BayCom Corp. 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2018. BayCom is a California bank holding company whose subsidiary, United Business Bank, serves businesses and individuals through 17 branches and a loan production office. Financial statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $13.0 million | $12.0 million | $38.0 million | $28.1 million |
| Provision for loan losses | $1.1 million | $58,000 | $1.6 million | $345,000 |
| Noninterest income | $1.6 million | $1.1 million | $5.4 million | $3.4 million |
| Noninterest expense | $8.4 million | $7.8 million | $25.2 million | $20.8 million |
| Net income | $3.5 million | $3.2 million | $11.9 million | $6.1 million |
| Diluted EPS | $0.31 | $0.46 | $1.30 | $0.97 |
For the nine months, net income rose 94.7%, supported by higher net interest and noninterest income and a lower effective tax rate (29.4% versus 41.5%). Q3 net income increased 10.6%, but EPS fell as weighted-average shares increased substantially following the May 2018 IPO. The efficiency ratio improved to 58.0% for the nine-month period from 65.9%.
Net interest margin was 4.14% for the first nine months, nearly unchanged from 4.15%. For Q3, the MD&A reports 4.09%, while its average-balance table reports 4.06%; the filing does not provide a consistent value. Loan yield declined, and management cited lower acquired-loan discount accretion and higher balances in lower-yielding cash and investments as factors weighing on margin.
Balance sheet, liquidity and capital
- At September 30, total assets were $1.344 billion, net loans $896.4 million, deposits $1.131 billion, and shareholders’ equity $197.3 million. Total assets were up from $1.246 billion and deposits from $1.104 billion at December 31, 2017.
- Cash and cash equivalents were $313.2 million, up from $249.9 million at year-end, largely reflecting $66.8 million in net IPO proceeds. Available-for-sale securities increased to $69.7 million from $40.5 million.
- Deposits funded the majority of operations; noninterest-bearing deposits were 30.8% of total deposits. The company reported no outstanding borrowings other than $5.4 million net carrying value of junior subordinated debentures. It had $336 million of available FHLB borrowing capacity and $55 million of federal funds lines.
- For the nine months, the cash flow statement reports $2.4 million cash provided by operations, $26.2 million used in investing, and $87.2 million provided by financing. Financing included IPO proceeds; investing included $39.3 million of securities purchases. Ending cash was $313.2 million.
- BayCom and the Bank exceeded regulatory capital requirements. At September 30, BayCom’s total risk-based capital ratio was 20.94% and the Bank’s was 14.51%; leverage ratios were 13.68% and 9.44%, respectively.
Changes, outlook and risks
- Loans grew 1.2% from year-end, with construction and land loans up 45.4%. Commercial real estate represented most of the loan portfolio; 82.5% of total loans were in California.
- Credit metrics weakened: nonaccrual loans increased to $5.2 million from $179,000 at year-end, primarily after two loans totaling $4.4 million migrated to nonaccrual. The allowance for loan losses rose to $5.5 million from $4.2 million; provision expense increased, reflecting higher specific reserves. One $1.4 million loan was more than 90 days past due but still accruing; management said it was well secured and being renewed.
- Noninterest income included $777,000 of life-insurance death benefits during the nine months, higher SBA loan servicing income, and increased deposit fees. Expenses increased with staffing and branch costs following 2017 acquisitions; the period also included a $600,000 write-down of office facilities held for sale and costs associated with the pending acquisition.
- On August 10, 2018, BayCom agreed to acquire Bethlehem Financial Corporation for approximately $23.5 million in cash. The filing said regulatory and shareholder approvals had been obtained and expected completion on November 30, 2018, subject to remaining customary closing conditions. BFC reported $157.2 million of assets, $77.2 million of loans, and $136.3 million of deposits at September 30.
- Management’s strategy is to pursue commercial loan growth, organic expansion, and selective acquisitions. No quantitative earnings guidance is provided. Principal disclosed risks include credit deterioration, interest-rate and deposit competition, merger execution and integration, regulatory changes, cybersecurity and third-party system risks, and economic conditions in the company’s markets. Management considered the allowance adequate but noted actual losses or regulatory assessments could require additional provision.
- The company adopted revenue-recognition guidance in 2018 without material financial-statement impact. It was evaluating the expected-credit-loss standard (CECL), which could increase the allowance; the eventual effect was not yet determined. Management reported effective disclosure controls and no significant quarterly change in internal control over financial reporting. Legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the Q3 net interest margin figures (4.09% in the MD&A narrative versus 4.06% in its table).
- Review subsequent filings for the completion, final terms, integration costs, and realized benefits of the BFC acquisition.
- Track the new nonaccrual loans, the past-due accruing loan, charge-offs, and allowance adequacy; reported loan-coverage figures differ across sections of the filing.
- Reconcile cash-flow figures: the statements report $2.4 million operating cash flow and $26.2 million investing outflow, while the MD&A cites $4.0 million and $27.8 million, respectively.
- Assess earnings quality and per-share trends in light of one-time life-insurance benefits, acquisition-related expenses, tax-rate changes, and the increase in shares following the IPO.