BayCom Corp — Q1 2019 Form 10-Q
Business context and period. BayCom Corp is a bank holding company whose principal subsidiary, United Business Bank, serves businesses and individuals through 22 branches and one loan production office. This unaudited report covers the three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $16.36 | $13.55 in Q1 2018 |
| Net interest income | $14.87 | $12.41 in Q1 2018 |
| Provision for loan losses | $0.28 | $0.25 in Q1 2018 |
| Noninterest income | $2.12 | $1.73 in Q1 2018 |
| Noninterest expense | $9.75 | $8.12 in Q1 2018 |
| Net income | $4.94 | $4.07 in Q1 2018 |
| Diluted EPS | $0.45 | $0.54 in Q1 2018 |
| Net interest margin | 4.30% | 4.28% in Q1 2018 |
| Efficiency ratio | 57.39% | 57.45% in Q1 2018 |
| Total assets | $1,482.5 | $1,478.4 at December 31, 2018 |
| Loans, net of allowance | $959.6 | $970.2 at December 31, 2018 |
| Deposits | $1,250.6 | $1,257.8 at December 31, 2018 |
| Shareholders’ equity | $206.4 | $200.8 at December 31, 2018 |
| Cash and cash equivalents | $332.5 | $323.6 at December 31, 2018 |
Cash flow and liquidity. Operating activities used $0.46 million of cash, versus $5.03 million provided in Q1 2018. Investing activities provided $16.55 million, mainly reflecting a $13.04 million net decrease in loans; financing activities used $7.20 million, including deposit outflows. Cash and cash equivalents increased $8.89 million during the quarter. The Bank reported no FHLB advances or Federal Funds borrowings outstanding, with available FHLB borrowing capacity of $371.6 million and Federal Funds lines of $65.0 million. The Bank was reported as well-capitalized; its total risk-based capital ratio was 15.87% and its leverage ratio was 10.44%.
Debt. Junior subordinated debentures, net, were $8.18 million at quarter-end. The filing reports no outstanding FHLB advances or Federal Funds line balances. Lease liabilities of $7.82 million were recognized following adoption of the new lease standard.
Changes versus comparable periods
- Net income rose 21.4% year over year, supported by higher net interest income and noninterest income, partly offset by higher operating expenses.
- Diluted EPS declined from $0.54 to $0.45. The filing’s weighted-average shares increased substantially year over year, reflecting the 2018 IPO; net income nonetheless increased.
- Net interest income increased 19.7%. Average interest-earning assets rose to $1.40 billion from $1.18 billion, while net interest margin edged up two basis points.
- Noninterest expense rose 20.0%, including higher salaries, occupancy and data-processing costs, associated with the BFC acquisition and organic growth.
- Noninterest income grew 22.8%; higher service charges, loan servicing and other income more than offset lower reported gain on sale of loans. Management attributed part of the increase in other income to an SBIC fund investment.
- Quarter-end net loans declined 1.1% from year-end as repayments exceeded originations. Deposits declined 0.6%; noninterest-bearing deposits increased to 33.3% of total deposits from 31.6%.
Outlook, risks and unusual items
- Acquisition outlook: BayCom expected to complete its pending Uniti Financial Corporation merger in Q2 2019, subject to Uniti shareholder approval and customary closing conditions. The announced transaction value was approximately $63.9 million; Uniti reported $329.3 million of assets, $277.0 million of loans and $278.6 million of deposits at March 31, 2019. The filing provides no quantified earnings guidance.
- Strategy and commentary: Management described continued growth through acquisitions and organic expansion, with excess cash intended for loans, securities, acquisitions or other growth initiatives.
- Credit and concentration: Commercial real estate represented a significant loan concentration. Nonperforming assets increased to $4.41 million from $3.93 million; nonaccrual loans were $3.61 million, or 0.37% of total loans. Loans 30–89 days past due rose to $8.73 million. Management considered the $5.41 million allowance adequate, while noting estimates may prove inaccurate and regulators may require additional provision.
- Credit standard change: The company was evaluating the forthcoming CECL expected-credit-loss standard and said the adoption impact was still being determined; it could increase the allowance.
- Other notable items: The company sold an Oakland building for which it recorded a $78,000 gain and leased back part of the premises. It adopted lease accounting on January 1, 2019, recording right-of-use assets of $7.8 million and lease liabilities of $8.2 million, with no significant effect on regulatory capital.
- Other risks: Management cited acquisition integration, economic and interest-rate changes, real estate values, deposit retention, credit quality, competition, regulatory actions, cybersecurity and third-party technology providers among the risks. It reported no material change in risk factors or interest-rate exposure from its prior annual report. Disclosure controls were assessed as effective; no significant internal-control changes were reported.
Investor verification priorities
- Check whether the Uniti merger closed as expected, its final consideration and financing, and subsequent integration costs and results.
- Assess loan-quality trends, especially CRE exposure, past-due and nonaccrual loans, potential problem loans, and allowance coverage.
- Determine how much earnings growth reflects sustainable net interest income versus acquisition-related effects, purchased-loan discount accretion and the SBIC-related income increase.
- Reconcile net income growth with lower EPS and the increased share count, and monitor future dilution.
- Review CECL implementation progress and the eventual allowance and capital impact, alongside deposit trends and liquidity needs.