Baycom Corp annual report, FY2018

Business context and reporting period

BayCom Corp is a bank holding company whose principal operating subsidiary, United Business Bank, serves businesses, business owners and individuals across California, Washington and Central New Mexico. This 10-K reports the fiscal year ended December 31, 2018; it is not a quarterly report, and the filing does not provide stand-alone Q4 results. At year-end, the Bank operated 22 full-service branches and one loan production office.

Growth strategy combines relationship-based commercial banking with organic expansion and community-bank acquisitions. BayCom completed its acquisition of Bethlehem Financial Corporation (BFC/MyBank) in November 2018 for approximately $23.5 million in cash. A separate Uniti Financial merger agreement was pending, with closing expected in Q2 2019, subject to approvals and other conditions.

Financial performance and position

Amounts below are consolidated; dollars in millions except per-share data.

Operating cash flow was $6.2 million; investing activities used $11.3 million; financing activities provided $78.7 million. Cash and cash equivalents increased $73.7 million to $323.6 million. Cash flow from financing included $66.8 million of net IPO proceeds. Year-end available-for-sale securities were $99.8 million.

Year-end borrowings included $8.2 million of junior subordinated debentures. There were no FHLB advances or balances on $55.0 million of Fed Funds lines; available FHLB borrowing capacity was approximately $369 million. The Bank reported a 10.04% Tier 1 leverage ratio, 14.63% CET1 ratio and 15.17% total capital ratio, and was classified as well capitalized.

Material changes versus the prior year

• Assets rose 18.7%, deposits 13.9% and net loans 9.4%; growth reflected BFC, organic activity and IPO proceeds. BFC contributed approximately $135.5 million of deposits and $75.4 million of loans.
• Net income increased 175.5%. Net interest income rose 30.0%, while noninterest income increased 47.7%; noninterest expense also rose 21.7% as the company expanded its workforce and branch network.
• The effective tax rate fell to 29.3% from 62.8%. The 2017 comparison included a $2.7 million deferred-tax-asset write-down following the Tax Act; the federal corporate tax rate fell from 35% to 21%.
• Credit measures weakened from unusually low prior-year levels: nonperforming assets increased to $3.9 million from $0.2 million, and nonperforming loans to $3.1 million from $0.2 million. The allowance rose to $5.1 million from $4.2 million.
• Equity increased largely because of the May 2018 IPO, which raised approximately $66.8 million net. BayCom paid no regular cash dividend.

Outlook, commentary, risks and unusual items

Management gave no numerical earnings or balance-sheet guidance. It said it intends to pursue organic growth and selective acquisitions, integrate acquired banks and improve operating efficiency; it also planned a new core processing system. The Uniti transaction was valued at approximately $63.9 million based on BayCom’s December 7, 2018 share price; Uniti shareholders were to receive cash and BayCom shares, representing approximately 9.3% ownership after closing.

• Credit and concentration: Real-estate-secured loans represented approximately 87.3% of total loans; commercial real estate, including construction and land, was approximately 76.8%. CRE loans under regulatory guidance were 315.1% of regulatory capital, above the 300% supervisory screening threshold. Loans to the ten largest borrowing relationships were approximately 14.1% of total loans.
• Funding concentration: Labor-union deposits were $464.2 million, or 36.9% of deposits. The ten largest non-brokered depositors represented approximately 11.5% of deposits. Withdrawals or higher deposit pricing could pressure liquidity and margins.
• Credit costs: The 2018 provision increased to $1.8 million, and net charge-offs were $917,000, including $669,000 on one commercial and industrial loan. Past-due loans and classified assets also increased. Management considered the allowance adequate, but acknowledged estimates and regulatory review could require further provision.
• Interest-rate exposure: Management identified rate changes as a material risk. Its model estimated net interest income would increase 4% with an immediate 100-basis-point rise and decline 8% with a 100-basis-point fall; the filing cautions that modeling assumptions may differ from actual results.
• Unusual items: 2018 noninterest income included $777,000 in life-insurance death benefits and $452,000 of SBIC investment income. Expenses included a $600,000 write-down of an acquired branch property. Loan discount accretion contributed to net interest income, including $3.2 million of acquired-loan accretion.
• Other matters: CECL adoption was expected to require a one-time allowance adjustment, but its amount was not yet determined. The company disclosed no material pending legal proceeding. The financial statements received an unqualified audit opinion; the auditor did not opine on internal control over financial reporting, and management cited the newly public company transition period.

Important facts for investors to verify

• Whether the Uniti merger closed as expected, its final consideration, integration costs and realized benefits.
• Subsequent trends in nonperforming loans, delinquencies, charge-offs, classified assets and allowance coverage, especially following the 2018 deterioration.
• Exposure and risk controls for commercial real estate concentrations, large borrower relationships and regional property markets.
• Retention and pricing of labor-union and other large deposits, and the effect on liquidity and net interest margin.
• How much earnings growth is recurring versus acquisition-related, loan-discount accretion and the identified unusual income and expense items; also monitor CECL’s eventual impact.