Company Quick10K Filing
Baycom
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 12 $265
10-Q 2019-11-12 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-03-19 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
S-1 2018-04-11 Public Filing
10-Q 2018-06-18 Quarter: 2018-03-31
8-K 2020-01-28 Earnings, Exhibits
8-K 2020-01-28 Regulation FD, Exhibits
8-K 2019-11-19 Officers, Exhibits
8-K 2019-11-04 Regulation FD, Other Events, Exhibits
8-K 2019-11-04 Regulation FD, Exhibits
8-K 2019-10-28 Earnings, Exhibits
8-K 2019-07-26 Earnings, Exhibits
8-K 2019-06-28 Enter Agreement, Regulation FD, Other Events, Exhibits
8-K 2019-06-18 Shareholder Vote
8-K 2019-05-28 Other Events, Exhibits
8-K 2019-05-24 M&A, Other Events, Exhibits
8-K 2019-05-06 Regulation FD, Exhibits
8-K 2019-04-29 Other Events, Exhibits
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-01-29 Earnings, Exhibits
8-K 2018-12-10 Regulation FD, Exhibits
8-K 2018-12-07 Enter Agreement, Other Events, Exhibits
8-K 2018-11-30 Other Events, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-08-10 Enter Agreement, Other Events, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-17 Shareholder Vote
8-K 2018-05-24 Accountant, Exhibits
8-K 2018-05-08 Other Events, Exhibits
8-K 2018-05-03 Enter Agreement, Other Events, Exhibits
BCML 2019-09-30
Part I - Financial Information
Item 1. Financial Statements.
Note 1 - Basis of Presentation
Note 2 - Accounting Standards Recently Issued or Adopted
Note 3 - Acquisitions
Note 4 - Investment Securities
Note 5 - Loans
Note 6 - Allowance for Loan Losses
Note 7 - Premises and Equipment
Note 8 - Goodwill and Intangible Assets
Note 9 - Interest Receivable and Other Assets
Note 10 - Deposits
Note 11 - Interest Payable and Other Liabilities
Note 12 - Other Expenses
Note 13 - Equity Incentive Plans
Note 14 - Fair Value Measurement
Note 15 - Commitments and Contingencies
Note 16 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II &Mdash; Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 tm1919493d1_ex31-1.htm
EX-31.2 tm1919493d1_ex31-2.htm
EX-32 tm1919493d1_ex32.htm

Baycom Earnings 2019-09-30

BCML 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
PCB 278 1,726 1,503 2 0 26 65 144 0% 2.2 2%
MFSF 277 2,091 1,874 0 0 22 46 244 5.3 1%
SFST 274 2,116 1,926 7 0 25 54 157 0% 2.9 1%
FNLC 273 1,999 1,794 0 0 25 56 266 4.7 1%
BCML 265 1,772 1,537 0 0 13 254 -86 -0.3 1%
FVCB 261 1,485 1,314 0 0 13 33 246 0% 7.4 1%
RBNC 261 1,794 1,580 0 0 16 39 225 5.7 1%
ACNB 258 1,679 1,498 0 0 24 37 260 7.1 1%
PKBK 256 1,550 1,383 0 0 28 57 89 1.6 2%
ORRF 254 2,400 2,180 0 0 11 35 220 6.3 0%

10-Q 1 tm1919493d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                      

 

COMMISSION FILE NUMBER 001-38483

 

BAYCOM CORP
(Exact Name of Registrant as Specified in its Charter)

 

California   37-1849111
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
500 Ygnacio Valley Road, Walnut Creek, California   94596
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code:  (925) 476-1800

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, no par value per share BCML The NASDAQ Stock Market LLC

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO ¨

 

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x  NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
   
Non-accelerated filer ¨ Smaller reporting company x
   
  Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨   NO x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

 

As of November 12, 2019 there were 12,937,419 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 

BAYCOM CORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 2
   
  Condensed Consolidated Balance Sheets (unaudited) 2
   
  Condensed Consolidated Statements of Income (unaudited) 3
   
  Condensed Consolidated Statements of Comprehensive Income (unaudited) 4
   
  Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows (unaudited) 6
   
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 53
   
Item 4. Controls and Procedures 53
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 54
   
Item 1A. Risk Factors 54
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
   
Item 3. Defaults Upon Senior Securities 54
   
Item 4. Mine Safety Disclosures 54
   
Item 5. Other Information 54
   
Item 6. Exhibits 55
   
SIGNATURES 56

 

As used throughout this report, the terms “we,” “our,” “us,” “BayCom,” or the “Company” refer to BayCom Corp and its consolidated subsidiary, United Business Bank, which we sometimes refer to as the “Bank,” unless the context otherwise requires.

 

1

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for per share data)

(unaudited)

 

   September 30,   December 31, 
   2019   2018 
ASSETS          
Cash and due from banks  $25,584   $20,846 
Federal funds sold   311,494    302,735 
Cash and cash equivalents   337,078    323,581 
           
Interest bearing deposits in banks   2,483    3,980 
Investment securities available-for-sale   99,017    99,796 
Federal Home Loan Bank (“FHLB”) stock, at par   7,174    5,162 
Federal Reserve Bank (“FRB”) stock, at par   4,169    4,081 
Loans held for sale   5,366    855 
Loans, net of allowance for loan losses of $6,360 and $5,140 at September 30, 2019 and December 31, 2018, respectively   1,225,321    970,189 
Premises and equipment, net   6,702    11,168 
Other real estate owned (“OREO”)   635    801 
Core deposit intangible   6,594    7,205 
Cash surrender value of bank owned life insurance (“BOLI”) policies, net   20,086    19,602 
Right-of-use assets (“ROU”)   10,185    - 
Goodwill   26,449    14,594 
Interest receivable and other assets   19,451    17,381 
Total Assets  $1,770,710   $1,478,395 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Noninterest and interest bearing deposits  $1,498,194   $1,257,768 
Lease liabilities   10,387    - 
Salary continuation plan   3,551    3,338 
Interest payable and other liabilities   9,472    8,375 
Junior subordinated deferrable interest debentures, net   8,221    8,161 
Total liabilities   1,529,825    1,277,642 
           
Commitments and contingencies (Note 15)          
           
Shareholders’ equity          
Preferred stock - no par value; 10,000,000 shares authorized; no shares issued and outstanding   -    - 
Common stock - no par value; 100,000,000 shares authorized; 12,061,616 and 10,869,275 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   174,942    149,248 
Additional paid in capital   287    287 
Accumulated other comprehensive income (loss), net of tax   1,604    (103)
Retained earnings   64,052    51,321 
Total shareholders’ equity   240,885    200,753 
Total Liabilities and Shareholders’ Equity  $1,770,710   $1,478,395 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2

 

 

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share data)

(unaudited)

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Interest income:                    
Loans, including fees  $17,524   $12,044   $46,194   $36,398 
Investment securities and interest bearing deposits in banks   2,662    2,107    7,990    4,757 
FHLB dividends   141    86    325    266 
FRB dividends   63    50    186    169 
Total interest and dividend income   20,390    14,287    54,695    41,590 
                     
Interest expense:                    
Deposits   2,493    1,179    5,623    3,183 
Other borrowings   140    93    433    378 
Total interest expense   2,633    1,272    6,056    3,561 
Net interest income   17,757    13,015    48,639    38,029 
                     
Provision for loan losses   479    1,081    1,201    1,578 
Net interest income after provision for loan losses   17,278    11,934    47,438    36,451 
                     
Noninterest income:                    
Gain on sale of loans   689    424    1,782    1,623 
Service charges and other fees   605    509    2,000    1,424 
Loan servicing fees and other income   443    312    1,367    831 
Gain on sale of premises   -    -    187    - 
Gain on sale of OREO   -    -    112    - 
Other income   377    393    1,326    1,569 
Total noninterest income   2,114    1,638    6,774    5,447 
                     
Noninterest expense:                    
Salaries and employee benefits   7,440    5,342    20,600    14,670 
Occupancy and equipment   1,396    976    3,570    3,219 
Data processing   1,036    526    5,643    1,849 
Other expense   1,792    1,573    6,394    5,458 
Total noninterest expense   11,664    8,417    36,207    25,196 
Income before provision for income taxes   7,728    5,155    18,005    16,702 
                     
Provision for income taxes   2,165    1,637    5,274    4,827 
Net income  $5,563   $3,518   $12,731   $11,875 
                     
Earnings per common share:                    
Basic earnings per common share  $0.46   $0.31   $1.11   $1.30 
Weighted average shares outstanding   12,061,616    10,869,275    11,450,108    9,295,274 
                     
Diluted earnings per common share  $0.46   $0.31   $1.11   $1.30 
Weighted average shares outstanding   12,061,616    10,869,275    11,450,108    9,295,274 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

 

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except for per share data)

(unaudited)

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Net income  $5,563    3,518   $12,731   $11,875 
Other comprehensive income (loss):                    
Change in unrealized gain (loss) on available-for-sale securities   446    (301)   2,391    (1,106)
Deferred tax (expense) benefit   (128)   89    (684)   327 
Other comprehensive income (loss), net of tax   318    (212)   1,707    (779)
Total comprehensive income  $5,881   $3,306   $14,438   $11,096 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except for per share data)

(unaudited)

 

                   Accumulated     
       Common   Additional       Other   Total 
   Number of   Stock   Paid in   Retained   Comprehensive   Shareholders' 
   Shares   Amount   Capital   Earnings   Income/(Loss)   Equity 
Balance, December 31, 2017   7,496,995   $81,307   $287   $36,828   $213   $118,635 
Net income                  4,069         4,069 
Other comprehensive loss, net                       (282)   (282)
Restricted stock granted   15,232                          
Stock based compensation        146                   146 
Balance, March 31, 2018   7,512,227    81,453    287    40,897    (69)   122,568 
Net income                  4,288         4,288 
Other comprehensive loss, net                       (285)   (285)
Restricted stock granted   78,148                          
Stock based compensation        308                   308 
Initial public offering, net   3,278,900    66,761                   66,761 
Balance, June 30, 2018   10,869,275    148,522    287    45,185    (354)   193,640 
Net income                  3,518         3,518 
Other comprehensive loss, net                       (212)   (212)
Stock based compensation        364                   364 
Balance, September 30, 2018   10,869,275    148,886    287    48,703    (566)   197,310 
Net income                  2,618         2,618 
Other comprehensive income, net                       463    463 
Stock based compensation        362                   362 
Balance, December 31, 2018   10,869,275    149,248    287    51,321    (103)   200,753 
Net income                  4,941         4,941 
Other comprehensive income, net                       597    597 
Restricted stock granted   22,289                          
Stock based compensation        120                   120 
Balance, March 31, 2019   10,891,564    149,368    287    56,262    494    206,411 
Net income                  2,227         2,227 
Other comprehensive income, net                       792    792 
Restricted stock granted   45,696                          
Stock based compensation        320                   320 
Stock issued in acquisition   1,115,006    24,887                   24,887 
Balance, June 30, 2019   12,052,266    174,575    287    58,489    1,286    234,637 
Net income                  5,563         5,563 
Other comprehensive income, net                       318    318 
Restricted stock granted   9,350                          
Stock based compensation        367                   367 
Balance, September 30, 2019   12,061,616   $174,942   $287   $64,052   $1,604   $240,885 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

 

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for per share data)

(unaudited)

 

   Nine months ended 
   September 30, 
   2019   2018 
Cash flows from operating activities:          
Net income  $12,731   $11,875 
Adjustments to reconcile net income to net cash provided by          
operating activities:          
Increase in deferred tax asset   (1,148)   (583)
Accretion on acquired loans   (2,683)   (2,377)
Gain on sale of loans   (1,782)   (1,623)
Proceeds from sale of loans   24,317    23,409 
Loans originated for sale   (33,551)   (31,524)
Write-down on premises   -    600 
Gain on sale of premises   (187)   - 
Gain on sale of OREO   (112)   - 
Accretion on junior subordinated debentures   60    41 
Increase in cash surrender value of life insurance policies   (484)   (231)
Provision for loan losses   1,201    1,578 
Amortization/accretion of premium/discount on investment securities   340    345 
Depreciation and amortization   859    693 
Core deposit intangible amortization   1,177    868 
Stock based compensation expense   807    818 
Increase (decrease) in deferred loan origination fees, net   212    (88)
(Increase) decrease in interest receivable and other assets   (6,889)   281 
Increase (decrease) in salary continuation plan, net   213    (789)
Increase (decrease) in interest payable and other liabilities   10,300    (1,535)
Net cash provided by operating activities   5,381    1,758 
           
Cash flows from investing activities:          
Maturity of interest bearing deposits in banks   1,497    743 
Purchase of investment securities   (13,260)   (39,255)
Proceeds from the maturity and repayment of investment securities   21,173    8,627 
Purchase of Federal Home Loan Bank stock   (477)   (325)
Purchase of Federal Reserve Bank stock   (88)   (370)
Proceeds from death benefit on BOLI investment   -    1,382 
Net decrease in loans   29,362    2,674 
Funds due Small Business Administration (“SBA”) participant   -    1,591 
Proceeds from sale of premises   4,961    - 
Proceeds from sale of OREO   354    - 
Purchase of equipment and leasehold improvements   (704)   (638)
Net cash paid in acquisition   (9,342)   - 
Net cash provided by (used in) investing activities   33,476    (25,571)
           
Cash flows from financing activities:          
Net (decrease) increase in noninterest and interest bearing deposits   (10,410)   51,893 
Net decrease in time deposits   (14,950)   (25,477)
Decrease in other borrowings   -    (6,000)
Proceeds from initial public offering, net   -    66,761 
Net cash (used in) provided by financing activities   (25,360)   87,177 
Increase in cash and cash equivalents   13,497    63,364 
Cash and cash equivalents at beginning of period   323,581    249,853 
           
Cash and cash equivalents at end of period  $337,078   $313,217 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6

 

 

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(In thousands, except for per share data)

(unaudited)

 

   Nine months ended 
   September 30, 
   2019   2018 
Supplemental disclosure of cash flow information:          
Cash paid during the year for:          
Interest expense  $4,745   $3,608 
Income tax, net of refunds   4,866    4,572 
           
Non-cash investing activities:          
Change in unrealized gain (loss) on available-for-sale securities, net of tax  $1,707   $(779)
Transfer of loans to OREO   -    362 
Recognition of ROU   11,411    - 
Recognition of lease liability   11,727    - 
           
Acquisition:          
Assets acquired, net of cash received  $289,546   $- 
Liabilities assumed   267,172    - 
Cash consideration   37,814    - 
Common stock issued   24,887    - 
Goodwill   11,855    - 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

7

 

 

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

BayCom Corp (the “Company”) is a bank holding company headquartered in Walnut Creek, California. United Business Bank (the “Bank”), the wholly owned banking subsidiary, is a California state-chartered bank which provides a broad range of financial services primarily to local small and mid-sized businesses, service professionals and individuals. In the 15 years of operation, the Bank has grown to 25 full service banking branches. The main office is located in Walnut Creek, California and branch offices are located in Oakland, Castro Valley, Mountain View, Napa, Stockton (2), Pleasanton, Livermore, San Jose, Long Beach, Sacramento, San Francisco, Glendale, Buena Park, Los Angeles, and Garden Grove, California, and Seattle, Washington (2), New Mexico (6). The condensed consolidated financial statements include the accounts of the Company and the Bank.

 

All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto for the year ended December 31, 2018. Results of operations for interim periods are not necessarily indicative of results for the full year. Certain prior year information has been reclassified to conform to current year presentation. The reclassifications had no impact on consolidated net income or shareholders’ equity.

 

On November 30, 2018, the Company completed the acquisition of Bethlehem Financial Corporation (“BFC”), the holding company for MyBank, both of Belen, New Mexico (“BFC Merger”) and on May 24, 2019, the Company completed the acquisition of Uniti Financial Corporation ("Uniti”), the holding company for Uniti Bank, both of Buena Park, California ("Uniti Merger"). See Note 3 - Acquisitions for additional information on the BFC Merger and the Uniti Merger (collectively the "BFC and Uniti Mergers").

 

On October 21, 2019, the Company completed its acquisition of TIG Bancorp (“TIG”) pursuant to an Agreement and Plan of Merger, dated June 28, 2019 (the “Merger Agreement”), by and between BayCom and TIG. Under the terms of the Merger Agreement, TIG merged with and into BayCom (the “Merger”), with BayCom as the surviving corporation in the Merger. Immediately following the Merger, First State Bank of Colorado, a wholly-owned subsidiary of TIG, merged with and into United Business Bank, a wholly-owned subsidiary of BayCom (the “Bank Merger”), with United Business Bank as the surviving bank in the Bank Merger. Upon completion of the TIG acquisition, the Bank now has 32 full service offices and has expanded its franchise into the State of Colorado.

 

Lease Accounting

 

On January 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the Consolidated Balance Sheets as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 7 - Premises and Equipment. The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The recognition of leases existing on January 1, 2019 did not require an adjustment to beginning retained earnings. Upon adoption, the Company recognized right-of-use assets and lease liabilities of $7.8 million and $8.2 million, respectively. Adoption of the standard did not have a significant effect on the Company’s regulatory capital measures.

 

8

 

 

Revenue Recognition

 

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations; and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

All of the Company’s revenue from contracts with customers in scope of ASC 606 is recognized in noninterest income and included in our commercial and consumer banking segment. For the three and nine months ended September 30, 2019, the Company recognized $65,000 and $254,000 in deposit fees, and $44,000 and $129,000 in debit card interchange fees considered in scope of ASC 606, respectively. There was a total of $2.0 million and $6.4 million of noninterest income considered not in scope of ASC 606 for the three and nine months ended September 30, 2019.

 

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our condensed consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.

 

Subsequent Events

 

Management has evaluated subsequent events for potential recognition and disclosure through November 12, 2019, the date the financial statements were issued. Expanded disclosures about the nature and terms of subsequent events are included in Note 16 – Subsequent Events.

 

NOTE 2 - ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) and subsequent amendment to the initial guidance in November 2018, ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and in May 2019, ASU 2019-05 Financial Instruments—Credit Losses, Topic 326, all of which clarifies codification and corrects unintended application of the guidance. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-05 allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis.

 

9

 

 

The amendments in these ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, assuming the adoption of an ASU implementing the FASB board decision in October 2019 extending the adoption date for certain registrants, including the Company, with early adoption permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is reviewing the requirements of these ASUs and expects to begin developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. Upon adoption, the Company expects changes in the processes and procedures used to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit-impaired loans; however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The amendments in this ASU are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 for public business entities who are not SEC filers and one year later for all other entities. The Company does not expect ASU 2017-04 to have a material impact on its consolidated financial statements.

 

In March 2017, FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Topic 310). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. The Company adopted ASU 2017-08 on January 1, 2019. The adoption of ASU 2017-08 did not have a material impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This new guidance simplifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees, applying some of the same requirements as employee share-based payment transactions. This ASU will not affect the accounting for share-based payment awards to nonemployee directors, which will continue to be treated as employee share-based transactions under the current standards. The Company adopted ASU 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2018, FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software.

 

10

 

 

The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The amendments in this ASU should be applied either retrospectively to all implementation costs incurred after the date of adoption. Adoption of ASU 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2019, FASB issued ASU No. 2019-01, Leases (Topic 842) - Codification Improvements. The changes in this amendment include: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) presentation on the statement of cash flows – sales types and direct financing leases; and (3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. This ASU specifically provides an exception to the paragraph 250-10-50-3 that would otherwise have required interim disclosures in the period an accounting change including the effect of that change on income from continuing operations, net income, any other financial statement line item, and any affected per share amounts. For items 1 and 2, this ASU is effective for fiscal and interim periods beginning after December 15, 2019. Item 3 does not have an effective date because the amendments related to transition disclosures are included in Topic 842. The adoption of ASU 2019-01 is not expected to have a material impact on the Company’s consolidated financial statements.

 

NOTE 3 - ACQUISITIONS

 

On May 24, 2019, the Company completed the Uniti Merger. As of the acquisition date, Uniti merged into the Company and Uniti Bank merged into United Business Bank. The acquisition increased the Company’s market share in California, through the addition of three branch offices located in Southern California. BayCom issued an aggregate of 1,115,006 shares of its common stock and paid aggregate cash consideration of $37.8 million. The total consideration transferred was $62.7 million in the Uniti Merger.

 

On November 30, 2018, the Company completed the BFC Merger. As of the acquisition date, BFC merged into the Company and MyBank merged into United Business Bank. The acquisition increased the Company’s market share in New Mexico through the addition of five branch offices located in Central New Mexico. The Company paid BFC shareholders $62.00 in cash for each share of BFC common stock or $23.5 million in total. The Company assumed subordinated debentures held by a subsidiary of BFC.

 

The primary reason for the BFC and Uniti Mergers was to create depth in the Company's geographic footprint consistent with its ongoing acquisition growth strategy, and to achieve operational scale and realize efficiencies of a larger combined organization. The mergers constitute business acquisitions as defined by FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. The Company was considered the acquirer in these transactions. Accordingly, the preliminary estimates of fair values of BFC and Uniti assets, including the identifiable intangible assets, and the assumed liabilities in the BFC Merger and Uniti Merger were measured and recorded as of November 30, 2018 and May 24, 2019, respectively. Fair values on the acquisition dates are preliminary and represent management’s best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisitions as additional information regarding the closing date fair values becomes available.

 

11

 

 

The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date:

 

   Uniti Merger   BFC Merger 
   completed   completed 
   May 24, 2019   November 30, 2018 
Fair value of assets:          
Cash and due from banks  $6,392   $4,932 
Federal funds sold   22,080    9,346 
Total cash and cash equivalents   28,472    14,278 
           
Investment securities available-for-sale   5,096    56,198 
FHLB stock, at par   1,535    154 
FRB stock, at par   -    173 
Loans, net   276,719    75,384 
Premises and equipment, net   463    3,291 
OREO   76    1,066 
Core deposit intangible   566    3,604 
Cash surrender value of bank owned life insurance policies, net   -    2,937 
Servicing assets   1,824    - 
Interest receivable and other assets   3,267    735 
Total assets acquired   318,018    157,820 
           
Liabilities:          
Deposits          
Noninterest bearing   143,082    97,771 
Interest bearing   122,704    37,711 
Total deposits   265,786    135,482 
           
Interest payable and other liabilities   1,386    329 
Junior subordinated deferrable interest debentures, net   -    2,715 
Total liabilities assumed   267,172    138,526 
           
Cash consideration   37,814    23,523 
Common stock issued   24,887    - 
Goodwill  $11,855   $4,229 

 

12

 

 

The following table presents the net assets acquired and the estimated fair value adjustments, which resulted in goodwill at the acquisition date:

 

   Uniti Merger   BFC Merger 
   completed   completed 
   May 24, 2019   November 30, 2018 
Book value of net assets acquired  $47,445   $16,201 
Fair value adjustments:          
Investments available-for-sale   -    (382)
Loans, net   4,617    284 
Premises and equipment, net   -    668 
Write-down on OREO   (32)   (229)
Core deposit intangible   566    3,604 
Deferred tax assets   (695)   (1,176)
Write-down on servicing assets   (805)   - 
Time deposits   (250)   (54)
Junior subordinated deferrable interest debentures, net   -    378 
Total purchase accounting adjustments   3,401    3,093 
Fair value of net assets acquired   50,846    19,294 
           
Price paid:          
Cash paid   37,814    23,523 
Common stock issued   24,887    - 
Total price paid   62,701    23,523 
Goodwill  $11,855   $4,229 

 

Pro Forma Results of Operations

 

The operating results of the Company for the three months and nine months ended September 30, 2019 in the condensed consolidated statements of income include the operating results by the net assets acquired in the BFC and Uniti Mergers since the November 30, 2018 and May 24, 2019 merger dates. The following table represents the net interest income, net income, basic and diluted earnings per share, as if the BFC and Uniti Mergers were effective January 1, 2018. The unaudited pro forma information in the following table is intended for informational purposes only and is not necessarily indicative of future operating results or operating results that would have occurred had the mergers been completed at the beginning of the respective year. No assumptions have been applied to the pro forma results of operation regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 

Unaudited pro forma net interest income, net income and earnings per share are presented below:

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Net interest income  $17,757   $18,195   $51,904   $53,106 
Net income   5,563    5,036    12,195    15,964 
                     
Basic earnings per share  $0.46   $0.42   $1.01   $1.53 
Diluted earnings per share  $0.46   $0.42   $1.01   $1.53 

 

These amounts include the acquisition-related third party expenses, accretion of the discounts on acquired loans and amortization of the fair value mark adjustments on core deposit intangible.

 

13

 

 

Acquisition Related Expenses

 

Acquisition expenses are recognized in the periods in which the costs are incurred and the services are received. The Company incurred third-party acquisition expenses in the consolidated statements of income for the periods indicated as follows:

 

   Uniti Merger   BFC Merger 
   Nine months ended   Year ended 
   September 30, 2019   December 31, 2018 
Professional fees  $535   $130 
Data processing   2,657    1,290 
Severance expense   578    536 
Other expense   365    369 
Total  $4,135   $2,325 

 

There were no acquisition related expenses incurred during both the three months ended September 30, 2019 and 2018.

 

NOTE 4 – INVESTMENT SECURITIES

 

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale at the dates indicated are summarized as follows:

 

       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
September 30, 2019  cost   gains   losses   fair value 
U.S. Treasuries  $997   $1   $-   $998 
U.S. Government Agencies   10,523    81    (15)   10,589 
Municipal securities   16,389    449    (11)   16,827 
Mortgage-backed securities   29,952    1,097    (7)   31,042 
Collateralized mortgage obligations   25,188    562    (10)   25,740 
SBA securities   3,678    4    (50)   3,632 
Corporate bonds   10,038    152    (1)   10,189 
Total  $96,765   $2,346   $(94)  $99,017 

 

       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
December 31, 2018  cost   gains   losses   fair value 
U.S. Treasuries  $984   $1   $-   $985 
U.S. Government Agencies   13,761    21    (17)   13,765 
Municipal securities   19,604    65    (166)   19,503 
Mortgage-backed securities   49,565    243    (206)   49,602 
Collateralized mortgage obligations   4,705    32    (20)   4,717 
SBA securities   4,300    2    (61)   4,241 
Corporate bonds   7,016    4    (37)   6,983 
Total  $99,935   $368   $(507)  $99,796 

 

14

 

 

The estimated fair value and gross unrealized losses for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position at the dates indicated are as follows:

 

   Less than 12 months   12 months or more   Total 
   Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized 
September 30, 2019  fair value   loss   fair value   loss   fair value   loss 
U.S. Treasuries  $-   $-   $-   $-   $-   $- 
U.S. Government Agencies   -    -    1,507    (15)   1,507    (15)
Municipal securities   -    -    2,386    (11)   2,386    (11)
Mortgage-backed securities   1,410    (5)   403    (2)   1,813    (7)
Collateralized mortgage obligations   902    (10)   -    -    902    (10)
SBA securities   -    -    2,361    (50)   2,361    (50)
Corporate bonds   -   -    1,519    (1)   1,519    (1)
Total  $2,312   $(15)  $8,176   $(79)  $10,488   $(94)

 

   Less than 12 months   12 months or more   Total 
   Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized 
December 31, 2018  fair value   loss   fair value   loss   fair value   loss 
U.S. Treasuries  $-   $-   $-   $-   $-   $- 
U.S. Government Agencies   4,014    (9)   1,743    (8)   5,757    (17)
Municipal securities   6,883    (35)   7,537    (131)   14,420    (166)
Mortgage-backed securities   14,919    (91)   6,054    (115)   20,973    (206)
Collateralized mortgage obligations   2,427    (9)   477    (11)   2,904    (20)
SBA securities   677    (32)   2,336    (29)   3,013    (61)
Corporate bonds   4,975    (37)   -    -    4,975    (37)
Total  $33,895   $(213)  $18,147   $(294)  $52,042   $(507)

 

At September 30, 2019, the Company held 208 investment securities, of which 17 were in an unrealized loss position for more than twelve months and 19 were in an unrealized loss position for less than twelve months. These temporary unrealized losses relate principally to current interest rates for similar types of securities. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

 

The amortized cost and estimated fair value of securities available-for-sale at the dates indicated, by contractual maturity dates for all securities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   September 30, 2019   December 31, 2018 
   Amortized   Estimated   Amortized   Estimated  
   cost   fair value   cost   fair value  
Available-for-sale                  
Due in one year or less   $7,788   $7,823   $14,292   $14,279  
Due after one through five years    27,924    28,394    26,287   26,327  
Due after five years through ten years    20,971    21,603    20,840   20,758  
Due after ten years    40,082    41,197    38,516   38,432  
Total   $96,765   $99,017   $99,935   $99,796  

 

For both the three and nine months ended September 30, 2019 and 2018, no realized gains or losses were recorded.

 

15

 

 

NOTE 5 – LOANS

 

The Company’s loan portfolio at the dates indicated is summarized below:

 

   September 30,   December 31, 
   2019   2018 
Commercial and industrial  $160,173   $121,855 
Construction and land   24,623    47,302 
Commercial real estate   912,622    701,983 
Residential   133,466    102,708 
Consumer   1,375    1,847 
Total loans   1,232,259    975,695 
Net deferred loan fees   (578)   (366)
Allowance for loan losses   (6,360)   (5,140)
Net loans  $1,225,321   $970,189 

 

The Company’s total impaired loans, including nonaccrual loans, accruing loans modified as troubled debt restructurings (“TDRs”), and accreting purchase credit impaired (“PCI”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows:

 

   Commercial
and industrial
   Construction
and land
   Commercial
real estate
   Residential   Consumer   Total 
September 30, 2019                              
Recorded investment in impaired loans:                              
With no specific allowance recorded  $2,289   $2,737   $2,192   $119   $-   $7,337 
With a specific allowance recorded   28    -    -    -    -    28 
Total recorded investment in impaired loans  $2,317   $2,737   $2,192   $119   $-   $7,365 
Specific allowance on impaired loans   28    -    -    -    -    28 
                               
December 31, 2018                              
Recorded investment in impaired loans:                              
With no specific allowance recorded  $1,868   $-   $1,346   $654   $-   $3,868 
With a specific allowance recorded   10    -    -    -    -    10 
Total recorded investment in impaired loans  $1,878   $-   $1,346   $654   $-   $3,878 
Specific allowance on impaired loans   10    -    -    -    -    10 
                               
Three months ended September 30, 2019                              
Average recorded investment in impaired loans  $2,283   $1,369   $1,634   $124   $-   $5,410 
Interest recognized   -    -    -    -    -    - 
                               
Nine months ended September 30, 2019                              
Average recorded investment in impaired loans   3,330    782    1,779    494    -    6,385 
Interest recognized   34    -    20    1    -    55 
                               
Three months ended September 30, 2018                              
Average recorded investment in impaired loans   1,387    -    1,829    192    -    3,408 
Interest recognized   5    -    41    -    -    46 
                               
Nine months ended September 30, 2018                              
Average recorded investment in impaired loans   1,261    -    1,508    300    -    3,069 
Interest recognized   5    -    47    -    -    52 

 

Impaired loans on accrual are loans that have been restructured and are performing under modified loan agreements, and principal and interest is determined to be collectible. Nonaccrual loans are loans where principal and interest have been determined to not be fully collectible.

 

16

 

 

The following table presents nonaccrual loans at the dates indicated:

 

   September 30,   December 31, 
   2019   2018 
Commercial and industrial  $2,317   $1,878 
Construction and land   2,737    - 
Commercial real estate   1,435    596 
Residential   119    654 
Consumer   -    - 
Total  $6,608   $3,128 

 

The balance of nonaccrual loans guaranteed by a government agency, which reduce the Company’s credit exposure, was $3.0 million and $2.3 million as of September 30, 2019 and December 31, 2018, respectively. Interest foregone on nonaccrual loans was approximately $66,500 and $155,010 for the three and nine months ended September 30, 2019 compared to $18,000 and $28,290 for the three and nine months ended September 30, 2018, respectively. At September 30, 2019, there were no residential loans in the process of foreclosure.

 

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt. At September 30, 2019, the TDR portfolio totaled $1.3 million, compared to $1.4 million at December 31, 2018. At September 30, 2019, $757,000 of TDR loans were performing in accordance with their modified terms. At September 30, 2019, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in TDRs. All TDRs are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses. As of September 30, 2019 and December 31, 2018, TDR loans had a related allowance of $10,000. No loans accounted for as TDRs were charged-off to the allowance for loan losses for either the three or nine months ended September 30, 2019 and 2018. There were no TDRs for which there was a payment default within the first 12 months of the modification during the nine months ended September 30, 2019.

 

17

 

 

The following tables present TDR loans by class, added during the periods indicated:

 

Three months ended September 30, 2019   Number of
loans
    Rate
modification
    Term
modification
    Interest only
modification
    Combined
modification
    Total 
Commercial and industrial   -   $-   $-   $-   $-   $- 
Construction and land   -    -    -    -    -    - 
Commercial real estate   -    -    -    -    -    - 
Residential   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
Total   -   $-   $-   $-   $-   $- 

 

Nine months ended September 30, 2019   Number of
loans
    Rate
modification
    Term
modification
    Interest only
modification
    Combined
modification
    Total 
Commercial and industrial   2   $-   $176   $-   $321   $497 
Construction and land   -    -    -    -    -    - 
Commercial real estate   -    -    -    -    -    - 
Residential   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
Total   2   $-   $176   $-   $321   $497 

 

Three months ended September 30, 2019   Number of
loans
    Rate
modification
    Term
modification
    Interest only
modification
    Combined
modification
    Total 
Commercial and industrial   -   $-   $-   $-   $-   $- 
Construction and land   -    -    -    -    -    - 
Commercial real estate   -    -    -    -    -    - 
Residential   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
Total   -   $-   $-   $-   $-   $- 

 

Nine months ended September 30, 2019   Number of
loans
    Rate
modification
    Term
modification
    Interest only
modification
    Combined
modification
    Total 
Commercial and industrial   1   $-   $-   $-   $11   $11 
Construction and land   -    -    -    -    -    - 
Commercial real estate   1    -    -    -    776    776 
Residential   1    -    129    -    -    129 
Consumer   -    -    -    -    -    - 
Total   3   $-   $129   $-   $787   $916 

 

Risk Rating System

 

The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of each loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics.

 

The Company’s Pass loans includes loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk.

 

Loans that are assigned higher risk grades are loans that exhibit the following characteristics:

 

Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating to either improve or to be downgraded.

 

18

 

 

Loans in this category would be characterized by any of the following situations:

 

·Credit that is currently protected but is potentially a weak asset;
·Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and
·Adverse financial trends.

 

Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard.

 

Some characteristics of Substandard loans are:

 

·Inability to service debt from ordinary and recurring cash flow;
·Chronic delinquency;
·Reliance upon alternative sources of repayment;
·Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt;
·Repayment dependent upon the liquidation of collateral;
·Inability to perform as agreed, but adequately protected by collateral;
·Necessity to renegotiate payments to a non-standard level to ensure performance; and
·The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

 

Doubtful loans have all the weaknesses inherent in one risk rated as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit.

 

Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for loan losses.

 

19

 

 

The following tables present the internally assigned risk grade by class of loans at the dates indicated:

 

       Special             
September 30, 2019  Pass   mention   Substandard   Doubtful   Total 
Commercial and industrial  $157,403   $1,135   $1,635   $-   $160,173 
Construction and land   21,749    97    2,777    -    24,623 
Commercial real estate   891,902    16,378    4,342    -    912,622 
Residential   132,128    786    552    -    133,466 
Consumer   1,366    -    9        -    1,375 
Total  $1,204,548   $18,396   $9,315   $-   $1,232,259 

 

       Special             
December 31, 2018  Pass   mention   Substandard   Doubtful   Total 
Commercial and industrial  $119,926   $1,302   $627   $-   $121,855 
Construction and land   44,490    -    2,812    -    47,302 
Commercial real estate   686,154    12,120    3,709    -    701,983 
Residential   101,908    147    653    -    102,708 
Consumer   1,847    -    -    -    1,847 
Total  $954,325   $13,569   $7,801   $     -   $975,695 

 

The following tables provide an aging of the Company’s loans receivable as of the dates indicated:

 

                               Recorded 
           90 Days                   investment > 
   30-59 Days   60-89 Days   or more   Total           Total loans   90 days and 
September 30, 2019  past due   past due   past due   past due   Current   PCI loans   receivable   accruing 
Commercial and industrial  $10   $-   $1,861   $1,871   $157,781   $521   $160,173   $- 
Construction and land   -    115    2,834    2,949    21,482    192    24,623    97 
Commercial real estate   2,513    627    1,517    4,657    895,635    12,330    912,622    167 
Residential   126    -    -    126    131,699    1,641    133,466      
Consumer   3    -    -    3    1,372    -    1,375    - 
Total  $2,652   $742   $6,212   $9,606   $1,207,969   $14,684   $1,232,259   $264 

 

                               Recorded 
           90 Days                   investment > 
   30-59 Days   60-89 Days   or more   Total           Total loans   90 days and 
December 31, 2018  past due   past due   past due   past due   Current   PCI loans   receivable   accruing 
Commercial and industrial  $270   $349   $1,861   $2,480   $119,373   $2   $121,855   $- 
Construction and land   -    -    -    -    47,069    233    47,302    - 
Commercial real estate   2,345    356    501    3,202    688,005    10,776    701,983    - 
Residential   93    -    57    150    100,765    1,793    102,708    - 
Consumer   -    4    -    4    1,843    -    1,847        - 
Total  $2,708   $709   $2,419   $5,836   $957,055   $12,804   $975,695   $- 

 

Purchase Credit Impaired Loans

 

As part of acquisitions, the Company has purchased loans, some of which have shown evidence of credit deterioration since origination and it is probable at the acquisition that all contractually requirement payments would not be collected.

 

20

 

 

The unpaid principal balance and carrying value of the Company’s PCI loans at the dates indicated are as follows:

 

   September 30, 2019   December 31, 2018 
   Unpaid       Unpaid     
   principal   Carrying   principal   Carrying 
   balance   value   balance   value 
Commercial and industrial  $1,193   $521   $125   $2 
Construction and land   279    192    335    233 
Commercial real estate   14,562    12,330    12,605    10,776 
Residential   2,227    1,641    2,381    1,793 
Consumer   -    -    -    - 
Total  $18,261   $14,684   $15,446   $12,804 

 

The following table summarized the accretable yield on the purchased credit impaired loans for the periods indicated:

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Balance at beginning of period  $557   $353   $256   $372 
Additions   190    -    540    - 
Accretion   (15)   (78)   (61)   (97)
Payoffs   (346)   -    (349)   - 
Balance at end of period  $386   $275   $386   $275 

 

21

 

 

NOTE 6 – ALLOWANCE FOR LOAN LOSSES

 

The following tables summarize the Company’s allowance for loan losses individually and collectively evaluated for impairment by loan product as of or for the periods ending as indicated:

 

   Commercial   Construction   Commercial                 
   and industrial   and land   real estate   Residential   Consumer   Unallocated   Total 
Three months ended September 30, 2019                                   
Allowance for loan losses                                   
Beginning balance  $1,250   $266   $3,853   $225   $2   $284   $5,880 
Charge-offs   -    -    -    (1)   -    -    (1)
Recoveries   2    -    -    -    -    -    2 
Provision (benefit) for loan losses   46    (59)   147    137    115    93    479 
Ending balance  $1,298   $207   $4,000   $361   $117   $377   $6,360 
                                    
Nine months ended September 30, 2019                                   
Allowance for loan losses                                   
Beginning balance  $1,017   $327   $3,214   $215   $3   $364   $5,140 
Charge-offs   -    -    (17)   (1)   (4)   -    (22)
Recoveries   41    -    -    -    -    -    41 
Provision (benefit) for loan losses   240    (120)   803    147    118    13    1,201 
Ending balance  $1,298   $207   $4,000   $361   $117   $377   $6,360 
                                    
September 30, 2019                                   
Allowance for loan losses related to:                                   
Loans individually evaluated for impairment  $28   $-   $-   $-   $-   $-   $28 
Loans collectively evaluated for impairment   1,270    207    4,000    361    117    377    6,332 
PCI loans   -    -    -    -    -    -    - 
                                    
Three months ended September 30, 2018                                   
Allowance for loan losses                                   
Beginning balance  $1,005   $251   $2,782   $160   $-   $402   $4,600 
Charge-offs   (186)   -    -    -    -    -    (186)
Recoveries   5    -    -    -    -    -    5 
Provision for loan losses   672    25    245    41    2    96    1,081 
Ending balance  $1,496   $276   $3,027   $201   $2   $498   $5,500 
                                    
Nine months ended September 30, 2018                                   
Allowance for loan losses                                   
Beginning balance  $841   $199   $2,695   $150   $3   $327   $4,215 
Charge-offs   (437)   -    -    -    -    -    (437)
Recoveries   144    -    -    -    -    -    144 
Provision (benefit) for loan losses   948    77    332    51    (1)   171    1,578 
Ending balance  $1,496   $276   $3,027   $201   $2   $498   $5,500 
                                    
September 30, 2018                                   
Allowance for loan losses related to:                                   
Loans individually evaluated for impairment  $685   $-   $-   $-   $-   $-   $685 
Loans collectively evaluated for impairment   811    276    3,027    201    2    498    4,815 
PCI loans   -    -    -    -    -    -    - 

 

22

 

 

NOTE 7 – PREMISES AND EQUIPMENT

 

Premises and equipment consisted of the following at the dates indicated:

 

   September 30,   December 31, 
   2019   2018 
Premises owned  $4,622   $10,267 
Write-down on premises owned   -    (600)
Premises owned, net   4,622    9,667 
Leasehold improvements   2,295    1,654 
Furniture, fixtures and equipment   4,230    3,835 
Less accumulated depreciation and amortization   (4,445)   (3,988)
Total premises and equipment, net  $6,702   $11,168 

 

 

Depreciation and amortization included in occupancy and equipment expense for the three months and nine months ended September 30, 2019 was $297,000 and $859,000 compared to $227,000 and $693,000 for the three and nine months ended September 30, 2018, respectively.

 

On March 29, 2019, the Company sold a commercial building in Oakland, California with a carrying value of $4.6 million. In connection with the sale, the Company leased back 4,021 square feet, representing 11.1% of the total square footage. The sale resulted in a $78,000 gain, included in noninterest income.

 

The Company leases 19 branches and administration offices under noncancelable operating leases. These leases expire on various dates through 2025. All leases have an option to renew one or more times following the expiration of the initial term with renewal periods between three and twelve years. The Company adopted the requirements of Topic 842 effective January 1, 2019, which required the Company record a right of use lease asset and a lease liability for leases with an initial term of more than 12 months for leases that existed as of January 1, 2019. The periods prior to the date of adoption are accounted for under Lease Topic 840; therefore, the following disclosures of future minimum lease payments as of September 30, 2019, include only the periods for which Topic 842 was effective:

 

Year ending December 31,     
2019  $732 
2020   2,804 
2021   2,482 
2022   1,853 
2023   1,352 
Thereafter   1,966 
Total lease payments   11,189 
Less: interest   (802)
Present value of lease liabilities  $10,387 

 

The following table presents the weighted average operating lease term and discount rate at the date indicated:

 

   September 30, 2019 
Weighted-average remaining lease term   4.92 years 
Weighted-average discount rate   2.88%

 

23

 

 

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

Changes in the Company’s goodwill for the periods indicated are as follows:

 

   September 30, 2019   December 31, 2018 
Balance at beginning of period  $14,594   $10,365 
Acquired goodwill   11,855    4,229 
Impairment   -    - 
Balance at end of period  $26,449   $14,594 

 

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. As of September 30, 2019, the Company had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the Company exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that its fair value exceeded its carrying value, resulting in no impairment.

 

Core Deposit Intangible

 

Changes in the Company’s core deposit intangible for the periods indicated were as follows:

 

   September 30, 2019   December 31, 2018 
Balance at beginning of period  $7,205   $4,772 
Additions   566    3,604 
Amortization   (1,177)   (1,171)
Balance at end of period  $6,594   $7,205 

 

The Company recorded total core deposit intangible amortization expense of $396,000 and $1.2 million for the three and nine months ended September 30, 2019 compared to $290,000 and $868,000 for the three and nine months ended September 30, 2018, respectively.

 

Estimated core deposit intangible amortization at September 30, 2019 is as follows:

 

Year ending December 31,     
2019  $397 
2020   1,441 
2021   1,414 
2022   1,414 
2023   635 
Thereafter   1,293 
Total  $6,594 

 

24

 

 

NOTE 9 – INTEREST RECEIVABLE AND OTHER ASSETS

 

The Company’s interest receivable and other assets at the dates indicated consisted of the following:

 

   September 30,   December 31, 
   2019   2018 
Deferred tax assets, net  $6,285   $5,891 
Accrued interest receivable   4,318    3,676 
Investment in SBIC Fund   2,244    1,347 
Prepaid assets   2,345    2,156 
Servicing asset   2,197    814 
Low income housing partnership, net   786    607 
Investment in statutory trusts   475    395 
Miscellaneous other assets   801    2,495 
Total  $19,451   $17,381 

 

NOTE 10 – DEPOSITS

 

The Company’s deposits consisted of the following at the dates indicated:

 

   September 30,   December 31, 
   2019   2018 
Demand deposits  $523,505   $398,045 
NOW accounts and savings   254,835    246,288 
Money market   398,442    398,081 
Time deposits - $250,000 or less   179,711    117,653 
Time deposits - more than $250,000   141,701    97,701 
Total  $1,498,194   $1,257,768 

 

NOTE 11 – INTEREST PAYABLE AND OTHER LIABILITIES

 

The Company’s interest payable and other liabilities at the dates indicated consisted of the following:

 

   September 30,   December 31, 
   2019   2018 
Accrued expenses  $5,356   $5,508 
Deferred rents   -    528 
CDARs deferred fees   353    494 
Accounts payable   1,350    811 
Reserve for unfunded commitments   375    330 
Accrued interest payable   1,556    198 
Miscellaneous other liabilities   482    506 
Total