BayCom Corp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless noted. BayCom is a bank holding company whose subsidiary, United Business Bank, serves businesses and individuals through 34 branches across California, Washington, New Mexico and Colorado. Amounts below are in U.S. dollars; financial statement figures are generally rounded to millions.
Key financial results
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $22.4 million | Up 23.6% from $18.1 million in Q1 2021 |
| Net interest margin | 3.63% | 3.49% in Q1 2021 |
| Noninterest income | $4.4 million | Up 96.6% from $2.2 million; includes $1.7 million bargain purchase gain |
| Noninterest expense | $18.3 million | Up 30.1% from $14.1 million; includes $3.1 million of PEB acquisition costs |
| Net income | $6.5 million | Up 43.2% from $4.5 million in Q1 2021 |
| Diluted earnings per share | $0.51 | $0.40 in Q1 2021 |
| Efficiency ratio | 68.48% | 69.31% in Q1 2021 |
| Net cash from operating activities | $2.8 million | $0.7 million in Q1 2021 |
| Cash and cash equivalents | $427.2 million | $379.7 million at December 31, 2021 |
Net income increased as higher net interest income and noninterest income more than offset increased expenses. Management attributed net interest income growth primarily to larger loan and investment portfolios. Average earning-asset yield was 4.03%, versus 3.91%; average interest-bearing liability cost was 0.64%, versus 0.71%. The reported margin benefited from PPP loan fees and acquired-loan discount accretion.
Financial condition, funding and capital
- Total assets were $2.76 billion, up 17.2%; net loans were $1.99 billion, up 20.6%; deposits were $2.33 billion, up 17.4%. The PEB acquisition was the principal driver of balance-sheet growth.
- Loans were $2.00 billion before deferred fees and allowance. Commercial real estate made up the largest category; management identified a CRE concentration and noted potential sensitivity to economic and property-value declines.
- Allowance for loan losses was $17.7 million, or 0.88% of total loans, compared with 1.06% at year-end. The quarter’s provision was $7,000. Acquired loans are recorded at fair value without an acquisition-date allowance, affecting the coverage ratio.
- Nonperforming assets were $12.6 million, or 0.46% of assets, compared with $6.9 million, or 0.29%, at year-end. Nonperforming loans were $12.6 million, or 0.63% of loans. The increase largely reflected a $4.9 million commercial and industrial loan restructured and placed on nonaccrual.
- Available-for-sale securities were $184.7 million. Their net-of-tax unrealized loss reduced accumulated other comprehensive income by $7.0 million during the quarter; total comprehensive loss was $0.5 million despite net income of $6.5 million.
- Reported liabilities included $72.0 million of junior subordinated debentures and subordinated debt, net, combined; no FHLB advances or federal funds borrowings were outstanding. Available borrowing capacity was $454.4 million at the FHLB, $114.6 million at the FRB and $65.0 million through correspondent-bank federal funds lines.
- Liquid assets (cash and equivalents, interest-bearing bank deposits and available-for-sale securities) totaled $615.2 million. The Bank was reported as well capitalized; its March 31 ratios included 11.77% leverage, 16.03% common equity Tier 1 and 16.92% total risk-based capital.
- Q1 investing cash flow was positive $77.5 million, including $18.4 million net cash received in the acquisition; financing cash flow was negative $32.8 million, reflecting deposit flows and other financing activity.
Material changes and unusual items
- BayCom completed its acquisition of Pacific Enterprise Bancorp on February 1, 2022, issuing 3,032,579 common shares and paying $275,000 cash. The transaction added approximately $412.9 million of net loans and $376.7 million of deposits at acquisition and expanded the California franchise with an Irvine branch.
- Q1 results included a $1.7 million bargain purchase gain and $3.1 million of nonrecurring acquisition-related expenses. Excluding those expenses, management said noninterest expense increased 8.2% year over year.
- Shareholders’ equity rose to $324.7 million, primarily from acquisition-related share issuance and earnings, partly offset by share repurchases, dividends and the securities-related accumulated other comprehensive loss. The company repurchased 57,177 shares for $1.3 million and declared a $0.05-per-share quarterly dividend.
- The Federal Reserve began raising rates in March 2022; management said the increase had limited effect on Q1 margin because it occurred late in the quarter. Further rate increases were expected by the FOMC at the time of filing.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue or margin guidance. Management described continued focus on organic commercial-loan growth and selective acquisitions, while noting that integration costs and the realization of acquisition benefits remain uncertain. It said liquidity and capital resources were adequate for reasonably foreseeable needs and reported no material change in interest-rate-risk exposure from the 2021 Form 10-K.
- Key disclosed risks include acquisition integration and retention, credit quality, local economic and real-estate conditions, interest-rate movements and deposit competition, liquidity, regulatory changes, operating costs, cybersecurity and third-party service disruptions.
- Commercial real estate is a significant portfolio concentration. Top ten depositors represented 11.4% of deposits at quarter-end. A decline in local economic conditions or real-estate values could impair collectability.
- The company expected to adopt the CECL credit-loss standard for fiscal years beginning after December 15, 2022. It anticipated changes to allowance processes and said CECL could increase the allowance, but the magnitude was not yet determined.
- Commitments to extend credit and standby letters of credit totaled $89.1 million. Remaining commitments to LIHTC partnerships and an SBIC fund were approximately $3.3 million. The company reported no pending legal proceeding believed likely to have a material adverse effect.
- Management reported disclosure controls and procedures were effective as of March 31, 2022, with no significant change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- PEB integration progress, remaining costs, and whether expected operating benefits emerge after the one-time bargain gain and acquisition expenses.
- Credit trends following the increase in nonperforming assets, particularly performance and collateral support for the $4.9 million restructured C&I loan and the CRE portfolio.
- Deposit retention, concentration among large depositors, and funding costs as market interest rates rise.
- Impact of securities unrealized losses on equity and liquidity, and the sensitivity of net interest margin to changing rates and PPP/acquired-loan accretion.
- CECL adoption assumptions and its eventual effect on the allowance, capital and reported earnings.
- Confirm reported loan-quality ratios against the detailed schedules: the MD&A contains an apparent transcription error describing nonperforming loans as “62%”; the detailed table reports 0.63%.