BayCom Corp — Q2 2020 Form 10-Q
Business context and reporting period. BayCom Corp is the holding company for United Business Bank, a community bank serving small and midsized businesses, professionals and individuals. This unaudited filing covers the quarter and six months ended June 30, 2020. The company operated 34 branches across California, Washington, New Mexico and Colorado. Its February 2020 acquisition of Grand Mountain Bancshares (GMB) added four Colorado branches; results also reflect the 2019 Uniti and TIG acquisitions.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. For a bank, net interest income is a key revenue measure.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest and dividend income | $22.8 | $17.9 | $45.3 | $34.3 |
| Net interest income | $21.0 | $16.0 | $41.0 | $30.9 |
| Provision for loan losses | $4.4 | $0.4 | $6.1 | $0.7 |
| Noninterest income | $1.3 | $2.5 | $3.9 | $4.7 |
| Noninterest expense | $13.5 | $14.8 | $30.5 | $24.5 |
| Net income | $3.1 | $2.2 | $5.9 | $7.2 |
| Diluted earnings per share | $0.26 | $0.20 | $0.49 | $0.64 |
| Net interest margin | 4.15% | 4.29% | 4.19% | 4.31% |
- Q2 net income rose 40.1% year over year; six-month net income fell 17.2%. The higher loan-loss provision weighed on both periods, while the six-month result also reflects lower noninterest income and acquisition-related expenses.
- Q2 efficiency ratio was 60.83%, versus 79.73% a year earlier; the six-month ratio was 67.88%, versus 69.05%. The Q2 comparison benefited from $4.1 million of acquisition costs in Q2 2019 and none in Q2 2020. Excluding those costs, Q2 2020 noninterest expense increased 27% year over year.
- Average loan yield was 5.13% in Q2, down from 5.59%; the filing attributes pressure to lower rates and 1% PPP loans. Acquired-loan discount accretion contributed 47 basis points to Q2 margin.
Balance sheet at June 30, 2020: Total assets were $2.19 billion, up 9.8% from year-end 2019. Net loans were $1.71 billion, up 18.0%; deposits were $1.89 billion, up 10.9%; and shareholders’ equity was $252.4 million, down 0.7%. Commercial real estate represented a significant concentration, with total real estate loans of approximately $1.41 billion.
- Cash and cash equivalents were $203.7 million, down $91.7 million from year-end; interest-bearing bank deposits were $14.6 million and available-for-sale securities were $121.4 million.
- Six-month operating cash flow was $0.9 million, investing cash use was $164.5 million, and financing cash provided was $72.0 million. Cash and cash equivalents declined by $91.7 million over the period.
- Deposits were the primary funding source. Period-end borrowings were $16.0 million, comprising $10.0 million of FHLB advances and a $6.0 million short-term borrowing used to fund share repurchases. Junior subordinated debentures were $8.3 million; lease liabilities were $14.1 million.
- The Bank was reported as well-capitalized. Its June 30 ratios included 9.92% leverage, 12.76% common equity Tier 1 and 13.60% total risk-based capital. Available borrowing capacity was $604.9 million from the FHLB and $85.0 million in Federal Funds lines; neither Federal Funds lines nor the Fed’s PPP Liquidity Facility was used at quarter-end.
Material changes, outlook and risks
- Credit and COVID-19: The allowance for loan losses rose to $13.5 million, or 0.78% of loans, from $7.4 million at year-end 2019. Q2 provision was $4.4 million, attributed to acquired-loan migration and expected losses related to COVID-19. Nonperforming assets were $8.5 million, or 0.39% of assets; nonaccrual loans were $8.2 million, or 0.48% of loans. The filing warns that delinquencies, criticized loans and charge-offs may rise as pandemic effects continue.
- At June 30, the Bank had modified 462 loans totaling $411.9 million under COVID-19 relief programs, representing 23.9% of loans; 21 further requests totaling $24.1 million were pending. These qualifying modifications were not classified as TDRs. Hospitality-related modifications totaled $98.4 million. Management said modified loans would be monitored and further relief reassessed.
- PPP loans totaled $129.9 million at June 30, were fully SBA-guaranteed and excluded from the allowance calculation. Forgiveness processing and evolving program rules remain risks. As of July 31, the filing reported 1,310 accepted applications; the related table separately reports funded, approved and in-process balances.
- Management expects the pandemic and low interest rates to adversely affect net interest income and margin in 2020 and possibly longer. No specific earnings or margin guidance was provided. Further economic deterioration could increase credit losses and goodwill impairment risk; management’s June qualitative goodwill assessment found no impairment necessary.
- Other risks include commercial real estate concentration, acquisition integration and realization of expected benefits, interest-rate and funding pressures, and operational/cybersecurity risks from remote work and third-party providers. Management reported no material change in interest-rate risk exposure from the 2019 Annual Report.
- Capital returned to shareholders: the company repurchased 680,503 shares for $10.1 million during the first half, including 451,978 shares at an average $12.09 in May. No regular cash dividend is paid. After quarter-end, on August 10, BayCom issued $65.0 million of 5.25% fixed-to-floating subordinated notes due 2030, with approximately $63.3 million net proceeds.
- Management reported disclosure controls were effective as of June 30, with no significant quarterly change in internal control over financial reporting. The company reported no pending legal proceeding it believed would materially affect its financial condition or operations.
Key investor verification points
- Track the performance, risk ratings and payment resumption of the $411.9 million modified loan portfolio, particularly hospitality and other pandemic-sensitive borrowers.
- Assess whether the $13.5 million allowance remains adequate as economic conditions and the acquired-loan portfolio evolve; distinguish allowance coverage from acquired-loan discounts and SBA-guaranteed PPP exposures.
- Verify PPP forgiveness, fee recognition and servicing outcomes, and reconcile the filing’s June 30 and July 31 PPP application and balance disclosures.
- Monitor net interest margin and funding costs as low rates persist, and review liquidity and capital after the $65 million subordinated-note issuance and share repurchases.
- Evaluate CRE concentration, acquisition integration and any subsequent developments affecting credit quality, goodwill or operating costs.