifteen One Year Years Years Years Total (Dollars in thousands) Commercial and industrial$ 25,698 $ 81,608 $ 74,797 $ 2,418$ 184,521 Real estate: Residential 1,764 39,273 32,783 36,107 109,927 Multifamily residential 1,014 35,602 103,929 94,323 234,868 Owner-occupied CRE 32,745 136,555 333,671 138,844 641,815 Non-owner occupied CRE 52,487 113,599 635,212 6,698 807,996 Construction and land 1,684 979 6,139 307 9,109 Total real estate 89,694 326,008 1,111,734 276,279 1,803,715 Consumer and other 1,721 785 1,677 - 4,183 PCI loans 1,100 8,482 9,736 9,469 28,787 Total loans$ 118,213 $ 416,883 $ 1,197,944 $ 288,166 $ 2,021,206
The following table sets forth the amounts of loans due after
Floating or
Fixed Adjustable
Rate Rate Total
(Dollars in thousands)
Commercial and industrial $ 110,006 $ 48,817 $ 158,823
Real estate:
Residential 27,657 80,506 108,163
Commercial Real Estate 466,921 1,131,512 1,598,433
Construction and land 511 6,914 7,425
Total real estate 495,089 1,218,932 1,714,021
Consumer and other 332 2,130 2,462
PCI loans 2,902 24,785 27,687
Total loans $ 608,329 $ 1,294,664 $ 1,902,993
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The following table sets forth the originations, purchases, sales and repayments of loans as of the dates indicated.
Years ended December 31,
2022 2021 2020
(Dollars in thousands)
Loans originated
Commercial and industrial $ 16,461 $ 108,275 $ 157,997
Real estate:
Residential 1,202 6,855 7,040
Multifamily residential 46,215 30,795 14,623
Owner occupied CRE 142,819 82,457 53,167
Non-owner occupied CRE 220,139 288,096 92,352
Construction and land 1,381 4,309 6,277
Total real estate 411,756 412,512 173,459
Consumer 518 24 97
Total loans originated 428,735 520,811 331,553
Loans purchased or acquired through acquisitions
Loans acquired through acquisitions, net 412,851 - 98,410 Other loans purchased 14,082 11,950 67,636 Loans sold Commercial and Industrial (5,604) (12,471) (9,918) Owner occupied CRE (28,353) (32,880) (14,035) Non-owner occupied CRE - (495) - Other Principal repayments (469,567) (467,531) (281,020)
Transfer to real estate owned - - (505) Increase in allowance for loan losses and other items, net (1,200) (200) (10,100) Net increase in loans receivable and loans held for sale$ 350,944 $
19,184
Nonperforming assets and nonaccrual loans. Nonperforming assets consist of
nonaccrual loans, accruing loans more than 90 days delinquent and other real
estate owned ("OREO"). 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. 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 . At December 31, 2022 and 2021, $839,000 and $822,000 of the Company's
nonperforming loans were guaranteed by governmental agencies, respectively.
Other real estate owned totaled $21,000 at both December 31, 2022 , and
December 31, 2021 .
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 . The decrease in past due 30
to 89 days at December 31, 2022 primarily related loans which have since been
brought current. 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. 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. 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. Generally, loans with temporarily
impaired values and loans to borrowers experiencing financial difficulties are
placed on nonaccrual status even though the borrowers continue to repay the
loans as scheduled. Such loans are categorized as performing nonaccrual loans
and are reflected in nonperforming assets. Interest received on such loans is
recognized as interest income when received. A
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nonaccrual loan is restored to an accrual basis when principal and interest payments are paid current, and full payment of principal and interest is probable. Loans that are well secured and in the process of collection will remain on accrual status.
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date, without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality, and impaired loans with evidence of significant credit deterioration.
Pass rated loans (typically performing loans) are accounted for in accordance
? with ASC Topic 310-20 "Nonrefundable Fees and Other Costs" as these loans do
not have evidence of credit deterioration since origination.
Non-impaired loans (typically performing substandard loans) are accounted for
? in accordance with ASC Topic 310-30, if they display at least some level of
credit deterioration since origination.
Impaired loans (typically substandard loans on nonaccrual status) are accounted
? for in accordance with ASC Topic 310-30, as they display significant credit
deterioration since origination.
For pass rated loans (non-purchased credit impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.
In accordance with ASC Topic 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows. Troubled debt restructured loans. Troubled debt restructurings, or TDRs, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. TDR loans atDecember 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 atDecember 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. There was a related allowance for loan losses on the TDR loans totaled$393,000 and zero atDecember 31, 2022 and 2021, respectively. 57
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The following table sets forth the nonperforming loans, nonperforming assets and troubled debt restructured loans as of the dates indicated:
December 31, December 31,
2022 2021
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial $ 869 $ 753
Real estate:
Residential 2,213 1,587
Multifamily residential 5,351 200
Owner occupied CRE 5,491 3,990
Non-owner occupied CRE 365 322
Construction and land - 36
Total real estate 13,420 6,135
Consumer - -
Total nonaccrual loans 14,289 6,888Accruing loans 90 days or more past due 934
- Total nonperforming loans 15,223 6,888 Real estate owned 21 21
Total nonperforming assets (1)$ 15,244 $
6,909
Troubled debt restructurings - performing 759
805
PCI loans$ 28,787 $
12,219
Nonperforming assets to total assets (1) 0.61 % 0.29 % Nonperforming loans to total loans (1) 0.75 %
0.41 %
Performing TDRs are neither included in nonperforming loans above nor are (1) 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.
At
Allowance for loan losses. The allowance for loan losses is maintained to cover
losses that are estimated in accordance with GAAP. It is our estimate of loan
losses inherent in our loan portfolio at each balance sheet date. Our
methodology for analyzing the allowance for loan losses consists of general and
specific components. For the general component, we stratify the loan portfolio
into homogeneous groups of loans that possess similar loss potential
characteristics and apply a loss ratio to these groups of loans to estimate the
credit losses in the loan portfolio. We use both historical loss ratios and
qualitative loss factors assigned to major loan collateral types to establish
general component loss allocations. Qualitative loss factors are based on
management's judgment of company, market, industry or business specific data and
external economic indicators, which may not yet be reflected in the historical
loss ratios, and that could impact our specific loan portfolios. Management and
the Board of Directors sets and adjusts qualitative loss factors by regularly
reviewing changes in underlying loan composition and the seasonality of specific
portfolios. Management and the Board of Directors also considers credit quality
and trends relating to delinquency, nonperforming and classified loans within
our loan portfolio when evaluating qualitative loss factors. Additionally,
management and the Board of Directors adjusts qualitative factors to account for
the potential impact of external economic factors, including the unemployment
rate, vacancy, capitalization rates, commodity prices and other pertinent
economic data specific to our primary market area and lending portfolios.
For the specific component, the allowance for loan losses is established for
impaired loans. Management evaluates current information and events regarding a
borrower's ability to repay its obligations and considers a loan to be impaired
when the ultimate collectability of amounts due, according to the contractual
terms of the loan agreement, is in doubt. If an impaired loan is
collateral-dependent, the fair value of the collateral, less the estimated cost
to sell, is used to determine the amount of impairment. If an impaired loan is
not collateral-dependent, the impairment amount is determined using the
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negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal. The calculation of the allowance for loan losses at bothDecember 31, 2022 andDecember 31, 2021 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA. In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts. Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. As ofDecember 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 atDecember 31, 2021 . The net discount includes a credit discount based on estimated losses in the acquired loans partially offset a premium, if any, based market interest rates on the date of acquisition. The decrease in the net discount on acquired loans atDecember 31, 2022 , compared toDecember 31, 2021 , was due to a net premium on the PEB loans given the higher yielding portfolio compared to current market interest rates. 59
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The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations.
Year ended December 31,
2022 2021 2020
(Dollars in thousands)
Allowance for loan losses as a
percentage of total loans outstanding at
period end 0.94 % 1.06 % 1.06 %
Allowance for loan losses $ 18,900 $ 17,700 $ 17,500
Total loans outstanding 2,021,124 1,664,890 1,643,312
Nonaccrual loans as a percentage of
total loans outstanding at period end 0.71 % 0.41 % 0.51 %
Total nonaccrual loans $ 14,289 $ 6,888 $ 8,421
Total loans outstanding 2,021,124 1,664,890
1,643,312
Allowance for loan losses as a percentage of nonaccrual loans at period end 132.27 % 256.97 % 207.81 % Allowance for loan losses$ 18,900 $ 17,700 $ 17,500 Total nonaccrual loans 14,289 6,888 8,421 Net charge-offs/(recoveries) during period to average loans outstanding: Commercial and industrial: 1.20 % 0.09 % 0.07 % Net charge-offs$ 3,234 $ 221 $ 186 Average loans outstanding 270,245 260,000 278,970 Construction and land: - % (0.02) % 0.11 % Net (recoveries)/charge-offs $ -$ (4) $ 20 Average loans outstanding 17,314 17,728 17,728 Commercial estate: - % - % - % Net charge-offs/(recoveries) $ 1$ 44 $ (4) Average loans outstanding 1,603,897 1,254,627 1,157,993 Residential: - % - % - % Net charge-offs $ - $ - $ 1 Average loans outstanding 86,891 115,639 188,892 Consumer: 0.27 % 0.21 % 0.31 % Net charge-offs $ 6 $ 5$ 17 Average loans outstanding 2,240 2,371 5,425 Total loans: 0.16 % 0.02 % 0.01 % Total net charge-offs$ 3,241 $ 266 $ 220
Total average loans outstanding 1,980,587 1,650,365
1,649,008
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The following table shows the allocation of the allowance for loan losses at the
indicated dates.
As of December 31,
2022 2021
Percent of Percent of
Loans in Loans in
Allowance Category Allowance Category
Loan by Loan to Total Loan by Loan to Total
Balance Category Loans Balance Category Loans
(Dollars in thousands)
Commercial and industrial $ 184,521 $ 2,885 9.1 % $ 229,871 $ 3,262 13.8 %
Real estate:
Residential 109,927 1,742 5.4 116,656 1,536 7.0
Multifamily residential 234,868 1,124 11.6 206,960 1,197 12.4
Owner-occupied CRE 641,815 4,999 31.8 393,978 4,024 23.6
Non-owner occupied CRE 807,996 8,062 40.0 688,600 7,489 41.3
Construction and land 9,109 68 0.5 13,371 173 0.8
Total real estate 1,803,715 15,995 89.3 1,419,565 14,419 85.2
Consumer 4,183 20 0.2 5,138 19 0.3
PCI loans 28,787 - 1.4 12,219 - 0.7
Total Loans $ 2,021,206 $ 18,900 100.0 % $ 1,666,793 $ 17,700 100.0 %
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 . 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. 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 .
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.
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. Of these impaired loans, only $1.3 million had a specific
allowance of $1.2 million recorded as of December 31, 2022 . 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 .
Management considers the allowance for loan losses at December 31, 2022 to be
adequate to cover losses inherent in the loan portfolio based on the assessment
of the above-mentioned factors affecting the loan portfolio. While management
believes the estimates and assumptions used in its determination of the adequacy
of the allowance are reasonable, there can be no assurance that such estimates
and assumptions will not be proven incorrect in the future, or that the actual
amount of future losses will not exceed the amount of the established allowance
for loan losses or that any increased allowance for loan losses that may be
required will not adversely impact our financial condition and results of
operations. 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. 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. 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 . 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 .
The
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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. Premises and equipment decreased$1.1 million , or 7.6%, to$13.3 million atDecember 31, 2022 from$14.4 million atDecember 31, 2021 . This decrease in premises and equipment was driven by normal amortization and depreciation expenses associated with these assets. Deposits. Deposits are our primary source of funding and consists 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$100.2 million , or 5.0%, to$2.1 billion atDecember 31, 2022 from$2.0 billion atDecember 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, atDecember 31, 2022 compared to$710.1 million , or 35.8% of total deposits, atDecember 31, 2021 .
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered at the dates indicated.
December 31,
2022 2021
Percent Percent
of Total of Total Increase/
Amount Deposits Amount Deposits (Decrease)
(Dollars in thousands)
Demand deposits $ 773,274 37.1 % $ 710,137 35.8 % $ 63,137 NOW accounts and savings 441,064 21.2
484,847 24.4 (43,783)
Money market 577,792 27.7 568,094 28.6 9,698
Time deposits 293,349 14.1 222,161 11.2 71,188
Total $ 2,085,479 100.0 % $ 1,985,239 100.0 % $ 100,240
The following table shows time deposits by maturity and rate as of December 31,
2022 .
After One After Two
One Year Year Through Years Through After Three
or Less Two Years Three Years Years Total
(Dollars in thousands)
0.00 - 0.99% $ 85,396 $ 10,566 $ 2,697 $ 4,756 $ 103,415
1.00 - 1.99% 22,033 11,312 31,856 210 65,411
2.00 - 2.99% 24,973 1,870 86 27 26,956
3.00% and above 88,963 5,955 1,969 680 97,567
Total $ 221,365 $ 29,703 $ 36,608 $ 5,673 $ 293,349
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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 .
(In thousands)
Less than 3 months $ 9,756
Over 3 through 6 months 4,850
Over 6 through 12 months 24,447
Over 12 months 47,261
$ 86,314
For additional information regarding our deposits, see "Note 11 - Deposits" of
the Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data" of this Form 10-K.
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 December 31, 2022 and 2021, we had the ability
to borrow from the FHLB up to $473.6 million and $483.1 million , respectively.
At both December 31, 2022 and 2021, there were no FHLB advances outstanding. 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. This line was closed during 2022, with no FRB
borrowings outstanding at December 31, 2022 .
The Bank also has uncommitted Federal Funds lines with four corresponding banks.
Cumulative available commitments totaled $65.0 million at both December 31, 2022
and December 31, 2021 . There are no amounts outstanding under these facilities
at both December 31, 2022 and 2021.
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. 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.
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 . For additional information, see "Item 1-Business - Sources of Funds",
contained in this Form 10-K. 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.
We are required to provide collateral for certain local agency deposits. At
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Shareholders' equity. Shareholders' equity increased$54.5 million , or 20.8%, to$317.1 million atDecember 31, 2022 from$262.6 million atDecember 31, 2021 . 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 . 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 endedDecember 31, 2022 . During the year endedDecember 31, 2022 , the Company repurchased a total of 905,740 shares of its common stock at a total cost of$19.83 per share. AtDecember 31, 2022 , 481,792 shares remain available for future purchases under the current stock repurchase plan. For additional information related to our stock repurchases, see "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities - Stock Repurchases" contained in this Form 10-K.
Comparison of Operating Results for the Years Ended
Earnings summary. We reported net income of$27.0 million for the year endedDecember 31, 2022 , compared to$20.7 million for the year endedDecember 31, 2021 , an increase of$6.3 million , or 30.4%. Net income for the year endedDecember 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 endedDecember 31, 2022 , an increase of$0.15 from diluted earnings per share of$1.90 for the year endedDecember 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 endedDecember 31, 2022 , compared to 65.57% for the year endedDecember 31, 2021 . The improvement in the efficiency ratio during the year endedDecember 31, 2022 was primarily due the increase net interest income during 2022, partially offset by higher noninterest expense. Interest income. Interest income for the year endedDecember 31, 2022 was$107.1 million , compared to$81.6 million for the year endedDecember 31, 2021 , an increase of$25.5 million or 31.2%. 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. 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 endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The average yield earned on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the year endedDecember 31, 2022 was 4.84%, compared to 4.69% for the year endedDecember 31, 2021 . Interest income included$2.0 million in fees earned related to PPP loans during the year endedDecember 31, 2022 , compared to$5.4 million in same period a year ago. As ofDecember 31, 2022 , total unrecognized fees on PPP loans were$94,000 . Interest income on loans for the year endedDecember 31, 2022 and 2021, included$1.3 million and$1.2 million respectively, in fees related to prepayment penalties. Interest income on loans for the year endedDecember 31, 2022 andDecember 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. The remaining net discount on these acquired loans was$522,000 and$2.1 million atDecember 31, 2022 and 2021, respectively. Interest income on investment securities increased$2.2 million , or 56.3%, to$6.1 million for the year endedDecember 31, 2022 from$3.9 million for the year endedDecember 31, 2021 . 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 endedDecember 31, 2022 from 3.02% for the year endedDecember 31, 2021 . 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 endedDecember 31, 2022 from$665,000 for the year endedDecember 31, 2021 . 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 endedDecember 31, 2022 from 0.16% for the year endedDecember 31, 2021 , partially offset by a 64
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Interest expense. Interest expense increased by$1.5 million , or 17.6%, to$10.4 million for the year endedDecember 31, 2022 from$8.8 million for the year endedDecember 31, 2021 . 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. The average rate paid on interest bearing liabilities increased three basis points to 0.70% for the year endedDecember 31, 2022 from 0.67% for the year endedDecember 31, 2021 . The total average balance of interest-bearing liabilities increased by$170.2 million , or 13.0%, to$1.4 billion for the year endedDecember 31, 2022 , from$1.3 billion for the year endedDecember 31, 2021 , primarily due to an increase in total interest bearing deposits. Interest expense on deposits increased$1.4 million , or 28.7%, to$6.3 million for the year endedDecember 31, 2022 from$4.9 million for the year endedDecember 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. The average rate paid on interest bearing deposits increased to 0.44% for the year endedDecember 31, 2022 , from 0.39% for the year endedDecember 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. The overall average cost of deposits for the year endedDecember 31, 2022 increased to 0.29%, compared to 0.25% for the year endedDecember 31, 2021 . The average balance of noninterest bearing deposits increased$64.4 million , or 8.87%, to$789.8 million for the year endedDecember 31, 2022 compared to$725.4 million for the year endedDecember 31, 2021 . 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. Interest expense on borrowings increased$151,000 , or 3.8%, to$4.1 million for the year endedDecember 31, 2022 , from$3.9 million for the year endedDecember 31, 2021 due to rising interest rates. The average balance of borrowings outstanding decreased$1.5 million to$72.1 million for the year endedDecember 31, 2022 , compared to$73.6 million for the year endedDecember 31, 2021 . The average cost of borrowings increased 32 basis points to 5.66% for the year endedDecember 31, 2022 , from 5.34% for the year endedDecember 31, 2021 . Net interest income and net interest margin. Net interest income increased$23.9 million , or 32.8%, to$96.7 million for the year endedDecember 31, 2022 compared to$72.8 million for the year endedDecember 31, 2021 . 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. Net interest margin for the year endedDecember 31, 2022 was 3.90%, a 56 basis point increase from 3.34% for the year endedDecember 31, 2021 . 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. 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. 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 endedDecember 31, 2022 , compared to an average yield of 4.52% and positive impact of 20 basis points for the year endedDecember 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. 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 endedDecember 31, 2022 and 2021, respectively. The average yield on interest earning assets for the year endedDecember 31, 2022 was 4.31%, a 57 basis point increase from 3.74% for the year endedDecember 31, 2021 , primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the year endedDecember 31, 2022 was 0.70%, a three basis point increase from 0.67% for the year endedDecember 31, 2021 . 65 Table of Contents Average Balances, Interest and Average Yields/Cost. The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average yields; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/ discounts to interest and fees on loans. Year ended December 31, 2022 2021 2020 Annualized Annualized Annualized Average Average Average Average Average Average Balance (1) Interest Yield/Cost Balance(1) Interest Yield/Cost Balance Interest Yield (Dollars in thousands) Interest earning assets Fed Funds sold and interest-bearing balances in banks$ 297,430 $ 4,025 1.35 %$ 413,583 $ 666 0.16 %$ 246,474 $ 1,251 0.51 % Investments securities available-for-sale 186,974 6,085 3.25 % 128,689 3,892 3.02 % 119,015 2,962 2.56 % FHLB Stock 10,484 684 6.52 % 8,198 494 6.02 % 7,579 340 4.49 % FRB Stock 9,150 549 6.00 % 7,629 458 6.00 % 7,446 453 6.09 % Total loans 1,978,453 95,722 4.84 % 1,623,068 76,099 4.69 % 1,662,660 82,186
4.94 % Total interest earning assets 2,482,491 107,065 4.31 % 2,181,167 81,609 3.74 % 2,043,174 87,192
4.27 %
Noninterest earning assets 138,187 140,632 145,342
Total average assets $ 2,620,678 $ 2,321,799 $ 2,188,516
Interest bearing liabilities
Savings $ 125,746 174 0.14 % $ 119,778 165 0.14 % $ 107,098 167 0.16 %
NOW accounts 340,465 325 0.10 % 320,568 287 0.09 % 270,318 250 0.09 %
Money market 664,993 3,238 0.49 % 569,122 2,266 0.40 % 529,402 2,721 0.51 %
Time deposits 280,011 2,536 0.91 % 230,103 2,157 0.94 % 276,098 3,816 1.38 %Total deposit accounts 1,411,215 6,273 0.44 % 1,239,571 4,875 0.39 % 1,182,916 6,954 0.59 % Subordinated debt, net 63,623 3,582 5.63 % 63,453 3,582 5.65 % 24,938 1,405 5.64 % Junior subordinated debentures, net 8,442 496 5.87 % 8,361 345 4.12 % 8,280 390 4.71 % Other borrowings - - - % 1,737 - - % 5,272 150 2.84 % Total interest bearing liabilities 1,483,280 10,351 0.70 % 1,313,122 8,802 0.67 % 1,221,406 8,899 0.73 % Noninterest bearing deposits 789,825 725,443 670,136 Other noninterest bearing liabilities 30,039 26,652 41,104
Noninterest bearing liabilities 819,864
752,095 711,240
Total average liabilities 2,303,144 2,065,217 1,932,646
Average equity 317,534 256,582 255,869
Total average liabilities and
equity $ 2,620,678 $ 2,321,799 $ 2,188,516
Net interest income $ 96,714 $ 72,807 $ 78,293
Interest rate spread (2) 3.61 % 3.07 % 3.54 %
Net interest margin (3) 3.90 % 3.34 % 3.84 %
Ratio of average interest
earning assets to average
interest bearing liabilities 167.36 % 166.11 % 167.00 %
(1) Average balances are 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 earning assets.
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Rate/Volume Analysis. Increases and decreases in interest income and interest
expense result from changes in average balances (volume) of interest earning
assets and interest bearing liabilities, as well as changes in weighted average
interest rates. The following table sets forth the effects of changing rates and
volumes on our net interest income during the periods shown. Information is
provided with respect to (i) effects on interest income attributable to changes
in volume (changes in volume multiplied by prior rate) and (ii) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume). Changes applicable to both volume and rate have been allocated to
volume. Yields have been calculated on a pre-tax basis.
Year ended December 31, Year ended December 31,
2022 compared to 2021 2021 compared to 2020
Increase/(Decrease) Increase/(Decrease)
Attributable to Attributable to
Rate Volume Total Rate Volume Total
(Dollars in thousands) (Dollars in thousands)
Interest earning assets
Fed funds sold and
interest bearing balances
in banks $ 3,546 $ (186) $ 3,360 $ (1,433) $ 848 $ (585)
Investments
available-for-sale 430 1,762 2,192 689 241 930
FHLB stock and FRB stock 52 229 281 117 42 159
Total loans 2,960 16,663 19,623 (4,081) (2,006) (6,087)
Total interest income 6,988 18,468 25,456 (4,708) (875) (5,583)
Interest bearing
liabilities
Savings 1 8 9 (22) 20 (2)
NOW accounts 20 18 38 (9) 46 37
Money market accounts 590 382 972 (659) 204 (455)
Time deposits (90) 468 378 (1,022) (636) (1,658)
Total deposit accounts 521 876 1,397 (1,712) (366) (2,078)
Subordinated debt, net - - - (1,405) 3,582 2,177
Junior subordinated
debentures, net 148 4 152 (50) 4 (46)
Other borrowings - - - (150) - (150)
Total interest expense 669 880 1,549 (3,317) 3,220 (97)
Net interest income $ 6,319 $ 17,588 $ 23,907 $ (1,391) $ (4,095) $ (5,486)
Provision for loan losses. We establish an allowance for loan losses by
charging amounts to the loan provision at a level required to reflect probable
loan losses in the loan portfolio. 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. See "Critical Accounting
Estimates - Allowance for loan losses" above for a description of the manner in
which the provision for loan losses is established.
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 . 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. 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 .
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 .
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. The Company received final
settlement from the lead lender during the fourth quarter of 2022, with no
additional charge-offs required.
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In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts. Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios. Noninterest income. Noninterest income decreased$595,000 , or 5.3%, to$10.7 million for the year endedDecember 31, 2021 compared to$11.3 million for the year endedDecember 31, 2021 . 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. During the year endedDecember 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 endedDecember 31, 2021 .
The following table presents the key components of noninterest income for
the years ended
December 31, Increase Increase
2022 2021 (Decrease) (Decrease)
(Dollars in thousands)
Gain on sale of loans $ 2,747 $ 4,795 $ (2,048) (42.7) %Service charges and other fees 3,107 2,403 704
29.3
Loan servicing and other loan fees 2,176 1,833 343
18.7
Income on investment in SBIC fund (70) 1,274 (1,344)
(105.5) Bargain purchase gain 1,665 - 1,665 N/M Other income and fees 1,048 963 85 8.9 Total noninterest income$ 10,673 $ 11,268 $ (595) (5.3) % N/M - Not meaningful Noninterest expense. Noninterest expense increased$10.8 million , or 19.6%, to$65.9 million for the year endedDecember 31, 2022 compared to$55.1 million for the year endedDecember 31, 2021 . 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 inFebruary 2022 , coupled with retention incentives and salary adjustments due to upward market pressure on wages in 2022. 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 . Noninterest expense for the year endedDecember 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. Excluding acquisition-related expense, noninterest expense for the year endedDecember 31, 2022 increased$7.7 million compared to year endedDecember 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. 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. Data processing expenses increased$331,000 due to higher transaction activity, and other noninterest expense increased$612,000 reflecting increased operating expenses, increased professional and other services as businesses reopened from COVID-19 related closures. 68 Table of Contents The following table presents the key components of noninterest expense for the periods indicated: December 31, Increase Increase 2022 2021 (Decrease) (Decrease) (Dollars in thousands)
Salaries and employee benefits$ 40,480 $ 33,761 $ 6,719
19.9 % Occupancy and equipment 8,384 7,384 1,000 13.5 Data processing 6,969 5,565 1,404 25.2 Other 10,102 8,419 1,683 20.0 Total noninterest expense$ 65,935 $ 55,129 $ 10,806 19.6 % Income taxes. Income tax expense increased$2.2 million , or 28.7%, to$10.0 million for the year endedDecember 31, 2022 from$7.8 million for the year endedDecember 31, 2021 , reflecting an increase in pre-tax income for the period endedDecember 31, 2022 . The Company's effective tax rate was 27.1% for the year endedDecember 31, 2022 compared to 27.3% for 2021. The effective tax rate for the year endedDecember 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
Earnings summary. We reported net income of$20.7 million for the year endedDecember 31, 2021 , compared to$13.7 million for the year endedDecember 31, 2020 , an increase of$7.0 million , or 50.7%. Net income for the year endedDecember 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. Diluted earnings per share were$1.90 for the year endedDecember 31, 2021 , an increase of$0.75 from diluted earnings per share of$1.15 for the year endedDecember 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 endedDecember 31, 2021 , compared to 67.21% for the year endedDecember 31, 2020 . The improvement in the efficiency ratio during the year endedDecember 31, 2021 was primarily due the reduced noninterest expense during 2021. Interest income. Interest income for the year endedDecember 31, 2021 was$81.6 million , compared to$87.2 million for the year endedDecember 31, 2020 , a decrease of$5.6 million , or 6.4%. The decrease in interest income primarily was due to a decrease in both the average balance and yield for interest earning assets, principally loans. 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 endedDecember 31, 2021 as compared to 2020. The average yield earned on loans for the year endedDecember 31, 2021 was 4.69%, compared to 4.94% for the year endedDecember 31, 2020 . Interest income included$5.4 million in fees earned related to PPP loans during the year endedDecember 31, 2021 , compared to$1.7 million in same period a year ago. As ofDecember 31, 2021 , total unrecognized fees on PPP loans were$2.1 million . For the year endedDecember 31, 2021 , the average balance of PPP loans was$78.4 million and the average yield was 7.83%. 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. 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. Interest income on loans for the year endedDecember 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 endedDecember 31, 2020 . The remaining net discount on these acquired loans was$2.1 million and$3.3 million atDecember 31, 2021 and 2020, respectively. 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 endedDecember 31, 2021 from 2.56% for the year endedDecember 31, 2020 . Interest income on fed funds sold and interest- 69
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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 endedDecember 31, 2021 from 0.51% for the year endedDecember 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. Interest expense decreased by$97,000 , or 1.1%, to$8.8 million for the year endedDecember 31, 2021 from$8.9 million for the year endedDecember 31, 2020 . 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. These decreases were partially offset by a$2.2 million increase in interest expense on subordinated debt, net. The average rate paid on interest bearing liabilities decreased six basis points to 0.67% during the year endedDecember 31, 2021 from 0.73% during the same period in 2020. The total average balance of interest bearing liabilities increased by$91.7 million , or 7.5%, to$1.3 billion for the year endedDecember 31, 2021 , from$1.2 billion for the year endedDecember 31, 2020 , primarily due to the issuance of our Notes. Interest expense on borrowings increased$2.0 million , or 101.9%, to$3.9 million for the year endedDecember 31, 2021 , from$1.9 million for the year endedDecember 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. The average balance of borrowings outstanding increased$35.1 million to$73.6 million during the year endedDecember 31, 2021 , compared to$38.5 million during 2020 for the same reason. The average cost of borrowings increased to 5.34% for the year endedDecember 31, 2021 , from 5.06% for the year endedDecember 31, 2020 . Net interest income. Net interest income decreased$5.5 million , or 7.0%, to$72.8 million for the year endedDecember 31, 2021 compared to$78.3 million for the year endedDecember 31, 2020 . Net interest margin for the year endedDecember 31, 2021 decreased 50 basis point to 3.34% from 3.84% for 2020. During the year endedDecember 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. 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. PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 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 endedDecember 31, 2021 , compared to an average yield of 2.71% and positive impact of 11 basis points during 2020. 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 endedDecember 31, 2021 , and 2020, respectively. Provision for loan losses. We recorded a provision for loan losses of$466,000 for the year endedDecember 31, 2021 , compared to a provision for loan losses of$10.3 million for the year endedDecember 31, 2020 , a decrease of$9.9 million . 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 sinceDecember 31, 2020 . Our allowance for loan losses specific reserves was$930,000 atDecember 31, 2021 , compared to$521,000 atDecember 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 endedDecember 31, 2021 and 2020. 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 endedDecember 31, 2021 , compared to none during 2020. We had a net charge-offs of$226,000 for the year endedDecember 31, 2021 compared to net charge-offs of$220,000 for the year endedDecember 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. 70
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Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios. The allowance for loan losses to total loans was 1.06% at bothDecember 31, 2021 and 2020. Noninterest income. Noninterest income increased$2.5 million , or 28.2%, to
$11.3 million for the year endedDecember 31, 2021 compared to$8.8 million for the year endedDecember 31, 2020 . 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 endedDecember 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 endedDecember 31, 2020 . SBIC income increased due to improved operating results throughout 2021 after sustaining COVID-19 related losses in 2020. 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
Year ended December 31,
2021 2020 $ Change % Change
(Dollars in thousands)
Gain on sale of loans $ 4,795 $ 1,835 $ 2,960 161.3 %Service charges and other fees 2,403 2,548 (145) (5.7) Loan servicing and other loan fees 1,833 2,465 (632) (25.6) Income on investment in SBIC fund 1,274 875
399 45.6
Other income and fees 963 1,052 (89) (8.5)
Total noninterest income $ 11,268 $ 8,775 $ 2,493 28.4 %
Noninterest expense. Noninterest expense decreased$3.4 million , or 5.8%, to$55.1 million for the year endedDecember 31, 2021 compared to$58.5 million for the year endedDecember 31, 2020 . 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. In addition, other non-interest expense decreased slightly for the year endedDecember 31, 2021 compared to last year reflecting decreased fees paid for employee recruiting and internal auditing and compliance related expenses, and an increase inFDIC insurance premiums as the application of$369,000 inFDIC small bank assessment credits reduced expenses in 2020. Salaries and employee benefits decreased slightly during the year endedDecember 31, 2021 compared to 2020, primarily due to a decrease in staffing levels. 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. Noninterest expense for the year endedDecember 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: Year ended December 31, 2021 2020 $ Change % Change (Dollars in thousands) Salaries and related benefits$ 33,761 $ 33,942 $ (181) (0.5) % Occupancy and equipment 7,384 7,088 296 4.2 Data processing 5,565 8,221 (2,656) (32.3) Other 8,419 9,268 (849) (9.2) Total noninterest expense$ 55,129 $ 58,519 $ (3,390) (5.8) % 71 Table of Contents Income taxes. Income tax expense increased$3.3 million , or 73.0%, to$7.8 million for the year endedDecember 31, 2021 from$4.5 million for the year endedDecember 31, 2020 , reflecting an increase in pre-tax income for the period endedDecember 31, 2021 and an increase in our effective tax rate. The Company's effective tax rate was 27.3% for the year endedDecember 31, 2021 compared to 24.7% for 2020. The increase in the effective tax rate during the year endedDecember 31, 2020 was primarily due to reduction in favorable permanent adjustments as compared to the prior year.
Liquidity and Capital Resources
Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short term basis through the cash management function. On a longer term basis, it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections. Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of funds are deposits, principal and interest payments on loans and proceeds from sale of loans. During the years endedDecember 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. During the years endedDecember 31, 2022 , 2021 and 2020, the Bank received$469.6 million ,$490.3 million and$284.4 million in principal repayments, respectively. 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. During the years endedDecember 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 atDecember 31, 2022 from$557.7 million atDecember 31, 2021 . Management believes that our security portfolio is of high quality and the securities would therefore be marketable. Securities purchased during the years endedDecember 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 atDecember 31, 2022 , totaled$221.4 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 ofDecember 31, 2022 , the Bank had an available borrowing capacity of$473.6 million with the FHLB ofSan Francisco , with no borrowings outstanding at that date. The Bank also had Federal Funds lines with available commitments totaling$65.0 million with four correspondent banks. There were no amounts outstanding under these facilities at bothDecember 31, 2022 andDecember 31, 2021 . Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible. Liquidity management is both a daily and long-term function of the Company's management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, includingU.S. Government obligations andU.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$97.5 million and$104.1 million , including$5.3 million and$3.2 million of undisbursed construction and development loan commitments, atDecember 31, 2022 and 2021, respectively. For information regarding our commitments, see "Note 16 - Commitments and Contingencies" of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Form 10 K. 72
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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 was$39.9 million and$10.4 million for the years endedDecember 31, 2022 and 2021, respectively. During the year endedDecember 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 endedDecember 31, 2021 . Net cash used in financing activities, comprised primarily of net change in deposits, was$296.4 million for the year endedDecember 31, 2022 , compared to$130.3 million of cash provided by financing activities for the year endedDecember 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. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year endingDecember 31, 2023 that would materially impact liquidity. We also have purchase obligations, generally with remaining terms of less than three years and contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor. In addition, atDecember 31, 2022 , we had other future obligations and accrued expenses of$33.7 million . As ofDecember 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 afterDecember 31, 2022 ). In addition, atDecember 31, 2022 , there were other future obligations and accrued expenses of$26.5 million . For information regarding our operating leases, see "Note 7, Leases" of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months.BayCom Corp is a separate legal entity from the Bank and must provide for its own liquidity. AtDecember 31, 2022 , the Company, on an unconsolidated basis, had liquid assets of$3.8 million . In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, funds paid out for Company stock repurchases, and payments on trust-preferred securities and the Notes held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. As ofDecember 31, 2022 , the Company declared$2.7 million of cash dividends on its common stock, of with$644,000 remained to be paid onJanuary 13, 2023 . The Company expects to continue to pay quarterly cash dividends on its common stock, subject to theBoard of Director's discretion to modify or terminate this practice at any time and for any reason without prior notice. OnFebruary 23, 2023 the Company declared a quarterly cash dividend of$0.10 per share on the Company's outstanding common stock payable onApril 14, 2023 to shareholders of record as of the close of business onMarch 10, 2023 . 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 atDecember 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. Item 1. Business" of this Form 10-K. 73
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From time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. InOctober 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 atDecember 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. See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " of this Form 10-K for additional information relating to stock. Regulatory capital. The Bank, as a state-chartered, federally insured commercial bank, and member of theFederal Reserve is subject to the capital requirements established by theFederal Reserve . TheFederal Reserve requires the Bank to maintain capital adequacy that generally parallels theFDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. TheFDIC 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 1Leverage 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 theFederal Reserve regulations. Based on capital levels atDecember 31, 2022 and 2021, the Bank was considered to be Well Capitalized. The table below shows the capital ratios under the Basel III capital framework as of the dates indicated: Minimum Minimum Regulatory Regulatory Requirement for Actual Requirement "Well Capitalized" Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) BayCom Corp As of December 31, 2022 Tier 1 leverage ratio$ 286,688 11.91 %$ 96,316 4.00 %$ 120,395 5.00 % Common equity tier 1 capital 286,688 13.84 93,218 4.50 134,648 6.50 Tier 1 capital to risk-weighted assets 296,173 14.30 124,291 6.00 165,721 8.00 Total capital to risk-weighted assets 380,388 18.36 165,721 8.00 207,151 10.00United Business Bank As of December 31, 2022 Tier 1 leverage ratio$ 336,667 13.64 %$ 98,722 4.00 %$ 123,402 5.00 % Common equity tier 1 capital 336,667 16.42 92,245 4.50 133,242 6.50 Tier 1 capital to risk-weighted assets 336,667 16.42 122,993 6.00 163,991 8.00 Total capital to risk-weighted assets 355,882 17.36 163,991 8.00 204,988 10.00
In addition to the minimum capital ratios, the Bank has to maintain a capital
conservation buffer consisting of additional Common Equity Tier 1 capital
greater than 2.5% above the required minimum levels in order to avoid
limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses based on percentages of eligible retained income that
could be utilized for such actions. At
For a bank holding company with less than$3.0 billion in assets, the capital guidelines apply on a bank only basis and theFederal Reserve expects the holding company's subsidiary banks 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, atDecember 31, 2022 , the Company would have exceeded all regulatory capital requirements. 74 Table of Contents For additional information see "Item 1. Business - Supervision and Regulation -United Business Bank - Capital Requirements" and Note 19, "Regulatory Matters" in the Notes to the Consolidated Financial Statements, included in "Item 8. Financial Statements and Supplementary Data", within this Form 10-K.
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