BayCom Corp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. BayCom is a bank holding company whose United Business Bank serves businesses, professionals and individuals through 34 branches in California, Washington, New Mexico and Colorado. Unless noted, financial amounts below are in millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest and dividend income | $27.1 | $20.0 | $77.6 | $60.2 |
| Net interest income | $24.7 | $17.7 | $70.2 | $53.6 |
| Provision for loan losses | $1.2 | $0.5 | $3.8 | ($0.03) reversal |
| Noninterest income | $2.7 | $4.0 | $9.2 | $8.7 |
| Noninterest expense | $16.1 | $13.9 | $49.6 | $41.4 |
| Net income | $7.2 | $5.4 | $18.9 | $15.3 |
| Diluted EPS | $0.54 | $0.51 | $1.44 | $1.39 |
Net income increased 33.6% in Q3 and 24.1% year to date. Net interest margin was 3.99% in Q3 and 3.73% year to date, versus 3.17% and 3.31%, respectively, in 2021. The efficiency ratio improved to 58.60% in Q3 and 62.49% year to date, from 63.82% and 66.40%. The filing does not provide a conventional revenue total; interest income and noninterest income are shown separately above.
Financial position, cash flow and capital
- At September 30, total assets were $2.53 billion, net loans $1.98 billion, deposits $2.12 billion and shareholders’ equity $314.4 million. Assets grew 7.8% and net loans 20.0% from December 31, 2021, with the February acquisition of Pacific Enterprise Bancorp (PEB) a significant contributor.
- Cash and cash equivalents were $224.7 million, down $155.0 million, or 40.8%, from year-end. Cash, time deposits at banks and available-for-sale securities totaled $394.4 million. The filing reports nine-month operating cash flow of $23.8 million, investing cash flow of $82.6 million and financing cash flow of negative $261.4 million; cash declined $155.0 million overall.
- Deposits increased 6.6% to $2.12 billion, including $376.7 million acquired with PEB. Noninterest-bearing demand deposits were $813.5 million, or 38.5% of deposits. The top ten depositors represented 9.17% of deposits.
- Borrowings included $63.7 million of subordinated debt and $8.5 million of junior subordinated debentures. There were no FHLB advances, FRB borrowings or outstanding federal funds line balances. Available capacity was $484.6 million at FHLB, $35.4 million at FRB and $65.0 million in federal funds lines.
- The Bank was reported well capitalized. Its September 30 ratios included a 12.90% leverage ratio, 16.16% Common Equity Tier 1 ratio and 17.07% total risk-based capital ratio.
- Available-for-sale securities had $20.3 million in gross unrealized losses at quarter-end. Year-to-date other comprehensive loss was $16.5 million net of tax, and accumulated other comprehensive loss was $14.3 million, compared with income of $2.2 million at year-end 2021.
Material changes and unusual items
- PEB was acquired on February 1, 2022 for approximately $64.4 million in stock and cash consideration. The transaction added an Irvine branch and expanded the California franchise. BayCom recorded a $1.7 million bargain purchase gain and $3.1 million of nonrecurring acquisition expenses in the first nine months.
- Loans grew primarily through PEB and new originations, partly offset by repayments and sales. Commercial real estate was $1.67 billion, about 84% of total loans; the filing identifies CRE concentration as a risk.
- Loan quality weakened on reported measures: nonperforming assets rose to $19.7 million from $6.9 million at year-end, and nonperforming loans rose to 0.99% of loans from 0.41%. The increase included a $5.1 million multifamily loan placed on nonaccrual, a shared national credit and $3.3 million of matured PPP loans awaiting forgiveness. A $1.7 million shared-credit participation was repaid after quarter-end with no additional charge-off required.
- Year-to-date net charge-offs were $3.5 million, including a $3.2 million charge-off on a shared national credit. The allowance for loan losses was $18.1 million, or 0.90% of loans, versus $17.7 million, or 1.06%, at year-end; acquired loans are initially recorded at fair value without an allowance at acquisition.
- Q3 noninterest income fell 31.5%, mainly from lower loan-sale gains and SBIC fund income. Nine-month noninterest expense increased 19.9%, reflecting PEB, acquisition costs, staffing and wage pressures, data processing and other operating costs.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management says it intends to pursue both strategic acquisitions and organic commercial-loan growth, and believes the balance sheet is positioned to benefit if rates rise further. The Federal Reserve had raised its target range to 3.00%–3.25% by September 30 and raised it again in November 2022; higher rates could also affect funding costs, securities values and borrowers.
Key disclosed risks include economic slowdown, inflation, labor and supply-chain pressures, credit deterioration, CRE exposure and real-estate values, interest-rate and funding sensitivity, deposit retention, acquisition integration and realization of expected benefits, and technology, cybersecurity, regulatory and litigation risks. Management reported no pending legal proceeding it believes would materially adversely affect the Company, no material change in previously disclosed risk factors, and effective disclosure controls as of quarter-end. The Company plans to adopt CECL on January 1, 2023, but had not yet determined the quantitative impact.
Commitments to extend credit and standby letters of credit totaled $102.7 million. The filing says most commitments are expected to expire undrawn. The Company declared a $0.05-per-share quarterly dividend and approved a sixth repurchase program in October for up to 645,000 shares, following completion of its existing program.
Most important facts for investors to verify
- Whether the rise in nonperforming loans and charge-offs persists, and how credit quality evolves in the concentrated CRE portfolio.
- Whether PEB integration, acquired-loan performance and expected transaction benefits meet management’s expectations, and whether further integration costs arise.
- How rising rates affect net interest margin, deposit pricing and retention, loan demand, and the market value of securities.
- The eventual CECL adoption effect on the allowance, retained earnings and reported results.
- Whether cash and liquidity remain adequate as time deposits mature and lending commitments are drawn, and how planned dividends and repurchases affect capital.