BayCom Corp. 2020 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. BayCom Corp. is a bank holding company whose wholly owned subsidiary, United Business Bank, serves businesses and individuals through 34 branches. Results include the February 2020 acquisition of Grand Mountain Bancshares (GMB); recent acquisitions expanded operations in California and Colorado. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest and dividend income | $21.2 | $20.4 | $66.5 | $54.7 |
| Net interest income | $19.0 | $17.8 | $60.0 | $48.6 |
| Provision for loan losses | $2.3 | $0.5 | $8.4 | $1.2 |
| Noninterest income | $1.8 | $2.1 | $5.7 | $6.8 |
| Noninterest expense | $14.2 | $11.7 | $44.6 | $36.2 |
| Net income | $3.2 | $5.6 | $9.2 | $12.7 |
| Diluted earnings per share | $0.27 | $0.46 | $0.76 | $1.11 |
| Net interest margin | 3.59% | 4.23% | 3.96% | 4.28% |
| Efficiency ratio | 67.95% | 58.70% | 67.90% | 65.34% |
Net income fell 41.6% in the quarter and 27.8% year to date. Higher credit-loss provisions and operating expenses outweighed growth in net interest income. Lower market rates, PPP loans and a larger balance of lower-yielding deposits pressured net interest margin. The efficiency ratio rose, indicating higher expenses relative to net interest income before provision plus noninterest income.
- Balance sheet at September 30: Total assets were $2.272 billion, up 13.9% from year-end 2019. Net loans were $1.678 billion, up 15.7%; deposits were $1.909 billion, up 12.2%; shareholders’ equity was $255.3 million.
- Cash flow, nine months: Operating activities provided $6.2 million; investing activities used $132.0 million, primarily reflecting loan growth; financing activities provided $150.3 million, mainly from deposit growth and borrowings. Cash and cash equivalents ended at $319.8 million.
- Debt and funding: The company issued $65 million of 5.25% fixed-to-floating subordinated notes due 2030, receiving net proceeds of $63.3 million. It also had $10 million of FHLB advances and $8.3 million of junior subordinated debentures. Deposits remained the primary funding source.
- Liquidity and capital: Management reported $466.7 million of available FHLB borrowing capacity and $75 million of available Federal Funds lines; the bank had not drawn on the Federal Funds lines. The Bank was reported as well-capitalized, with a 13.41% CET1 ratio and 14.41% total risk-based capital ratio, above the respective 6.50% and 10.00% well-capitalized thresholds.
Material changes versus comparable periods
- Loan growth reflected GMB acquisition assets, organic originations and $140.2 million of PPP loans. Commercial and industrial loans rose 93% from December 2019, while total loans increased 16.5% before deferred fees and allowance.
- Interest income increased with a larger average loan portfolio, but loan yields declined: 4.64% in Q3 versus 5.76% a year earlier. The quarterly net interest margin declined 64 basis points.
- The allowance for loan losses rose to $15.8 million, or 0.93% of total loans, from $7.4 million, or 0.51%, at year-end 2019. The nine-month provision increased to $8.4 million. The filing cites COVID-19 uncertainty, risk-rating downgrades and acquired-loan accounting migration as factors.
- Noninterest expense rose 21.4% in Q3 and 23.2% year to date, reflecting acquisitions and business growth, including more employees, branches and data-processing activity. Nine-month acquisition-related expenses were $3.0 million, versus $4.1 million in 2019.
- Noninterest income decreased, partly because of lower SBA loan-sale gains. The company repurchased 739,151 shares for $10.7 million during the first nine months; a further repurchase authorization for up to approximately 590,000 shares was announced after quarter-end.
Outlook, risks and unusual items
- Management provided no quantified earnings or financial guidance. It expected COVID-19 and the low-rate environment to adversely affect net interest income and margin during 2020 and possibly longer.
- COVID-19 relief had been granted on 426 loans totaling $413.9 million; 371 loans totaling $335.8 million had resumed normal payments. At quarter-end, 55 loans totaling $78.1 million remained under relief, including 30 loans totaling $57.8 million with a second forbearance. These qualifying short-term modifications were not classified as TDRs under the CARES Act guidance.
- Potential problem loans totaled $62.5 million, including $57.8 million with second COVID-related payment relief. Nonperforming assets were $7.9 million, or 0.35% of assets; nonperforming loans were $7.6 million, or 0.45% of loans. Commercial real estate is a material portfolio concentration, exposing the Bank to deterioration in borrower performance or property values.
- The filing warns that worsening economic conditions could increase delinquencies, charge-offs and required provisions. PPP loans are federally guaranteed, but loan forgiveness administration and evolving SBA rules present operational and compliance risks.
- A COVID-related qualitative goodwill assessment found no impairment at September 30, 2020; sustained adverse conditions or a continued decline in stock value could prompt impairment charges. The company expects the future CECL standard could increase the allowance but had not determined the impact; adoption was described as required for the company in 2023.
- The filing reports no pending legal proceeding believed likely to have a material adverse effect. Disclosure controls were assessed as effective, and no significant changes in internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether loan-relief borrowers, especially the second-forbearance group, resume payments and whether potential problem loans migrate to nonaccrual or require additional reserves.
- How the allowance and credit quality evolve as COVID-19 effects, acquired-loan discounts and PPP forgiveness are reflected in results.
- Whether deposit growth and elevated cash balances convert into profitable loan growth without further margin compression.
- Whether acquisition integration and ongoing operating-cost growth improve efficiency and earnings over time.
- The terms, regulatory treatment and capital effects of subordinated debt, alongside the execution and cost of the new share repurchase authorization.