BayCom Corp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. BayCom Corp is the holding company for United Business Bank, a community bank operating 34 branches in California, Washington, New Mexico and Colorado. Financial comparisons below use the filing’s restated prior-period figures where indicated.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $31.3m | $25.6m | $61.3m | $50.4m |
| Net interest income | $24.3m | $23.2m | $49.5m | $45.5m |
| Provision (reversal) for credit losses | ($1.3m) | $2.6m | ($985,000) | $2.6m |
| Net income | $7.2m | $3.9m | $14.4m | $9.1m |
| Diluted EPS | $0.59 | $0.29 | $1.16 | $0.70 |
| Net interest margin | 4.02% | 3.59% | 4.16% | 3.61% |
- Q2 net income increased 84.4%; first-half net income increased 57.6%. Higher asset yields and lower credit-loss provisions were key contributors.
- Q2 noninterest income was $1.1m, up from $180,000, partly reflecting a smaller fair-value loss on equity securities. First-half noninterest income declined 5.8% to $2.6m, including no repeat of the $1.7m 2022 bargain-purchase gain.
- Noninterest expense rose 8.9% in Q2 to $16.6m, primarily due to salaries and benefits. First-half expense declined 1.3% to $33.1m, partly because 2022 included $3.1m of PEB acquisition costs. Efficiency ratio was 65.27% for Q2 and 63.40% for the first half.
- At June 30, total assets were $2.57bn, loans net of allowance were $1.99bn, deposits were $2.15bn, and shareholders’ equity was $307.0m. Total loans were $2.01bn, little changed from year-end.
- Cash and cash equivalents were $250.2m, up $73.4m from year-end. The AFS securities portfolio was $146.5m and carried $23.1m in gross unrealized losses; accumulated other comprehensive loss, net of tax, was $16.4m.
- Deposits rose 3.0% from year-end, but noninterest-bearing demand deposits fell 14.1% to $664.1m; time deposits increased 56.5% to $459.1m. Estimated uninsured deposits were $992.2m, or 46.2% of total deposits.
- Loan allowance was $19.1m, or 0.95% of loans. Nonaccrual loans were $12.8m (0.64% of loans), down from $14.3m at year-end. Commercial real estate loans accounted for the largest portion of the portfolio; management identifies CRE concentration as a risk.
- Outstanding debt included $63.8m of subordinated notes and $8.5m of junior subordinated debentures. There were no FHLB advances or federal funds line borrowings. Available borrowing capacity included $499.1m from the FHLB and $65.0m in correspondent-bank lines.
- United Business Bank remained “Well Capitalized”; its June 30 leverage, CET1, Tier 1 risk-based and total risk-based ratios were 13.05%, 16.60%, 16.60% and 17.59%, respectively.
Material changes, outlook and risks
- Restatement and controls: The company restated prior financial statements after determining that preferred equity securities had been incorrectly classified as available-for-sale debt securities. Fair-value changes should have been recorded in earnings rather than other comprehensive income. The filing says disclosure controls were ineffective and a material weakness in internal control over financial reporting remained unresolved at June 30. Remediation includes additional training, outside expertise and redesigned classification and review controls.
- Accounting change: CECL was adopted January 1, 2023, increasing the loan allowance by $1.5m and the unfunded-commitment reserve by $45,000, with a $491,000 after-tax reduction to opening retained earnings. Management attributed the period’s allowance reversal mainly to improved economic forecasts and, to a lesser extent, lower loan balances.
- Rate and funding outlook: Management said higher rates improved asset yields and believes the balance sheet is structured to benefit if rates rise further. Deposit costs are also increasing; the filing provides no formal earnings or margin guidance. The Federal Reserve raised its target range after quarter-end by a further 25 basis points.
- Subsequent credit event: After quarter-end, a borrower’s bankruptcy affected a $5.0m certificate-of-deposit-secured loan. The bank applied $4.0m of deposit collateral, but an escrow agent had released the remaining $1.0m without the bank’s consent. The company plans legal action and expects to record a $1.0m reserve in Q3; recovery is uncertain.
- Other risks: The filing highlights potential uninsured-deposit outflows, the risk of selling securities at a loss, CRE and economic exposure, rising funding costs, interest-rate sensitivity, and legal, regulatory, cyber and integration risks. Management reported no material legal proceedings expected to adversely affect the company.
- Capital returns: The company paid/declared a quarterly dividend of $0.10 per share and repurchased $17.2m of stock in the first half. A new authorization permits repurchase of up to 619,000 shares over one year, subject to the company’s discretion and liquidity needs.
Important facts for investors to verify
- Review the restatement disclosures and monitor whether the material weakness is remediated; the filing states controls were still ineffective.
- Reconcile cash-flow figures: the cash-flow statement reports six-month operating, investing and financing cash flows of $19.8m, $10.4m and $43.2m, respectively, while MD&A cites $18.5m, $10.4m and $44.4m. The filing text does not explain the differences.
- Track the $1.0m unsecured exposure from the post-quarter loan event, expected Q3 reserve and outcome of planned recovery action.
- Assess uninsured deposits, deposit mix and pricing, and whether higher deposit costs continue to pressure net interest margin.
- Monitor CRE concentration, nonaccrual trends, allowance assumptions and the sensitivity of AFS securities to interest rates and liquidity needs.
- Confirm the company’s progress on control remediation and the effects of repurchases, dividends and any future capital or liquidity needs.