Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38483
BAYCOM CORP
(Exact name of registrant as specified in its charter)
California
37-1849111
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
500 Ygnacio Valley Road, Suite 200, Walnut Creek, California
94596
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (925) 476-1800
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value per share
BCML
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
As of May 8, 2024, there were 11,248,342 shares of the registrant’s common stock outstanding.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
2
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
52
ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
53
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
54
ITEM 6. EXHIBITS
SIGNATURES
55
As used throughout this report, the terms “we,” “our,” “us,” “BayCom,” or the “Company” refer to BayCom Corp and its consolidated subsidiary, United Business Bank, which we sometimes refer to as the “Bank,” unless the context otherwise requires.
1
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
3
Condensed Consolidated Statements of Income (unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (unaudited)
5
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
6
Condensed Consolidated Statements of Cash Flows (unaudited)
7
Notes to Condensed Consolidated Financial Statements (unaudited)
9
BAYCOM CORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(unaudited)
March 31,
December 31,
2024
2023
ASSETS
Cash due from banks
$
20,379
17,901
Federal funds sold and interest-bearing balances in banks
327,953
289,638
Cash and cash equivalents
348,332
307,539
Time deposits in banks
996
1,245
Investment securities available-for-sale ("AFS"), at fair value, net of allowance for credit losses of $0 at both March 31, 2024 and December 31, 2023
167,919
163,152
Equity securities
13,158
12,585
Federal Home Loan Bank ("FHLB") stock, at par
11,313
Federal Reserve Bank ("FRB") stock, at par
9,630
9,626
Loans held for sale
1,684
—
Loans, net of allowance for credit losses of $18,890 at March 31, 2024 and $22,000 at December 31, 2023
1,867,840
1,905,829
Premises and equipment, net
14,355
13,734
Core deposit intangible, net
3,610
3,915
Cash surrender value of bank owned life insurance ("BOLI") policies, net
23,044
22,867
Right-of-use assets ("ROU"), net
13,460
13,939
Goodwill
38,838
Interest receivable and other assets
46,530
47,378
Total assets
2,560,709
2,551,960
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest and interest bearing deposits
2,142,907
2,132,750
Junior subordinated deferrable interest debentures, net
8,585
8,565
Subordinated debt, net
63,609
63,881
Salary continuation plan
4,667
4,552
Lease liabilities
14,321
14,752
Interest payable and other liabilities
12,385
14,591
Total liabilities
2,246,474
2,239,091
Commitments and contingencies (Note 17)
Shareholders' equity
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding at both March 31, 2024 and December 31, 2023
Common stock, no par value; 100,000,000 shares authorized; 11,377,117 and 11,551,271 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
177,075
180,913
Additional paid in capital
287
Accumulated other comprehensive loss, net of tax
(14,108)
(14,592)
Retained earnings
150,981
146,261
Total shareholders’ equity
314,235
312,869
Total liabilities and shareholders’ equity
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for share and per share data)
Three months ended
(As Restated)
Interest income:
Loans, including fees
25,257
26,255
Investment securities
1,956
1,640
Fed funds sold and interest-bearing balances in banks
4,115
1,829
FHLB dividends
272
188
FRB dividends
144
Total interest and dividend income
31,744
30,056
Interest expense:
Deposits
8,227
3,700
Subordinated debt
893
896
Junior subordinated deferrable interest debentures
217
203
Total interest expense
9,337
4,799
Net interest income
22,407
Provision for credit losses
252
275
Net interest income after provision for credit losses
22,155
24,982
Noninterest income:
Gain on sale of loans
412
Gain (loss) on equity securities
573
(896)
Service charges and other fees
839
885
Loan servicing and other loan fees
392
410
(Loss) income on investment in Small Business Investment Company (“SBIC”) fund
(30)
489
Other income and fees
288
261
Total noninterest income
2,062
1,561
Noninterest expense:
Salaries and employee benefits
10,036
11,036
Occupancy and equipment
2,154
2,027
Data processing
1,753
1,465
Other expense
2,128
2,001
Total noninterest expense
16,071
16,529
Income before provision for income taxes
8,146
10,014
Provision for income taxes
2,269
2,823
Net income
5,877
7,191
Earnings per common share:
Basic earnings per common share
0.51
0.57
Weighted average common shares outstanding
11,525,752
12,699,476
Diluted earnings per common share
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive loss:
Change in unrealized gain (loss) on AFS securities
696
(1,821)
Deferred tax (expense) benefit
(212)
524
Other comprehensive income (loss), net of tax
484
(1,297)
Total comprehensive income
6,361
5,894
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Common
Additional
Other
Total
Number of
Stock
Paid in
Comprehensive
Retained
Shareholders’
Shares
Amount
Capital
Income/(Loss)
Earnings
Equity
Three months ended March 31, 2024
Balance, December 31, 2023
11,551,271
Other comprehensive income, net
Restricted stock granted
24,471
Forfeiture of restricted stock grants
(505)
Cash dividends of $0.10 per share
(1,157)
Stock based compensation
160
Repurchase of shares
(198,120)
(3,998)
Balance, March 31, 2024
11,377,117
Three months ended March 31, 2023
Balance, December 31, 2022 (As Restated)
12,838,462
204,301
(11,561)
124,122
317,149
Other comprehensive loss, net
Cumulative change from adoption of ASU 2016-13, net of tax
(491)
28,392
(1,264)
250
(422,877)
(8,066)
Balance, March 31, 2023 (As Restated)
12,443,977
196,485
(12,858)
129,558
313,472
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax expense
1,909
1,681
Accretion on acquired loans
(38)
(893)
(412)
Proceeds from sale of loans
8,497
Loans originated for sale
(6,372)
Accretion on junior subordinated debentures
20
Gain on repayment of subordinated debt, net
34
Increase in cash surrender value of life insurance policies
(177)
(166)
Amortization/accretion of premiums/discounts on investment securities, net
36
113
(Gain) loss on equity securities
(573)
Depreciation and amortization
491
453
Core deposit intangible amortization
305
369
Stock based compensation expense
Increase (decrease) in deferred loan origination fees, net
64
(66)
Net change in interest receivable and other assets
(811)
1,317
Increase in salary continuation plan, net
115
81
Net change in interest payable and other liabilities
(2,581)
(5,046)
Net cash provided by operating activities
5,083
8,188
Cash flows from investing activities:
Proceeds from maturities of interest bearing deposits in banks
249
Purchase of investment securities AFS
(7,132)
(1,500)
Proceeds from maturities, repayments and calls of investment securities AFS
3,025
1,170
Purchase of FRB stock
(4)
(7)
Decrease (increase) in loans, net
36,027
(20,560)
Purchase of equipment and leasehold improvements, net
(1,143)
(148)
Net cash provided by (used in) investing activities
31,022
(21,045)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)
Cash flows from financing activities:
Decrease in noninterest and interest bearing deposits in banks, net
(26,816)
(54,301)
Increase in time deposits, net
36,973
96,591
Repayment of subordinated debt, net
(315)
Repurchase of common stock
Dividends paid on common stock
(1,156)
(644)
Net cash provided by financing activities
4,688
33,580
Increase in cash and cash equivalents
40,793
20,723
Cash and cash equivalents at beginning of period
176,815
Cash and cash equivalents at end of period
197,538
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense
9,673
5,108
Income taxes paid, net
10
Recognition of ROU assets
575
Recognition of lease liability
570
Non-cash operating activities:
Increase in allowance for credit losses upon adoption of ASU 2016-03
1,545
Non-cash investing and financing activities:
Change in unrealized gain (loss) on AFS securities, net of tax
Transfer of loans to held-for-sale
Cash dividends declared on common stock not yet paid
8
NOTE 1 – BASIS OF PRESENTATION
BayCom Corp (the “Company”) is a bank holding company headquartered in Walnut Creek, California. United Business Bank (the “Bank”), the Company’s wholly owned banking subsidiary, is a California state-chartered bank which provides a broad range of financial services primarily to local small and mid-sized businesses, service professionals and individuals. In its 19 years of operation, the Bank has grown to 35 full-service banking branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado. The condensed consolidated financial statements include the accounts of the Company and the Bank.
All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Amounts presented in the consolidated financial statements and footnote tables are rounded and presented to the nearest thousands of dollars except per share amounts. If the amounts are above $1.0 million, they are rounded one decimal point, and if they are above $1.0 billion, they are rounded two decimal points.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Results of operations for interim periods are not necessarily indicative of results for the full year. Certain prior year information has been reclassified to conform to the current year presentation. None of the reclassifications impacted consolidated net income, earnings per share or shareholders’ equity.
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for a public company that qualified as an “emerging growth company,” or EGC. The Company qualified as an EGC and remained an EGC until December 31, 2023, the last day of the Company’s fiscal year following the fifth anniversary of the completion of the Company’s initial public offering. As an EGC, we were permitted to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies. We took advantage of the benefits of this extended transition period; accordingly, our condensed consolidated financial statements for periods prior to our exit from EGC status may not be comparable to companies that comply with such new or revised accounting standards.
Restatement of Previously Issued Consolidated Financial Statements
On July 18, 2023, the audit committee of the Company’s board of directors concluded that the Company’s previously issued unaudited interim consolidated financial statements for the period ended March 31, 2023 and the consolidated financial statements for the year ended December 31, 2022, as well as for the unaudited interim periods included in that fiscal year (collectively, “Restated Periods”), should no longer be relied upon because of errors related to the accounting for unrealized losses on preferred equity securities that resulted in material misstatements of noninterest income and accumulated other comprehensive income.
At the time of its purchase of the preferred equity securities for investment purposes, the Company inappropriately accounted for them as AFS debt securities under Accounting Standards Codification (“ASC”) Topic 320 – Investments-Debt Securities. As such, the changes in the fair value of these securities were not recorded as part of net income but rather as a component of shareholders’ equity (in accumulated other comprehensive income, net of tax). However, as a result of subsequent research and third-party consultation, the Company determined that the securities should instead have been accounted for under ASC Topic 321 – Investments-Equity Securities. The result of this change in classification of the preferred equity securities is that the change in the fair value of the securities each quarter should have been recorded in noninterest income on the consolidated statements of income.
On July 25, 2023, the Company filed amendments to its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2023, September 30, 2022, June 30, 2022, and March 31, 2022, and its Form 10-K for the year ended December 31, 2022, (the “Original Reports”) with the Securities and Exchange Commission (“SEC”), to reflect the restatement of the Company’s consolidated financial statements for the Restated Periods (the “Amended Form 10-Qs” and the “Amended Form 10-K,” collectively, the “Amended Reports”).
As disclosed in the Original Reports, the Company recorded the change, net of taxes, in the fair value of preferred equity securities as part of other comprehensive loss, net of taxes, under ASC Topic 320 – Investments-Debt Securities rather than as part of non-interest income under ASC Topic 321 – Investments-Equity Securities. In addition, various footnotes in the Amended Reports reflect the effects of these restatements.
For additional information on the effects of the restatement, see Note 2 Restatement of Consolidated Financial Statements in the Notes to Consolidated Financial Statements contained in the Amended Form 10-K and Note 3. Restatement of the Consolidated Financial Statements in the Notes to Condensed Consolidated Financial Statements contained in each of the Amended Form 10-Qs.
NOTE 2 - ACCOUNTING GUIDANCE NOT YET EFFECTIVE AND ADOPTED ACCOUNTING GUIDANCE
Accounting Guidance Adopted in 2024
On January 1, 2024, the Company adopted Accounting Standards Update (“ASU”) 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force. ASU 2023-02 allows an entity the option to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits if certain conditions are met. Prior to this ASU, the application of the proportional amortization method of accounting was limited to investments in low-income housing tax credit structures. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the statements of income, income tax expense. Under this ASU, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit program basis. In addition, the amendments in this ASU require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323-740-25-3, requiring a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this ASU, low-income housing tax credit investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. Further, this ASU specifies that impairment of low-income housing tax credit investments not accounted for using the equity method must apply the impairment guidance in Subtopic 323-10: Investments - Equity Method and Joint Ventures - Overall. This ASU also clarifies that for low-income housing tax credit investments not accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic 321: Investments - Equity Securities. The amendments in the ASU also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations. ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The adoption of ASU 2023-02 did not have a material impact on the Company's consolidated financial statements and related disclosures.
Fair Value Measurement (Topic 820) - In June 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The guidance in the ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account on the equity security and, therefore, is not considered in measuring fair value. The ASU also requires additional disclosures about the restriction. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The adoption of ASU 2022-03 did not have a significant impact on the Company's consolidated financial statements and related disclosures.
Recent Accounting Guidance Not Yet Effective
Business Combinations (Topic 805) - In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (JV) Formations: Recognition and Initial Measurement. The guidance requires newly-formed JVs to apply a new basis of accounting to all of its contributed net assets, which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would be applied prospectively and is effective for all newly-formed joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and does not expect them to have a material effect on the consolidated financial statements.
Segment Reporting – Improvements to Reportable Segment Disclosures (Topic 280) – In November 2023, the FASB issued ASU 2023-07 to enhance disclosures about significant segment expenses for public entities reporting segment information under Topic 280. It requires that a public entity disclose, on an annual and interim basis, significant expense categories for each reportable segment. Significant expense categories are derived from expenses that are 1) regularly reported to an entity’s chief operating decision-maker ("CODM"), and 2) included in a segment’s reported measure of profit or loss. The disclosures should include an amount for "other segment items," reflecting the difference between 1) segment revenue less significant segment expenses, and 2) the reportable segment’s profit or loss measures. It requires that a public entity disclose the title and position of the CODM and how the CODM uses the reported measure of profit or loss to assess segment performance and to allocate resources. Further it clarifies that entities with a single reportable segment must disclose both new and existing segment reporting requirements. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Entities must adopt the guidance on a retrospective basis. The Company is evaluating the accounting and disclosure requirements of this update and does not expect them to have a material effect on the consolidated financial statements.
Income Taxes – Improvements to Income Tax Disclosures (Topic 740) –In December 2023, the FASB issued ASU 2023-09 to provide additional transparency into an entity’s income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The standard requires that public business entities disclose, on an annual basis, specific categories in the rate reconciliation and additional information for reconciling items meeting a certain quantitative threshold. The amendments also require that entities disclose on an annual basis: 1) income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and 2) the income taxes paid (net of refunds received) disaggregated by individual jurisdictions exceeding 5% of total income taxes paid (net of refunds received). The amendments are effective for public business entities for annual periods beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of this update and does not expect them to have a material effect on the consolidated financial statements.
11
NOTE 3 – INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of securities AFS at the dates indicated are summarized as follows:
Gross
Amortized
unrealized
Estimated
cost
gains
losses
fair value
March 31, 2024
Municipal securities
23,080
98
(1,326)
21,852
Mortgage-backed securities
40,499
136
(3,745)
36,890
Collateralized mortgage obligations
37,787
(2,330)
35,593
SBA securities
4,954
40
(82)
4,912
Corporate bonds
81,391
(12,726)
68,672
187,711
417
(20,209)
December 31, 2023
21,910
75
(1,158)
20,827
41,048
194
(3,641)
37,601
35,019
256
(2,299)
32,976
5,280
49
(77)
5,252
80,383
(13,894)
66,496
183,640
581
(21,069)
Amortized cost and fair values exclude accrued interest receivable of $1.5 million and $1.2 million at March 31, 2024 and December 31, 2023, respectively, which is included in interest receivable and other assets in the condensed consolidated balance sheets.
During both the three months ended March 31, 2024 and 2023, the Company sold no securities AFS.
The amortized cost and estimated fair value of securities AFS at the dates indicated by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities AFS
Due in one year or less
4,880
4,839
6,397
6,338
Due after one through five years
16,285
14,560
15,909
14,206
Due after five years through ten years
102,621
89,055
102,430
87,867
Due after ten years
63,925
59,465
58,904
54,741
At March 31, 2024, there were $12.0 million securities pledged, compared to no securities pledged at December 31, 2023.
12
The estimated fair value and gross unrealized losses for securities AFS aggregated by the length of time that individual securities have been in a continuous unrealized loss position at the dates indicated are as follows:
Less than 12 months
12 months or more
Unrealized
loss
2,479
(24)
15,167
(1,302)
17,646
1,355
(23)
25,932
(3,722)
27,287
23,863
1,710
67,675
3,834
(47)
134,347
(20,162)
138,181
2,483
(28)
13,975
(1,130)
16,458
1,369
26,435
(3,611)
27,804
1,496
(8)
20,713
(2,291)
22,209
1,610
65,505
5,348
128,238
(21,003)
133,586
At March 31, 2024, the Company held 321 securities AFS, of which 301 were in an unrealized loss position for more than twelve months and 17 were in an unrealized loss position for less than twelve months. At December 31, 2023, the Company held 334 investment securities, of which 297 were in an unrealized loss position for more than twelve months and 22 were in an unrealized loss position for less than twelve months. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.
Allowance for credit losses on investment debt securities available-for-sale
Securities that were in an unrealized loss position as of March 31, 2024 were evaluated to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or changes in required yields by investors in these types of securities, among other factors. This assessment first includes a determination of whether the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. In making this assessment, management considers the nature of the security and any related government guarantees, any changes to the rating of the security by a rating agency, creditworthiness of the issuers/guarantors, the underlying collateral, the financial conditions and prospects of the issuer, and any adverse conditions specifically related to the security, among other factors.
As of March 31, 2024, the Company expects to recover the amortized cost basis of its securities, has no present intent to sell any investment securities with unrealized losses and it is not more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost and the decline in fair value is largely attributed to changes in interest rates and other market conditions. The issuers of these securities continue to make timely principal and interest payments. No allowances for credit losses have been recognized on investment debt securities AFS in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at March 31, 2024.
13
Equity Securities
The Company recognized a net gain on equity securities of $573,000 and a net loss on equity securities of $896,000 for the three months ended March 31, 2024 and 2023, respectively. Equity securities were $13.2 million and $12.6 million as of March 31, 2024 and December 31, 2023, respectively.
NOTE 4 – LOANS
The Company’s loan portfolio at the dates indicated is summarized below:
Commercial and industrial (1)
160,594
162,889
Construction and land
9,616
9,559
Commercial real estate
1,632,090
1,668,585
Residential
83,868
86,002
Consumer
738
Total loans
1,886,738
1,927,773
Net deferred loan (fees) costs
56
Allowance for credit losses
(18,890)
(22,000)
Net loans
Net loans exclude accrued interest receivable of $6.0 million and $6.7 million at March 31, 2024 and December 31, 2023, respectively, which is included in interest receivable and other assets in the condensed consolidated balance sheets.
14
The Company’s total individually evaluated loans, including nonaccrual loans, modified loans to borrowers experiencing financial difficulty, and accreting purchase credit deteriorated (“PCD”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows:
Commercial
Construction
and industrial
and land
real estate
Recorded investment in loans individually evaluated:
With no specific allowance recorded
103
366
13,208
1,324
15,001
With a specific allowance recorded
1,564
5,400
139
7,103
Total recorded investment in loans individually evaluated
1,667
18,608
1,463
22,104
Specific allowance on loans individually evaluated
1,290
58
1,350
273
1,298
1,349
3,286
1,799
7,745
147
9,691
2,072
9,043
12,977
1,423
3,008
4,433
From time to time, the Company may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. At time of restructuring, these loans are generally placed on nonaccrual. These loans may be returned to accrual status after the borrower demonstrated performance with the modified terms for a sustained period of time (generally six months) and the capacity to continue to perform in accordance with the modified terms of the restructured debt. The ACL on a modified loan to a borrower experiencing financial difficulty is measured using the same method as individually evaluated loans. During the three months ended March 31, 2024 and 2023, there were no modifications of loans to borrowers experiencing financial difficulty.
15
A summary of modified loans to borrowers experiencing financial difficulty by type of concession and type of loan, as of the dates indicated, is set forth below (number of loans not in thousands):
Rate
Term
Rate & term
% of Total
loans
modification
loans outstanding
Commercial and industrial
117
0.07
%
2,143
0.13
767
0.91
3,027
0.16
March 31, 2023
154
0.08
5,112
0.29
829
0.86
6,095
0.30
For the three months ended March 31, 2024 and 2023, the Company recorded $1.3 million of charge-offs and no charge-offs for modified loans to borrowers experiencing financial difficulty, respectively.
As of March 31, 2024 and December 31, 2023, individually evaluated modified loans to borrowers experiencing financial difficulty had a related allowance of $42,000 and $1.3 million, respectively. As of March 31, 2024 and December 31, 2023, none of modified loans to borrowers experiencing financial difficulty were performing in accordance with their modified terms. Accruing modified loans to borrowers experiencing financial difficulty are included in the loans individually evaluated as part of the calculation of the allowance for credit losses for loans.
Risk Rating System
The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of the loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics.
The Company’s Pass loans include loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk.
Loans that are assigned higher risk grades are loans that exhibit the following characteristics:
Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded.
Loans in this category would be characterized by any of the following situations:
16
Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard.
Some characteristics of Substandard loans are:
Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit.
Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for credit losses.
Revolving loans that are converted to term loans are treated as new originations in the tables below and are presented by year of initial origination. During the three months ended March 31, 2024, and the year ended December 31, 2023, $129,000 and $7.1 million of revolving loans were converted to term loans, respectively.
17
The following tables present the internally assigned risk grade by class of loans at the dates indicated:
Revolving
Term loans - amortized cost by origination year
2022
2021
2020
Prior
amortized cost
Commercial and industrial:
Pass
5,556
24,834
24,099
16,934
19,792
41,905
19,655
152,775
Special mention
1,269
2,680
1,788
5,737
Substandard
156
903
1,023
2,082
Total commercial and industrial
21,217
45,488
22,466
YTD gross charge-offs
45
133
178
Construction and land:
1,338
6,040
1,159
713
9,250
Total construction and land
1,525
Commercial real estate:
10,704
82,139
381,844
358,419
135,808
525,343
9,285
1,503,542
7,099
13,773
19,163
51,708
91,743
3,328
2,431
31,046
36,805
Total commercial real estate
392,271
374,623
154,971
608,097
1,272
1,934
3,206
Residential:
702
2,410
4,268
42,287
32,249
81,916
430
1,522
Total residential
44,239
Consumer:
31
57
78
384
552
18
Total consumer
96
Total loans outstanding
Risk ratings
16,962
108,342
412,040
377,763
161,029
610,326
61,573
1,748,035
20,432
54,818
97,910
522
33,489
Doubtful
422,467
393,967
181,983
698,633
64,384
1,405
1,935
3,385
2019
26,055
25,039
19,294
22,831
26,008
17,357
17,754
154,338
1,323
932
1,926
1,831
6,012
320
1,039
1,024
2,539
24,310
27,260
20,322
20,609
27
436
463
1,217
1,177
109
650
9,193
1,543
80,576
397,319
377,165
140,265
180,859
370,887
9,405
1,556,476
10,348
1,894
17,001
15,101
41,482
85,826
158
946
11,579
13,600
26,283
407,825
380,005
157,266
207,539
425,969
2,432
4,319
7,986
36,814
32,420
83,971
437
1,594
8,423
38,408
172
175
65
67
69
494
719
19
37
107,913
428,465
398,891
168,598
214,980
425,777
60,073
1,804,697
18,324
16,470
43,408
92,275
11,918
16,233
30,801
438,971
401,731
187,444
243,368
485,418
62,928
608
643
The following tables provide an aging of the Company’s loans receivable as of the dates indicated:
Recorded
90 Days
investment >
30–59 Days
60–89 Days
or more
90 days and
past due
Current
PCD loans
receivable
accruing
704
1,422
158,258
193
9,230
2,228
2,881
9,286
14,395
1,592,569
25,126
283
1,063
82,409
396
3,699
2,911
11,357
17,967
1,843,036
25,735
803
146
1,782
2,731
159,960
198
97
9,071
25
2,908
1,702
7,793
12,403
1,631,129
25,053
85,500
447
3,863
1,848
9,941
15,652
1,886,398
25,723
Nonaccrual loans totaled $16.5 million and $13.0 million at March 31, 2024 and December 31, 2023, respectively. Nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, were $2.2 million at March 31, 2024 compared to $740,000 at December 31, 2023. At March 31, 2024, nonaccrual loans included $4.0 million of loans 30-89 days past due and $1.1 million of loans less than 30 days past due. At December 31, 2023, nonaccrual loans included $927,000 of loans 30-89 days past due and $2.1 million of loans less than 30 days past due. At March 31, 2024, the $4.0 million of nonaccrual loans 30-89 days past due was comprised of seven loans and the $1.1 million of loans less than 30 days past due was comprised of 14 loans. All these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were no loans that were 90 days or more past due and still accruing at March 31, 2024 and December 31, 2023.
Interest foregone on nonaccrual loans was approximately $483,000 for the three months ended March 31, 2024 compared to $235,000 for the three months ended March 31, 2023. Interest income recognized on nonaccrual loans was approximately $7,200 and $65,000 for the three months ended March 31, 2024 and 2023, respectively.
Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1.0 billion and $1.14 billion at March 31, 2024 and December 31, 2023, respectively. Our discount window advance line with the FRB of San Francisco is secured by a pledge of certain qualifying loans with unpaid principal balances of $92.1 million at March 31, 2024. No loans were pledged to the FRB of San Francisco at December 31, 2023. For additional information, see Note 11, Other Borrowings.
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES FOR LOANS
The following tables summarize the Company’s allowance for credit losses for loans, reserve for unfunded commitments, and loan balances individually and collectively evaluated by type of loan as of or for the three months ended March 31, 2024 and 2023:
Reserve for
unfunded commitments
Beginning balance
4,216
298
16,498
979
22,000
225
Charge-offs
(178)
(3,206)
(1)
(3,385)
Recoveries
Provision for (reversal of) credit losses
140
(32)
262
(10)
Ending balance
4,191
312
13,432
947
18,890
215
Allowance for credit losses:
Loans individually evaluated
Loans collectively evaluated
2,902
12,816
940
16,978
558
563
Loans receivable:
Individually evaluated
Collectively evaluated
158,734
1,594,041
82,009
1,844,584
19,441
20,050
Three Months Ended March 31, 2023
Allowance for loan losses
2,885
68
14,185
1,742
18,900
315
Impact of CECL adoption
1,366
402
(302)
32
1,500
(158)
(175)
(334)
Provision for (reversal of) loan losses
361
(156)
343
(199)
(34)
(40)
4,470
314
14,530
1,066
20,400
Allowance for loan losses:
561
259
822
3,670
311
13,796
1,051
18,848
239
475
730
790
11,329
1,738
13,857
192,311
9,964
1,702,108
94,237
2,196
2,000,816
4,472
301
24,490
616
29,879
197,573
10,265
1,737,927
2,044,552
For the three months ended March 31, 2024, the provision for credit losses and related change in the allowance for credit losses on loans was mainly driven by a replenishment of the allowance due to net charge-offs during the period, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves. Net charges-offs
21
totaled $3.4 million during the first quarter of 2024, of which $3.2 million was specifically reserved for at December 31, 2023. No changes were made to the qualitative risk factor conclusions during the first quarter of 2024. The quantitative reserve was impacted by improvement in forecasted economic conditions, specifically, national unemployment levels and national gross domestic product, both of which are key indicators utilized to estimate credit losses. The reserve for individually evaluated loans decreased during the three months ended March 31, 2024 primarily due to a charge-off of $3.2 million of reserve as the collateral shortfalls were deemed uncollectable.
The following table summarizes the amortized cost basis of individually evaluated collateral-dependent loans, including nonaccrual loans, modified loans to borrowers experiencing financial difficulty, and accreting purchase credit deteriorated (“PCD”) loans that have experienced post-acquisition declines in cash flows expected to be collected, by loan and collateral type as of the dates indicated.
Retail and
Convalescent
A/R and
Office
Multifamily
facility
Hotel
SFR 1-4
Equipment
ACL
1,022
645
967
8,401
1,202
4,818
3,220
4,242
1,021
1,052
2,073
224
5,305
2,213
135
1,165
9,042
2,186
1,862
22
The following table shows the amortized cost and allowance for credit losses for loans on nonaccrual status as of the dates indicated:
As of March 31, 2024
As of December 31, 2023
Nonaccrual
with no allowance
with allowance
for credit losses
nonaccrual
for loan losses
1,800
7,869
5,126
12,995
1,295
7,748
9,662
6,829
16,491
3,282
9,695
As part of the acquisition of Pacific Enterprise Bancorp (“PEB”) in 2022, the Company acquired certain small business loans to borrowers qualified under The California Capital Access Program for Small Business, a state guaranteed loan program sponsored by the California Pollution Control Financing Authority (“CalCAP”). PEB ceased originating loans under this loan program in 2017. Under this loan program, the borrower, CalCAP and the participating lender contributed funds to a loss reserve account that is held in a demand deposit account at the participating lender. The borrower contributions to the loss reserve account are attributed to the participating lender. Losses on qualified loans are charged to this account after approval by CalCAP. Under the program, if a loan defaults, the participating lender has immediate coverage of 100% of the loss. The participating lender must return recoveries from the borrower, less expenses, to the credit loss reserve account. The funds in the loss reserve account are the property of CalCAP; however, in the event that the participating lender leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the participating lender and provided there are no pending claims for reimbursement, the remaining excess funds are distributed to CalCAP and the participating lender based on their respective contributions to the loss reserve account. Funds contributed by the participating lender to the loss reserve account are treated as a receivable from CalCAP and evaluated for impairment quarterly. As of March 31, 2024 and December 31, 2023, the Company had $19.2 million and $19.4 million, respectively, of loans enrolled in this loan program. The Company had a loss reserve account of $13.7 million as of both March 31, 2024 and December 31, 2023.
In addition, as successor to PEB, the Company was approved by CalCAP, in partnership with the California Air Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program. Under this loan program, CalCAP solely contributes funds to a loss reserve account that is held in a demand deposit account at the participating lender. Losses are handled in the same manner as described above. The funds are the property of CalCAP and are payable upon termination of the program. When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to CalCAP. The Company originated $1.1 million and $481,000 of loans under this program during the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the Company had $15.6 million of loans enrolled in this program and a loss reserve account of $5.1 million. As of December 31, 2023, the Company had $17.7 million of loans enrolled in this program and a loss reserve account of $6.2 million.
NOTE 6 – PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at the dates indicated:
Premises owned
11,258
11,233
Leasehold improvements
3,082
Furniture, fixtures and equipment
8,973
7,948
Less accumulated depreciation and amortization
(8,958)
(8,529)
Total premises and equipment, net
23
Depreciation and amortization included in occupancy and equipment expense totaled $491,000 and $453,000 for the three months ended March 31, 2024 and 2023, respectively.
NOTE 7 – LEASES
The Company leased 20 branches under noncancelable operating leases as of March 31, 2024. These leases expire on various dates through 2030. The Company’s leases often have an option to renew one or more times, at the Company’s discretion, following the expiration of the initial term. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability.
The Company uses the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.
The below maturity schedule represents the undiscounted lease payments for the five-year period and thereafter as of March 31, 2024:
For remainder of 2024
2,921
2025
3,436
2026
2,751
2027
2,322
2028
2,164
Thereafter
2,041
Total undiscounted cash flows
15,635
Less: interest
(1,314)
Present value of lease payments
The following table presents the weighted average lease term and discount rate at the dates indicated:
Weighted-average remaining lease term
4.7
years
4.8
Weighted-average discount rate
3.6
3.4
Rental expense included in occupancy and equipment expense totaled $1.0 million for both the three months ended March 31, 2024 and 2023.
The following table presents certain information related to the operating lease costs included in occupancy and equipment expense on the consolidated statements of income for the periods indicated:
Operating lease cost
986
955
Short-term lease cost
44
Less: Sublease income
(12)
(22)
Total operating lease cost, net
989
977
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and the liabilities assumed as of the acquisition date. Goodwill and other intangible assets are assessed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Intangible assets with definite useful lives are
24
amortized over their estimated useful lives to their estimated residual values. Core deposit intangible represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and amortized over an estimated useful life of seven to ten years.
The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment exists when a reporting unit’s fair value is less than its carrying amount, including goodwill.
Changes in the Company's goodwill during the three months ended March 31, 2024 and year ended December 31, 2023 were as follows:
Balance at beginning of period
Acquired goodwill
Impairment
Balance at end of period
Core Deposit Intangible
Changes in the Company’s core deposit intangible during the three months ended March 31, 2024 and year ended December 31, 2023 were as follows:
5,201
Additions
Less amortization
(305)
(1,286)
Estimated annual amortization expense at March 31, 2024 was as follows:
917
948
455
380
NOTE 9 – INTEREST RECEIVABLE AND OTHER ASSETS
The Company’s interest receivable and other assets at the dates indicated consisted of the following:
Tax assets, net
18,086
19,480
Accrued interest receivable
8,500
Investment in SBIC fund
3,940
3,969
Investment in Community Reinvestment Act fund
2,000
Prepaid assets
1,917
2,023
Servicing assets
1,073
Investment in Low Income Housing Tax Credit ("LIHTC") partnerships, net
3,689
3,480
Investment in statutory trusts
516
511
CalCAP reserve receivable
4,023
Other assets
2,786
2,200
NOTE 10 – DEPOSITS
The Company’s deposits consisted of the following at the dates indicated:
Demand deposits
629,962
646,278
NOW accounts
276,907
283,089
Savings
97,015
102,073
Money market
624,806
624,066
Time deposits
514,217
477,244
Included in time deposits above are brokered deposits of $41.5 million and $43.6 million as of March 31, 2024 and December 31, 2023, respectively. At March 31, 2023, uninsured deposits totaled $949.3 million, or 44.3% of total deposits, compared to $969.2 million, or 45.5% of total deposits at December 31, 2023. The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements.
NOTE 11 – BORROWINGS
Other borrowings – The Bank has an approved secured borrowing facility with the Federal Home Loan Bank of San Francisco (the “FHLB”) for up to 25% of total assets for a term not to exceed five years under a blanket lien of certain types of loans. At both March 31, 2024 and December 31, 2023, the Company had no FHLB advances outstanding. During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans. At March 31, 2024 the Bank had no FRB of San Francisco advances outstanding.
The Bank has Federal Funds lines with four corresponding banks. Cumulative available commitments totaled $65.0 million at both March 31, 2024 and December 31, 2023. There were no amounts outstanding under these facilities at both March 31, 2024 and December 31, 2023.
Junior subordinated deferrable interest debentures – In connection with its previous acquisitions, the Company assumed junior subordinated deferrable interest debentures, totaling $8.6 million, net of fair value adjustments, with a weighted average interest rate of 8.17% at March 31, 2024, compared to $8.6 million, net of fair value adjustments, with a weighted average rate of 8.23% at December 31, 2023. The junior subordinated deferrable interest debentures mature in 2034, subject to earlier redemption by the Company.
26
Subordinated debt – On August 10, 2020, the Company issued and sold $65.0 million aggregate principal amount of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Notes initially bear a fixed interest rate of 5.25% per year. Commencing on September 15, 2025, the interest rate on the Notes resets quarterly to the three-month Secured Overnight Financing rate plus a spread of 521 basis points (5.21%), payable quarterly in arrears. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year through September 15, 2025 and quarterly thereafter on March 15, June 15, September 15 and December 15 of each year through the maturity date or earlier redemption date. The Company, at its option, may redeem the Notes, in whole or in part, on any interest payment date on or after September 15, 2025, without a premium. At March 31, 2024 and December 31, 2023, the Company had outstanding Notes, net of cost to issue, totaling $63.6 million and $63.9 million, respectively.
NOTE 12 – INTEREST PAYABLE AND OTHER LIABILITIES
The Company’s interest payable and other liabilities at the dates indicated consisted of the following:
Accrued expenses
4,696
7,419
Accounts payable
755
716
Reserve for unfunded commitments
Accrued interest payable
2,752
3,054
Other liabilities
3,967
3,177
NOTE 13 – OTHER EXPENSES
The Company’s other expenses for the periods indicated consisted of the following:
Professional fees
587
Core deposit premium amortization
Marketing and promotions
123
Stationery and supplies
76
87
Insurance (including FDIC premiums)
359
201
Communication and postage
229
Loan default related expense
Director fees and expenses
88
82
Bank service charges
Courier expense
182
114
177
The Company expenses marketing and promotion costs as they are incurred. Advertising expense included in marketing and promotions totaled $11,000 and $5,000 for the three months ended March 31, 2024 and 2023, respectively.
NOTE 14 – EQUITY INCENTIVE PLANS
Equity Incentive Plans
2017 Omnibus Equity Incentive Plan
The Company’s shareholders approved the Company’s 2017 Omnibus Equity Incentive Plan (“2017 Plan”) in November 2017. The 2017 Plan provides for the awarding by the Company’s Board of Directors of equity incentive awards
to employees and non-employee directors. An equity incentive award under the 2017 Plan may be an option, stock appreciation right, restricted stock units, stock award, other stock-based award or performance award. Factors considered by the Board in awarding equity incentives to officers and employees include the performance of the Company, the employee’s or officer’s job performance, the importance of his or her position, and his or her contribution to the organization’s goals for the award period. Generally, awards have a vesting period of no longer than ten years. Subject to adjustment as provided in the 2017 Plan, the maximum number of shares of common stock that may be delivered pursuant to awards granted under the 2017 Plan is 450,000. The 2017 Plan provides for annual restricted stock grant limits to officers, employees and directors. The annual stock grant limit per person for officers and employees is the lesser of 50,000 shares or a value of $2.0 million, and per person for directors, the maximum is 25,000 shares. All unvested restricted shares outstanding vest in the event of a change in control of the Company. Awarded shares of restricted stock vest over (i) a one-year period following the date of grant, in the case of the non-employee directors, and (ii) a three-year or five-year period following the date of grant, with the initial vesting occurring on the one-year anniversary of the date of grant, in the case of the executive officers. As of March 31, 2024, a total of 19,765 shares were available for future issuance under the 2017 Plan.
The following table provides the restricted stock grant activity for the periods indicated:
Weighted-average
grant date
Non-vested at January 1,
81,365
18.27
97,877
16.80
Granted
23.30
18.98
Vested
(19,927)
18.99
(16,979)
19.06
Forfeited
16.67
Non-vested, at March 31,
85,404
19.55
109,290
17.01
NOTE 15 – FAIR VALUE MEASUREMENT
ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the reporting entity has the ability to access at the measurement date.
Level 2 – Observable prices in active markets for similar assets and liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.
Level 3 – Unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
We use fair value to measure certain assets and liabilities on a recurring basis, primarily securities AFS. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and other real estate owned and to record impairment on certain assets, such as goodwill, core deposit intangible, and other long-lived assets.
In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or
28
liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our quarterly valuation process. There were no transfers between levels during the three months ended March 31, 2024 and 2023.
The following assets are measured at fair value on a recurring basis as of the dates indicated:
Total Estimated
Fair Value Measurements
Fair Value
Level 1
Level 2
Level 3
181,077
175,737
The following assets are measured at fair value on a nonrecurring basis as of the dates indicated:
Individually evaluated loans
Individually evaluated loans (1)
The Company does not record loans at fair value on a recurring basis. However, from time to time, certain loans have individual risk characteristics not consistent with a pool of loans and are individually evaluated for credit reserves. Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are typically individually evaluated. The fair value of individually evaluated loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise and liquidation value and discounted cash flows. Those individually evaluated loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. When the
29
fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the individually evaluated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is less than the appraised value or the appraised value contains a significant assumption and there is no observable market price, the Company records the individually evaluated loan as nonrecurring Level 3.
The Company records foreclosed assets, or other real estate owned (“OREO”), at fair value on a nonrecurring basis based on the collateral value of the property. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the OREO as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is less than the appraised value or the appraised value contains a significant assumption, and there is no observable market price, the Company records the OREO as nonrecurring Level 3. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also incorporates assumptions regarding market trends or other relevant factors and selling and commission costs ranging from 5% to 10%. Such adjustments and assumptions are typically significant and result in a Level 3 classification of the inputs for determining fair value. The Company had no OREO at both March 31, 2024 and December 31, 2023.
NOTE 16 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented below:
Carrying
Fair
Fair value measurements
amount
value
Financial assets:
Investment securities AFS
Investment in FHLB and FRB Stock
20,943
Loans, net
1,772,016
Financial liabilities:
2,145,841
8,696
Off-balance sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit
73,791
73,576
30
20,939
1,810,426
2,135,923
8,631
77,377
77,152
NOTE 17 – COMMITMENTS AND CONTINGENCIES
Lending and Letter of Credit Commitments
We operate in a highly regulated environment. From time to time, we are a party to various claims and litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings where we believe the resolution would have a material adverse effect on our business, financial condition, or results of operations.
Nevertheless, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
In the normal course of business, the Company enters into various commitments to extend credit which are not reflected in the financial statements. These commitments consist of the undisbursed balance on home equity and unsecured personal lines of credit, commercial lines of credit, including commercial real estate secured lines of credit, and of undisbursed funds on construction and development loans. The Company also issues standby letter of credit commitments, primarily for the third-party performance obligations of clients.
The following table presents a summary of commitments described above as of the dates indicated:
Commitments to extend credit
73,139
76,531
Standby letters of credit
652
846
Total commitments
Commitments generally have fixed expiration dates or other termination clauses. The actual liquidity needs or the credit risk that the Company will experience will likely be lower than the contractual amount of commitments to extend credit because a significant portion of these commitments are expected to expire without being drawn upon. The commitments are generally variable rate and include unfunded home equity lines of credit, commercial real estate construction loans where disbursement is made over the course of construction, commercial revolving lines of credit, and
unsecured personal lines of credit. The Company’s outstanding loan commitments are made using the same underwriting standards as comparable outstanding loans. The reserve associated with these commitments included in interest payable and other liabilities on the consolidated balance sheets was $215,000 at March 31, 2024 and $225,000 at December 31, 2023.
Commercial Real Estate Concentrations
At March 31, 2024 and December 31, 2023, in management’s judgment, a concentration of loans existed in commercial real estate related loans. The Company’s commercial real estate loans are secured by owner-occupied and non-owner occupied commercial real estate and multifamily properties. Although management believes that loans within these concentrations have no more than the normal risk of collectability, a decline in the performance of the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on collectability.
Other Assets
The Company has commitments to fund investments in LIHTC partnerships and an SBIC fund. At March 31, 2024, the remaining commitments to the LIHTC partnerships and the SBIC fund were approximately $5.4 million and $122,000, respectively. At December 31, 2023, the remaining commitments to the LIHTC partnerships and the SBIC fund were approximately $5.7 million and $122,000, respectively.
At March 31, 2024, approximately $236.1 million, or 11.0%, of the Company's deposits were derived from its top ten depositors. At December 31, 2023, approximately $246.0 million, or 11.5%, of the Company's deposits were derived from its top ten depositors. As of March 31, 2024 and December 31, 2023, approximately $949.3 million, or 44.3% and $969.2 million, or 45.4%, of our total deposits were uninsured, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements.
Local Agency Deposits and Other Advances
In the normal course of business, the Company accepts deposits from local agencies. The Company is required to provide collateral for certain local agency deposits in the states of California, Colorado, New Mexico and Washington. As of both March 31, 2024 and December 31, 2023, the FHLB issued letters of credit on behalf of the Company totaling $40.6 million, as collateral for local agency deposits.
NOTE 18 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward- looking statements as a result of a wide variety or range of factors including, but not limited to:
In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for the remainder of 2024 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.
Executive Overview
General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 35 full-service branches, with 16 locations in California, one in Nevada, two in Washington, five in New Mexico and 11 in Colorado. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related data, relate primarily to the Bank.
Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. Since 2010, we have expanded our geographic footprint through 10 strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share. We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Las Vegas, Nevada, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, Colorado, provides us with access to low cost, stable core deposits that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. At March 31, 2024, on a consolidated basis, the Company had approximately $2.6 billion in total assets, $1.9 billion in total loans, $2.1 billion in total deposits and $314.2 million in shareholders’ equity.
We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At March 31, 2024, our $1.9 billion total loan portfolio included $370.8 million, or 19.7%, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.5 billion, or 80.3%, consisted of loans we originated.
The profitability of our operations depends primarily on our net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses. Our net income is also affected by other factors, including the provision for credit losses on loans, noninterest income and noninterest expense.
Set forth below is a discussion of the primary factors affecting our results of operations:
Net interest income. Net interest income represents interest income less interest expense. We generate interest income from interest and fees received on interest earning assets, including loans and investment securities and dividends on Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) stock we own. We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest margin; and (iv) the regulatory risk weighting associated with our assets. Net interest margin is calculated as the annualized net interest income divided by average interest earning assets. Because noninterest bearing sources of funds, such as noninterest bearing deposits and shareholders’ equity, also fund interest earning assets, net interest margin reflects the benefit of these noninterest bearing sources.
Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since January 1, 2023 through the quarter ended March 31, 2024, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) has increased the target range for the federal funds rate 100 basis points to a
35
range of 5.25% to 5.50%. The increase in the average yield on interest-earning assets during the three months ended March 31, 2024 reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher. We believe our balance sheet is structured to enhance our net interest margin if the FOMC continues to raise the targeted federal funds rate.
Noninterest income. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) gain (loss) on equity securities; and (iv) other noninterest income. Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of Small Business Administration (“SBA”) loans, capitalized loan servicing rights and other related income.
Provision for credit losses. We established an allowance for credit losses by charging amounts to provision for credit losses at a level required to reflect estimated credit losses in the loan and available-for sale investment securities portfolios. For loans, management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors. See “Critical Accounting Policies and Estimates - Allowance for Credit Losses” for a description of the manner in which the provision for credit losses is established.
For investments, the Company evaluates investment available-for-sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Such situations may result from either a decline in the financial condition of the issuing entity or in the case of fixed interest rate investments, from rising interest rates. In making this assessment, management considers the length of time and the extent to which fair value is less than amortized cost, the nature of the security, the underlying collateral, and the financial condition and prospects of the issuer, among other factors. This assessment also includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for credit losses for available-for-sale securities is recognized in other comprehensive income. Changes in the allowance for credit losses for available-for-sale securities are recorded as provision for (or reversal of) credit loss. Losses are charged against the allowance for credit losses for available-for-sale securities, with a corresponding adjustment to the security's amortized cost basis, when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.
Noninterest expense. Noninterest expense includes, among other things: (i) salaries and related benefits; (ii) occupancy and equipment expense; (iii) data processing; (iv) Federal Deposit Insurance Corporation (“FDIC”) and state assessments; (v) outside and professional services; and (vi) other general and administrative expenses, including amortization of intangible assets. Salaries and related benefits include compensation, employee benefits and employment tax expenses for our personnel. Occupancy and equipment expense includes depreciation expense on our owned properties and equipment, lease expense on our leased properties and other occupancy-related expenses. Data processing expense includes fees paid to our third-party data processing system provider and other data service providers. FDIC and state assessments expense represents the assessments that we pay to the FDIC for deposit insurance and other regulatory costs to various states. Outside and professional fees include legal, accounting, consulting and other outsourcing arrangements. Amortization of intangibles represents the amortization of our core deposit intangible from various acquisitions. Other general and administrative expenses include expenses associated with travel, meals, training, supplies and postage. Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased significantly over the past few years as we have grown through acquisitions and organically, and as we have built out our operational infrastructure.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the Banking industry. To prepare financial statements and interim
financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes; and are based on information available as of the date of the financial statements. As this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.
These critical accounting policies and estimates include determining the allowance for credit losses and related provision. The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K. For a detailed discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2023 Form 10-K filed with the SEC on March 15, 2024.
Comparison of Financial Condition at March 31, 2024 and December 31, 2023
Total assets. Total assets increased $8.7 million, or 0.3%, to $2.6 billion at March 31, 2024, from December 31, 2023. The increase primarily was due to cash and cash equivalents increasing $40.8 million, or 13.3% and investment securities available-for-sale increasing $4.8 million, or 2.9%, partially offset by decreases in loans receivable, net, of $38.0 million or 2.0%. In addition, interest receivable and other assets decreased $848,000 or 1.8%, equity securities increased $573,000 or 4.6%, and loans held for sale increased $1.7 million.
Cash and cash equivalents. Cash and cash equivalents increased $40.8 million, or 13.3%, to $348.3 million, at March 31, 2024, from $307.5 million at December 31, 2023. The increase primarily was due to a $38.3 million increase in federal funds sold and interest bearing balances in banks due to repayment on loans coupled with decline in loan demand.
Investment securities available-for-sale. Investment securities available-for-sale increased $4.8 million, or 2.9%, to $167.9 million at March 31, 2024 from $163.2 million at December 31, 2024. The increase primarily was due to the purchase of $7.1 million of investment securities and unrealized gains on investment securities available-for-sale of $696,000 as a result of fair value adjustments, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured of $3.0 million during the three months ended March 31, 2024.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as of March 31, 2024. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.
Amount Due or Repricing Within:
One Year
Over One
Over Five
Over
or Less
to Five Years
to Ten Years
Ten Years
Weighted
Average
Cost
Yield
(Dollars in thousands)
2,503
2.34
7,462
1.47
10,919
2.94
3.90
2.49
1,379
2.51
3,366
3.19
10,352
2.46
25,402
3.98
3.47
2.50
2,175
4.00
2,501
2.56
33,105
4.07
3.96
282
6.88
2,199
5.02
2,473
6.57
5.90
992
9.55
3,000
5.00
76,650
4.44
749
3.37
4.51
3.86
2.91
4.05
4.11
3.97
Equity securities. Equity securities increased $573,000, or 0.6%, to $13.2 million at March 31, 2024 from $12.6 million at December 31, 2023, primarily due to a $573,000 mark-to-market upward adjustment recorded during the three months ended March 31, 2024.
Loans receivable, net. We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Loans receivable, net decreased $38.0 million, or 2.0%, to $1.9 billion at March 31, 2024 from December 31, 2023. The decrease was due to $72.4 million of loan repayments, partially offset by $32.0 million of new loan originations.
The following table provides information about our loan portfolio by type of loan, with purchase credit deteriorated (“PCD”) loans presented as a separate balance, at the dates presented.
% Change
160,401
162,691
(1.4)
Real estate:
83,472
85,555
(2.4)
Multifamily residential
240,995
246,840
Owner occupied CRE
483,218
497,360
(2.8)
Non-owner occupied CRE
882,751
899,332
(1.8)
9,596
9,534
0.7
Total real estate
1,700,032
1,738,621
(2.2)
(22.8)
0.0
Total Loans
(2.1)
Net deferred loan fees
(114.0)
(14.1)
(2.0)
38
The following table shows as of March 31, 2024, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:
San Francisco Bay
Total in State of
Area (1)
Other California (2)
All Other States (3)
% of
Total in
Category
36,615
8.8
70,790
107,405
53,189
8.0
8.5
12,909
3.1
43,022
5.3
55,931
4.6
27,937
4.2
4.4
43,948
10.5
105,954
13.1
149,902
12.2
93,743
14.2
243,645
12.9
167,446
40.2
284,518
35.2
451,964
36.9
42,627
6.4
494,591
26.2
156,019
37.4
296,754
36.7
452,773
37.0
441,081
66.7
893,854
47.4
7,210
0.9
0.6
2,406
0.4
0.5
380,322
737,458
1,117,780
607,794
1,725,574
551
0.1
416,955
808,249
1,225,204
661,534
35,954
75,549
9.0
111,503
51,386
7.7
8.4
13,876
3.3
43,157
5.1
57,033
4.5
28,969
4.3
46,129
10.9
109,214
13.0
155,343
12.3
94,180
14.1
249,523
168,977
40.1
292,880
34.9
461,857
36.6
47,296
7.1
509,153
26.4
156,411
37.1
312,362
37.2
468,773
441,136
66.2
909,909
47.2
7,217
2,342
385,393
764,830
1,150,223
613,923
1,764,146
733
421,351
840,380
1,261,731
666,042
Acquired loans. As of March 31, 2024, acquired non-PCD loans totaled $173.3 million with a remaining net premium of $2.1 million, compared to $187.7 million with a remaining net premium of $2.1 million as of December 31, 2023. The net premium for acquired non-PCD loans includes a credit discount based on estimated losses in the acquired loans, partially offset by any premium based on market interest rates on the date of acquisition.
As of March 31, 2024 acquired PCD loans totaled $27.1 million with a remaining net non-credit discount of $1.7 million, compared to $27.5 million with a remaining net non-credit discount of $1.8 million as of December 31, 2023.
Nonperforming assets and loans. Nonperforming assets generally consists of nonaccrual loans, accruing loans that are 90 days or more past due and other real estate owned (“OREO”). Nonperforming loans generally consist of nonaccrual loans and accruing loans that are 90 days or more past due. There were no accruing loans 90 days or more past due or other real estate owned (“OREO”) at both March 31, 2024 and December 31, 2023.
Nonperforming loans, consisting solely of non-accrual loans, totaled $16.5 million, or 0.87% of total loans, at March 31, 2024, compared to $13.0 million, or 0.67% of total loans, at December 31, 2023. The increase in nonperforming loans was primarily due to six new loans placed on non-accrual during the current quarter totaling $7.3 million, partially offset by partial charge-offs of two non-accrual loans totaling $2.9 million, charge-offs of five non-accrual loans totaling $435,000 and, to a lesser extent, pay-offs of five non-accrual loans totaling $305,000. At March 31, 2024, nonperforming loans totaling $2.2 million were guaranteed by governmental agencies, compared to $740,000 at December 31, 2023. At
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March 31, 2024 and December 31, 2023, there were no performing (accruing) modified loans to borrowers experiencing financial difficulty.
At March 31, 2024 and December 31, 2023, nonaccrual loans included $4.0 million and $927,000 of loans 30-89 days past due, and $1.1 million and $2.1 million of loans less than 30 days past due, respectively. At March 31, 2024, the $1.1 million of nonaccrual loans less than 30 days past due was comprised of 14 loans, all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers.
In general, loans are placed on nonaccrual status after being contractually delinquent for more than 90 days, or earlier, if management believes full collection of future principal and interest on a timely basis is unlikely. When a loan is placed on nonaccrual status, all interest accrued but not received is charged against interest income. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Interest received on such loans is recognized as interest income when received. A nonaccrual loan is restored to an accrual basis when principal and interest payments are paid current, and full payment of principal and interest is probable. Loans that are well secured and in the process of collection will remain on accrual status.
Loans may be acquired at a premium or discount to par value, in which case the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay-off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.
Modified loans to borrowers experiencing financial difficulty. Occasionally, the Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or any combination of these. When principal forgiveness is provided, the amount of the forgiveness is charged-off against the allowance for credit losses for loans. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses for loans is adjusted by the same amount.
Loan modifications to borrowers experiencing financial difficulty as of March 31, 2024 totaled $3.0 million, of which none were accruing and performing according to their modified terms, compared to $4.3 million, of which none were accruing and performing according to their modified terms, at December 31, 2023. Modified loans that are accruing and performing according to their modified terms are not considered nonperforming loans as they continue to accrue interest despite their modified status. The related allowance for credit losses on individually evaluated modified loans totaled $42,000 and $1.3 million at March 31, 2024 and December 31, 2023, respectively.
The following table provides information regarding nonperforming loans, nonperforming assets and modified loans as of the dates indicated:
Loans accounted for on a nonaccrual basis:
8,075
4,687
3,573
233
165
14,824
10,905
Total nonaccrual loans
Accruing loans 90 days or more past due
Total nonperforming loans
Real estate owned
Total nonperforming assets (1)
Modified loans to borrowers experiencing financial difficulty – performing
Nonperforming assets to total assets (1)
0.64
Nonperforming loans to total loans (1)
0.87
0.67
Performing modified loans to borrowers experiencing financial difficulty are neither included in nonperforming loans above nor are they included in the numerators used to calculate these ratios.
Interest foregone on nonaccrual loans was approximately $483,000 and $235,000 for the three months ended March 31, 2024 and 2023, respectively, none of which was included in interest income. Interest income recognized on nonaccrual loans was approximately $7,200 and $65,000 for the three months ended March 31, 2024 and 2023, respectively.
Allowance for credit losses for loans. The allowance for credit losses is determined by us on a quarterly basis, although we are engaged in monitoring the appropriate level of the allowance on a more frequent basis. We assess the allowance for credit losses based on three categories: (i) originated loans, (ii) acquired non-PCD loans, and (iii) acquired PCD loans. The allowance for credit losses reflects management’s estimate of current expected credit losses inherent in the loan portfolios. The computation includes elements of judgment and high levels of subjectivity.
At March 31, 2024, the Company’s allowance for credit losses for loans was $18.9 million, or 1.00% of total loans, compared to $22.0 million, or 1.14% of total loans, at December 31, 2023. Based on the current conditions of the loan portfolio, management believes that the $18.9 million allowance for credit losses at March 31, 2024 is adequate to absorb expected credit losses inherent in the Company’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
We recorded net charge-offs of $3.4 million and $315,000 for the three months ended March 31, 2024 and 2023, respectively. The calculation of the allowance for credit losses for loans at March 31, 2024 and December 31, 2023, excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA. The increase in activity in net charge-offs during the first quarter of 2024 involved partial charge-offs of two non-accrual loans totaling $2.9 million, as well as complete write-offs of five non-accrual loans totaling $435,000. At December 31, 2023, $3.2 million of the nonaccrual loan charge-offs were specifically reserved for. These actions were taken due to collateral shortfalls deemed uncollectable.
41
The following table presents certain credit ratios at the dates and for the periods indicated and each component of the ratio’s calculations:
Three months ended March 31,
Allowance for credit losses on loans as a percentage of total loans outstanding at period end
1.00
Allowance for credit losses on loans
1,886,730
2,044,536
Nonaccrual loans as a percentage of total loans outstanding at period end
13,090
Allowance for credit losses on loans as a percentage of nonaccrual loans at period end
114.55
155.84
Net charge-offs/(recoveries) during period to average loans outstanding:
0.10
Net charge-offs
142
Average loans outstanding
162,978
199,807
9,588
17,887
Commercial estate:
1,652,506
1,714,792
0.18
85,130
98,237
(0.09)
Net charge-offs/(recoveries)
(2)
769
2,223
Total loans:
0.02
Total net charge-offs
3,372
Total average loans outstanding
1,910,971
2,032,945
As of March 31, 2024, the Company individually evaluated $20.2 million in loans, inclusive of $16.5 million of nonperforming loans. Of these individually evaluated loans, $6.8 million had a specific allowance of $1.4 million as of March 31, 2024. As of December 31, 2023, the Company individually evaluated $13.0 million in loans, all of which were on nonaccrual status. Of these individually evaluated loans, $9.7 million had a specific allowance of $4.4 million as of December 31, 2023.
Management considers the allowance for credit losses for loans at March 31, 2024 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for credit losses for loans or that any increased allowance for credit losses for loans that may be required will not adversely impact our financial condition and results of operations. A further decline in national and local economic conditions due to employment levels, labor shortages, the effects of inflation, a potential recession, slowed economic growth or otherwise, could result in a material increase in the allowance for credit losses for loans and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for credit losses for loans is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for credit losses based upon their judgment of information available to them at the time of their examination.
42
Deposits. Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.
Total deposits increased $10.2 million, or 0.5%, to $2.1 billion at March 31, 2024 from December 31, 2023. At March 31, 2024, noninterest bearing demand deposits totaled $630.0 million, or 29.4% of total deposits, compared to $646.3 million, or 30.3% of total deposits, at December 31, 2023. At March 31, 2023, uninsured deposits totaled $949.3 million, or 44.3% of total deposits, compared to $969.2 million, or 45.5% of total deposits at December 31, 2023. Estimated uninsured deposits, excluding collateralized public deposits and affiliate deposits, were approximately 41.4% and 42.1% of total deposits at March 31, 2024 and December 31, 2023, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements.
We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. We also offer an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insurance limits. At March 31, 2024, our average deposit account size (excluding public funds), calculated by dividing period-end deposits by the population of accounts with balances, was approximately $58,000. See Note 17 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our top ten depositors.
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered at the dates indicated.
Noninterest bearing demand deposits
(2.5)
Saving
(5.0)
Borrowings. Although deposits are our primary source of funds, we may from time to time utilize borrowings as a cost-effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. We are a member of and may obtain advances from the FHLB of San Francisco, which is part of the Federal Home Loan Bank System. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.
At March 31, 2024 and December 31, 2023, we had the ability to borrow up to $508.2 million and $576.9 million, respectively, from the FHLB of San Francisco. At both March 31, 2024 and December 31, 2023, there were no FHLB advances outstanding.
During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans. At March 31, 2024, we had the ability to borrow up to $46.7 million from the FRB of San Francisco, with no FRB of San Francisco advances outstanding at that date.
We may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At both March 31, 2024 and December 31, 2023, we had a total of $65.0 million in federal funds line available from third-party financial institutions and no balances outstanding at these dates.
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At both March 31, 2024 and December 31, 2023, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, assumed in connection with its previous acquisitions totaling $8.6 million.
At March 31, 2024, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.9 million at December 31, 2023.
We are required to provide collateral for certain local agency deposits. At both March 31, 2024 and December 31, 2023, the FHLB of San Francisco had issued letters of credit on behalf of the Bank totaling $40.6 million, as collateral for local agency deposits.
Shareholders’ equity. Shareholders’ equity increased $1.4 million, to $314.2 million at March 31, 2024 from $312.9 million at December 31, 2023. The increase in shareholders’ equity primarily was due to $5.9 million of net income earned and a $484,000 decrease in accumulated other comprehensive loss, net of taxes, partially offset by the repurchase of $4.0 million of Company common stock and cash dividends paid or accrued payable totaling $1.2 million, during the first three months of 2024. During the three months ended March 31, 2024, the Company repurchased a total of 198,120 shares of its common stock at a total cost of $4.0 million, or $20.20 per share, leaving 161,632 shares available for future purchases under the current stock repurchase plan. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”
Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023
Earnings summary. Net income was $5.9 million for the three months ended March 31, 2024, compared to $7.2 million for the three months ended March 31, 2023, a decrease of $1.3 million or 18.3%. The decrease was the result of a $2.9 million decrease in net interest income, partially offset by a $501,000 increase in noninterest income, a $458,000 decrease in noninterest expenses, and a $554,000 decrease in provision for income taxes. Diluted earnings per share were $0.51 for the three months ended March 31, 2024, compared to $0.57 for the three months ended March 31, 2023.
Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for credit losses and noninterest income, was 65.68% and 61.63% for the three months ended March 31, 2024 and 2023, respectively. The deterioration in the efficiency ratio during the three months ended March 31, 2024 compared to the same period in 2023 was primarily due to lower overall revenues.
Interest income. Interest income for the three months ended March 31, 2024 was $31.7 million, compared to $30.1 million for the three months ended March 31, 2023, an increase of $1.6 million or 5.6%. The increase in interest income between periods reflects increases in interest income in all interest-earning asset categories, except loans. Increased yields earned on interest-earning assets, along with an increase in the average balance of fed funds sold and interest bearing balances in banks, were the primary drivers for the increase in interest income, partially offset by a decrease in the average balance of loans.
Interest income on loans, including fees, decreased $998,000, or 3.8%, to $25.3 million for the three months ended March 31, 2024, compared to $26.3 million for the three months ended March 31, 2023, due a $121.5 million decrease in the average balance of loans, partially offset by an eight basis point increase in the average loan yield. The average balance of loans was $1.9 billion for the first quarter of 2024, compared to $2.0 billion for the first quarter of 2023. The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended March 31, 2024, was 5.32%, compared to 5.24% for the three months ended March 31, 2023. The increase in the average yield on loans from the first quarter of 2023 was due to the impact of increased rates on variable rate loans as well as new loans being originated at higher market interest rates.
Interest income on loans for three months ended March 31, 2024 and 2023 included $98,000 and $97,000 respectively, in accretion of the net discount on acquired loans and revenue from PCD loans in excess of discounts. The remaining net discount on acquired loans was $392,000 and $371,000 at March 31, 2024 and 2023, respectively. Interest income on loans for the three months ended March 31, 2024 and 2023, included $176,000 and $269,000, respectively, in fees related to prepayment penalties.
Interest income on investment securities increased $316,000, or 19.3%, to $2.0 million for the three months ended March 31, 2024, compared to $1.6 million for the three months ended March 31, 2023, due to a 72 basis point increase in the average yield earned on investment securities, partially offset by a $3.3 million decrease in the average balance of investment securities. The average yield on investment securities was 4.24% for the three months ended March 31, 2024 compared to 3.52% for the three months ended March 31, 2023. In addition, during the first quarter of 2024, we received $416,000 in cash dividends on our FRB and FHLB stock, up 25.3% from $332,000 received in the first quarter of 2023.
Interest income on federal funds sold and interest-bearing balances in banks increased $2.3 million, or 125.0%, to $4.1 million for the three months ended March 31, 2024, compared to $1.8 million for the three months ended March 31, 2023. The increase was due to a 92 basis point increase in the average yield earned on federal funds sold and, to a lesser extent, a $139.3 million increase in the average balance of federal funds sold and interest-bearing balances in banks. The average yield on federal funds sold and interest-bearing balances in banks was 5.48% for the three months ended March 31, 2024 compared to 4.56% for the three months ended March 31, 2023.
Interest expense. Interest expense increased $4.5 million, or 94.6%, to $9.3 million for the three months ended March 31, 2024, compared to $4.8 million for the three months ended March 31, 2023, reflecting higher funding costs primarily related to increased market rates of interest payable on money market and time deposits. The average rate paid on interest-bearing liabilities for three months ended March 31, 2024 was 2.40% compared to 1.35% for three months ended March 31, 2023. Total average interest-bearing liabilities increased $126.2 million, or 1.05%, to $1.6 billion for the three months ended March 31, 2024, compared to $1.4 billion for the three months ended March 31, 2023.
Interest expense on deposits increased $4.5 million, or 122.4%, to $8.2 million for the three months ended March 31, 2024 compared to $3.7 million for the three months ended March 31, 2023. The increase was driven by higher rates paid on money market accounts and time deposits and, to a lesser extent, an increase in the average balance of time deposits. Specifically, rates on money market accounts and time deposits increased by 103 basis points and 159 basis points, respectively, during the three months ended March 31, 2024, compared to the same period in 2023. The average balance of time deposits also increased, rising by $163.5 million, or 50.3%, to $488.7 million during the three months ended March 31, 2024, compared to $325.3 million during the same period in 2023.
The average rate paid on all interest-bearing deposits increased by 112 basis points to 2.22% for the three months ended March 31, 2024, compared to 1.10% for the three months ended March 31, 2023. The average balance of interest-bearing deposits totaled $1.5 billion for the three months ended March 31, 2024, compared to $1.4 billion for the three months ended March 31, 2023. The overall average cost of deposits for the three months ended March 31, 2024 and 2023 was 1.55% and 0.71%, respectively. Meanwhile, the average balance of noninterest-bearing deposits decreased $102.3 million, or 13.8%, to $639.7 million for the three months ended March 31, 2024 compared to $742.0 million for the same period in 2022.
Interest expense on borrowings increased $11,000, or 1.00%, to $1.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, due to a 98 basis point increase in the average rate paid on junior subordinated debentures. The average cost of total borrowings increased to 6.18% for the three months ended March 31, 2024, compared to 6.05% for the three months ended March 31, 2023. The average balance of borrowings decreased $654,000 to $72.3 million during the three months ended March 31, 2024, compared to $72.9 million during the three months ended March 31, 2023.
Net interest income and net interest margin. Net interest income decreased $2.9 million, or 11.3%, to $22.4 million for the three months ended March 31, 2024, compared to $25.3 million for the three months ended March 31, 2023. The decrease in net interest income primarily was due to an increase in interest expense on deposits and a decrease in interest income on loans, partially offset by increases in interest income on federal funds sold and interest-bearing balances in banks, interest income on investment securities and dividends on FHLB stock.
The average yield (annualized) on interest earning assets for the three months ended March 31, 2024 increased to 5.28%, a 21 basis point increase from 5.07% for the three months ended March 31, 2023, while the average cost of interest bearing liabilities increased 105 basis points to 2.40% for the three months ended March 31, 2024, compared to 1.35% for the three months ended March 31, 2023. The increases in average yields on interest-earning assets and
average rates paid on interest-bearing liabilities during the three months ended March 31, 2024, compare to the same periods in 2023, were due to higher market interest rates generally.
The annualized net interest margin was 3.72% and 4.26%, for the three months ended March 31, 2024 and 2023, respectively. Net interest margin in the first quarter of 2024 as compared to the first quarter of 2023 was negatively impacted by increasing funding costs, due to shifts towards higher yielding deposits, which outpaced, on a percentage basis, increasing yields on interest-earning assets.
Average Balances, Interest and Average Yields/Cost. The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average costs; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Nonaccrual loans have been included in the table as loans carrying a zero yield. Yields have been calculated on a pre-tax basis. Loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.
Annualized
Balance (1)
Interest
Yield/Cost
Balance(1)
Interest earning assets
Fed Funds sold and interest-bearing balances in banks
302,120
5.48
162,796
4.56
Investments securities
185,704
4.24
188,974
3.52
FHLB Stock
9.68
10,679
7.16
FRB Stock
9,633
6.01
9,606
6.08
5.32
2,032,442
5.24
Total interest earning assets
2,419,741
5.28
2,404,497
5.07
Noninterest earning assets
131,293
128,432
Total average assets
2,551,034
2,532,929
Interest bearing liabilities
97,519
119,597
0.14
284,005
0.09
316,307
74
621,509
3,397
2.20
603,784
1,737
1.17
488,745
4,735
325,286
1,849
2.31
Total interest bearing deposit accounts
1,491,778
2.22
1,364,974
1.10
63,715
5.64
63,728
5.70
Junior subordinated debentures, net
8,572
10.20
8,491
9.22
Other borrowings
722
Total interest bearing liabilities
1,564,065
2.40
1,437,915
1.35
Noninterest bearing deposits
639,737
742,037
Other noninterest bearing liabilities
31,222
34,101
Noninterest bearing liabilities
670,959
776,138
Total average liabilities
2,235,024
2,214,053
Average equity
316,010
318,876
Total average liabilities and equity
Interest rate spread (2)
2.88
3.72
Net interest margin (3)
4.26
Ratio of average interest earning assets to average interest bearing liabilities
154.71
167.22
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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.
2024 compared to 2023
Increase/(Decrease)
Attributable to
Volume
Fed funds sold and interest bearing balances in banks
742
1,544
2,286
344
316
FHLB stock and FRB stock
73
84
550
(1,548)
(998)
Total interest income
1,709
(21)
1,688
(9)
Money market accounts
50
1,660
1,969
2,886
Total deposit accounts
3,575
952
4,527
(3)
3,584
954
4,538
(1,875)
(975)
(2,850)
Provision for credit losses. We recorded a $262,000 and a $315,000 provision for credit losses for loans for the three months ended March 31, 2024 and 2023, respectively. The provision for credit losses for loans in the first quarter of 2024 was mainly driven by a replenishment of the allowance due to net charge-offs during the period, partially offset by decreases in outstanding loan balances, leading to lower quantitative reserves. Net chares-offs totaled $3.4 million during the first quarter of 2024, of which $3.2 million was specifically reserved for at December 31, 2023. No changes were made to the qualitative risk factor conclusions during the first quarter of 2024. The quantitative reserve was impacted by improvement in forecasted economic conditions, specifically, national unemployment and national gross domestic product, both of which are key indicators utilized to estimate credit losses.
Noninterest income. Noninterest income increased $501,000, or 32.1%, to $2.1 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023. The increase was primarily due to a $1.5 million increase in gain on equity securities, partially offset by a $519,000 decrease in income on an investment in a Small Business Investment Company (“SBIC”) fund and a $412,000 decrease in gain on sale of loans.
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The following table presents the key components of noninterest income for the periods indicated:
2023 (As Restated)
$ Change
(100.0)
1,469
(164.0)
(46)
(5.2)
(18)
(4.4)
(Loss) income on investment in SBIC fund
(519)
106.1
10.3
501
32.1
Noninterest expense. Noninterest expense decreased $458,000, or 2.8%, to $16.1 million for the three months ended March 31, 2024 compared to $16.5 million for the three months ended March 31, 2023. The decrease primarily was due to a $1.0 million decrease in salaries and employee benefits as a result of a $675,000 decrease in bonus accrual, a decrease in full-time equivalent employees, and a reduction in deferred loan origination expenses, partially offset by wage increases during 2024. This decrease was partially offset by a $288,000 increase in data processing expense due to decline in pricing credits offered and expenses relating to enhancements to the Bank’s network, a $127,000 increase in other expense due to increased FDIC insurance costs and professional fees, and a $127,000 increase in occupancy and equipment expense.
The following table details the components of noninterest expense for the periods indicated:
(1,000)
(9.1)
127
6.3
19.7
(458)
Income taxes. The provision for income taxes decreased $554,000, or 19.6%, to $2.3 million the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023 due to lower taxable income. The Company’s effective tax rate was 27.9% and 28.2% for three months ended March 31, 2024 and 2023, respectively. The effective tax rate was lower for the three months ended March 31, 2024, compared to the same period in 2023, due to higher low income housing tax credits.
Liquidity and Capital Resources
Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis, it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources to meet our potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. During the three months ended March 31, 2024, the Bank sold no loans or loan participation interests and received $72.4 million in principal loan repayments. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.
Deposits increased $15.1 million to $2.1 billion and liquid assets, in the form of cash and cash equivalents, time deposit in banks and investment securities, increased $165.0 million to $517.2 million at March 31, 2024 from December
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31, 2023. Management believes that our securities portfolio is of high quality and the securities would therefore be marketable. Securities purchased during the three months ended March 31, 2024, totaled $7.1 million and securities repayments, maturities and sales during the period were $3.0 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2024, totaled $266.5 million. It is management’s policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.
In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of March 31, 2024, the Bank had an available borrowing capacity of $508.2 million with the FHLB of San Francisco, with no borrowings outstanding at that date or at December 31, 2023. During the first quarter of 2024, the Bank was approved for discount window advances with the FRB of San Francisco secured by certain types of loans. At March 31, 2024, we had the ability to borrow up to $46.7 million, from the FRB of San Francisco, with no borrowings outstanding at that date. The Bank also had, as of that date, federal funds lines with available commitments totaling $65.0 million with four correspondent banks. There were no amounts outstanding under these facilities at March 31, 2024 and December 31, 2023. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.
Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $73.8 million, including $48,000 of undisbursed construction and development loan commitments, at March 31, 2024. For information regarding our commitments, see “Note 17 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1. Financial Information” of Part I of this report.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities for the three months ended March 31, 2024 was $5.1 million, compared to $8.2 million provided by operating activities for the three months ended March 31, 2023. During the three months ended March 31, 2024, net cash provided by investing activities was $31.0 million, which consisted primarily of net decrease in loans receivable, compared to $21.0 million of cash used in investing activities for the three months ended March 31, 2023. Net cash provided by financing activities for the three months ended March 31, 2024 was $4.7 million, which was comprised primarily of net increase in deposits, compared to $33.6 million provided by financing activities during the three months ended March 31, 2023. Management believes our capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements. There has not been a material change in our liquidity and capital resources since the information disclosed in our 2023 Annual Report other than set forth above. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.
BayCom Corp is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, 2024, BayCom Corp had liquid assets of $18.8 million. In addition to its operating expenses, BayCom Corp is responsible for paying to its shareholders any dividends that have been declared, funding stock repurchases, and making payments on its junior subordinated debentures and subordinated notes. BayCom Corp can receive dividends and other capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends and make other capital distributions.
On March 6, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share on the Company’s outstanding common stock, payable on April 12, 2024 to shareholders of record as of the close of business on March 16, 2024. The Company expects to continue to pay quarterly cash dividends on its common stock, subject to the Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment of the cash dividend at this rate of $0.10 per share, our average total dividend paid each quarter would be approximately $1.2 million based on the number of our outstanding shares at March 31, 2024. The dividends we pay if any, may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I. Item 1. Business” of the 2023 Annual Report.
From time to time, our Board of Directors has authorized stock repurchase programs. In general, stock repurchases allow us to proactively manage our capital position and return excess capital to shareholders. Stock repurchases also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. In August 2023, our Board of Directors announced a new stock repurchase program, to commence following completion of the existing stock repurchase program (which was completed during the quarter ended September 30, 2023), for the repurchase of up to 588,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one year period. Purchases under the Company’s stock repurchase programs may be made through open market purchases, privately negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The repurchase programs may be suspended, terminated, or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The Company’s stock repurchase programs do not obligate the Company to purchase any particular number of shares. As of March 31, 2024, there remained 161,632 shares available for repurchase under the Company’s existing stock repurchase program. For additional information on the Company’s stock repurchases, see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.
Regulatory Capital
The Bank, as a state-chartered, federally insured commercial bank, and member of the Board of Governors of the Federal Reserve System, is subject to capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain levels of capital adequacy that generally parallel the FDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “Well Capitalized” status under the Federal Reserve regulations. Based on capital levels at March 31, 2024 and December 31, 2023, the Bank was considered Well Capitalized at both of those dates.
The table below shows the capital ratios under the Basel III capital framework as of the dates indicated:
At March 31, 2024
At December 31, 2023
Ratio
Leverage Ratio
BayCom Corp
284,598
11.66
282,402
11.56
Minimum requirement for “Well Capitalized”
122,037
122,135
Minimum regulatory requirement
97,629
97,708
United Business Bank
335,964
13.41
328,303
13.08
125,244
125,479
100,195
100,383
Common Equity Tier 1 Ratio
14.17
14.41
130,572
6.50
127,400
90,396
4.50
8,820
16.91
16.94
129,136
125,987
89,402
87,222
Tier 1 Risk-Based Capital Ratio
294,083
14.64
291,887
14.89
160,704
8.00
156,800
120,528
6.00
117,600
158,936
155,062
119,202
116,296
Total Risk-Based Capital Ratio
377,873
18.81
379,112
19.34
200,880
10.00
196,000
355,069
17.87
350,528
18.08
198,670
193,827
In addition to the minimum capital ratios, the Bank must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At March 31, 2024, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary bank(s) to be Well Capitalized under the prompt corrective action regulations. If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2023, the Company would have exceeded all regulatory capital requirements.
For additional information, see “Item 1. Business — Supervision and Regulation — United Business Bank — Capital Requirements” and Note 19, “Regulatory Matters” in the Notes to the Consolidated Financial Statements, included in “Item 8. Financial Statements and Supplementary Data” in the 2023 Annual Report.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate risk through our lending and deposit gathering activities. Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. For information regarding the Company’s market risk, see “Management Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market and Interest Rate Risk,” in the Company’s 2023 Annual Report. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2023 Annual Report.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the disclosure controls and procedures as defined in Rule 13a 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of March 31, 2024 under the supervision and with the participation of the Company’s principal executive officer, principal financial officer and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Company’s principal executive officer and principal financial officer concluded that as of March 31, 2024, based on their evaluation, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to BayCom Corp’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.
(b) Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.
Item 1A. Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the 2023 Annual Report.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
(a)
Not applicable.
(b)
(c)Stock Repurchases. The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended March 31, 2024:
Total number of
shares purchased
Maximum number of
number of
price
as part of
shares that may yet be
shares
paid
publicly announced
purchased under the
purchased
per share
plans or programs
plans or programs (1)
January 1, 2024 - January 31, 2024
359,752
February 1, 2024 - February 29, 2024
53,659
20.14
306,093
March 1, 2024 - March 31, 2024
144,461
20.23
161,632
198,120
20.20
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
(c)Trading Plans. During the three months ended March 31, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 6. Exhibits
Articles of Incorporation of BayCom Corp(1)
3.2
Amended and Restated Bylaws of BayCom Corp(2)
31.1
31.2
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Balance Sheets; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Changes in Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Notes to Condensed Consolidated Financial Statements.
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Cover Page Interactive Data File (embedded within the Inline XBRL document).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Registrant
Date: May 10, 2024
By:
/s/ George J. Guarini
George J. Guarini
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Keary L. Colwell
Keary L. Colwell
Senior Executive Vice President, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)