BayCom Corp Reports 2018 Third Quarter Earnings of $3.5 Million

BayCom Corp (the “Company”) (NASDAQ:BCML), the holding company for United Business Bank (the “Bank”), announced earnings of $3.5 million, or $0.31 per diluted share, for the third quarter of 2018 compared to $3.2 million, or $0.46 per diluted share, for the third quarter of 2017, and earnings of $4.3 million, or $0.45 per diluted share, for the second quarter of 2018. The increase in earnings during the third quarter of 2018 compared to the same quarter last year was primarily due to increases in net interest income and other non-interest income as a result of the Plaza acquisition in November 2017, and the lower effective tax rate in 2018, partially offset by the higher provision for loan losses for the third quarter 2018. The decrease in earnings during the third quarter of 2018 compared to the prior quarter was primarily due to a $838,000 increase in provision for loan losses resulting from the reclassification of one commercial real estate loan and one commercial and industrial loan to non-accrual status. The Company had net income of $11.9 million, or $1.30 per diluted common share, for the nine months ended September 30, 2018, compared to $6.1 million, or $0.97 per diluted common share, for the nine months ended September 30, 2017.

Third Quarter 2018 Performance Highlights:

• Total assets increased to $1.34 billion at September 30, 2018 compared to $1.19 billion at September 30, 2017 and decreased slightly compared to $1.35 billion at June 30, 2018. The increase from the prior year was the result of the Plaza Bank merger in November 2017 and organic loan growth.
• Loans, net of allowance for loan losses and deferred fees, totaled $896.4 million at September 30, 2018, compared to $839.6 million at September 30, 2017 and $908.5 million at June 30, 2018.
• Deposits totaled $1.13 billion at September 30, 2018 compared to $1.05 billion at September 30, 2017 and $1.14 billion at June 30, 2018. Non-interest bearing deposits represented 30.9% of total deposits at September 30, 2018 compared to 29.1% at September 30, 2017 and 30.4% at June 30, 2018.
• Non-accrual loans represented 0.58% of total loans as of September 30, 2018, compared to 0.02% September 30, 2017 and 0.10% of total loans as of June 30, 2018.
• The Bank remains a “well-capitalized” institution for regulatory capital purposes at September 30, 2018.

George J. Guarini, President and Chief Executive Officer of the Company stated, “While we are disappointed to report a decline in earnings per share this quarter as a result of an increase in our provision for loan losses, we are confident that this is not a reflection of the overall credit quality of our loan portfolio. It was necessary to increase our loan loss provisions as a result of two long standing banking relationships that are experiencing cash flow problems migrating to non-accrual status during the third quarter of 2018. Our overall credit quality metrics remain strong.”

Mr. Guarini continued, “Our pending New Mexico acquisition is expected to close in the fourth quarter and we continue to actively look for new opportunities to expand our geographical market reach, build market penetration, and add value for our clients and increase earnings per share for our shareholders.”

Proposed Acquisition of Bethlehem Financial Corporation

On August 10, 2018, the Company entered into a definitive agreement (the "Agreement") with Bethlehem Financial Corporation (“BFC”), headquartered in Belin, New Mexico, pursuant to which BFC will be merged with and into BayCom Corp, and immediately thereafter BFC’s bank subsidiary, MyBank, will be merged with and into United Business Bank. MyBank serves central New Mexico through five branches operating in Belen, Rio Communities, Los Lunas, Albuquerque, and Mountainair, New Mexico. Under the terms of the Agreement, BFC shareholders will receive $62.00 in cash for each share of BFC common stock or approximately $23.5 million in aggregate.

In the event the Agreement is terminated under certain specified circumstances in connection with a competing transaction, BFC will be required to pay the Company a termination fee of $1.5 million in cash. The proposed transaction has been approved by regulatory authorities and by the shareholders of BFC. It is expected to be completed on November 30, 2018.

Earnings

Net interest income increased to $13.0 million for the third quarter of 2018 compared to $12.0 million in the same quarter a year ago and was $12.6 million in the preceding quarter. The increase in net interest income compared to the same period in 2017 was primarily due to an increase in average interest earning assets largely related to the Plaza Bank acquisition in November 2017 and, to a lesser extent, net proceeds received from the issuance of common stock in the second quarter of 2018. Average interest earning assets increased $159.6 million or 11.9% for the three months ended September 30, 2018 compared to the same period in 2017, largely due to the Plaza Bank acquisition in November 2017. Interest income on loans for the quarters ended September 30, 2018 and September 30, 2017 included $948,000 and $1.5 million, 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, compared to $644,000 for the quarter ended June 30, 2018. The net discount on these purchased loans was $6.3 million, $7.9 million, and $7.1 million at September 30, 2018, September 30, 2017 and June 30, 2018, respectively.

The Company’s net interest margin was 4.06% for the third quarter of 2018 compared to 4.28% for the third quarter a year ago, and 4.11% for the preceding quarter. The decrease in net interest margin during the third quarter of 2018 compared to the same quarter a year earlier is the result of a lower yield on loans, primarily due to a decline in the accretion of acquisition accounting discounts, and an increase in the average balance outstanding of lower yielding cash and investments. 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 23 basis points, 52 basis points and 19 basis points during the third quarter of 2018, third quarter of 2017, and the second quarter of 2018, respectively. Our average yield on loans for the third quarter of 2018 was 5.24% compared to 5.67% for the same quarter last year and 5.40% for the second quarter of 2018. Our average cost of funds for the third quarter of 2018 was 0.64%, up slightly from 0.60% for the third quarter of 2017 and was 0.59% for the second quarter of 2018.

Non-interest income for the third quarter of 2018 totaled $1.6 million compared to $1.1 million in the same quarter in 2017, and $2.1 million in the previous quarter. The increase in non-interest income compared to the same quarter last year was primarily due to increases in loan fee income, and other fees and service charges. Other non-interest income also increased primarily due to income received on the investment in a Small Business Investment Company fund. Non-interest income for the second quarter in 2018 was higher compared to the third quarter in 2018 primarily due to the recognition of benefits received under two Bank owned life insurance policies.

Non-interest expense for the third quarter of 2018 totaled $8.4 million, an increase of $650,000, or 8.4%, compared to $7.8 million for the third quarter of 2017, and decreased $240,000, or 2.87%, compared to $8.7 million for the second quarter of 2018. The second quarter of 2018 included a $600,000 write-down of acquired office facilities held-for-sale which is reflected in other miscellaneous non-interest expense. Non-interest expenses for the third quarter of 2018 compared to same period last year increased primarily due to an increase in salary and benefits including an increase in the number of employees from our two acquisitions in 2017. Professional expenses increased in 2018 compared to the same period in 2017 due to one-time consulting services related to the implementation of enhanced regulatory compliance and risk management processes and an increase in audit and accounting fees, partially offset by a decline in data processing expenses. Data processing expenses in 2017 included certain on-time expenses related to one of our acquisitions.

Loans and Credit Quality

Loans, net of deferred fees, increased $58.2 million, or 6.9%, to $901.9 million at September 30, 2018, from $843.7 million at September 30, 2017 and decreased $11.2 million, or 1.2%, as compared to $913.1 million at June 30, 2018. The increase in loans from the comparable period in 2017 was primarily due to the Plaza Bank merger in the fourth quarter of 2017. The decline in the third quarter of 2018 compared to the previous quarter was primarily the result of significantly higher loan prepayments due to the prepayment of acquired loans and a decline in loan originations. Loan originations for the quarter ended September 30, 2018 totaled $32.7 million compared to $24.6 million during the third quarter of 2017 and $42.3 million during the second quarter 2018. Loan originations in the third quarter of 2018 were spread throughout our markets with the majority focused in San Francisco, Contra Costa, San Mateo and Los Angeles Counties, with commercial and residential real estate secured loans accounting for the majority of the originations during the quarter.

Non-accrual loans totaled $5.2 million, or 0.58% of total loans, compared to $187,000, or 0.02% of total loans, at September 30, 2017 and $932,000, or 0.10% of total loans, at June 30, 2018. The increase in non-accrual loans from a year ago and the prior quarter primarily related to the migration of two loans totaling $4.4 million to non-accrual status. These loans were related to two long-standing borrowers of the Bank. At September 30, 2018, $2.3 million of our non-accrual loans are guaranteed by government agencies compared to $456,000 at June 30, 2018. At September 30, 2018, accruing loans past due 30 to 89 days totaled $1.4 million compared to none at September 30, 2017 and $2.7 million at June 30, 2018. At September 30, 2018, accruing loans past due more than 90 days were $1.4 million compared to none at September 30, 2017 and $122,000 at June 30, 2018.

At September 30, 2018, our allowance for loan losses was $5.5 million, or 0.61% of total loans, compared to $4.1 million, or 0.48% of total loans, at September 30, 2017 and $4.6 million, or 0.50% of total loans, at June 30, 2018. The allowance for loan losses plus the discount recorded on acquired loans totaled $11.8 million, representing 1.30% of total loans at September 30, 2018 compared to $12.0 million or 1.40% of total loans at September 30, 2017 and $11.7 million or 1.28% of total loans at June 30, 2018. Included in the carrying value of loans are net discounts on acquired loans as they are carried at their estimated fair value on the date on which they were acquired. As of September 30, 2018, acquired loans net of their discounts totaled $343.9 million compared to $363.6 million at September 30, 2017 and $362.7 million at June 30, 2018. The provision for loan losses recorded in the third quarter of 2018 totaled $1.1 million compared to $58,000 for the same quarter in 2017 and $243,000 for the second quarter of 2018. At September 30, 2018, our allowance for loan losses specific reserves increased to $685,000 compared to $13,000 at both September 30, 2017 and June 30, 2018.

Deposits and Borrowings

Deposits totaled $1.13 billion at September 30, 2018 compared to $1.05 billion at September 30, 2017, and $1.14 billion at June 30, 2018. The increase in deposits from the same quarter a year ago was primarily attributable to the $54.2 million of deposits acquired in connection with our Plaza Bank acquisition in November 2017, and to a slightly lesser extent, organic growth. Non-interest bearing deposits totaled $349.3 million, or 30.9% of total deposits, at September 30, 2018 compared to $307.1 million, or 29.1% of total deposits, at September 30, 2017, and $346.2 million, or 30.4% of total deposits, at June 30, 2018.

At September 30, 2018, borrowings totaled $5.4 million compared to $11.4 million at September 30, 2017 and $5.4 million at June 30, 2018. 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. Our borrowings at September 30, 2018 relate to junior subordinated debentures assumed in connection with our acquisition of First ULB Corp. in April 2017.

Shareholders’ Equity

Total shareholders’ equity increased to $197.3 million at September 30, 2018 from $107.4 million at September 30, 2017, and $193.6 million at June 30, 2018. The increase in shareholders’ equity during 2018 compared to 2017 also included, in addition to net income, the common stock issued in our initial public offering of $66.0 million, net of expenses and underwriting commissions, and the issuance of common stock totaling $12.0 million in connection with our acquisition of Plaza Bank during the fourth quarter of 2017.

About BayCom Corp

The Company, through its wholly owned operating subsidiary, United Business Bank, offers a full-range of loans, including SBA, FSA and USDA guaranteed loans, and deposit products and services to businesses and its affiliates in California, Washington and New Mexico. The Bank also offers business escrow services and facilitates tax free exchanges through its Bankers Exchange Division. The Bank is an Equal Housing Lender and a member of FDIC. The Company is traded on the NASDAQ under the symbol “BCML”. For more information, go to www.unitedbusinessbank.com.

Forward-Looking Statements

This release, as well as other public or shareholder communications released by the Company, may contain forward-looking statements, including, but not limited to, (i) statements regarding the financial condition, results of operations and business of the Company, (ii) statements about the Company’s plans, objectives, expectations and intentions and other statements that are not historical facts and (iii) other statements identified by the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions that are intended to identify "forward-looking statements", within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead are based on current beliefs and expectations of the Company’s management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: expected revenues, cost savings, synergies and other benefits from the proposed merger of the Company and Bethlehem Financial Corporation (“BFC”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; changes in general economic conditions and conditions within the securities market; legislative and regulatory changes; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; increased competitive pressures; changes in management’s business strategies; and other factors described from time to time in the Company’s filings with the Securities and Exchange Commission ("SEC"), including our prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the Securities Act on May 4, 2018, Quarterly Reports on Form 10-Q and other filings with the SEC that are available on our website at unitedbusinessbank.com and on the SEC's website at www.sec.gov.

The factors listed above could materially affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake - and specifically declines any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. When considering forward-looking statements, you should keep in mind these risks and uncertainties. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made.

Non-GAAP Financial Measures:

In addition to results presented in accordance with generally accepted accounting principles utilized in the United States (“GAAP”), this earnings release contains the tangible book value per share, a non-GAAP financial measure. Tangible common shareholders’ equity is calculated by excluding intangible assets from shareholders’ equity. For this financial measure, the Company’s intangible assets are goodwill and core deposit intangibles. Tangible book value per share is calculated by dividing tangible common shareholders’ equity by the number of common shares outstanding. The Company believes that this measure is consistent with the capital treatment by our bank regulatory agencies, which excludes intangible assets from the calculation of risk-based capital ratios and presents this measure to facilitate comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Further, this non-GAAP financial measure of tangible book value per share should not be considered in isolation or as a substitute for book value per share or total shareholders' equity determined in accordance with GAAP and may not be comparable to a similarly titled measure reported by other companies.

Reconciliation of the GAAP and non-GAAP financial measure is presented below.

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