# BayCom Corp: Form 10-Q for the period ended Jun 30, 2018

- Company: [BayCom Corp](/companies/bcml.md) (CIK 1730984)
- Form: 10-Q
- Filed: 2018-08-14
- Accepted by EDGAR: Aug 14, 2018, 17:30 ET
- Period: 2018-06-30
- Accession: 0001144204-18-044770
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1730984/000114420418044770/tv500131_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1730984/000114420418044770/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $1.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $2.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $4.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $8.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.45 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.99 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 9,467,431 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 8,495,230 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $3.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2018-06-30 | $318.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-06-30 | $1.35bn | us-gaap:Assets |
| Total liabilities | at 2018-06-30 | $1.15bn | us-gaap:Liabilities |
| Shareholders' equity | at 2018-06-30 | $193.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 71,508 characters.

### Executive Overview

BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 17 full service branches located in Northern and Central California, Seattle, Washington and Albuquerque, New Mexico.

Since 2010, we have completed a series of five acquisitions with aggregate total assets of approximately $892.2 million and total deposits of approximately $768.6 million. We have sought to integrate the banks we acquire into our existing operational platform and enhance shareholder value through the creation of efficiencies within the combined operations. In April 2017, we completed our largest acquisition to date when we acquired United Business Bank, FSB headquartered in Oakland, California, which increased our deposits by approximately $428.0 million, consisting primarily of lower cost stable core deposits from a strong network of relationships with labor unions. At the time of acquisition, United Business Bank, FSB had total assets of approximately $473.1 million, which significantly increased our total asset size and provided us with nine full-service banking offices in Albuquerque, New Mexico; Long Beach, Oakland, Sacramento, San Francisco, San Jose and Glendale, California; and Seattle, Washington. We integrated the United Business Bank, FSB’s branches and recognized the opportunity to consolidate two branches, one of which was completed in January 2017 and the other was completed in April 2018. In addition, in November 2017 we acquired Plaza Bank, with one branch located in Seattle, Washington. At the time of the acquisition, Plaza Bank had total assets of approximately $75.8 million and deposits of $54.2 million.

Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase our current market share. We believe our geographic footprint, which includes the San Francisco Bay area and the metropolitan markets of Los Angeles and Seattle and other community markets including Albuquerque, New Mexico, provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth.

The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for loan losses. The provision for loan losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio as well as prevailing economic and market conditions. Our net income is also affected by non-interest income and non-interest expenses. Non interest income and non interest expenses are impacted by the growth of our banking operations and growth in the number of loan and deposit accounts both organically and through strategic acquisitions.

Set forth below is a discussion of the primary factors we use to evaluate and manage our results of operations:

***Net interest income.*** Net interest income represents interest income less interest expense. We generate interest income from interest and fees received on interest-earning assets, including loans and investment securities and dividends on Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) stock we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest-earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest margin; and (iv) the regulatory risk weighting associated with the assets. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

***Noninterest income.*** Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) other noninterest income. Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of U.S. Small Business Administration (“SBA”) loans, capitalized loan servicing rights and other related income.

***Noninterest expense.*** Noninterest expense includes, among other things: (i) salaries and related benefits; (ii) occupancy and equipment expense; (iii) data processing; (iv) Federal Deposit Insurance Corporation (“FDIC”) and state assessments; (v) outside and professional services; (vi) amortization of intangibles; and (vii) other general and administrative expenses. Salaries and related benefits include compensation, employee benefits and employment tax expenses for our personnel. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Data processing expense includes data fees paid to our third-party data processing system provider and other data service providers. FDIC and state assessments expense represents the assessments that we pay to the FDIC for deposit insurance and other regulatory costs to various states. Outside and professional fees include legal, accounting, consulting and other outsourcing arrangements. Amortization of intangibles represents the amortization of our core deposit intangible from various acquisitions. Other general and administrative expenses include expenses associated with travel, meals, training, supplies and postage. Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased significantly over the past few years as we have grown through acquisitions and organically, and as we have built out our operational infrastructure.

### Critical Accounting Policies and Estimates

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex, or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers.

The following represent our critical accounting policies:

***Allowance for loan losses.*** The allowance for loan losses is evaluated on a regular basis by management. Periodically, we charge current earnings with provisions for estimated probable losses of loans receivable. The provision or adjustment takes into consideration the adequacy of the total allowance for loan losses giving due consideration to specifically identified problem loans, the financial condition of the borrowers, fair value of the underlying collateral, recourse provisions, prevailing economic conditions, and other factors. Additional consideration is given to our historical loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography. This evaluation is inherently subjective and requires estimates that are susceptible to significant change as additional or new information becomes available. In addition, regulatory examiners may require additional allowances based on their judgments of the information regarding problem loans and credit risk available to them at the time of their examinations.

Generally, the allowance for loan loss consists of various components including a component for specifically identified weaknesses as a result of individual loans being impaired, a component for general non-specific weakness related to historical experience, economic conditions and other factors that indicate probable loss in the loan portfolio, and an unallocated component that relates to the inherent imprecision in the use of estimates. Loans determined to be impaired are individually evaluated by management for specific risk of loss.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. We measure any loss on the TDR in accordance with the guidance concerning impaired loans set forth above. Additionally, TDRs are generally placed on non-accrual 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.

***Estimated expected cash flows related to purchased credit impaired loans.*** Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In situations where such PCI loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation.

The cash flows expected over the life of the PCI loan or pool are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to default rates, loss severity and prepayment speeds are utilized to calculate the expected cash flows.

Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amounts of the future cash flows of the pool are reasonably estimable. Subsequent to the acquisition date, any increases in cash flow over those expected at purchase date in excess of fair value are recorded as interest income prospectively. Any subsequent decreases in cash flow over those expected at purchase date are recognized by recording an allowance for loan losses. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the loan pool at the carrying amount.

***Business combinations.*** We apply the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company’s common stock in a business combination.

***Loan sales and servicing of financial assets.*** Periodically, we sell loans and retain the servicing rights. The gain or loss on sale of loans depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. All servicing assets and liabilities are initially measured at fair value. In addition, we amortize servicing rights in proportion to and over the period of the estimated net servicing income or loss and assess the rights for impairment. The servicing rights are initially measured at fair value and amortized in proportion to and over the period of the estimated net servicing income assuming prepayments.

***Income taxes.*** Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carry forwards depends on having sufficient taxable income of an appropriate character within the carry forward periods.

We recognize that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

***Goodwill.*** Our goodwill resulted from our acquisitions of United Business Bank, FSB and Plaza Bank. Goodwill is reviewed for impairment annually and more often if an event occurs or circumstances change that might indicate the recorded value of the goodwill is more than its implied value. Such indicators may include, among others: a significant adverse change in legal factors or in the general business climate; significant decline in the Company’s stock price and market capitalization; unanticipated competition; and an adverse action or assessment by a regulator. Any adverse changes in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial condition and results of operations.

The testing for impairment may begin with an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting unit’s fair value as well as positive and mitigating events. When required, the goodwill impairment test involves a two-step process. The first test for goodwill impairment is done by comparing the reporting unit’s aggregate fair value to its carrying value. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit). Absent other indicators of impairment, if the aggregate fair value exceeds the carrying value, goodwill is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value, a second test would be performed to measure the amount of impairment loss, if any. To measure any impairment loss the implied fair value would be determined in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill an impairment charge would be recorded for the difference. As of June 30, 2018, the Company completed its qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of the Bank, the reporting unit, exceeds the carrying value. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results.

Even though the Company determined that there was no goodwill impairment, a decline in the value of its stock price as well as values of other financial institutions, declines in revenue for the Company beyond our current forecasts, significant adverse changes in the operating environment for the financial industry or an increase in the value of our assets without an increase in the value of the reporting unit may result in a future impairment charge.

It is possible that changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management's judgments, assumptions and estimates made in assessing the fair value of our goodwill, could result in an impairment charge of a portion or all of our goodwill. If the Company recorded an impairment charge, its financial position and results of operations would be adversely affected; however, such an impairment charge would have no impact on our liquidity, operations or regulatory capital. For more information, see Note 8 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

### Comparison of Financial Condition at June 30, 2018 and December 31, 2017

***Total assets.*** Total assets increased to $1.35 billion at June 30, 2018 compared to $1.25 billion at December 31, 2017. The increase was the result of the Plaza Bank merger in 2017 and organic growth.

***Cash and cash equivalents.*** Cash and cash equivalents increased $68.4 million, or 27.4%, to $318.3 million at June 30, 2018 from $249.9 million at December 31, 2017. The increase was primarily due to cash received from the Company’s initial public offering, (“IPO”) in May 2018. We intend to invest our excess cash in marketable securities until such funds are needed to support loan growth or other operating or strategic initiatives.

***Securities available-for-sale.*** Investment securities available-for-sale increased $13.9 million, or 34.4%, to $54.4 million at June 30, 2018 from $40.5 million at December 31, 2017. The increase was primarily due to the purchases of new securities as we started to deploy excess cash earning a nominal yield into higher yielding investment securities. At June 30, 2018, all of our investment securities were classified as available-for-sale.

***Loans receivable, net.*** We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Loans receivable, net of allowance for loan losses, increased $21.8 million, or 2.5%, to $908.5 million at June 30, 2018 from $886.9 million at December 31, 2017. Loan originations for six months ended June 30, 2018 totaled $71.5 million compared to $77.7 million during the six months ended December 31, 2017. We also sold $16.7 million of the guaranteed portion of SBA loans during the six months ended June 30, 2018.

The following table provides information about our loan portfolio by type of loan at the dates presented.

*(Dollars in thousands)*

|  | June 30, 2018 | December, 31 2017 | June 30, 2017 | Percentage Change Prior Year End | Prior Year |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $115,214 | $113,801 | $104,760 | 1.24% | 9.98% |
| Real estate: |  |  |  |  |  |
| Residential | 82,100 | 83,486 | 89,007 | -1.66% | -7.76% |
| Multifamily residential | 111,299 | 113,759 | 114,745 | -2.16% | -3.00% |
| Owner occupied CRE | 256,253 | 250,436 | 231,811 | 2.32% | 10.54% |
| Non-owner occupied CRE | 301,998 | 291,935 | 280,440 | 3.45% | 7.69% |
| Construction and land | 33,388 | 22,720 | 22,476 | 46.95% | 48.55% |
| Total real estate | 785,038 | 762,336 | 738,479 | 2.98% | 6.30% |
| Consumer | 635 | 1,096 | 1,362 | -42.06% | -53.37% |
| PCI loans | 12,599 | 14,315 | 14,373 | -11.99% | -12.34% |
| Total loans | 913,486 | 891,548 | 858,974 | 2.46% | 6.35% |
| Deferred loan fees and costs, net | (423) | (469) | (258) | -9.81% | 63.95% |
| Allowance for loan losses | (4,600) | (4,215) | (4,075) | 9.13% | 12.88% |
| Loans receivable, net | $908,463 | $886,864 | $854,641 | 2.44% | 6.30% |

The following table shows at June 30, 2018, the geographic distribution of our loan portfolio in dollar amounts and percentages.

*(Dollars in thousands)*

|  | San Francisco Bay Region(1) Amount | % of Total in Category | Other California Amount | % of Total in Category | Total in State of California Amount | % of Total in Category | All Other States(2) Amount | % of Total in Category | Total Amount | % of Total in Category |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $114,079 | 17.5% | $698 | 0.6% | $114,777 | 14.8% | $439 | 0.3% | $115,216 | 12.6% |
| Real estate: |  |  |  |  |  |  |  |  |  |  |
| Residential | $62,407 | 9.6% | $6,579 | 5.4% | $68,986 | 8.9% | $14,505 | 10.4% | $83,491 | 9.1% |
| Multifamily residential | 79,144 | 12.1% | 14,248 | 11.7% | 93,392 | 12.1% | 22,193 | 15.9% | 115,585 | 12.7% |
| Owner occupied CRE | 173,798 | 26.7% | 49,618 | 40.7% | 223,416 | 28.9% | 36,722 | 26.2% | 260,138 | 28.5% |
| Non-owner occupied | 196,430 | 30.1% | 45,717 | 37.5% | 242,147 | 31.3% | 62,886 | 44.9% | 305,033 | 33.4% |
| Construction and land | 25,071 | 3.8% | 5,086 | 4.2% | 30,157 | 3.9% | 3,231 | 2.3% | 33,388 | 3.7% |
| Total real estate | $536,850 |  | $121,248 |  | $658,098 |  | $139,537 |  | $797,635 |  |
| Consumer | 614 | 0.1% | - | 0.0% | 614 | 0.1% | 21 | 0.0% | 635 | 0.1% |
| Total loans | $651,543 |  | $121,945 |  | $773,490 |  | $139,997 |  | $913,486 |  |

(1) Includes Alameda, Contra Costa, Solano, Napa, Sonoma, Marin, San Francisco, San Joaquin, San Mateo and Santa Clara counties.

(2) Includes loans located in the states of New Mexico, Washington and other states. At June 30, 2018, loans in New Mexico, Washington and other states totaled $140.0 million.

***Nonperforming assets and nonaccrual loans.*** Nonperforming assets comprised entirely of nonaccrual loans at June 30, 2018, increased $753,000, or 420.7%, to $932,000. The Company had nonaccrual loans totaling $456,000 and zero guaranteed by governmental agencies at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, accruing loans past due 30 to 89 days totaled $3.0 million, compared to $1.9 million at December 31, 2017.

In general, loans are placed on non-accrual status after being contractually delinquent for more than 90 days, or earlier if management believes full collection of future principal and interest on a timely basis is unlikely. When a loan is placed on non-accrual status, all interest accrued but not received is charged against interest income. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Generally, loans with temporarily impaired values and loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are categorized as performing non-accrual loans and are reflected in non-performing assets. Interest received on such loans is recognized as interest income when received. A non-accrual loan is restored to an accrual basis when principal and interest payments are paid current and full payment of principal and interest is probable. Loans that are well secured and in the process of collection remain on accrual status.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.

- Pass rated loans (typically performing loans) are accounted for in accordance with ASC Topic 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.
- Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if they display at least some level of credit deterioration since origination.
- Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC Topic 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.

In accordance with ASC Topic 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows.

***Troubled debt restructured loans.*** Troubled debt restructurings, also referred to as “TDRs” herein, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. At December 31, 2017, we had four TDR loans totaling $1.0 million, three of which totaling $967,000 were performing according to their restructured terms. The performing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. TDR loans as of June 30, 2018 totaled $916,000, of which $140,000 was non-performing. PCI loans included in TDR loans totaled $776,000 and $794,000 as of June 30, 2018 and December 31, 2017, respectively. There was $11,000 related allowance for loan losses on the TDR loans at June 30, 2018 and $13,000 December 31, 2017.

The following table sets forth the non-performing loans, non-performing assets and troubled debt restructured loans as of the dates indicated:

*(Dollars in thousands)*

| Loans accounted for on a non-accrual basis: | June 30, 2018 | December 31, 2017 | June 30, 2017 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $702 | $13 | $268 |
| Real estate: |  |  |  |
| Residential | 129 | - | - |
| Multifamily residential | - | - | - |
| Owner occupied CRE | 17 | 78 | 100 |
| Non-owner occupied CRE | 84 | 88 | - |
| Construction and land | - | - | - |
| Total real estate | 230 | 166 | 100 |
| Consumer | - | - | - |
| Total nonaccrual loans | 932 | 179 | 368 |
| More than 90 days past due and still accruing | - | - | - |
| Total of nonaccrual and 90 days past due loans | 932 | 179 | 368 |
| Real estate owned | - | - | 275 |
| Total nonperforming assets(1) | 932 | 179 | 643 |
| Troubled debt restructurings – performing | 776 | 1,045 | 163 |
| PCI loans | $12,599 | $14,315 | $14,373 |
| Nonperforming assets to total assets(1) | 0.07% | 0.01% | 0.06% |
| Nonperforming loans to total loans(1) | 0.10% | 0.02% | 0.07% |

(1) Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate this ratio.

Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above. At June 30, 2018 and December 31, 2017, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

***Potential problem loans.*** Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which we are monitoring because the financial information of the borrower causes us concerns as to their ability to comply with their loan repayment terms. No loans which are past due 90 days or more are still accruing interest at June 30, 2018.

***Allowance for loan losses.*** We establish an allowance for loan losses by charging amounts to the loan provision at a level required to reflect estimated credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers, among other factors, historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions and current risk factors specifically related to each loan type. See “— Critical Accounting Policies and Estimates Allowance for loan loss” for a description of the manner in which the provision for loan losses is established.

In accordance with acquisition accounting, loans acquired from the United Business Bank, FSB, and Plaza Bank mergers were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions of United Business Bank, FSB, and Plaza Bank. The remaining net discount of all acquired loans was $7.1 million and $8.7 million at June 30, 2018 and December 31, 2017, respectively.

Based on the Company’s established comprehensive methodology discussed above, the allowance for loan losses was $4.6 million at June 30, 2018, 0.50% of loans receivable, net and 493.56% of nonperforming loans. This compares to an allowance for loan losses at December 31, 2017 of $4.2 million, or 0.47% of loans receivable, net and 2,354.75% of nonperforming loans.

The following table presents an analysis of changes in the allowance for loan losses for the six months ended June 30, 2018 and 2017 and the year ended December 31, 2017:

*(Dollars in thousands)*

|  | June 30, 2018 | December 31, 2017 | June 30, 2017 |
| --- | ---: | ---: | ---: |
| Allowance at beginning of period | $4,215 | $3,775 | $3,775 |
| Provisions for loan losses | 497 | 462 | 287 |
| Recoveries: |  |  |  |
| Commercial and industrial | 139 | 45 | 16 |
| Residential | - | - | - |
| Owner occupied CRE | - | - | - |
| Non-owner occupied CRE | - | - | - |
| Consumer | - | - | - |
| Total recoveries | 139 | 45 | 16 |
| Charge-offs: |  |  |  |
| Commercial and industrial | (251) | (63) | - |
| Residential | - | - | - |
| Owner occupied CRE | - | - | (3) |
| Non-owner occupied CRE | - | (3) | - |
| Consumer | - | (1) | - |
| Total charge-offs | (251) | (67) | (3) |
| Net charge-offs (recoveries) | (112) | (22) | 13 |
| Balance at end of period | $4,600 | $4,215 | $4,075 |
| Ratios: |  |  |  |
| Allowance for loan losses as a percentage of total loans | 0.50% | 0.47% | 0.47% |
| Allowance for loan losses to total loans excluding PCI loans | 0.51% | 0.48% | 0.48% |
| Allowance for loan losses excluding acquired loans (loans not covered by the allowance) | 0.84% | 0.85% | 0.85% |
| Allowance for loan losses as a percentage of total nonperforming loans | 493.56% | 2352.78% | 633.75% |
| Net (recoveries) charge-offs as a percentage of average loans outstanding for the period | (0.01)% | 0.00% | 0.00% |
| Total loans | $913,486 | $891,548 | $858,973 |
| PCI Loans | 12,599 | 14,315 | 14,373 |

As of June 30, 2018, we identified $1.7 million in impaired loans, inclusive of $932,000 of nonperforming loans and $776,000 of performing TDR loans. Of these impaired loans, only $11,000 had allowances for loan losses as their estimated collateral value or discounted expected cash flow is equal to or exceeds their carrying costs. As of December 31, 2017, we identified $1.1 million in impaired loans, inclusive of $179,000 of nonperforming loans and $954,000 of performing TDR loans. Of these impaired loans, only $13,000 had allowances for loan losses as their estimated collateral value or discounted expected cash flow is equal to or exceeds their carrying costs.

Management considers the allowance for loan losses at June 30, 2018 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

***Deposits.*** Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest-bearing and non-interest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits. Total deposits increased $34.0 million, or 3.1%, to $1.14 billion at June 30, 2018 from $1.10 billion at December 31, 2017, primarily due to normal fluctuations within our deposit portfolio. Non-interest bearing deposits represented 30.4% of total deposits at June 30, 2018 compared to 29.6% at December 31, 2017.

The following table sets forth the dollar amount of deposits in the various types of deposit programs offer at the dates indicated.

*(Dollars in thousands)*

|  | June 30, 2018 | December 31, 2017 | June 30, 2017 | Percentage Change Prior Year End | Prior Year |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non interest bearing | $346,009 | $327,309 | $311,522 | 5.7% | 11.1% |
| Interest bearing checking | 174,958 | 155,011 | 150,601 | 12.9% | 16.2% |
| Regular savings accounts | 36,823 | 36,539 | 38,494 | 0.8% | -4.3% |
| Money Market accounts | 359,798 | 356,640 | 334,642 | 0.9% | 7.5% |
| Interest bearing transactions and savings accounts | 571,579 | 548,190 | 523,737 | 4.3% | 9.1% |
| Interest bearing certificates | 220,580 | 228,806 | 196,522 | -3.6% | 12.2% |
| Total deposits | $1,138,168 | $1,104,305 | $1,031,781 | 3.1% | 10.3% |

***Borrowings.*** At June 30, 2018, borrowings totaled $5.4 million compared to $11.4 million at both December 31, 2017 and June 30, 2017. During the second quarter 2018 we repaid $6.0 million in long-term secured borrowings out of the net proceeds from our initial public offering. The $5.4 million of borrowings, net carrying value, at June 30, 2018, are related to junior subordinated debentures assumed in connection our acquisition of First ULB Corp. in April 2017. At June 30, 2018, we had no FHLB advances outstanding and the ability to borrow up to $387.6 million.

In addition to FHLB advances, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At June 30, 2018, we had a total of $55.0 million federal funds line available from four third-party financial institutions.

We are required to provide collateral for certain local agency deposits. As of June 30, 2018, the FHLB had issued a letter of credit on behalf of the Bank totaling $7.5 million as collateral for local agency deposits.

### Shareholders’ Equity

Total shareholders’ equity increased to $193.6 million at June 30, 2018 from $118.6 million at December 31, 2017, and $104.0 million at June 30, 2017. The increase in shareholders’ equity was primarily due to the issuance of common stock in our initial public offering for approximately $66.8 million, net of expenses and underwriting commissions and to a lesser extent, our net income during the six months ended June 30, 2018.

### Comparison of Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

***Earnings summary.*** We reported net income of $4.3 million for the three months ended June 30, 2018, compared to $1.5 million for the three months ended June 30, 2017, an increase of $2.8 million, or 185.5%. Net income for the six months ended June 30, 2018 was $8.4 million compared to net income of $2.9 million for the six months ended June 30, 2017, an increase of $5.4 million or 186.4%. The increase in net income primarily was the result of increases in net interest income and non-interest income partially offset by an increase in non-interest expense reflecting both our two whole-bank acquisitions in 2017 and organic growth.

Diluted earnings per share were $0.45 for the three months ended June 30, 2018, an increase of $0.22 from diluted earnings per share of $0.23 for the three months ended June 30, 2017. Diluted earnings per share were $0.99 for the six months ended June 30, 2018, an increase of $0.50 from diluted earnings per share of $0.49 for the six months ended June 30, 2017.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, improved to 58.21% for the six months ended June 30, 2018, compared to 70.43% for the six months ended June 30, 2017. The change in the efficiency ratio for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 is attributable primarily to the increase in net interest income and noninterest income, partially offset by an increase in noninterest expense due to merger related expenses of $2.3 million in 2017.

***Interest income.*** Interest income for the three months ended June 30, 2018 was $13.8 million, compared to $10.7 million for the three months ended June 30, 2017, an increase of $3.1 million, or 28.31%. The increase in net interest income was primarily due to an increase in average interest earning assets largely related to our two bank acquisitions in 2017, partially offset by a decrease in the accretion of purchase accounting adjustments on acquired loans. Average interest earning assets increased $323.7 million or 35.8% for the three months ended June 30, 2018 compared to the same period in 2017, largely due to our two bank acquisitions during 2017. Our average yield on loans for the second quarter of 2018 was 5.40% compared to 5.54% for the same quarter last year. Interest income on loans for the quarters ended June 30, 2018 and June 30, 2017 included $644,000 and $633,000, respectively, in accretion of purchase accounting fair value adjustments on acquired loans including the recognition of revenue from purchase credit impaired loans in excess of discounts. The remaining net discount on these purchased loans was $7.1 million and $9.3 million at June 30, 2018, and 2017, respectively.

Interest income for the six months ended June 30, 2018 was $27.3 million, compared to $18.1 million for the six months ended June 30, 2017, an increase of $9.2 million, or 50.8%. The average yield earned on loans for the six months ended June 30, 2018 was 5.48%, compared to 5.49% for the six months ended June 30, 2017. Interest income on loans for the six months ended June 30, 2018 included $1.8 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $1.1 million for the six months ended June 30, 2017.

Interest income on interest-earning deposits increased $969,000 as a result of a $144.1 million increase in the average balance of interest earning deposits and a 79 basis point increase in the yield on interest-earning deposits to 1.95 % for the three months ended June 30, 2018 from 1.16% for the three months ended June 30, 2017. Interest income on interest earning deposits increased $1.6 million as a result of a $132.6 million increase in the average balance of interest earning deposits and a 75 basis point increase in the yield on interest earning deposits to 1.78% for the six months ended June 30, 2018 from 1.03% for the six months ended June 30, 2017

Interest income on investment securities increased $81,000 as a result of a $11.1 million increase in the average balance of investment securities for the three months ended June 30, 2018 from the three months ended June 30, 2017. Interest income on investment securities increased $236,000 as a result of a $18.6 million increase in the average balance of investment securities for the six months ended June 30, 2018 from the six months ended June 30, 2017.

***Interest expense.*** Interest expense remained relatively unchanged for the three months ended June 30, 2018 and 2017, increasing by $79,000, or 7.27%, to $1.1 million at June 30, 2018. The average cost of interest bearing liabilities decreased 11 basis points to 0.59% for the three months ended June 30, 2018 from 0.69% for the three months ended June 30, 2017. Total average interest bearing liabilities increased by $149.9 million, or 23.9%, to $778.2 million for the three months ended June 30, 2018 from $629.6 million for the three months ended June 30, 2017. Interest expense increased by $298,000, or 14.97%, to $2.3 million for the six months ended June 30, 2018 from $2.0 million for the six months ended June 30, 2017. The average cost of interest bearing liabilities decreased 15 basis points to 0.59% for the six months ended June 30, 2018 from 0.74% for the six months ended June 30, 2017. Total average interest-bearing liabilities increased by $238.1 million, or 43.72%, to $782.7 million for the six months ended June 30, 2018 from $544.6 million for the six months ended June 30, 2017.

Interest expense on deposits increased $54,000, or 5.5%, to $1.0 million during the three months ended June 30, 2018 from $971,000 the same period in 2017. Interest expense on deposits increased $114,000, or 6.03%, to $2.0 million during the six months ended June 30, 2018 from $1.9 million the same period in 2017, primarily due to the deposits acquired in the United Business Bank, FSB and Plaza Bank acquisitions. The effects of the increase in the average deposit balance was largely offset by lower rates paid on interest bearing deposits, reflecting the still relatively low interest rate environment. The average rate paid on interest bearing deposits decreased to 0.52% for the six months ended June 30, 2018 from 0.70% for the six months ended June 30, 2017. Interest expense on borrowings was $285,000 for the six months ended June 30, 2018 compared to $101,000 for the same period in 2017, as a result of the Subordinated Debentures assumed and the $6.0 million term loan obtained in connection with our United Business Bank, FSB acquisition. The Company paid off the $6.0 million term loan during the three months ended June 30, 2018.

***Net interest income.*** Net interest income increased $3.0 million, or 30.7%, to $12.6 million for the three months ended June 30, 2018 compared to $9.6 million for the three months ended June 30, 2017. The Company’s net interest margin was 4.11% for the three months ended June 30, 2018 compared to 4.27% for the same quarter a year ago. The decrease in net interest margin during the second quarter of 2018 compared to the same quarter a year earlier is the result of a lower yield on loans and an increase in lower yielding cash and investments partially offset by a lower cost of funds. Net interest margin is enhanced by the amortization of acquisition accounting discounts on loans acquired in the acquisitions. Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 19 basis points and 26 basis points during the three months ended June 30, 2018 and 2017, respectively. The average yield on interest earning assets for the three months ended June 30, 2018 was 4.49%, a 26 basis point decrease from the three months ended June 30, 2017, due to the lower accretion on acquired loans. While the average cost of interest-bearing liabilities for the three months ended June 30, 2018 was 0.59%, down 10 basis points from the 0.69% cost of funds during the six months ended June 30, 2017, due primarily to the pay-off of borrowed funds.

Net interest income increased $8.9 million, or 55.1%, to $25.0 million for the six months ended June 30, 2018 compared to $16.1 million for the six months ended June 30, 2017. Net interest margin for the six months ended June 30, 2018 increased two basis points to 4.19% from 4.17% for the same period in 2017. Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 30 basis points and 24 basis points during the six months ended June 30, 2018 and 2017, respectively. The average yield on interest earning assets for the six months ended June 30, 2018 was 4.58%, a ten basis point decrease from the six months ended June 30, 2017, due to lower accretion on acquired loans. While the average cost of interest-bearing liabilities for the six months ended June 30, 2018 was 0.59%, down 15 basis points from the 0.74% cost of funds during the six months ended June 30, 2017, due primarily to the pay-off of borrowed funds.

***Average Balances, Interest and Average Yields/Cost.*** The following tables presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average yields; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis.

*(Dollars in thousands)*

| Interest earning assets | Three months ended June 30, 2018 Average Balance (1) | Interest | Annualized Average Yield | 2017 Average Balance | Interest | Annualized Average Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest earning deposits | $282,025 | $1,368 | 1.95% | $137,891 | $398 | 1.16% |
| Investments available-for-sale | 41,183 | 173 | 1.68% | 30,083 | 92 | 1.23% |
| FHLB Stock | 5,029 | 87 | 6.94% | 4,063 | 106 | 10.46% |
| FRB Stock | 3,353 | 50 | 5.98% | 1,426 | 23 | 6.47% |
| Total loans (1) | 897,315 | 12,073 | 5.40% | 731,759 | 10,098 | 5.54% |
| Total interest earning assets | 1,228,905 | 13,751 | 4.49% | 905,222 | 10,717 | 4.75% |
| Noninterest earning assets | 69,268 |  |  | 58,151 |  |  |
| Total average assets | $1,298,173 |  |  | $963,373 |  |  |
| Interest bearing liabilities |  |  |  |  |  |  |
| Savings accounts | $37,742 | 8 | 0.09% | $28,654 | 7 | 0.10% |
| Interest bearing checking | 165,059 | 35 | 0.09% | 102,749 | 28 | 0.11% |
| Money market accounts | 345,463 | 445 | 0.52% | 313,140 | 432 | 0.55% |
| Certificates of deposit | 221,978 | 537 | 0.97% | 175,750 | 505 | 1.15% |
| Total deposit accounts | 770,242 | 1,025 | 0.53% | 620,293 | 972 | 0.63% |
| Borrowed funds | 7,915 | 126 | 6.39% | 7,929 | 101 | 5.11% |
| Total interest bearing liabilities | 778,157 | 1,151 | 0.59% | 628,222 | 1,073 | 0.69% |
| Noninterest bearing liabilties | 354,913 |  |  | 238,545 |  |  |
| Total average liabilities | 1,133,070 |  |  | 866,767 |  |  |
| Average equity | 165,103 |  |  | 96,606 |  |  |
| Total average liabilities and equity | $1,298,173 |  |  | $963,373 |  |  |
| Net interest income |  | $12,600 |  |  | $9,644 |  |
| Interest rate spread (2) |  |  | 3.89% |  |  | 4.06% |
| Net interest margin (3) |  |  | 4.11% |  |  | 4.27% |
| Ratio of average interest earning assets to average interest bearing liabilities |  |  | 157.93% |  |  | 144.09% |

(1) Average balances are average daily balances

(2) Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

(3) Net interest margin is calculated as net interest income divided by total average earning assets.

*(Dollars in thousands)*

| Interest earning assets | For the six months ended June 30, 2018 Average Balance (1) | Interest | Annualized Average Yield | 2017 Average Balance | Interest | Annualized Average Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest earning deposits | $259,003 | $2,283 | 1.78% | $126,369 | $647 | 1.03% |
| Investments available-for-sale | 40,559 | 367 | 1.82% | 21,932 | 131 | 1.20% |
| FHLB Stock | 4,901 | 180 | 7.41% | 3,291 | 192 | 11.76% |
| FRB Stock | 3,181 | 119 | 7.54% | 1,419 | 45 | 6.40% |
| Total loans (1) | 895,588 | 24,354 | 5.48% | 627,797 | 17,104 | 5.49% |
| Total interest earning assets | 1,203,232 | 27,303 | 4.58% | 780,808 | 18,119 | 4.68% |
| Noninterest earning assets | 67,222 |  |  | 41,655 |  |  |
| Total average assets | $1,270,454 |  |  | $822,463 |  |  |
| Interest bearing liabilities |  |  |  |  |  |  |
| Savings accounts | $37,554 | 16 | 0.09% | $20,838 | 12 | 0.12% |
| Interest bearing checking | 162,828 | 68 | 0.08% | 72,191 | 49 | 0.14% |
| Money market accounts | 349,786 | 858 | 0.49% | 278,781 | 857 | 0.62% |
| Certificates of deposit | 222,899 | 1,062 | 0.96% | 168,809 | 972 | 1.16% |
| Total deposit accounts | 773,067 | 2,004 | 0.52% | 540,619 | 1,890 | 0.70% |
| Borrowed funds | 9,645 | 285 | 5.96% | 3,987 | 101 | 5.11% |
| Total interest bearing liabilities | 782,712 | 2,289 | 0.59% | 544,606 | 1,991 | 0.74% |
| Noninterest bearing liabilities | 344,399 |  |  | 190,039 |  |  |
| Total average liabilities | 1,127,111 |  |  | 734,645 |  |  |
| Average equity | 143,343 |  |  | 87,822 |  |  |
| Total average liabilities and equity | $1,270,454 |  |  | $822,467 |  |  |
| Net interest income |  | $25,014 |  |  | $16,128 |  |
| Interest rate spread (2) |  |  | 3.99% |  |  | 3.94% |
| Net interest margin (3) |  |  | 4.19% |  |  | 4.17% |
| Ratio of average interest earning assets to average interest bearing liabilities |  |  | 153.73% |  |  | 143.37% |

***Rate/Volume Analysis.*** Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.

The following table compares the three months and six months ended June 30, 2018 and 2017:

*(Dollars in thousands)*

| Interest earning assets: | Three months ended June 30, 2018 compared to 2017 Increase/(Decrease) Attributable to Rate | Volume | Total | Six months ended June 30, 2018 compared to 2017 Increase/(Decrease) Attributable to Rate | Volume | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest bearing deposits | $556 | $415 | $971 | $960 | $678 | $1,638 |
| Investments available-for-sale | 47 | 34 | 81 | 125 | 111 | 236 |
| Other equity securities | (48) | 56 | 8 | (88) | 150 | 62 |
| Total loans | (305) | 2,279 | 1,974 | (148) | 7,403 | 7,248 |
| Total interest income | 250 | 2,783 | 3,033 | 849 | 8,342 | 9,184 |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings accounts | (1) | 2 | 1 | (6) | 10 | 4 |
| Interest bearing checking | (10) | 17 | 7 | (43) | 62 | 19 |
| Money market accounts | (31) | 44 | 14 | (217) | 218 | 1 |
| Certificates of deposit | (100) | 132 | 32 | (221) | 312 | 90 |
| Total deposits | (142) | 195 | 54 | (487) | 602 | 114 |
| Borrowed funds | 25 | - | 25 | 35 | 148 | 184 |
| Total interest expense | (116) | 195 | 79 | (452) | 750 | 298 |
| Net interest income | $367 | $2,588 | $2,954 | $1,301 | $7,592 | $8,886 |

***Provision for loan losses.*** We recorded a provision for loan losses of $243,000 for the three months ended June 30, 2018, compared to a provision for loan losses of $144,000 for the three months ended June 30, 2017, an increase of $99,000 or 68.8%. We recorded a provision for loan losses of $497,000 for the six months ended June 30, 2018, compared to a provision for loan losses of $287,000 for the six months ended June 30, 2017, an increase of $210,000 or 73.2%. We recorded no provision for loan losses for acquired loans related to the acquired non-purchased credit-impaired loans as accounted for in accordance with ASC Topic 310-20 for both the three and six months ended June 30, 2018 and 2017. In addition, no additional provisions were recorded on the purchase credit-impaired loans accounted for in accordance with ASC Topic 310-30 during both these periods. The provision for loan losses increased primarily as a result of an increase in specific reserves on certain loans. We had net recoveries on previously charged-off loans of $112,000 for the three months ended June 30, 2018 compared to net charge-offs of $13,000 during the three months ended June 30, 2017. Net recoveries on previously charged-off loans for the six months ended June 30, 2018 and 2017 were $139,000 and $16,000, respectively. The ratio of net recoveries to average total loans outstanding was 0.01% for the six months ended June 30, 2018 and 0.00% for the six months ended June 30, 2017. The allowance for loan losses to loans receivable was 0.50% at June 30, 2018 compared to 0.47% at June 30, 2017. See Comparison of Financial Condition - Allowance for loan losses for additional details.

***Noninterest income.*** Non interest income for the second quarter of 2018 increased $454,000, or 27.9%, to $2.1 million from $1.6 million in the same quarter in 2017. The increase is primarily related to $170,000 or 5.69 % increase in service charges and loan fees from higher balances and to the recognition of $777,000 of benefits received under two Bank owned life insurance policies which is included in other income.

Non-interest income for the six months ended June 30, 2018 increased $1.4 million, or 61.2%, to $3.8 million from $2.4 million in the same period in 2017. During the six months ended June 30, 2018, the Company sold $16.9 million of SBA loans, which generated a net gain on sale of $1.2 million compared to the sale of $14.3 million in SBA loans at a net gain of $1.3 million during the six months ended June 30, 2017. Additionally, our acquisitions and organic growth significantly increased our deposit accounts, which resulted in a $473,000 or 107.1%, increase in service charges and other fees for the six months ended June 30, 2018 compared to the same period in 2017. Loan fee income increased $209,000, or 67.4%, to $519,000 for the six months ended June 30, 2018, compared to $310,000 for the six months ended June 30, 2017. All other components of noninterest income increased $838,000, net between these two periods due primarily to the $777,000 of death benefit payments on two Bank owned life insurance policies.

The following tables detail the components of non interest income during the periods shown:

*(Dollars in thousands)*

|  | Three months ended June 30, 2018 | 2017 | Variance Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Gain on sale of loans | $548 | $875 | $(327) | -37.4% |
| Service charges and other fees | 469 | 299 | 170 | 56.9% |
| Loan servicing and other loan fees | 274 | 253 | 21 | 8.3% |
| Other income and fees | 792 | 202 | 590 | 292.1% |
| Total non interest income | $2,083 | $1,629 | $454 | 28.0% |

*(Dollars in thousands)*

|  | Six months ended June 30, 2018 | 2017 | Variance Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Gain on sale of loans | $1,199 | $1,275 | $(76) | -6.0% |
| Service charges and other fees | 915 | 442 | 473 | 107.0% |
| Loan servicing and other loan fees | 519 | 310 | 209 | 67.4% |
| Other income and fees | 1,176 | 338 | 838 | 247.9% |
| Total non interest income | $3,809 | $2,365 | $1,444 | 61.2% |

***Noninterest expense.*** Non interest expense for the second quarter of 2018 totaled $8.7 million, an increase of $269,000, or 3.21%, compared to $8.4 million for the second quarter of 2017. Non interest expense for the six months ended June 30, 2018 totaled $16.8 million, an increase of $3.8 million, or 28.8%, compared to $13.0 million for the six months ended June 30, 2017. The second quarter of 2018 included $600,000 write-down of acquired office facilities held-for-sale which is reflected in other miscellaneous non interest expense. The second quarter of 2017 included $2.3 million of merger related expenses associated with our acquisition of First ULB Corp. Non interest expenses in 2018 compared to prior periods increased primarily due to increased operating expenses resulting from our acquisitions in 2017 and organic growth, including an increase in salary and benefits associated with the increased number of employees, an increase in occupancy expense associated with additional branch offices and an increase in data processing charges as a result of higher transaction volume.

The following table details the components of non interest expense during the periods shown:

*(Dollars in thousands)*

|  | Three months ended June 30, 2018 | 2017 | Variance Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Salaries and related benefits | $4,547 | $3,947 | $600 | 15.2% |
| Occupancy and Equipment | 1,268 | 790 | 478 | 60.5% |
| Data processing expense | 615 | 2,074 | (1,459) | -70.3% |
| Other expense | 2,226 | 1,576 | 650 | 41.2% |
| Total non interest expense | $8,656 | $8,387 | $269 | 3.3% |

*(Dollars in thousands)*

|  | Six months ended June 30, 2018 | 2017 | Variance Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Salaries and related benefits | $9,461 | $7,029 | $2,432 | 34.6% |
| Occupancy and Equipment | 2,243 | 1,359 | 884 | 65.0% |
| Data processing expense | 1,323 | 2,434 | (1,111) | -45.6% |
| Other expense | 3,752 | 2,203 | 1,549 | 70.3% |
| Total non interest expense | $16,779 | $13,025 | $3,754 | 28.9% |

***Income taxes.*** The provision for income taxes was $1.5 million and $3.2 million for the three and six months ended June 30, 2018, respectively, compared to $1.2 million and $2.3 million for the three and six months ended June 30, 2017, respectively. The effective tax rate was 29.4 % for the three and six months ended June 30, 2018, compared to 41.9% for the three and six months ended June 30, 2017, The decrease in the Company’s effective tax rate during 2018 compared to 2017 is primarily the result of the Tax Act which reduced the statutory federal corporate income tax rate from 35.0% to 21.0%.

### Liquidity and Capital Resources

Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash, short-term investments, including interest-bearing demand deposits and securities available-for-sale. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of June 30, 2018, the Bank had an available borrowing capacity of $387.6 million with the FHLB of San Francisco, and four Federal Funds lines with available commitments totaling $55.0 million with four correspondent banks. There are no amounts outstanding under these facilities at June 30, 2018 and December 31, 2017. Additionally, the Company classifies its securities portfolio as available for sale, providing an additional source of liquidity. Management believes that our security portfolio is of high quality and the securities would therefore be marketable.

We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $87.9 million and $98.7 million at June 30, 2018 and December 31, 2017, certificates of deposit scheduled to mature in one year or less at June 30, 2018, totaled $170.3 million. It is management's policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $3.3 million and net cash used in operating activities was $1.4 million for the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, net cash used in investing activities, which consisted primarily of a net increase in loans receivable and purchases of investment securities, was $29.5 million. During the six months ended June 30, 2017, net cash provided by investing activities was $60.1 million due primarily to an increase in securities purchased and acquisition. Net cash provided by financing activities totaling $94.6 million for the six months ended June 30, 2018 was comprised primarily of a net increase in deposits and proceeds from an initial public offering . Net cash provided by financing activities totaling $13.0 million for the six months ended June 30, 2017 was comprised primarily of a net increase in deposits.

As a separate legal entity from the Bank, BayCom must provide for its own liquidity. Sources of capital and liquidity for BayCom include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At June 30, 2018, BayCom had liquid assets of $61.2 million on an unconsolidated basis.

### Capital Requirements

BayCom is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as a state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require BayCom and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires BayCom to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. In addition to the minimum capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at an amount more than 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount more than 2.5% of risk-weighted assets in January 2019. At June 30, 2018, the required capital conservation buffer was an amount more than 1.875%. At June 30, 2018, BayCom and the Bank each exceeded all regulatory capital requirements.

The actual regulatory capital ratios calculated for BayCom Corp and the Bank as of June 30, 2018 and December 31, 2017, along with the minimum capital amounts and ratios, were as follows:

*(Dollars in thousands)*

| Leverage Ratio | At June 30, 2018 Dollars | Ratio | At December 31, 2017 Dollars | Ratio |
| --- | ---: | ---: | ---: | ---: |
| BayCom Corp | $177,353 | 14.34% | $107,153 | 8.73% |
| Minimum requirement for "Well-Capitalized" | 64,077 | 5.00% | 61,396 | 5.00% |
| Minimum regulatory requirement | 51,261 | 4.00% | 49,117 | 4.00% |
| United Business Bank | $121,096 | 9.46% | $111,143 | 8.92% |
| Minimum requirement for "Well-Capitalized" | 64,028 | 5.00% | 62,279 | 5.00% |
| Minimum regulatory requirement | 51,222 | 4.00% | 49,823 | 4.00% |
| Common Equity Tier 1 Ratio |  |  |  |  |
| BayCom Corp | $177,353 | 19.56% | $100,761 | 11.43% |
| Minimum requirement for "Well-Capitalized" | 58,527 | 6.50% | 57,285 | 6.50% |
| Minimum regulatory requirement | 40,519 | 4.50% | 39,659 | 4.50% |
| United Business Bank | $121,096 | 13.36% | $111,143 | 12.43% |
| Minimum requirement for "Well-Capitalized" | 58,491 | 6.50% | 58,109 | 6.50% |
| Minimum regulatory requirement | 40,494 | 4.50% | 40,229 | 4.50% |
| Tier 1 Risk-Based Capital Ratio |  |  |  |  |
| BayCom Corp | $183,745 | 20.27% | $107,153 | 12.16% |
| Minimum requirement for "Well-Capitalized" | 72,033 | 8.00% | 70,504 | 8.00% |
| Minimum regulatory requirement | 54,025 | 6.00% | 52,878 | 6.00% |
| United Business Bank | $121,096 | 13.36% | $111,143 | 12.43% |
| Minimum requirement for "Well-Capitalized" | 71,989 | 8.00% | 71,519 | 8.00% |
| Minimum regulatory requirement | 53,992 | 6.00% | 53,639 | 6.00% |
| Total Risk-Based Capital Ratio |  |  |  |  |
| BayCom Corp | $188,655 | 20.81% | $111,678 | 12.67% |
| Minimum requirement for "Well-Capitalized" | 90,041 | 10.00% | 88,131 | 10.00% |
| Minimum regulatory requirement | 72,033 | 8.00% | 70,504 | 8.00% |
| United Business Bank | $126,006 | 13.91% | $115,668 | 12.94% |
| Minimum requirement for "Well-Capitalized" | 89,986 | 10.00% | 89,399 | 10.00% |
| Minimum regulatory requirement | 71,989 | 8.00% | 71,519 | 8.00% |

56

***Off-Balance Sheet Arrangements.*** In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit.

As of June 30, 2018, and December 31, 2017, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and letters of credit were $87.9 million and $98.7 million at June 30, 2018 and December 31, 2017, respectively. As a percentage of net loans, these off-balance sheet items represent 7.9% and 11.0%, respectively. The Company does not expect all commitments to be funded.

In the normal course of business, the Company accepts deposits from local agencies. The Company is required to provide collateral for certain local agency deposits in the states of California and Washington. As of June 30, 2018, and December 31, 2017, the FHLB issued a letter of credit on behalf of the Company totaling $7.5 million and $9.9 million, respectively, as collateral for local agency deposits.

We have not engaged in any other off-balance-sheet transactions in the normal course of our lending activities.

## Market risk

As filed, 446 characters.

For information regarding the Company’s market risk, see “Management Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity and Market Risk,” in the Company’s prospectus dated May 4, 2018, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on May 4, 2018. As of June 30, 2018, the market risk of the Company has not changed materially from those disclosed in the prospectus.

## Controls and procedures

As filed, 3,520 characters.

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of June 30, 2018 under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

The Company’s CEO and CFO concluded that based on their evaluation at June 30, 2018, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to BayCom Corp’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.

(b) Changes in Internal Controls

There were no significant changes in the Company’s internal control over financial reporting that occurred during the six months ended June 30, 2018, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

## Risk factors

As filed, 333 characters.

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s prospectus dated May 4, 2018, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on May 4, 2018. As of June 30, 2018, the risk factors of the Company have not changed materially from those disclosed in the prospectus.

Filed Aug 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001144204-18-044770. Last ingested by Listed: Nov 10, 2026, 00:50 ET. No prices; not investment advice.