Baycom Corp quarterly report, Q1 FY2023

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BayCom Corp — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. BayCom is a bank holding company whose subsidiary, United Business Bank, serves businesses, professionals and individuals through 34 branches in California, Washington, New Mexico and Colorado. Financial amounts below are in U.S. dollars.

Financial results and position

  • Earnings: Net income was $7.0 million, up 8.6% from $6.5 million in Q1 2022. Diluted EPS was $0.55 versus $0.51.
  • Net interest income and margin: Net interest income rose 13.0% to $25.3 million. Net interest margin increased to 4.26% from 3.63%; the average yield on interest-earning assets rose to 5.07% from 4.03%, while the average cost of interest-bearing liabilities rose to 1.35% from 0.64%.
  • Credit costs: The income statement reported a $1.375 million provision for credit losses, versus $7,000 in Q1 2022. This included a $1.1 million reserve for one preferred equity security and a $275,000 net provision for loans and unfunded commitments. Net loan charge-offs were $315,000.
  • Noninterest income and expense: Noninterest income declined 44.1% to $2.5 million, while noninterest expense fell 9.8% to $16.5 million. The efficiency ratio improved to 59.64% from 68.48%. The effective tax rate was 28.2%, versus 23.0%.
  • Assets and loans: Total assets were $2.548 billion, up 1.4% from year-end. Net loans were $2.024 billion, up 1.1%; total loans were $2.045 billion, with commercial real estate representing the largest concentration. The allowance for credit losses on loans was $20.4 million, or 1.00% of total loans.
  • Deposits and liquidity: Deposits were $2.128 billion, up 2.0%. Noninterest-bearing deposits fell to $705.9 million from $773.3 million, while time deposits increased to $389.9 million from $293.3 million. Cash and cash equivalents were $197.5 million. Management reported $506.2 million of FHLB borrowing capacity and $65.0 million of correspondent-bank federal funds lines, with no balances outstanding under either facility.
  • Cash flow: Operating activities provided $7.5 million; investing activities used $21.0 million; financing activities provided $34.2 million. Cash and cash equivalents increased $20.7 million during the quarter.
  • Debt and capital: Subordinated debt was $63.8 million and junior subordinated debentures were $8.5 million. Shareholders’ equity was $313.5 million. The Bank remained “Well Capitalized”; its reported CET1 ratio was 16.41% and total risk-based capital ratio was 17.44%.

Changes versus the prior comparable period

  • Higher loan yields and balances, increased returns on cash balances, and higher investment income lifted interest income. Deposit costs also rose substantially as rates increased.
  • Reported Q1 2022 results included a $1.665 million bargain purchase gain from the Pacific Enterprise Bancorp acquisition and $3.075 million of acquisition-related expenses. Neither item recurred in Q1 2023; these items materially affect comparisons of noninterest income and expense.
  • Q1 2023 loan growth was $23.3 million before net deferred fees and the allowance. Nonperforming assets declined to $13.1 million, or 0.51% of assets, from $15.2 million, or 0.61%, at year-end; nonperforming loans were 0.64% of total loans.
  • Accumulated other comprehensive loss increased by $1.2 million, net of tax, during the quarter. AFS securities had $22.5 million of gross unrealized losses at March 31; management attributed most declines to interest rates and market conditions, but recorded a $1.1 million credit allowance for one preferred equity security.
  • The company repurchased 422,877 shares for approximately $8.1 million during the quarter. A $0.10-per-share dividend was declared, payable April 14, 2023.

Outlook, commentary and risks

  • Management says it intends to pursue both organic growth and selective acquisitions. It believes the balance sheet is positioned to benefit if the Federal Reserve continues raising rates; this is an expectation, not a quantified forecast. The filing provides no specific earnings or revenue guidance.
  • Management considers liquidity and capital adequate for reasonably foreseeable needs. It reported approximately $1.0 billion of uninsured deposits at March 31 and identified unexpected uninsured-deposit outflows, potentially forcing securities sales at a loss, as a risk. The filing also reports $22.5 million of gross unrealized securities losses.
  • Credit risks include the commercial real estate concentration, economic deterioration, and changes in property values. Other identified risks include higher funding costs, interest-rate changes, acquisition integration, deposit retention, regulatory actions, litigation, and information-technology or third-party-provider disruptions.
  • CECL was adopted 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 allowance and provision are subject to estimation uncertainty and regulatory review.
  • In April 2023, the Board authorized a new repurchase program for up to 619,000 shares after completion of the existing program. Repurchases are discretionary. Management expects to continue quarterly dividends, subject to Board discretion and regulatory limits.
  • The filing says there were no pending legal proceedings believed likely to have a material adverse effect and no material changes to the risk factors previously reported in the 2022 Form 10-K. Disclosure controls were assessed as effective; no significant internal-control changes were reported for the quarter.

Important facts for investors to verify

  1. Deposit stability and funding costs, particularly the decline in noninterest-bearing deposits, growth in time deposits, and the level and concentration of uninsured deposits.
  2. Commercial real estate credit quality, criticized and nonaccrual loan trends, charge-offs, and the adequacy of the CECL allowance.
  3. The preferred equity security’s credit condition and the potential effect of further rate-driven securities losses or deposit outflows on liquidity and capital.
  4. Whether net interest margin can hold up as asset yields and deposit costs reprice, and whether reported expense improvement persists after excluding prior-year acquisition items.
  5. Confirm the uninsured-deposit disclosure: the notes give approximately $1.0 billion at March 31, 2023, while a related percentage statement is labeled “March 31, 2022”; the filing text does not provide a clear matching date for that percentage.
  6. Confirm the nonaccrual interest foregone comparison: the filing contains inconsistent Q1 2022 figures in different sections, so the comparable value is unclear from the text provided.