BayCom Corp. 2022 Q2 Form 10-Q Summary
Business context and reporting period. BayCom Corp is a bank holding company whose subsidiary, United Business Bank, serves businesses, professionals and individuals through 34 branches across California, Washington, New Mexico and Colorado. This unaudited 10-Q covers the quarter and six months ended June 30, 2022. BayCom completed its acquisition of Pacific Enterprise Bancorp (PEB) on February 1, 2022; reported 2022 results include PEB only from that date. Unless indicated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $23.2 | $17.8 | $45.5 | $35.9 |
| Provision for (reversal of) loan losses | $2.6 | ($0.5) | $2.6 | ($0.5) |
| Noninterest income | $2.0 | $2.5 | $6.4 | $4.7 |
| Noninterest expense | $15.2 | $13.4 | $33.5 | $27.5 |
| Net income | $5.2 | $5.3 | $11.7 | $9.8 |
| Diluted earnings per share | $0.38 | $0.49 | $0.89 | $0.89 |
| Net interest margin | 3.59% | 3.29% | 3.61% | 3.38% |
| Efficiency ratio | 60.38% | 66.27% | 64.56% | 67.79% |
Q2 net income declined 1.7%, despite higher net interest income, as loan-loss provision, expenses and lower noninterest income offset much of the revenue growth. Q2 diluted EPS fell from $0.49 to $0.38; weighted-average shares increased substantially, primarily reflecting shares issued for the PEB acquisition. First-half net income rose 19.0%; first-half EPS was unchanged at $0.89.
- Balance sheet at June 30: assets were $2.678 billion, loans net of allowance were $1.987 billion, deposits were $2.255 billion and shareholders’ equity was $320.6 million. Total assets increased 13.9% and net loans increased 20.6% from December 31, 2021, mainly due to PEB.
- Credit quality: the allowance for loan losses was $17.8 million, or 0.89% of total loans, versus $17.7 million, or 1.06%, at year-end. Nonperforming loans were $10.7 million, or 0.53% of loans, versus $6.9 million, or 0.41%. A $2.4 million charge-off on a shared national credit was a key driver of the quarter’s provision.
- Cash flow and liquidity: for the first half, operating activities provided $10.8 million, investing activities provided $76.8 million and financing activities used $112.8 million. Cash and cash equivalents ended at $354.5 million, down from $379.7 million at year-end. Management reported $534.7 million of liquid assets, including cash equivalents, bank deposits and available-for-sale securities.
- Debt and funding: deposits are the primary funding source. The company had $63.6 million of subordinated debt and $8.4 million of junior subordinated debentures; no FHLB advances, FRB borrowings or correspondent-bank federal funds were outstanding. Available borrowing capacity included $503.1 million at the FHLB, $68.8 million at the FRB and $65.0 million in federal funds lines.
- Capital: the Bank was classified as well capitalized. At June 30, its leverage ratio was 12.30%, Common Equity Tier 1 ratio 16.29%, Tier 1 risk-based ratio 16.29% and total risk-based capital ratio 17.19%.
- Other comprehensive loss: first-half unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $11.4 million after tax, leaving accumulated other comprehensive loss of $9.2 million at June 30. The filing attributes the decline to higher market interest rates.
Material changes and unusual items
- PEB added $412.9 million of loans and $376.7 million of deposits at acquisition; the transaction issued 3,032,579 BayCom shares and included $275,000 in cash consideration. The acquisition added one Irvine branch.
- First-half noninterest income included a $1.665 million bargain-purchase gain. First-half noninterest expense included $3.075 million of nonrecurring acquisition costs, primarily recorded in Q1. Management said acquisition and integration costs may continue until systems and operations are fully integrated.
- Q2 interest income increased 28.1% year over year, largely from higher average loan and securities balances. Average loan yield declined to 4.62% from 4.71%, while the average yield on interest-earning assets rose to 3.97% from 3.69%. The reported Q2 net interest margin improved to 3.59% from 3.29%.
- Q2 noninterest income declined 17.6%, mainly because of lower gains on SBA loan sales and lower SBIC investment income. First-half noninterest income increased 36.9%, largely due to the PEB bargain-purchase gain.
- Commercial real estate is a significant portfolio concentration. Management cautions that weaker economic conditions or falling real estate values in its markets could adversely affect loan collectability.
Outlook, risks and contingencies
BayCom provided no specific earnings or financial guidance. Management said it believes the balance sheet is positioned to benefit if the Federal Reserve continues raising rates, as variable-rate assets reprice; this outcome is not assured. Management’s stated priorities include organic commercial-loan growth and selective acquisitions. The company expects to continue quarterly dividends at $0.05 per share, subject to Board discretion, and its stock-repurchase program remained authorized through January 29, 2023, subject to modification or termination.
- Key disclosed risks include credit deterioration, economic slowdown or recession, inflation, interest-rate and yield-curve changes, deposit competition and retention, CRE values, acquisition integration and anticipated synergies, regulatory action, and information-technology or third-party service disruptions.
- Nonperforming assets rose to $10.7 million, principally reflecting a restructured $2.5 million shared-national-credit participation and other nonaccrual loans. Management considered the allowance adequate but warned actual losses could exceed estimates.
- Available-for-sale securities had $13.2 million of gross unrealized losses at June 30, compared with $0.6 million at year-end. Management attributed losses principally to interest rates and expected recovery of amortized cost, but market-value changes remain a relevant risk.
- Commitments to extend credit and standby letters of credit totaled $105.2 million. The top ten depositors represented 11.2% of deposits. The company also had $3.1 million of remaining LIHTC investment commitments and $122,000 of remaining SBIC commitments.
- The filing reported no pending legal proceeding believed likely to have a material adverse effect and no material change in previously disclosed risk factors. Management said disclosure controls were effective and there were no significant quarterly changes in internal control over financial reporting.
- BayCom was preparing to adopt the CECL expected-credit-loss standard, effective for it in 2023. Management said adoption may increase the allowance, but the amount and financial-statement impact had not yet been determined.
Important facts for investors to verify
- Track PEB integration costs, systems conversion, retention, and whether expected acquisition benefits are realized.
- Monitor loan delinquencies, nonaccruals, charge-offs and allowance coverage, especially in commercial real estate and shared national credit exposures.
- Review deposit balances, depositor concentration, funding costs and liquidity as market rates and competition change.
- Assess whether higher rates improve net interest margin as management expects, while considering securities valuation effects and potential deposit repricing.
- Separate recurring earnings from the bargain-purchase gain and acquisition costs; note that the filing’s unaudited pro forma results, assuming PEB had been acquired at the start of the comparative periods, show lower 2022 net income than 2021.
- Confirm the eventual CECL transition impact and the company’s continued capital, dividend and repurchase capacity.