BayCom Corp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods unless stated otherwise. BayCom is a bank holding company whose United Business Bank subsidiary operated 34 branches across California, Washington, New Mexico, and Colorado, serving businesses, professionals, and individuals. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest and dividend income | $20.0 | $22.8 | $40.3 | $45.3 |
| Net interest income | $17.8 | $21.0 | $35.9 | $41.0 |
| Provision for loan losses | $(0.5) reversal | $4.4 | $(0.5) reversal | $6.1 |
| Noninterest income | $2.5 | $1.3 | $4.7 | $3.9 |
| Noninterest expense | $13.4 | $13.5 | $27.5 | $30.5 |
| Net income | $5.3 | $3.1 | $9.8 | $5.9 |
| Diluted EPS | $0.49 | $0.26 | $0.89 | $0.49 |
| Net interest margin | 3.29% | 4.15% | 3.38% | 4.19% |
| Efficiency ratio | 66.27% | 60.83% | 66.79% | 67.88% |
At June 30, 2021, total assets were $2.334 billion, net loans $1.576 billion, deposits $1.978 billion, and shareholders’ equity $252.5 million. Cash and cash equivalents were $468.7 million, up from $299.3 million at year-end 2020. Total loans declined 3.0% from year-end to $1.597 billion before deferred fees and allowance; commercial real estate made up the largest portfolio category.
The allowance for loan losses was $17.0 million, or 1.07% of total loans, compared with $17.5 million, or 1.06%, at December 31, 2020. Nonperforming assets were $8.9 million (0.38% of assets), and nonperforming loans were 0.55% of loans. Potential problem loans increased to $16.1 million from $12.7 million at year-end.
For the six months, operating cash flow was $8.5 million, investing cash flow was positive $37.1 million, and financing cash flow was positive $123.8 million. Cash and cash equivalents increased $169.4 million. Deposits increased 7.6% from year-end; noninterest-bearing demand deposits were 36.8% of deposits.
At quarter-end, the Bank had no FHLB advances outstanding and no balances drawn on its $75 million federal funds lines. The company reported $63.5 million of subordinated debt, issued in 2020 at a 5.25% initial fixed rate, and $8.4 million of junior subordinated debentures. The Bank was categorized as “Well Capitalized”; its leverage ratio was 10.53%, CET1 ratio 15.15%, Tier 1 risk-based ratio 15.15%, and total risk-based capital ratio 16.27%.
Material changes and management commentary
- Quarterly net income rose to $5.3 million from $3.1 million, principally because the loan-loss provision shifted from a $4.4 million charge to a $0.5 million reversal, while noninterest income increased. These benefits were partly offset by a $3.2 million decline in net interest income.
- For the six months, net income increased to $9.8 million from $5.9 million. Lower credit provision and expense, including the absence of $3.0 million of 2020 acquisition-related costs, more than offset lower net interest income.
- Net interest income and margin weakened year over year as lower market rates and loan yields, including PPP lending, reduced asset yields. The Q2 average yield on interest-earning assets was 3.69%, versus 4.52% a year earlier. Subordinated debt issuance also raised borrowing costs.
- Noninterest income benefited from SBA loan-sale gains and SBIC investment income. Q2 SBA loan-sale gains were $953,000; six-month gains were $1.5 million. The six-month comparison also benefited from lower data-processing and other expenses relative to 2020 acquisition integration costs.
- Management attributed the loan-loss reversal to improved economic forecasts and lower qualitative reserve factors, while noting the allowance remains estimate-sensitive. It reported rising COVID-19 transmissions associated with the Delta variant but no renewed business restrictions in its primary markets as of the filing.
- PPP activity remained material: at June 30, the Bank had 1,229 PPP loans outstanding totaling $150.4 million and $4.5 million of unrecognized fees. The Bank had received forgiveness on 901 first-round loans totaling $106.5 million and funded 771 second-round loans totaling $98.2 million.
- The Company repurchased 488,020 shares in Q2 at an average $18.10 per share. For the six months, it repurchased 132,123 shares for $11.0 million, an average $16.66 per share; 24,123 shares remained available under the plan at June 30. Shareholders’ equity was essentially unchanged from year-end.
Outlook, risks, and contingencies
The filing provides no specific numerical earnings or growth guidance. Management said it expects lower interest rates and low-yielding PPP loans to weigh on net interest income and margin in 2021 and potentially longer. It intends to pursue both organic growth and selective acquisitions, but results depend on market conditions and successful execution.
Key disclosed risks include COVID-19 effects on borrowers and operations; loan credit deterioration, especially if business restrictions return; concentration in commercial real estate and sensitivity to local property values; interest-rate and funding-cost changes; deposit retention and liquidity; acquisition integration and goodwill impairment; regulatory and litigation exposure; and technology, cybersecurity, and third-party service disruptions. The Company had $105.9 million of loan commitments and standby letters of credit, plus remaining LIHTC and SBIC funding commitments of approximately $2.4 million and $122,000. Management reported no pending legal proceeding it believed would materially adversely affect the Company. The Q2 goodwill assessment found no impairment was more likely than not, but management cautioned sustained adverse conditions or market capitalization declines could lead to an impairment charge.
The Bank had $389.9 million of FHLB borrowing capacity and $75.0 million of federal funds lines available at June 30. Management considered liquidity adequate. COVID relief modifications were still in place for one multifamily loan of $3.9 million, compared with 43 loans totaling $66.7 million at year-end 2020.
Important facts for investors to verify
- Whether loan quality and the $17.0 million allowance remain adequate as COVID-related uncertainty and the $16.1 million of potential problem loans evolve.
- How quickly PPP balances and deferred fees run off, and the effect of loan repayments and forgiveness on future loan growth, yields, and net interest margin.
- Whether deposit growth and very high cash balances can be redeployed profitably without increasing funding or interest-rate risk.
- Whether SBA loan-sale gains and SBIC income are repeatable, and whether expense comparisons remain affected by the prior-year acquisition integration.
- Future capital allocation, including share repurchases, acquisition spending, and the cost and terms of the subordinated debt.