BayCom Corp — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results for BayCom Corp and United Business Bank. The bank serves businesses and individuals through 17 branches. Comparisons with Q1 2017 are materially affected by the 2017 acquisitions of United Business Bank, FSB and Plaza Bank, so they are not fully like-for-like.
Key financial results
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Interest and dividend income | $13.6 million | $7.4 million |
| Net interest income | $12.4 million | $6.5 million |
| Net interest margin | 4.27% | 4.02% per MD&A |
| Provision for loan losses | $254,000 | $143,000 |
| Noninterest income | $1.7 million | $736,000 |
| Noninterest expense | $8.1 million | $4.6 million |
| Net income | $4.1 million | $1.4 million |
| Diluted earnings per share | $0.54 | $0.26 |
| Efficiency ratio | 57.45% | 64.24% |
| Operating cash flow | $5.0 million provided | $10.3 million used |
Balance sheet at March 31: Total assets were $1.242 billion, down 0.3% from year-end 2017. Gross loans were $891.0 million and net loans $886.0 million; deposits totaled $1.099 billion, down 0.5% from year-end. Cash and cash equivalents were $255.6 million, and available-for-sale securities were $36.8 million. Shareholders’ equity was $122.6 million. Other borrowings were $6.0 million and junior subordinated debentures, net, were $5.4 million. The $6.0 million term loan was repaid after quarter-end.
Credit and capital: The allowance for loan losses was $4.6 million, or 0.52% of loans, versus $4.2 million and 0.47% at December 31, 2017. Nonaccrual loans were $229,000; there were no loans 90 days past due and still accruing. Potential problem loans totaled $10.2 million. Real estate loans were approximately $776 million, indicating substantial real-estate lending concentration. BayCom and the Bank exceeded regulatory capital requirements; the Bank’s total risk-based capital ratio was 13.88% and common equity Tier 1 ratio 13.31%.
Changes, outlook and notable items
- Net income rose 187%, largely reflecting the expanded balance sheet following the 2017 acquisitions, higher net interest income and noninterest income. Average interest-earning assets increased substantially year over year; acquired-loan discount accretion contributed 41 basis points to Q1 2018 net interest margin.
- Noninterest expense rose 75%, reflecting acquisition-related scale, staffing, branch and processing costs. Management attributed the improved efficiency ratio to revenue growth outpacing expense growth.
- Noninterest income growth included $651,000 of gains on SBA loan sales. The company sold $8.8 million of guaranteed SBA loans during the quarter.
- Deposits were the primary funding source. Available secondary liquidity included $310.3 million of FHLB borrowing capacity and $55.0 million of Federal Funds lines. Loan commitments and letters of credit were $82.4 million; certificates of deposit maturing within one year totaled $167.0 million.
- On May 8, 2018, BayCom completed an IPO of 3,278,900 shares at $22 per share, generating approximately $66.8 million in net proceeds. It used about $6.0 million to repay the term loan; remaining proceeds were intended to support Bank capital, acquisitions, growth and general corporate purposes. The company stated it planned to pursue both acquisitions and organic growth, but provided no quantified earnings or loan-growth guidance.
- Management considered the allowance adequate but noted estimates may prove inaccurate and regulatory review could require additional provisions. Disclosed risks include credit quality, economic and interest-rate changes, deposit retention, acquisition integration, competition, cybersecurity and technology disruptions, and regulatory or legal changes. Management reported no material change in risk factors from its May 2018 prospectus.
- The company adopted revenue-recognition guidance in 2018 with no material financial-statement impact. It was evaluating the expected-credit-loss standard (CECL), which could increase the allowance; the magnitude was not yet determined. Adoption of the new lease standard was expected to increase reported assets and liabilities, but not to have a material overall impact based on current leases.
Investor verification priorities
- Assess the sustainability of earnings and margins excluding acquired-loan accretion, SBA loan-sale gains, acquisition effects and tax-rate changes.
- Review real-estate concentration, the $10.2 million of potential problem loans, nonaccrual trends, and allowance adequacy alongside acquired-loan discounts.
- Confirm post-IPO share count, use of the remaining IPO proceeds, and the effect of the share issuance on per-share results and capital.
- Monitor deposit mix and pricing, near-term certificate maturities, loan commitments, and available borrowing capacity.
- Reconcile reported net interest margin: MD&A cites 4.27%, while the average-balance table reports 4.28% for Q1 2018.
- Note the cover page indicates the company had not filed all required Exchange Act reports during the preceding 12 months; confirm the context and any subsequent reporting history.