BayCom Corp (BCML) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparison periods are the corresponding 2020 periods. BayCom is a bank holding company whose wholly owned United Business Bank serves businesses and individuals through 33 branches in California, Washington, New Mexico, and Colorado. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $17.7 | $19.0 | $53.6 | $60.0 |
| Provision for (reversal of) loan losses | $0.5 | $2.3 | ($0.03) | $8.4 |
| Noninterest income | $4.0 | $1.8 | $8.7 | $5.7 |
| Noninterest expense | $13.9 | $14.2 | $41.4 | $44.6 |
| Net income | $5.4 | $3.2 | $15.3 | $9.2 |
| Diluted EPS | $0.51 | $0.27 | $1.39 | $0.76 |
- Net income increased 66.6% in Q3 and 66.0% for the first nine months. Lower loan-loss provisions and higher noninterest income more than offset lower net interest income. Q3 noninterest income benefited from $2.2 million in loan-sale gains; nine-month loan-sale gains were $3.7 million.
- Net interest margin was 3.17% for Q3, versus 3.59% a year earlier. The MD&A reports nine-month margin of 3.51%, but the average-balance table reports 3.31%; the filing does not reconcile this difference. Efficiency ratio improved to 63.82% for Q3 and 66.40% year to date, from 67.95% and 67.90%, respectively.
- Interest income and loan yields declined amid low rates, lower average loan balances, PPP lending, and elevated cash balances. Nine-month net interest income fell $6.4 million year over year. Deposit costs declined, but the cost of subordinated debt partly offset the benefit.
Financial position, cash flow, and capital
- At September 30, total assets were $2.364 billion, up 7.7% from December 31, 2020. Cash and cash equivalents were $444.5 million; available-for-sale securities were $142.3 million; net loans were $1.624 billion.
- Deposits rose 9.2% to $2.008 billion. Noninterest-bearing demand deposits were $733.1 million, or 36.5% of deposits. Loans were essentially flat at $1.645 billion gross; growth in non-owner-occupied commercial real estate was offset by declines in other categories, including PPP forgiveness and loan repayments.
- Shareholders’ equity was $257.3 million. The company repurchased 643,609 shares for $11.5 million during the first nine months, at an average $17.80 per share; 657 shares remained authorized for repurchase under the plan.
- For the first nine months, operating cash flow was $5.4 million, investing cash outflow was $13.2 million, and financing cash inflow was $152.9 million, primarily reflecting net deposit growth. Cash and cash equivalents increased $145.1 million.
- There were no FHLB borrowings outstanding at quarter-end. Debt included $63.5 million of subordinated notes, bearing 5.25% fixed interest until September 2025 and floating thereafter, plus $8.4 million of junior subordinated debentures. Available funding included $434.9 million of FHLB capacity and $75.0 million of federal funds lines.
- The Bank was classified as well capitalized. Its quarter-end CET1, Tier 1 risk-based, total risk-based, and leverage ratios were 14.83%, 14.83%, 15.91%, and 10.63%, respectively.
Credit, outlook, and notable matters
- The allowance for loan losses was $17.3 million, or 1.05% of loans, versus $17.5 million, or 1.06%, at year-end 2020. Management attributed the year-to-date reversal in provision mainly to improving economic forecasts; Q3 provision related primarily to new loan production. Nonperforming loans were $8.3 million, or 0.50% of loans, compared with $8.7 million, or 0.53%, at year-end. Potential problem loans increased to $13.7 million from $12.7 million.
- Commercial real estate is a significant portfolio concentration. Management cautioned that economic weakness or declining property values in its markets could impair collectability. COVID-19 and the Delta variant remain risks; management noted no COVID-related payment-adjustment loans at September 30, compared with 43 totaling $66.7 million at year-end 2020.
- Management expects low interest rates and low-yielding PPP loans to adversely affect net interest income and margin in 2021 and possibly longer. No specific earnings or financial guidance was provided. The Bank had 764 PPP loans outstanding totaling $113.2 million, with $4.0 million of unrecognized fees.
- On September 7, 2021, BayCom agreed to acquire Pacific Enterprise Bancorp in a stock transaction valued at approximately $53.1 million using the September 3 share price. PEB shareholders would own approximately 22.2% of the combined company. Closing was expected in Q1 2022, subject to regulatory and shareholder approvals and other conditions; the filing highlights execution, integration, dilution, and credit-quality risks.
- The company reported no material pending legal proceedings and no material change in previously disclosed risk factors other than risks relating to the pending PEB acquisition. Management concluded disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting. A third-quarter goodwill assessment found no impairment was more likely than not.
Investor verification points
- Reconcile the nine-month net interest margin: MD&A states 3.51%, while the average-balance table states 3.31%.
- Track the PEB merger’s regulatory and shareholder approvals, expected closing, integration costs, and actual dilution versus the estimated 22.2% ownership.
- Monitor commercial real estate concentration, potential problem loans, nonperforming assets, allowance adequacy, and any renewed COVID-related borrower stress.
- Assess whether deposit growth and elevated cash balances persist, and how rates, PPP fee recognition, and loan yields affect net interest income and margin.
- Review the sustainability of earnings growth given the role of lower credit provisions and increased loan-sale gains, and verify subsequent share repurchases and capital levels.