Bay p(BCML) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, statements of changes in shareholders' equity, and cash flow statements, along with related notes, for the periods ended June 30, 2019, and December 31, 2018 Condensed Consolidated Balance Sheets (unaudited) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity as of June 30, 2019, and December 31, 2018 Balance Sheet Key Data (As of June 30, 2019 vs December 31, 2018) | Indicator | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :----------------------------------- | :--------------------- | :---------------------- | | Assets | | | | Cash and cash equivalents | 351,594 | 323,581 | | Available-for-sale investment securities | 100,271 | 99,796 | | Loans, net | 1,213,527 | 970,189 | | Goodwill | 26,449 | 14,594 | | Total assets | 1,771,727 | 1,478,395 | | Liabilities | | | | Deposits | 1,505,382 | 1,257,768 | | Total liabilities | 1,537,090 | 1,277,642 | | Shareholders' Equity | | | | Common stock | 174,575 | 149,248 | | Retained earnings | 58,489 | 51,321 | | Total shareholders' equity | 234,637 | 200,753 | | Total liabilities and shareholders' equity | 1,771,727 | 1,478,395 | Condensed Consolidated Statements of Income (unaudited) This section presents the company's operating results, including interest income, interest expense, net interest income, non-interest income, non-interest expense, and net income for the three and six months ended June 30, 2019, and 2018 Income Statement Key Data (For the Three and Six Months Ended June 30, 2019) | Indicator | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :--------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Total interest income | 17,948 | 13,751 | 34,305 | 27,303 | | Total interest expense | 1,930 | 1,151 | 3,422 | 2,289 | | Net interest income | 16,018 | 12,600 | 30,883 | 25,014 | | Provision for loan losses | 445 | 243 | 722 | 497 | | Net interest income (after provision for loan losses) | 15,573 | 12,357 | 30,161 | 24,517 | | Total non-interest income | 2,540 | 2,083 | 4,660 | 3,809 | | Total non-interest expense | 14,795 | 8,656 | 24,543 | 16,779 | | Income before income tax provision | 3,318 | 5,784 | 10,278 | 11,547 | | Income tax provision | 1,091 | 1,496 | 3,110 | 3,190 | | Net income | 2,227 | 4,288 | 7,168 | 8,357 | | Basic earnings per share | 0.20 | 0.45 | 0.64 | 0.99 | | Diluted earnings per share | 0.20 | 0.45 | 0.64 | 0.99 | Condensed Consolidated Statements of Comprehensive Income (unaudited) This section details the company's comprehensive income, including net income and other comprehensive income (loss) components, for the three and six months ended June 30, 2019, and 2018 Comprehensive Income Statement Key Data (For the Three and Six Months Ended June 30, 2019) | Indicator | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :----------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Net income | 2,227 | 4,288 | 7,168 | 8,357 | | Other comprehensive income (loss), net of tax | 792 | (285) | 1,389 | (567) | | Total comprehensive income | 3,019 | 4,003 | 8,557 | 7,790 | Condensed Consolidated Statements of Changes in Shareholders' Equity (unaudited) This section outlines the changes in the company's shareholders' equity, including common stock, additional paid-in capital, accumulated other comprehensive income (loss), and retained earnings, as of June 30, 2019, and December 31, 2018 Changes in Shareholders' Equity (As of June 30, 2019) | Indicator | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | Common stock | 174,575 | 149,248 | | Additional paid-in capital | 287 | 287 | | Accumulated other comprehensive income (loss), net of tax | 1,286 | (103) | | Retained earnings | 58,489 | 51,321 | | Total shareholders' equity | 234,637 | 200,753 | - As of June 30, 2019, the number of common shares outstanding increased to 12,052,266 from 10,869,275 as of December 31, 2018, primarily due to shares issued for acquisitions[9] Condensed Consolidated Statements of Cash Flows (unaudited) This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2019, and 2018 Cash Flow Statement Key Data (For the Six Months Ended June 30, 2019) | Cash Flow Activity | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :------------------- | :------------------- | :------------------- | | Net cash from operating activities | 2,166 | 3,292 | | Net cash from investing activities | 44,019 | (29,502) | | Net cash from financing activities | (18,172) | 94,624 | | Increase in cash and cash equivalents | 28,013 | 68,414 | | Cash and cash equivalents at end of period | 351,594 | 318,267 | - In the first half of 2019, net cash from investing activities turned into a net inflow of $44.019 million, compared to a net outflow of $29.502 million in the same period of 2018, primarily influenced by net changes in loans and investment securities purchases and sales[215] - Net cash from financing activities shifted from a net inflow of $94.624 million in the first half of 2018 to a net outflow of $18.172 million in the first half of 2019, mainly due to net changes in deposits[215] Notes to Condensed Consolidated Financial Statements (unaudited) This section provides detailed explanations and additional information regarding the figures presented in the condensed consolidated financial statements NOTE 1 – BASIS OF PRESENTATION This note describes BayCom Corp's business as a bank holding company and its wholly-owned bank subsidiary, United Business Bank, including its operational nature, geographic reach, adoption of new accounting standards, and strategic acquisitions - BayCom Corp, a bank holding company headquartered in Walnut Creek, California, operates through its wholly-owned subsidiary, United Business Bank, providing a wide range of financial services primarily to local small and medium-sized businesses, service professionals, and individuals[13] - As of June 30, 2019, the bank has expanded to 25 full-service banking branches and 1 loan production office across California, Washington, and New Mexico[13] - The company completed the acquisition of Bethlehem Financial Corporation (BFC) on November 30, 2018, and Uniti Financial Corporation (Uniti) on May 24, 2019, to expand market share[16] - The company adopted the new lease accounting standard (Topic 842) on January 1, 2019, requiring operating leases to be recognized as right-of-use assets and lease liabilities, with no significant impact on opening retained earnings[18] - As an "emerging growth company," the company has elected to delay the adoption of new or revised accounting standards applicable to public companies until they apply to private companies[21] NOTE 2 - ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED This note details the accounting standards recently adopted or to be adopted by the company, including ASU 2016-13 (CECL model), ASU 2017-04 (goodwill impairment simplification), ASU 2017-08 (redeemable debt securities amortization), ASU 2018-07 (non-employee equity compensation), ASU 2018-13 (fair value measurement disclosures), and ASU 2018-15 (cloud service implementation costs) - The company is reviewing the requirements of ASU No. 2016-13 (CECL model), which is expected to change the calculation processes and procedures for the allowance for loan losses and may result in an increase in the allowance for loan losses[22] - The company adopted ASU 2017-08 on January 1, 2019, which shortens the amortization period for certain callable debt securities with premium, but had no material impact on the consolidated financial statements[25] - The company adopted ASU 2018-07 on January 1, 2019, simplifying the accounting for non-employee equity compensation transactions, with no material impact on the consolidated financial statements[26] - ASU 2017-04 (goodwill impairment simplification), ASU 2018-13 (fair value measurement disclosures), and ASU 2018-15 (cloud service implementation costs) are not expected to have a material impact on the company's consolidated financial statements[24][27][28] NOTE 3 - ACQUISITION This note provides details on the company's recent Uniti and BFC mergers and the proposed acquisition of TIG Bancorp, outlining the strategic rationale, fair value of acquired assets and assumed liabilities, goodwill recognized, and related acquisition expenses - The company completed the Uniti merger on May 24, 2019, issuing 1,115,006 shares of common stock and paying $37.8 million in cash, for a total consideration of $62.7 million, expanding its market share in Southern California[31] - The BFC merger was completed on November 30, 2018, with a cash payment of $23.5 million, expanding the company's market share in New Mexico[32] - The Uniti merger generated $11.855 million in goodwill, and the BFC merger generated $4.229 million in goodwill, primarily aimed at deepening geographic footprint and achieving operational scale and efficiency[33][35][37] Uniti and BFC Merger Fair Value Summary of Assets and Liabilities | Item | Uniti Merger (May 24, 2019) (USD thousands) | BFC Merger (November 30, 2018) (USD thousands) | | :--------------------------- | :--------------------------------- | :--------------------------------- | | Acquired Assets | | | | Cash and due from banks | 6,392 | 4,932 | | Federal funds sold | 22,080 | 9,346 | | Loans, net | 276,719 | 75,384 | | Core deposit intangible | 566 | 3,604 | | Total assets | 318,018 | 157,820 | | Liabilities Assumed | | | | Deposits | 265,786 | 135,482 | | Total liabilities | 267,172 | 138,526 | | Consideration | | | | Cash consideration | 37,814 | 23,523 | | Common stock issued | 24,887 | - | | Goodwill | 11,855 | 4,229 | Acquisition-Related Expenses (For the Six Months Ended June 30, 2019) | Expense Type | Uniti Merger (USD thousands) | BFC Merger (USD thousands) | | :------------- | :------------------ | :---------------- | | Professional fees | 535 | 130 | | Data processing | 2,657 | 1,290 | | Severance | 578 | 536 | | Other | 365 | 369 | | Total | 4,135 | 2,325 | - The company announced on June 28, 2019, the signing of an agreement to acquire TIG Bancorp in an all-cash and stock transaction valued at approximately $39.4 million, expected to close in the fourth quarter of 2019[42] NOTE 4 – INVESTMENT SECURITIES This note provides information on the amortized cost, unrealized gains and losses, and estimated fair value of the company's available-for-sale investment securities, which totaled $100.271 million as of June 30, 2019 Available-for-Sale Investment Securities Fair Value (As of June 30, 2019 vs December 31, 2018) | Security Type | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | U.S. Treasury securities | 996 | 985 | | U.S. government agency securities | 13,587 | 13,765 | | Municipal securities | 17,464 | 19,503 | | Mortgage-backed securities | 29,646 | 49,602 | | Collateralized mortgage obligations | 24,166 | 4,717 | | SBA securities | 4,241 | 4,241 | | Corporate bonds | 10,171 | 6,983 | | Total | 100,271 | 99,796 | Available-for-Sale Securities Unrealized Loss Status (As of June 30, 2019) | Security Type | Unrealized Losses Less Than 12 Months (USD thousands) | Unrealized Losses 12 Months or More (USD thousands) | Total Unrealized Losses (USD thousands) | | :--------------------------- | :---------------------------- | :---------------------------- | :---------------------- | | U.S. government agency securities | (14) | - | (14) | | Municipal securities | (4) | (11) | (15) | | Mortgage-backed securities | (5) | (3) | (8) | | Collateralized mortgage obligations | (10) | (1) | (11) | | SBA securities | - | (48) | (48) | | Corporate bonds | (4) | - | (4) | | Total | (37) | (63) | (100) | - As of June 30, 2019, the company held 214 investment securities, with 20 in an unrealized loss position for over 12 months and 22 for less than 12 months; these losses are primarily interest rate related, and the company expects to fully recover amortized cost at maturity or when market conditions improve[48] NOTE 5 - LOANS This note details the composition of the company's loan portfolio, including commercial and industrial, real estate, and consumer loans, along with an analysis of nonperforming loans, troubled debt restructurings (TDRs), and purchased credit impaired (PCI) loans Loan Portfolio Overview (As of June 30, 2019 vs December 31, 2018) | Loan Type | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :------------------- | :--------------------- | :---------------------- | | Commercial and industrial | 151,862 | 121,855 | | Construction and land | 30,502 | 47,302 | | Commercial real estate | 902,896 | 701,983 | | Residential | 128,590 | 102,708 | | Consumer | 6,052 | 1,847 | | Total loans | 1,219,902 | 975,695 | | Allowance for loan losses | (5,880) | (5,140) | | Loans, net | 1,213,527 | 970,189 | Nonperforming Loans and Troubled Debt Restructurings (TDRs) (As of June 30, 2019 vs December 31, 2018) | Indicator | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | Total nonperforming loans | 3,822 | 3,128 | | Total troubled debt restructurings (TDRs) | 1,400 | 1,400 | | Total purchased credit impaired (PCI) loans | 18,601 | 12,804 | - As of June 30, 2019, total nonperforming loans amounted to $3.822 million, comprising $2.25 million in commercial and industrial loans, $1.452 million in commercial real estate loans, and $0.12 million in residential loans[54] - As of June 30, 2019, $0.763 million of TDR loans were performing under modified terms, and the company had no additional credit commitments to TDR borrowers[56] Loan Risk Grade Distribution (As of June 30, 2019) | Loan Type | Pass (USD thousands) | Special Mention (USD thousands) | Substandard (USD thousands) | Doubtful (USD thousands) | Total (USD thousands) | | :------------------- | :------------ | :-------------- | :------------ | :------------ | :------------ | | Commercial and industrial | 149,943 | 1,253 | 666 | - | 151,862 | | Construction and land | 27,618 | 147 | 2,737 | - | 30,502 | | Commercial real estate | 882,714 | 16,038 | 4,144 | - | 902,896 | | Residential | 127,239 | 1,231 | 120 | - | 128,590 | | Consumer | 6,041 | 11 | - | - | 6,052 | | Total | 1,193,555 | 18,680 | 7,667 | - | 1,219,902 | NOTE 6 – ALLOWANCE FOR LOAN LOSSES This note provides a detailed analysis of the company's allowance for loan losses (ALLL), including changes in the allowance and its composition by loan product and assessment method, with management affirming its adequacy Allowance for Loan Losses Movement Analysis (For the Three and Six Months Ended June 30, 2019) | Indicator | 2019 3 Months (USD thousands) | 2019 6 Months (USD thousands) | | :------------------- | :------------------- | :------------------- | | Beginning balance | 5,405 | 5,140 | | Charge-offs | - | (21) | | Recoveries | 30 | 39 | | Provision for loan losses | 445 | 722 | | Ending balance | 5,880 | 5,880 | Allowance for Loan Losses Composition (As of June 30, 2019) | Category | Amount (USD thousands) | | :--------------------------- | :------------ | | Loans individually evaluated for impairment | 19 | | Loans collectively evaluated for impairment | 5,861 | | PCI loans | - | | Total | 5,880 | - As of June 30, 2019, the allowance for loan losses was $5.88 million, representing 0.48% of total loans and 153.85% of total nonperforming loans[170][172] - In the first half of 2019, the company recorded net recoveries of $0.018 million, compared to net charge-offs of $0.112 million in the same period of 2018[202] NOTE 7 – PREMISES AND EQUIPMENT This note details the composition and changes in the company's premises and equipment, including the recognition of lease liabilities and right-of-use assets following the adoption of new lease accounting standards Premises and Equipment, Net (As of June 30, 2019 vs December 31, 2018) | Item | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | Owned premises, net | 4,571 | 9,667 | | Leasehold improvements | 2,178 | 1,654 | | Furniture, fixtures, and equipment | 4,016 | 3,835 | | Less: Accumulated depreciation and amortization | (4,184) | (3,988) | | Total premises and equipment, net | 6,581 | 11,168 | - Net premises and equipment decreased by $4.6 million, primarily due to the sale of a commercial building in Oakland with a book value of $4.6 million, and a partial space leaseback[78][177] - The company adopted Topic 842 on January 1, 2019, recognizing $7.8 million in right-of-use assets and $8.2 million in lease liabilities, with no significant impact on regulatory capital measures[18][176] Lease Liabilities Present Value (As of June 30, 2019) | Year | Total Lease Payments (USD thousands) | | :------------------- | :-------------------- | | For the remainder of 2019 | 1,465 | | 2020 | 2,759 | | 2021 | 2,431 | | 2022 | 1,801 | | 2023 | 1,299 | | Thereafter | 1,906 | | Total lease payments | 11,661 | | Less: Interest | (863) | | Present value of lease liabilities | 10,798 | NOTE 8 – GOODWILL AND INTANGIBLE ASSETS This note discloses the changes in the company's goodwill and core deposit intangible assets, including additions from acquisitions and amortization, and confirms the absence of impairment Goodwill Changes (As of June 30, 2019 vs December 31, 2018) | Indicator | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :------------------- | :--------------------- | :---------------------- | | Beginning balance (January 1) | 14,594 | 10,365 | | Goodwill from acquisitions | 11,855 | 4,229 | | Impairment | - | - | | Ending balance | 26,449 | 14,594 | - As of June 30, 2019, the company performed a qualitative assessment of goodwill and determined that its fair value exceeded its carrying value, thus no impairment occurred[83] Core Deposit Intangible Asset Changes (As of June 30, 2019 vs December 31, 2018) | Indicator | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :------------------- | :--------------------- | :---------------------- | | Beginning balance (January 1) | 7,205 | 4,772 | | Additions | 566 | 3,604 | | Less: Amortization | (781) | (1,171) | | Ending balance | 6,990 | 7,205 | - Core deposit intangible asset amortization expense for the first half of 2019 was $0.781 million, an increase from $0.578 million in the same period of 2018[84] NOTE 9 – INTEREST RECEIVABLE AND OTHER ASSETS This note details the composition of the company's interest receivable and other assets, which increased to $19.581 million as of June 30, 2019, primarily due to higher net deferred tax assets and interest receivable Interest Receivable and Other Assets Composition (As of June 30, 2019 vs December 31, 2018) | Item | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | Net deferred tax assets | 7,295 | 5,891 | | Interest receivable | 4,228 | 3,676 | | SBIC fund investment | 2,113 | 1,347 | | Prepaid assets | 1,322 | 2,156 | | Servicing assets | 2,446 | 814 | | Low-income housing partnerships, net | 705 | 607 | | Statutory trust investments | 395 | 395 | | All other | 1,077 | 2,495 | | Total | 19,581 | 17,381 | NOTE 10 – DEPOSITS This note provides a detailed breakdown of the company's deposit composition, highlighting a 19.7% increase to $1.505382 billion as of June 30, 2019, primarily driven by the Uniti merger Deposits Composition (As of June 30, 2019 vs December 31, 2018) | Deposit Type | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | Non-interest bearing demand | 538,504 | 398,045 | | NOW accounts and savings | 248,029 | 246,288 | | Money market | 385,934 | 398,081 | | Time deposits under $250,000 | 189,842 | 117,653 | | Time deposits $250,000 and over | 143,073 | 97,701 | | Total | 1,505,382 | 1,257,768 | - Total deposits increased by $247.6 million, or 19.7%, primarily attributable to the Uniti merger[178][180] NOTE 11 – INTEREST PAYABLE AND OTHER LIABILITIES This note outlines the composition of the company's interest payable and other liabilities, which increased to $9.238 million as of June 30, 2019, mainly due to higher accrued expenses and interest payable Interest Payable and Other Liabilities Composition (As of June 30, 2019 vs December 31, 2018) | Item | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | | :--------------------------- | :--------------------- | :---------------------- | | Accrued expenses | 5,448 | 5,508 | | Deferred rent | - | 528 | | CDARs deferred fees | - | 494 | | Accounts payable | 1,044 | 811 | | Reserve for unfunded commitments | - | 330 | | Interest payable | 1,453 | 198 | | Other miscellaneous liabilities | - | 506 | | Total | 9,238 | 8,375 | NOTE 12 – OTHER EXPENSES This note details the composition of the company's other non-interest expenses, which increased for both the three and six months ended June 30, 2019, driven by professional fees, core deposit intangible amortization, and marketing expenses Other Expenses Composition (For the Three and Six Months Ended June 30, 2019) | Expense Type | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :--------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Professional fees | 867 | 557 | 1,264 | 898 | | Core deposit intangible amortization | 392 | 290 | 781 | 578 | | Marketing and promotion | 396 | 248 | 606 | 459 | | Stationery and supplies | 161 | 91 | 298 | 215 | | Insurance (including FDIC premiums) | 159 | 107 | 315 | 265 | | Directors' fees | 375 | 72 | 496 | 131 | | Total other expenses | 2,850 | 2,226 | 4,601 | 3,752 | NOTE 13 – EQUITY INCENTIVE PLANS This note describes the company's equity incentive plans, including the 2017 and 2014 Omnibus Equity Incentive Plans, which aim to incentivize employees and non-employee directors through stock options and restricted stock awards - The 2017 Omnibus Equity Incentive Plan authorizes equity incentive awards to employees and non-employee directors, with a maximum of 450,000 shares of common stock; as of June 30, 2019, 161,365 restricted stock awards have been granted[92] - The 2014 Omnibus Equity Incentive Plan has granted 148,962 restricted stock awards and will not grant any further awards in the future[93] - Total compensation expense for equity incentive plans was $0.32 million and $0.44 million for the three and six months ended June 30, 2019, respectively[94] - As of June 30, 2019, total unrecognized compensation cost related to unvested restricted stock awards was $2.6 million, expected to be recognized over approximately two years[96] NOTE 14 – FAIR VALUE MEASUREMENT This note provides information on the company's assets and liabilities measured at fair value, explaining the valuation techniques and the three-level fair value hierarchy used - The fair value hierarchy is categorized into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[98][99] Assets Measured at Fair Value on a Recurring Basis (As of June 30, 2019) | Asset Type | Total (USD thousands) | Level 1 (USD thousands) | Level 2 (USD thousands) | Level 3 (USD thousands) | | :--------------------------- | :------------ | :------------ | :------------ | :------------ | | U.S. Treasury securities | 996 | 996 | - | - | | U.S. government agency securities | 13,587 | - | 13,587 | - | | Municipal securities | 17,464 | - | 17,464 | - | | Mortgage-backed securities | 29,646 | - | 29,646 | - | | Collateralized mortgage obligations | 24,166 | - | 24,166 | - | | SBA securities | 4,241 | - | 4,241 | - | | Corporate bonds | 10,171 | - | 10,171 | - | | Total | 100,271 | 996 | 99,275 | - | Assets Measured at Fair Value on a Non-Recurring Basis (As of June 30, 2019) | Asset Type | Total (USD thousands) | Level 1 (USD thousands) | Level 2 (USD thousands) | Level 3 (USD thousands) | | :--------------------------- | :------------ | :------------ | :------------ | :------------ | | Performing impaired loans | 763 | - | - | 763 | | Nonperforming impaired loans | 3,822 | - | - | 3,822 | | OREO | 627 | - | - | 627 | | Total | 5,212 | - | - | 5,212 | - Fair value measurements for impaired loans and OREO typically involve significant assumptions and unobservable market data, thus classified as Level 3[104][105] NOTE 15 – COMMITMENTS AND CONTINGENCIES This note discloses the company's various commitments and contingencies arising in the normal course of business, including loan commitments, letters of credit, commercial real estate loan concentrations, and investments in low-income housing tax credit (LIHTC) and Small Business Investment Company (SBIC) partnerships - As of June 30, 2019, total unfunded loan commitments were $120.7 million, and standby letters of credit totaled $0.769 million[109] - The company has a concentration in commercial real estate-related loans, but management believes the risks are manageable[111] - As of June 30, 2019, the company's remaining commitments to LIHTC and SBIC were approximately $3.6 million and $0.473 million, respectively[112] - As of June 30, 2019, the company's top ten deposit customers accounted for 8.6% of total deposits, and local agency deposits require collateralization[113][114] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's detailed analysis of the company's financial condition and operating results, covering forward-looking statements, executive overview, critical accounting policies, comparative financial condition, operating performance, and liquidity and capital resources SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This section cautions investors that forward-looking statements in the report involve risks and uncertainties, and actual results may differ materially from expectations - Forward-looking statements are based on current management expectations and involve risks and uncertainties related to M&A integration, credit risk, economic conditions, interest rate fluctuations, regulatory requirements, acquisition strategy, goodwill impairment, legal and regulatory changes, deposit attraction, operating cost control, IT system security, and key talent retention[116][118] - Actual results may differ materially from forward-looking statements due to various factors, and investors should not place undue reliance on these statements[116][119] Executive Overview BayCom Corp, a bank holding company operating through United Business Bank, aims to enhance shareholder value and sustained profitability through strategic acquisitions and organic growth, with profitability primarily driven by net interest income, loan loss provision, non-interest income, and non-interest expense - BayCom Corp, a bank holding company operating through United Business Bank, reported approximately $1.8 billion in total assets, $1.2 billion in total loans, $1.5 billion in total deposits, and $234.6 million in shareholders' equity as of June 30, 2019[120] - The company's primary goal is to increase shareholder value and sustained profitability through strategic acquisitions and organic growth, having expanded its geographic footprint through six acquisitions and planning to continue seeking acquisition opportunities[122] - Company profitability is primarily dependent on net interest income (after provision for loan losses), non-interest income, and non-interest expense[123] - Net interest income is influenced by market interest rates, the yield curve, asset yields, liability costs, and changes in the asset and liability structure[124][125] Critical Accounting Policies and Estimates This section outlines the critical accounting policies and estimates used in the company's financial reporting, which require complex and subjective management judgments, including the allowance for loan losses, purchased credit impaired loans, business combinations, loan sales, income taxes, and goodwill - The assessment of the allowance for loan losses is inherently subjective, requiring management to make estimates based on historical experience, loan portfolio type, borrower repayment ability, collateral fair value, and economic conditions[130] - Expected cash flows for purchased credit impaired (PCI) loans are accounted for under ASC 310-30, estimated using an internal cash flow model, and projected based on assumptions such as default rates, loss severity, and prepayment speeds[133][134] - Business combinations are accounted for using the acquisition method, recognizing acquired assets and assumed liabilities at fair value on the acquisition date, with any excess recognized as goodwill[137] - Goodwill is tested for impairment annually or more frequently if impairment indicators arise; as of June 30, 2019, the company completed a qualitative assessment of goodwill and found no impairment[141][142] Comparison of Financial Condition at June 30, 2019 and December 31, 2018 This section compares the company's financial condition as of June 30, 2019, and December 31, 2018, highlighting significant increases in total assets, net loans, total deposits, and shareholders' equity, primarily driven by the Uniti merger - Total assets increased by $293.3 million to $1.8 billion, primarily attributable to the Uniti merger[146] - Cash and cash equivalents increased by $28 million (8.7%) to $351.6 million, mainly due to a decrease in net loans[147] - Net loans increased by $243.3 million (25.1%) to $1.2 billion, primarily driven by the Uniti merger, partially offset by loan repayments[149] Loan Portfolio Type Changes (As of June 30, 2019 vs December 31, 2018) | Loan Type | June 30, 2019 (USD thousands) | December 31, 2018 (USD thousands) | Percentage Change | | :--------------------------- | :--------------------- | :---------------------- | :--------- | | Commercial and industrial | 151,086 | 121,853 | 24.0% | | Residential real estate | 126,814 | 100,915 | 25.7% | | Multi-family residential | 116,197 | 112,958 | 2.9% | | Owner-occupied commercial real estate | 360,978 | 270,204 | 33.6% | | Non-owner-occupied commercial real estate | 409,892 | 308,045 | 33.1% | | Construction and land | 30,282 | 47,069 | -35.7% | | Consumer | 6,052 | 1,847 | 227.7% | | PCI loans | 18,601 | 12,804 | 45.3% | | Total loans | 1,219,902 | 975,695 | 25.0% | - Nonperforming assets increased by $0.52 million (13.2%) to $4.4 million, primarily due to a $0.907 million increase in commercial real estate loans[155] - Total deposits increased by $247.6 million to $1.5 billion, primarily attributable to the Uniti merger[178] - Shareholders' equity increased by $33.9 million (16.8%) to $234.6 million, mainly due to the issuance of $24.9 million in common stock in the Uniti merger, $7.2 million in net income, and an improvement in the fair value of available-for-sale investments[184] Comparison of Results of Operations for the Three and Six Months Ended June 30, 2019 and 2018 This section compares the company's operating results for the three and six months ended June 30, 2019, and 2018, noting a decline in net income and EPS primarily due to acquisition-related expenses, despite growth in net interest and non-interest income, which was offset by a significant increase in non-interest expenses Net Income and Earnings Per Share (For the Three and Six Months Ended June 30, 2019) | Indicator | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :--------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Net income | 2,227 | 4,288 | 7,168 | 8,357 | | Diluted earnings per share | 0.20 | 0.45 | 0.64 | 0.99 | - Net income decreased primarily due to $4.1 million in acquisition-related expenses associated with the Uniti merger in the first half of 2019[185] Net Interest Income and Net Interest Margin (For the Three and Six Months Ended June 30, 2019) | Indicator | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :--------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Net interest income | 16,018 | 12,600 | 30,883 | 25,014 | | Net interest spread | 3.99% | 3.89% | 4.00% | 3.99% | | Net interest margin | 4.29% | 4.11% | 4.31% | 4.19% | - Net interest income growth was primarily driven by an increase in average interest-earning assets, particularly loans, largely propelled by the Uniti and BFC mergers[188] Non-Interest Income (For the Three and Six Months Ended June 30, 2019) | Income Type | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :--------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Gain on sale of loans | 903 | 548 | 1,169 | 1,199 | | Service charges and other fees | 663 | 469 | 1,396 | 915 | | Loan servicing fees and other income | 514 | 274 | 924 | 519 | | Other income | 239 | 792 | 873 | 1,176 | | Total non-interest income | 2,540 | 2,083 | 4,660 | 3,809 | - Non-interest income increased primarily due to higher gains on loan sales, increased service charges and other fees, and higher loan servicing fees and other income, partially offset by a decrease in other income (due to a bank-owned life insurance death benefit in 2018)[203][205] Non-Interest Expense (For the Three and Six Months Ended June 30, 2019) | Expense Type | 2019 3 Months (USD thousands) | 2018 3 Months (USD thousands) | 2019 6 Months (USD thousands) | 2018 6 Months (USD thousands) | | :--------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Salaries and employee benefits | 7,198 | 4,547 | 13,161 | 9,461 | | Occupancy and equipment | 1,064 | 1,268 | 2,174 | 2,243 | | Data processing | 3,683 | 615 | 4,607 | 1,323 | | Other expenses | 2,850 | 2,226 | 4,601 | 3,752 | | Total non-interest expense | 14,795 | 8,656 | 24,543 | 16,779 | - Non-interest expense significantly increased, primarily due to $4.1 million in acquisition-related expenses for the Uniti merger and higher salaries and benefits costs resulting from increased employee count due to the Uniti and BFC mergers[207] - The efficiency ratio deteriorated to 79.73% (three months) and 69.05% (six months) in the first half of 2019, compared to 57.39% and 58.21% in the same periods of 2018, mainly due to the substantial increase in non-interest expenses[187] Liquidity and Capital Resources This section discusses the company's liquidity management strategies and capital adequacy, highlighting its ability to meet daily funding needs through deposits, loan repayments, and sales, supplemented by available borrowing capacity, while maintaining "well-capitalized" status - The company meets liquidity needs through deposits, loan principal and interest repayments, and loan sale proceeds, with additional borrowing capacity of $371 million from FHLB and $65 million from federal funds[211][212] Cash Flow Overview (For the Six Months Ended June 30, 2019) | Cash Flow Activity | 2019 6 Months (USD thousands) | | :------------------- | :------------------- | | Net cash from operating activities | 2,166 | | Net cash from investing activities | 44,019 | | Net cash from financing activities | (18,172) | - As of June 30, 2019, the company (non-consolidated) held $3.9 million in liquid assets[216] - As of June 30, 2019, the bank was considered "well-capitalized," meeting the Federal Reserve Board's capital adequacy requirements[217] Basel III Capital Ratios (As of June 30, 2019) | Capital Ratio | BayCom Corp | United Business Bank | | :--------------------------- | :---------- | :------------------- | | Leverage ratio | 11.35% | 11.55% | | Common Equity Tier 1 capital ratio | 15.94% | 16.22% | | Tier 1 risk-based capital ratio | 16.60% | 16.22% | | Total risk-based capital ratio | 17.10% | 16.73% | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company primarily faces interest rate risk, with its operating performance highly dependent on effective interest rate risk management, and no significant changes in exposure since the 2018 annual report - The company primarily faces interest rate risk, and its operating performance is highly dependent on its ability to manage this risk effectively[223] - The company assesses and measures interest rate risk quarterly and believes there have been no significant changes in its interest rate risk exposure since the disclosure in the 2018 annual report[223] Item 4. Controls and Procedures Management, including the CEO and CFO, assessed the effectiveness of disclosure controls and procedures as of June 30, 2019, deeming them effective, with no material changes to internal control over financial reporting during the period - As of June 30, 2019, the company's Chief Executive Officer and Chief Financial Officer assessed and concluded that the company's disclosure controls and procedures were effective[225] - There were no material changes in the company's internal control over financial reporting during the reporting period[226] - Management acknowledges that any control procedures have inherent limitations, can only provide reasonable assurance, not absolute, and may not prevent all errors and fraud due to judgment errors, simple mistakes, collusion, or circumvention[226] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is occasionally involved in various legal proceedings in the normal course of business, with management believing that any resulting liabilities will not materially adversely affect its business or financial condition - The company is occasionally involved in various legal proceedings in the normal course of business[228] - Management believes that any liabilities arising from these proceedings will not have a material adverse effect on the company's business or financial condition[228] Item 1A. Risk Factors This section states that as of June 30, 2019, the company's risk factors have not materially changed from those disclosed in its 2018 annual report - As of June 30, 2019, the company's risk factors have not materially changed from those disclosed in its 2018 annual report[229] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that it is not applicable, indicating no information regarding unregistered sales of equity securities and use of proceeds for the reporting period - This section is not applicable, indicating no information regarding unregistered sales of equity securities and use of proceeds for the reporting period[229] Item 3. Defaults Upon Senior Securities This section states that it is not applicable, indicating no information regarding defaults upon senior securities for the reporting period - This section is not applicable, indicating no information regarding defaults upon senior securities for the reporting period[229] Item 4. Mine Safety Disclosures This section states that it is not applicable, indicating no information regarding mine safety disclosures - This section is not applicable, indicating no information regarding mine safety disclosures[230] Item 5. Other Information This section states that it is not applicable, indicating no other information requiring disclosure - This section is not applicable, indicating no other information requiring disclosure[230] Item 6. Exhibits This section lists the exhibits filed with the company's Form 10-Q report, including merger agreements, articles of incorporation, CEO and CFO certifications, and financial statements in XBRL format - Exhibits include merger agreements with TIG Bancorp and Uniti Financial Corporation, articles of incorporation, Sarbanes-Oxley certifications from the Chief Executive Officer and Chief Financial Officer, and financial statements in XBRL format[232] SIGNATURES This section contains the signatures of the company's Chief Executive Officer, George Guarini, and Chief Financial Officer, Keary Colwell, as required by the Securities Exchange Act of 1934 - The report was signed by Chief Executive Officer George Guarini and Chief Financial Officer Keary Colwell on August 9, 2019[236]