Baycom Corp quarterly report, Q2 FY2018

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BayCom Corp — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018. BayCom is a bank holding company; its subsidiary, United Business Bank, serves businesses and individuals through 17 branches. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.

Financial performance and position

  • Q2 earnings: Net income was $4.29 million, up 185.5% from $1.50 million a year earlier. Diluted EPS was $0.45 versus $0.23.
  • First-half earnings: Net income was $8.36 million versus $2.92 million; diluted EPS was $0.99 versus $0.49.
  • Interest and margins: Q2 net interest income rose 30.7% to $12.60 million, while net interest margin narrowed to 4.11% from 4.27%. First-half net interest income increased 55.1% to $25.01 million; margin was 4.19% versus 4.17%.
  • Other income and expenses: Q2 noninterest income was $2.08 million, up 28.0%; noninterest expense was $8.66 million, up 3.3%. First-half noninterest income rose 61.2% to $3.81 million and expenses rose 28.9% to $16.78 million. The six-month efficiency ratio improved to 58.21% from 70.43%.
  • Credit costs: Provision for loan losses was $0.24 million for Q2 and $0.50 million for the first half, compared with $0.14 million and $0.29 million, respectively, in 2017. First-half net recoveries were $0.11 million.
  • Balance sheet at June 30: Assets were $1.346 billion; net loans $908.5 million; deposits $1.138 billion; and shareholders’ equity $193.6 million. Since December 31, 2017, assets grew from $1.246 billion, net loans from $886.9 million, deposits from $1.104 billion, and equity from $118.6 million.
  • Liquidity, funding and debt: Cash and cash equivalents were $318.3 million, including substantial IPO proceeds. BayCom reported no outstanding FHLB advances or other borrowings, but had $5.4 million of junior subordinated debentures. Available capacity included $387.6 million from the FHLB and $55 million in federal funds lines. Noninterest-bearing deposits were 30.4% of deposits.
  • Cash flow, first half: Operating activities provided $3.3 million; investing activities used $29.5 million; financing activities provided $94.6 million. Financing included $66.8 million net IPO proceeds.
  • Capital: At June 30, the Bank’s total risk-based capital ratio was 13.91%, and its common equity Tier 1 ratio was 13.36%. The filing states BayCom and the Bank exceeded regulatory capital requirements.

Changes, unusual items and outlook

  • Year-over-year growth reflects, in part, the 2017 acquisitions of United Business Bank, FSB and Plaza Bank, as well as organic growth. Loan growth was concentrated in commercial real estate and construction and land lending.
  • The May 2018 IPO issued 3,278,900 shares and raised approximately $66.8 million net. A portion repaid a $6.0 million term loan; remaining proceeds were intended to support bank capital, acquisitions, growth and general corporate purposes. Shares outstanding rose to 10,869,275 at June 30.
  • Q2 included a $0.6 million write-down of acquired office facilities held for sale and $0.777 million in life-insurance death benefits. First-half income-tax expense reflected a 29.4% effective tax rate, versus 41.9% in 2017, primarily due to the Tax Act’s lower federal corporate rate.
  • Credit indicators warrant attention: nonaccrual loans increased to $0.932 million from $0.179 million at year-end; $3.437 million of loans were past due at June 30, versus $1.894 million at year-end. The allowance was $4.6 million, or 0.50% of total loans. Management considered it adequate but noted actual losses or regulatory review could require additional provision.
  • On August 10, 2018, BayCom agreed to acquire Bethlehem Financial Corporation for approximately $23.5 million in cash, subject to regulatory and shareholder approvals and other closing conditions. The transaction was expected to close in Q4 2018; BFC reported $157.6 million in assets, $79.4 million in loans and $136.2 million in deposits at June 30.
  • No earnings or financial guidance was provided. Management cited organic commercial growth and selective acquisitions as objectives. Principal risks include credit quality, interest-rate and funding pressures, merger approval and integration, competition, regulatory changes, and operational and cybersecurity risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting.

Important facts for investors to verify

  • Whether the Bethlehem Financial transaction received required approvals, closed on expected terms and delivered anticipated benefits.
  • Whether earnings growth persists after separating acquisition effects, IPO-related liquidity and the one-time life-insurance benefit; monitor Q2 margin compression.
  • Trends in nonaccrual and past-due loans, concentrations in commercial real estate, construction lending and geography, and adequacy of the allowance—including acquired-loan discounts.
  • How excess IPO cash is deployed, the effect on returns and margins, and the impact of higher share count on per-share performance.
  • Deposit retention and funding costs, upcoming certificate maturities, and compliance with regulatory capital requirements as the bank grows.