BayCom Corp. — Q3 2023 Form 10-Q
Period: Quarter and nine months ended September 30, 2023. BayCom is a bank holding company; its subsidiary, United Business Bank, operates 35 branches across California, Washington, New Mexico, and Colorado and primarily serves businesses and individuals. Dollar amounts below are in millions unless noted. Comparative 2022 results are identified as restated in the filing.
Financial performance and position
- Third-quarter earnings: Net income was $6.63 million, down 4.9% from $6.97 million. Diluted EPS was $0.56 versus $0.52; the lower average share count contributed to higher per-share earnings despite lower net income.
- Nine-month earnings: Net income was $21.03 million, up 30.6% from $16.11 million; diluted EPS rose to $1.72 from $1.22.
- Net interest income and margin: Q3 net interest income was $24.81 million, up 0.3%; nine-month net interest income was $74.35 million, up 5.8%. Net interest margin was 4.03% for Q3 and 4.12% for the nine months, compared with 3.99% and 3.73%, respectively, in 2022.
- Interest costs and earnings mix: Q3 interest expense increased to $8.02 million from $2.41 million, as deposit costs rose. Average interest-bearing deposit cost was 1.85% in Q3 versus 0.40% a year earlier. Q3 total noninterest income fell 30.6% to $1.65 million, mainly due to lower gains on loan sales. Nine-month noninterest income fell 17.2% to $4.30 million, including no repeat of the $1.67 million 2022 bargain-purchase gain.
- Expenses and margins: Noninterest expense increased 2.6% to $16.52 million in Q3 and was essentially unchanged at $49.61 million for the nine months. The efficiency ratio was 62.42% for Q3 and 63.07% year to date, versus 59.38% and 65.78% in 2022.
- Credit costs: The company recorded a $0.67 million Q3 provision for credit losses, compared with $1.19 million in Q3 2022. For the first nine months, it recorded a $0.31 million reversal, versus a $3.82 million provision in 2022. The September 30 allowance for credit losses was $19.8 million, or 1.01% of loans.
- Balance sheet and liquidity: Total assets were $2.57 billion, deposits $2.16 billion, net loans $1.95 billion, and shareholders’ equity $307.3 million at September 30. Cash and cash equivalents were $301.9 million, up $125.1 million from year-end 2022; management attributed the higher balance partly to a liquidity strategy following bank failures.
- Deposits and funding: Deposits rose 3.5% from year-end, but noninterest-bearing demand deposits declined 13.7% while time deposits increased 47.0%. Estimated uninsured deposits were $991.6 million, or 45.9% of deposits, versus $1.1 billion, or 53.3%, at year-end 2022. No FHLB advances or correspondent-bank federal funds borrowings were outstanding; reported available capacity was $597.6 million from the FHLB and $65.0 million under federal funds lines.
- Debt and capital: Subordinated debt was $63.8 million and junior subordinated debentures were $8.5 million. The Bank was reported well capitalized; its common equity tier 1, tier 1 risk-based, and total risk-based capital ratios were 17.20%, 17.20%, and 18.23%, respectively.
- Cash flow: For the nine months, operating activities provided $22.4 million, investing activities provided $52.9 million, and financing activities provided $49.8 million. Cash and cash equivalents increased $125.1 million.
Material changes and notable items
- Loan balances, net of allowance, declined 2.7% from December 31, 2022. Commercial real estate represented the bulk of the portfolio; non-owner-occupied CRE was 46.8% of total loans by the filing’s loan-category presentation.
- Nonperforming assets were $14.3 million, or 0.56% of assets, compared with $15.2 million, or 0.61%, at year-end. Nonaccrual loans were $14.3 million; none were 90 days past due and still accruing at September 30.
- Shareholders’ equity declined $9.9 million from year-end, reflecting $21.7 million of share repurchases, dividends, and increased accumulated other comprehensive loss, partly offset by net income. The company repurchased 1.21 million shares for $21.7 million during the nine months.
- BayCom adopted the CECL credit-loss standard on January 1, 2023. Adoption increased the loan allowance by $1.5 million and the unfunded-commitment reserve by $45,000, with a $491,000 after-tax reduction to opening retained earnings.
- The company restated prior financial statements after determining that preferred equity securities had been incorrectly accounted for as available-for-sale debt securities. Fair-value changes should have been recorded in earnings rather than other comprehensive income. Amended prior filings were submitted in July 2023.
Outlook, risks, and contingencies
- No specific numerical earnings or balance-sheet guidance was provided. Management described continued emphasis on organic commercial-loan growth and selective acquisitions, and said it believes the balance sheet is positioned to benefit if rates rise further.
- Management cited higher deposit and funding costs as a key pressure. The filing also identifies interest-rate changes, competition for deposits, possible uninsured-deposit outflows, economic weakness, and real-estate value declines as risks.
- CRE concentration is a material exposure: management cautioned that weaker economic conditions or falling real-estate values in its markets could impair collectability. The company stated that its securities unrealized losses were largely rate- and market-related, that it did not intend to sell affected securities, and that no credit-loss allowance was recorded on them.
- A roughly $1.0 million loan to a trust was placed on nonaccrual and fully reserved after the borrower’s trustee filed for bankruptcy. The Bank had applied a $4.0 million certificate of deposit against the loan; an additional $1.0 million of collateral held by a third-party escrow agent had been released without the Bank’s consent. The Bank initiated legal action, and recovery remains uncertain.
- Control weakness: Management concluded that disclosure controls were ineffective at September 30 because a material weakness related to the securities-accounting error remained. The company redesigned controls and began testing them, but stated the weakness would not be remediated until controls operate effectively for a sufficient period. Management nevertheless concluded the current-period financial statements were fairly stated in all material respects.
- The company declared a $0.10-per-share quarterly dividend and announced a new authorization to repurchase up to 588,000 shares over one year, subject to the Board’s discretion and other conditions.
Important facts for investors to verify
- Progress and independent testing of the remediation plan for the material weakness, and whether any further restatements or adjustments are required.
- Developments in the escrow-collateral litigation, recovery prospects, and adequacy of the full reserve on the trust loan.
- Trends in uninsured deposits, deposit pricing, deposit mix, and liquidity if funding conditions worsen.
- Credit quality and collateral trends in the concentrated CRE portfolio, including nonaccruals, criticized loans, and allowance coverage.
- Whether loan yields continue to outpace rising deposit costs and support net interest margin and earnings.