BayCom Corp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. BayCom is a bank holding company whose subsidiary, United Business Bank, serves businesses and individuals across 35 branches. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise stated.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total interest income | $22.5 million | $16.4 million in Q1 2019 |
| Net interest income | $20.0 million | $14.9 million in Q1 2019 |
| Net interest margin | 4.22% | 4.30% in Q1 2019 |
| Net income / diluted EPS | $2.8 million / $0.23 | $4.9 million / $0.45 in Q1 2019 |
| Loans, net | $1.618 billion | $1.450 billion at Dec. 31, 2019 |
| Deposits | $1.779 billion | $1.701 billion at Dec. 31, 2019 |
| Total assets | $2.169 billion | $1.994 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $274.3 million | $295.4 million at Dec. 31, 2019 |
| Allowance for loan losses | $9.1 million; 0.56% of loans | $7.4 million; 0.51% at Dec. 31, 2019 |
Net interest income after the loan-loss provision was $18.3 million. Noninterest income was $2.6 million; noninterest expense was $16.9 million. The efficiency ratio was 74.81%, versus 57.39% in Q1 2019. The income tax provision was $1.2 million, and the effective tax rate was 29.3%.
Operating cash flow was negative $3.0 million; investing activities used $71.3 million, largely reflecting loan growth and the GMB acquisition; financing activities provided $53.2 million, including $100 million of new FHLB advances. Cash and cash equivalents decreased by $21.1 million during the quarter.
At March 31, the company had $100 million of FHLB borrowings, with $50 million scheduled to mature April 24 and $50 million May 24, 2020; junior subordinated debentures were $8.3 million. It also reported $274.3 million of cash and cash equivalents, $16.5 million of interest-bearing bank deposits, $123.9 million of available-for-sale securities, and unused FHLB borrowing capacity of $491.8 million. The Bank was reported as well-capitalized; its CET1 ratio was 12.55% and total risk-based capital ratio was 13.13%.
Material changes and drivers
- Net income fell 43.0% year over year despite 34.8% growth in net interest income. Management attributed the decline principally to higher operating and acquisition expenses and a larger loan-loss provision.
- Noninterest expense rose 73.6% to $16.9 million, including $3.0 million of GMB-related acquisition expenses. Data processing expense increased to $3.6 million, including $2.0 million of GMB conversion costs.
- The $1.7 million provision for loan losses, compared with $277,000 in Q1 2019, reflected loan growth and management’s assessment of potential COVID-19-related economic deterioration. Net charge-offs were $13,000.
- Interest income increased 37.5%, primarily as average loans grew; average loan yield declined to 5.34% from 5.67%. The average cost of interest-bearing liabilities rose to 0.84% from 0.70%, while net interest margin declined eight basis points.
- Loans grew 11.5% from year-end, primarily due to the February 4 acquisition of Grand Mountain Bancshares (GMB), new originations, and purchased loans. Deposits rose 4.6%, also reflecting GMB. GMB added four Colorado branches; the company had also completed the TIG and Uniti acquisitions in 2019.
- Nonperforming assets increased to $9.3 million from $7.7 million; nonaccrual loans were $8.3 million, or 0.51% of loans, versus $6.8 million, or 0.47%, at year-end. Commercial real estate represented about 88% of total loans, and management identified a CRE concentration.
- Shareholders’ equity declined 0.3% to $253.6 million, mainly due to $4.6 million of share repurchases, partly offset by earnings and higher unrealized securities gains. The company does not pay a regular cash dividend.
Outlook, COVID-19 response and risks
Management provided no numerical earnings guidance. It expected net interest income and net interest margin to be adversely affected during 2020 and possibly longer, citing the pandemic, lower market rates, and uncertainty about economic activity. Management said loan delinquencies, adversely classified loans, and charge-offs could increase; future loss estimates remain highly uncertain. A March 2020 qualitative goodwill assessment found no impairment, but sustained adverse conditions or a prolonged decline in the company’s stock price could trigger a future impairment charge.
Subsequent to quarter-end, as of April 30, 2020, the company reported 319 COVID-19-related loan modifications totaling $353.9 million, or 21.8% of loans; requests totaled $406.2 million. The filing said six loans totaling $5.1 million had been modified by March 31 and were not classified as TDRs under applicable relief guidance. By April 30, the company had funded $78.3 million of PPP loans, with another $49.0 million approved and awaiting funding and $5.4 million in process. It planned to use the Federal Reserve’s PPP Liquidity Facility, subject to the program’s terms.
Key risks include COVID-19 effects on borrowers, credit quality, operations and markets; exposure to commercial real estate; interest-rate and funding pressures; integration of recent acquisitions; PPP compliance, forgiveness and litigation risk; goodwill impairment; and reliance on vendors and remote-work systems. Loan commitments and standby letters of credit totaled approximately $131.4 million at quarter-end. The filing reported no pending legal proceedings expected to have a material adverse effect. Management stated that disclosure controls were effective and that no significant changes in internal control occurred during the quarter.
Important facts for investors to verify
- Whether modified borrowers resume payments and how deferrals affect delinquencies, nonaccrual loans, charge-offs and the allowance.
- Actual PPP loan funding, fees, forgiveness and any SBA guarantee or litigation issues.
- Progress integrating GMB and prior acquisitions, including whether elevated operating and data-processing costs decline.
- Net interest margin and deposit costs as interest rates and funding conditions change, including repayment or refinancing of the $100 million near-term FHLB advances.
- Credit quality in the concentrated commercial real estate portfolio and any future goodwill impairment indicators.