S-1/A 1 tv491471-s1a.htm AMENDMNET NO.1 TO FORM S-1 tv491471-s1a - block - 16.8590458s
As filed with the Securities and Exchange Commission on April 27, 2018.
Registration No. 333-224236​
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BAYCOM CORP
(Exact name of registrant as specified in its charter)
California
6022
37-1849111
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
500 Ygnacio Valley Road, Suite 200
Walnut Creek, CA 94596
(925) 476-1800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Keary L. Colwell
Senior Executive Vice President, Chief Financial Officer and Corporate Secretary
BayCom Corp
500 Ygnacio Valley Road, Suite 200
Walnut Creek, CA 94596
(925) 476-1800
(Name, address, including zip code and telephone number, including area code, of agent for service)
Copies to:
Dave M. Muchnikoff, P.C.
Michael S. Sadow, P.C.
Silver, Freedman, Taff  & Tiernan LLP
3299 K Street, N.W. Suite 100
Washington, DC 20007
(202) 295-4500
Nikki Wolontis, Esq.
King, Holmes, Paterno & Soriano, LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
(818) 631-2224
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definition of  “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
☒ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered
Proposed maximum aggregate
offering price(1)(2)
Amount of registration fee(3)
Common Stock, no par value per share
$ 57,500,000 $ 7,159
(1)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2)
Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.
(3)
Previously paid.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated April 27, 2018
PROSPECTUS
2,272,727 Shares
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Common Stock
This prospectus relates to the initial public offering of BayCom Corp common stock. We are a bank holding company headquartered in Walnut Creek, California for United Business Bank, a California-chartered bank. We are offering 2,272,727 shares of our common stock.
Prior to this offering, there has been no established public market for our common stock. We anticipate that the initial public offering price of our common stock will be between $21.00 and $23.00 per share. Our common stock has been approved for listing on the NASDAQ Global Select Market under the symbol “BCML,” subject to notice of issuance.
We are an “emerging growth company” under the federal securities laws and are eligible for reduced public company reporting requirements. See “Implications of Being an Emerging Growth Company.”
Investing in our common stock involves risks. See “Risk Factors” beginning on page 27 of this prospectus.
Per Share
Total
Initial public offering price
$     $     
Underwriting discounts and commissions(1)
$ $
Proceeds to us, before expenses
$ $
(1)
See “Underwriting” for a description of all underwriting compensation payable in connection with this offering.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The shares of our common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of our bank subsidiary and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The underwriters expect to deliver the shares of our common stock against payment in New York, New York on or about            , 2018, subject to customary closing conditions.
We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase an additional 340,909 shares of our common stock on the same terms and conditions set forth above, less the underwriting discount, solely to cover over-allotments.
FIG Partners, LLC   D.A. Davidson & Co.
Prospectus dated            , 2018

TABLE OF CONTENTS
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F-1
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ABOUT THIS PROSPECTUS
Unless we state otherwise or the context otherwise requires, references in this prospectus to “we,” “our,” “us,” “the Company” and “BayCom” refer to BayCom Corp and its consolidated subsidiary, United Business Bank (formerly known as Bay Commercial Bank), which we sometimes refer to as “the Bank.”
Neither we nor the underwriters have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the cover page of this prospectus. This prospectus includes references to information contained on, or that can be accessed through, our website. Information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus.
This prospectus describes the specific details regarding this offering and the terms and conditions of our common stock being offered hereby and the risks of investing in our common stock. For further information, see “Where You Can Find More Information.”
Neither we, nor any of our officers, directors, agents or representatives, or the underwriters, make any representation to you about the legality of an investment in our common stock. You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.
No action is being taken in any jurisdiction outside the United States to permit a public offering of our securities or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this prospectus applicable to those jurisdictions.
Unless otherwise expressly stated or the context otherwise requires, all information in this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of our common stock to cover over-allotments, if any.
INDUSTRY AND MARKET DATA
Although we are responsible for all of the disclosures contained in this prospectus, this prospectus contains industry, market and competitive position data and forecasts that are based on industry publications and studies conducted by independent third parties. The industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Although we believe that the market position, market opportunity and market size information included in this prospectus is generally reliable, we have not verified the data, which is inherently imprecise. The forward-looking statements included in this prospectus related to industry, market and competitive data position may be materially different than actual results. Trademarks used in the prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks.
IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we are an emerging growth company, unlike other public companies that are not emerging growth companies under the JOBS Act, we are not required to:

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;
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provide more than two years of audited financial statements and related management’s discussion and analysis of financial condition and results of operations;

comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; or

provide certain disclosure regarding executive compensation required of larger public companies or hold shareholder advisory votes on executive compensation or golden parachute payments as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act.
We have elected to take advantage of the reduced disclosure requirements and other relief described above, and in the future we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of  (i) the end of the fiscal year during which we have total annual gross revenues of  $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
In addition to the relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to use this extended transition period, which means that the financial statements included in this prospectus, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider before deciding to purchase our common stock in this offering. You should read the entire prospectus carefully, including the sections titled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” together with our consolidated financial statements and the related notes thereto, before making an investment decision.
Our Company
We are a bank holding company headquartered in Walnut Creek, California. United Business Bank, our wholly owned banking subsidiary, is a California state-chartered bank which provides a broad range of financial services primarily to local small and mid-sized businesses, service professionals and individuals. In our 14 years of operation, we have grown to 17 full service banking branches. Our main office is located in Walnut Creek, California and our branch offices are located in Oakland, Castro Valley, Mountain View, Napa, Stockton (2), Pleasanton, Livermore, San Jose, Long Beach, Sacramento, San Francisco and Glendale, California; Seattle, Washington (2); and Albuquerque, New Mexico. In addition, we have one loan production office in Los Angeles, California. In addition to our organic growth, we have completed five whole-bank acquisitions since 2010. As of December 31, 2017, we had, on a consolidated basis, total assets of  $1.25 billion, total deposits of  $1.10 billion, total loans of  $890.1 million (net of allowances) and total shareholders’ equity of  $118.6 million.
Our principal objective is to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through opportunistic acquisitions that are additive to our franchise value and organic growth. We strive to provide an enhanced banking experience for our clients by providing a comprehensive suite of sophisticated banking products and services tailored to meet their needs and by delivering the high-quality, relationship-based, client service of a community bank.
Our History and Growth
The Company was formed as the holding company for the Bank in 2016. We commenced banking operations as Bay Commercial Bank in July 2004 and changed the name of the Bank to United Business Bank in April 2017 following our acquisition of United Business Bank, FSB in April 2017.
The Bank was founded in March 2004 as California-chartered commercial bank by a group of Walnut Creek business and community leaders, including George Guarini who serves as our Chief Executive Officer. Mr. Guarini and our other founders envisioned a community bank in Walnut Creek committed to creating long-term relationships with small and mid-sized businesses and professionals. The severe economic recession beginning in 2008 and the ongoing consolidation in the banking industry created an opportunity for our management team and board to build an attractive commercial banking franchise and create long-term value for our shareholders by employing an acquisition strategy that focuses on opportunities that grow our product portfolio and expand the business geographically.
In 2010, we raised $16.8 million in net proceeds through institutional investors and individuals to support our acquisition strategy. Since 2010, we have implemented our vision of becoming a strategic consolidator of community banks and a destination for seasoned bankers and business persons who share our entrepreneurial spirit. While not without risk, we believe there are certain advantages resulting from mergers and acquisitions. These advantages include, among others, the diversification of our loan portfolio with seasoned loans, the expansion of our market areas and an effective method to augment our growth and risk management infrastructure through the retention of local lending personnel and credit administration personnel to manage the client relationships of the banks being acquired.
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We believe we have a successful track record of selectively acquiring, integrating and consolidating community banks. 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. Our acquisition activity includes the following:

October 2011 — Acquired Global Trust Bank in Mountain View, California, with $90.0 million in total assets and $71.3 million in deposits.

April 2014 — Acquired Community Bank of San Joaquin in Stockton, California, with $123.7 million in total assets and $107.2 million in deposits.

February 2015 — Acquired Valley Community Bank in Pleasanton, California with locations in Pleasanton, Livermore and San Jose, California, with $129.6 million in total assets and $107.9 million in deposits.

April 2017 — Acquired United Business Bank, FSB headquartered in Oakland, California, with nine full-service banking offices in Long Beach, Oakland, Sacramento, San Francisco, San Jose and Glendale, California, Seattle, Washington and Albuquerque, New Mexico. At the time of acquisition, United Business Bank, FSB had $473.1 million in total assets and $428.0 million in deposits. This acquisition significantly increased our total asset size, expanded our geographic footprint and added low cost, stable deposits associated with a strong network of relationship with labor unions. Upon completion of our merger with United Business Bank, FSB, we changed the name of the Bank from Bay Commercial Bank to United Business Bank.

November 2017 — Acquired Plaza Bank in Seattle, Washington, with $75.8 million in total assets and $54.2 million in deposits, expanding our presence in the Seattle, Washington market.
As a result of our acquisitions and organic growth for the five years ended December 31, 2017, total assets have grown at a compound annual growth rate, or CAGR, of 32%, our total deposits at a CAGR of 33% and our total loans (net of allowances) at a CAGR of 32%. Our operating performance has also improved during the five-year period ended December 31, 2017. Our net income grew at a CAGR of 20% and our nonperforming assets improved, decreasing to $179,000, or 0.01% of total assets, at December 31, 2017, from $2.9 million, or 0.83% of total assets, at December 31, 2013. Our efficiency ratio was 67.34% for the year ended December 31, 2017, compared to 63.85% for the year ended December 31, 2013.
As we have grown, we have been able to effectively manage our capital and as of December 31, 2017, the Company and the Bank were considered “well capitalized” for regulatory capital purposes. Our tangible book value per share has increased from $11.05 at December 31, 2013 to $13.81 at December 31, 2017. As of December 31, 2017, we had $118.6 million in total shareholders’ equity.
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Our Historical Performance
Operating Results
Since our first acquisition in 2011 through December 31, 2017, we have achieved significant growth in many of our key financial performance categories. Since December 31, 2013, we have grown our total assets from $342.3 million to $1.25 billion, total loans, net of allowances, from $251.1 million to $890.1 million, and total deposits from $286.5 million to $1.10 billion. The charts below illustrate the growth in the dollar balances of our total assets, loans and deposits for the five-year period ended December 31, 2017. The growth in these metrics from December 31, 2016 to December 31, 2017 was primarily attributable to our acquisition of United Business Bank, FSB, which was completed in April 2017.
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During the five-year period ended December 31, 2017, our profitability also significantly increased. The charts below illustrate our net income to common shareholders, diluted earnings per share (“EPS”) and net interest margin (“NIM”) during this period.
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Note: Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets for the period.
The charts below illustrate our return on average assets (“ROAA”), our return on average equity (“ROAE”) and our efficiency ratio in the five-year period ended December 31, 2017.
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Note: ROAA and ROAE are calculated by dividing annualized net income by average assets and average common equity.
As we have grown, we have been able to effectively manage our capital while strengthening our asset quality and driving growth in our tangible book value per share. As of December 31, 2017, our ratio of nonperforming loans to total loans was 0.02% and the Bank’s Tier 1 leverage ratio was 8.92%. We have maintained a strong balance sheet and, as of December 31, 2017, the Company and the Bank were above the regulatory definitions of  “well capitalized.” Our tangible book value per share has increased from $11.05 at December 31, 2013 to $13.81 at December 31, 2017. At December 31, 2017, we had $118.6 million in total shareholders’ equity. For a reconciliation of the non-GAAP measure to the most directly comparable GAAP measure, see “Non-GAAP Financial Measures.”
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Loan and Deposit Portfolio
As illustrated in the chart and table below, we have grown our loan portfolio from $254.2 million as of December 31, 2013 to $894.8 million as of December 31, 2017. Our loan portfolio composition was 90.4% commercial loans and 9.6% one-to-four family and other as of December 31, 2017, and within our commercial loan portfolio, 77.6% of such loans were commercial real estate loans and 12.8% of such loans were commercial and industrial loans.
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(Dollars in Thousands and as of period end dates)
2013
2014
2015
2016
2017
Commercial and Industrial
$ 73,430 $ 71,983 $ 71,605 $ 71,093 $ 114,373
Residential RE
17,596 25,312 29,378 31,917 84,781
Multifamily RE
920 8,233 36,778 38,236 118,128
Owner occupied CRE
53,974 81,434 131,686 150,289 256,451
Non-owner occupied CRE
93,371 125,737 176,900 195,753 297,244
Construction and land
14,598 12,548 17,086 19,745 22,720
Consumer and other(1)
289 452 967 1,317 1,096
Total Loans
$ 254,178 $ 325,699 $ 464,400 $ 508,350 $ 894,793
(1)
Consumer and other represent less than 1% of total loans and are not reflected in the chart above.
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In addition, as illustrated in the chart and table below, we have grown our deposits from $286.5 million at December 31, 2013 to $1.10 billion at December 31, 2017. The improvement in our deposit mix as well as the current rate environment have helped lower our cost of interest-bearing deposits from 95 basis points at December 31, 2013 to 59 basis points at December 31, 2017.
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(Dollars in Thousands and as of period end dates)
2013
2014
2015
2016
2017
Noninterest-bearing demand
$ 58,017 $ 124,228 $ 152,013 $ 128,697 $ 327,309
Money market
101,038 143,028 210,523 247,732 356,640
Interest-bearing demand and savings
15,621 42,760 53,982 53,186 191,550
Certificates
111,788 127,923 126,786 161,144 228,806
Total Deposits
$ 286,464 $ 437,939 $ 543,304 $ 590,759 $ 1,104,305
Cost of Interest-Bearing Deposits
0.95% 0.89% 0.72% 0.73% 0.59%
Net Interest Margin
4.10% 3.95% 4.00% 4.25% 4.14%
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more comprehensive discussion of our operating and financial performance.
Our Strategies
Our strategy is to continue to make strategic acquisitions of financial institutions within the Western United States, grow organically and preserve our strong asset quality through disciplined lending practices.

Strategic Consolidation of Community Banks.   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 of financial institutions and believe our target market areas present us with numerous acquisition opportunities as many of these financial institution will continue to be burdened and challenged by new and more complex banking regulations, resource constraints, competitive limitations, rising technological and other business costs, management succession issues and liquidity concerns.
The following map illustrates the headquarters of potential acquisition opportunities broken out by asset size between $100.0 million and $1.5 billion within our target footprint.
There are 187 banks within our target markets that meet our size criteria
Total Banks
Median Asset Size
Banks $100M – $500M
121 $ 229,034
Banks $500M – $1B
50 $ 751,945
Banks $1B – $1.5B
16 $ 1,208,314
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Source: S&P Global Market Intelligence as of December 31, 2017.
Despite the significant number of opportunities, we intend to continue to employ a disciplined approach to our acquisition strategy and only seek to identify and partner with financial institutions that possess attractive market share, low-cost deposit funding and compelling noninterest income-generating businesses. We believe consolidation will lead to organic growth opportunities for us following the integration of businesses we acquire. We also expect to continue to manage our branch network in order to ensure effective coverage for clients while minimizing any geographic overlap and driving corporate efficiency.

Enhance the Performance of the Banks We Acquire.   We strive to successfully integrate the banks we acquire into our existing operational platform and enhance shareholder value through the creation of efficiencies within the combined operations. We believe that our experience and reputation as a successful integrator and acquirer will allow us to continue to capitalize on additional opportunities in the future.

Focus on Lending Growth in Our Metropolitan Markets While Increasing Deposits in Our Community Markets.   We believe the markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase our current market share through organic growth. We believe our diverse geographic footprint provides us with access to low cost, stable core deposits in community markets, which deposits can be used to fund commercial loan growth in our larger metropolitan markets. In acquiring United Business Bank, FSB in 2017, we acquired a large deposit base from the local and regional unionized labor
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community. As of December 31, 2017, our top ten depositors included five labor unions which accounted for roughly 9.31% of our deposits. At that date, nearly 30% of our deposit base was comprised of non-interest-bearing demand deposit accounts, significantly lowering our aggregate cost of funds.

Our team of seasoned bankers represents an important driver of our organic growth by expanding banking relationships with current and potential clients.   We expect to continue to make opportunistic hires of talented and entrepreneurial bankers to further augment our growth. Our bankers are incentivized to increase the size of their loan and deposit portfolios and generate fee income while maintaining strong credit quality. We also seek to cross-sell our various banking products, including our deposit products, to our commercial loan clients, which we believe provides a basis for expanding our banking relationships as well as a stable, low-cost deposit base. We believe we have built a scalable platform that will support this continued organic growth.

Preserve Our Asset Quality Through Disciplined Lending Practices.   Our approach to credit management uses well-defined policies and procedures, disciplined underwriting criteria and ongoing risk management. We believe we are a competitive and effective commercial lender, supplementing ongoing and active loan servicing with early-stage credit review provided by our bankers. This approach has allowed us to maintain loan growth with a diversified portfolio of assets. We believe our credit culture supports accountable bankers, who maintain an ability to expand our client base as well as make sound decisions for our Company. As of December 31, 2017, our ratio of nonperforming assets to total assets was 0.01% and our ratio of nonperforming loans to total loans was 0.02%. In the 14 years since our inception, which time frame includes the recent recession in the U.S., we have cumulative net charge-offs of  $6.0 million. We believe our success in managing asset quality is illustrated by our aggregate net charge-off history.
Our Competitive Strengths
Our management team has identified the following competitive strengths which we believe will allow us to continue to achieve our principal objective of increasing shareholder value and generating consistent earnings growth:

Experienced Leadership and Management Team.   Our experienced executive management team, senior leaders and board of directors have exhibited the ability to deliver shareholder value by significantly growing profitably while expanding our commercial banking franchise through acquisitions. The members of our executive management team have many years’ worth of experience working for financial institutions in our markets during various economic cycles and have significant merger and acquisition experience in the financial services industry. Our executive management team has instilled a transparent and entrepreneurial culture that rewards leadership, innovation and problem solving. All founding members of our executive management team, which consists of our chief executive officer, chief operating officer, and chief financial officer have invested their own capital in the equity of our Company, providing close alignment of their interests with those of our other shareholders. See “— Our Team.”

Sophisticated and Customized Banking Products with High-Quality Client Service.   We provide a comprehensive suite of financial solutions that competes with large, national competitors, but with the personalized attention and nimbleness of a relationship-focused community bank. We offer a full range of lending products, including commercial and multi-family real estate loans (including owner-occupied and investor real estate loans), commercial and industrial loans (including equipment loans and working capital lines of credit), U.S. Small Business Administration (“SBA”) loans, construction and land loans, agriculture-related loans and consumer loans. We provide our commercial clients with a diverse array of cash management services. We also offer convenience-related services, including banking by appointment (before or after normal business hours on weekdays and on weekends), online banking services, access to a national automated teller machine network, remote deposit capture, on-line banking and courier services so that clients’ deposit and other banking needs may be served without the client having to make a trip to the branch.
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Experience in Smaller Communities and Metropolitan Markets.   Our banking footprint has given us experience operating in small communities and large cities. We believe that our presence in smaller communities gives us a relatively stable source of core deposits and steady profitability, while our more metropolitan markets represents strong long-term growth opportunities. In addition, we believe that the breadth of our operating experience and successful track record of integrating prior acquisitions increases the potential acquisition opportunities available to us.

Disciplined Acquisition Approach.   Our disciplined approach to acquisitions, consolidations and integrations, includes the following: (i) selectively acquiring community banking franchises only at appropriate valuations, after taking into account risks that we perceive with respect to the targeted bank; (ii) completing comprehensive due diligence and developing an appropriate plan to address any legacy credit problems of the targeted institution; (iii) identifying an achievable cost savings estimate; (iv) executing definitive acquisition agreements that we believe provide adequate protections to us; (v) installing our credit procedures, audit and risk management policies and procedures, and compliance standards upon consummation of the acquisition; (vi) collaborating with the target’s management team to execute on synergies and cost saving opportunities related to the acquisition; and (vii) involving a broader management team across multiple departments in order to help ensure the successful integration of all business functions. We believe this approach allows us to realize the benefits of the acquisition and create shareholder value, while appropriately managing risk.

Efficient and Scalable Platform with Capacity to Support Our Growth.   Through significant investments in technology and staff, our management team has built an efficient and scalable corporate infrastructure within our commercial banking franchise which we believe will support our continued growth. During 2017, we undertook several initiatives designed to strengthen our operations and risk culture, including implementing controls and procedures designed to comply with the applicable requirements of the Federal Deposit Insurance Corporation Improvement Act, or FDICIA. We also intend in the future to implement a new core processing system to further enhance our acquisition ability. We believe that this scalable infrastructure will continue to allow us to efficiently and effectively manage our anticipated growth.

Focus on Operating Efficiencies.   We seek to realize operating efficiencies from our recently completed acquisitions by utilizing technology to streamline our operations. We continue to centralize the back-office functions of our acquired banks, as well as realize cost savings through the use of third party vendors and technology, in order to take advantage of economies of scale as we continue to grow. We intend to focus on initiatives that we believe will provide opportunities to enhance earnings, including the continued rationalization of our retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.

Strong Risk Management Practices.   We place significant emphasis on risk management as an integral component of our organizational culture without sacrificing growth. We believe our comprehensive risk management system is designed to make sure that we have sound policies, procedures, and practices for the management of key risks under our risk framework (which includes market, operational, liquidity, interest rate sensitivity, credit, insurance, regulatory, legal and reputational risk) and that any exceptions are reported by senior management to our board of directors or audit committee. We believe that our enterprise risk management philosophy has been important in gaining and maintaining the confidence of our various constituencies and growing our business and footprint within our markets. We also believe our risk management practices are manifested in our strong asset quality statistics. As of December 31, 2017, our ratio of nonperforming assets to total assets was 0.01% and our ratio of nonperforming loans to total loans was 0.02%.
Our Team
Our directors possess significant executive management and board leadership experience across a diverse range of industries, including financial services, private equity, manufacturing, accounting, legal and insurance. Five of our directors, including our Chief Executive Officer, have been investors in our Company since inception, and our directors and executive officers beneficially owned, in the aggregate, approximately 6.6% of our outstanding common stock as of March 31, 2018.
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Our board of directors oversees the seasoned and experienced members of our executive management team, most of whom have held management-level positions at commercial banking franchises within our markets, including throughout various economic cycles. Our executive management team has a long and successful history of leading acquisition projects, managing organic growth and developing a strong and disciplined credit culture. Our executive management team is supported by our other officers, managers, bankers and employees, who also have significant experience in commercial banking, including areas such as lending, underwriting, credit administration, risk management, finance, operations and information technology. Sharing in our entrepreneurial and ownership-based culture, most of our executive management team has invested personal funds to acquire equity in our Company, which we believe closely aligns their interests with those of our shareholders.
Our executive management team includes the following officers:

George J. Guarini, President & Chief Executive Officer, is a founding member of Bay Commercial Bank (which is now known as United Business Bank). Since its inception in 2004, Mr. Guarini has served as the Bank’s President and Chief Executive Officer. Mr. Guarini’s has more than 30 years of experience in the banking industry, holding key executive and senior level management positions with national and regional financial institutions. Prior to opening the Bank, Mr. Guarini was the Senior Vice President and Senior Lending Officer of Summit Bank, a community bank headquartered in Oakland, California. Mr. Guarini also enjoyed a career with Imperial Capital Bank based in Glendale, California, where he began as Senior Vice President in charge of resolving significant loan portfolio weakness and subsequently was appointed as that bank’s Chief Lending Officer.

Janet L. King, Senior Executive Vice President and Chief Operating Officer, has been with the Bank since its inception in 2004, and currently serves in these positions with the Company. Ms. King is a member of the executive management team and has over 29 years of banking experience. Prior to joining the Bank, Ms. King was employed by Circle Bank as the Chief Branch Administrative Officer and was formerly Vice President of Operations for Valencia Bank & Trust in Valencia, California.

Keary L. Colwell, Senior Executive Vice President, Chief Financial Officer and Corporate Secretary, has been with the Bank since its inception in 2004, and currently serves in these positions with the Company. Ms. Colwell has over 28 years in banking and finance. Prior to joining the Bank, Ms. Colwell was employed by The San Francisco Company and Bank of San Francisco, First Nationwide Bank and Independence Savings and Loan Association.

Izabella L. Zhu, Executive Vice President and Chief Risk Officer, joined the Bank in September 2013. Ms. Zhu was previously a Senior Financial Institutions Examiner and a founding and inaugural member of the Examiner Council at the California Department of Business Oversight as well as Examiner-in-Charge of various large banks, troubled financial institutions, and trust departments. Prior to that Ms. Zhu was a financial advisor at Morgan Stanley.

David Funkhouser, Executive Vice President and Chief Credit Officer, joined the Bank in June 2015. Mr. Funkhouser has over 30 years of experience in banking. Prior to joining the Bank, Mr. Funkhouser served as President and Chief Executive Officer at Trans Pacific National Bank from 2010 to 2014.

Charles Yun, Executive Vice President and Chief Lending Officer, joined the Bank in March 2016. Mr. Yun has been in the banking industry for over 25 years and previously served as a Senior Vice President at Umpqua Bank where he was responsible for the middle market production group in the Bay Area. Mr. Yun’s experiences also extend to various positions with Comerica Bank, Silicon Valley Bank, Heritage Bank and Stanford Federal Credit Union.

Mary Therese (Terry) Curley, Executive Vice President/Director of the Labor Service Division, joined in the Bank in April 2017, in connection with our acquisition of United Business Bank, FSB. Ms. Curley served in a variety of positions at United Business Bank, FSB, including most recently as Executive Vice President and Chief Credit Officer.
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For additional information about our directors and executive officers, see “Management — Business Background of Our Directors” and “— Business Background of Our Executive Officers Who Are Not Directors.”
Products and Services
We offer a full range of lending products, including commercial and multi-family real estate loans (including owner-occupied and investor real estate loans), commercial and industrial loans (including equipment loans and working capital lines of credit), SBA loans, construction and land loans, agriculture-related loans and consumer loans.
The following chart summarizes the composition of our loan portfolio as of December 31, 2017.
Loan Type
Amount
Percent of
Total
Commercial and industrial
$ 114,373 12.8%
Real estate:
Residential
84,781 9.5%
Multifamily residential
118,128 13.2%
Owner occupied CRE
256,451 28.7%
Non-owner occupied CRE
297,244 33.2%
Construction and land
22,720 2.5%
Total real estate
779,324 87.1%
Consumer and other
1,096 0.1%
Gross loans
894,793 100.0%
Deferred loan fees and costs, net
(469)
Allowance for loan losses
(4,215)
Loans receivable, net
$ 890,109
We offer a variety of deposit accounts with a wide range of interest rates and terms including demand, savings, money market and time deposits with the goal of attracting a wide variety of clients. We solicit these accounts from individuals, small to medium-sized businesses, trade unions and their related businesses, associations, organizations and government authorities. Our transaction accounts and time certificates are tailored to the principal market area at rates competitive with those offered in the area. While we do not actively solicit wholesale deposits for funding purposes and do not partner with deposit brokers, we do participate in the CDARS service via Promontory Interfinancial Network an as option for our clients to place funds. Our goal is to cross-sell our deposit products to our loan clients.
The following chart summarizes the composition of our deposits as of December 31, 2017.
Deposit Type
Amount
Percent of
Total Deposits
Noninterest-bearing demand
$ 327,309 29.6%
Money market
356,640 32.3%
Interest-bearing demand and savings
191,550 17.3%
Certificates that mature:
Within one year
170,306 15.5%
After one year, but within three years
44,174 4.0%
After three years
14,326 1.3%
Total
$ 1,104,305 100.0%
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We provide our commercial clients with a diverse array of cash management services. We also offer escrow services on commercial transactions and facilitate tax-deferred commercial exchanges under Section 1031 (“Section 1031”) of the Internal Revenue Code of 1986 as amended (“Code”) through our Bankers Exchange Division, Bankers Exchange Services, or BES. We provide our clients with convenience-related services, including banking by appointment (before or after normal business hours on weekdays and on weekends), online banking services, access to a national automated teller machine network, remote deposit capture, on-line banking and courier services so that clients’ deposit and other banking needs may be served without the client having to make a trip to the branch.
Our Markets
We target our services to small and medium-sized businesses, professional firms, real estate professionals, nonprofit businesses, labor unions and related nonprofit entities and businesses and individual consumers within Northern, Central and Southern California, Seattle, Washington and Albuquerque, New Mexico. We generally lend in markets where we have a physical presence through our branch offices. We operate primarily in the San Francisco-Oakland-Hayward, California Metropolitan Statistical Area (“MSA”) with additional operations in the Los Angeles-Long Beach-Anaheim, California MSA, with Northern California responsible for 66.5% and Southern California responsible for 11.3% of our loan portfolio as of December 31, 2017.
A majority of our branches are located in the San Francisco Bay Area which includes/in the counties of Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, Solano, and Sonoma counties, in California. The greater San Francisco Bay area contains two significant MSAs — the San Francisco-Oakland-Hayward MSA and the San Jose-Sunnyvale-Santa Clara MSA. With a population of approximately 4.7 million, the San Francisco-Oakland-Hayward MSA represents the second most populous area in California and the twelfth largest in the United States. In addition to its current size, the market also demonstrates key characteristics we believe provide the opportunity for additional growth, including projected population growth of 5.9% through 2022 versus the national average of 3.7%, a median household income of  $88,685 versus a national average of  $57,462, and the third highest population density in the nation. The San Jose-Sunnyvale-Santa Clara MSA also demonstrates key characteristics that provide us growth opportunities, including a population of approximately 2.0 million, projected population growth of 6.0% through 2022, and a median household income of  $101,689.
We operate two branch offices and one loan production office in the Los Angeles-Long Beach-Anaheim, California MSA. The greater Los Angeles area is one of the most significant business markets in the world and with an estimated gross domestic product of approximately $1 trillion it would rank as the 16th largest economy in the world. The Los Angeles-Long Beach-Anaheim, California MSA maintains a population of approximately 13.5 million, the most populous area in California and the second largest in the United States. We believe the market’s projected population growth of 4.2% through 2022, its median household income of  $64,343, large concentration of small- and medium-sized businesses, and its highest population density in the nation position the area as an attractive market in which to expand operations.
We serve the Sacramento-Roseville-Arden-Arcade MSA through one branch office. With a population of approximately 2.3 million, the Sacramento-Roseville-Arden-Arcade MSA includes the City of Sacramento, the state capital of California. The population is projected to grow 5.1% through 2022 and the median household income is approximately $63,727. State and local government make up the largest employers, while transportation, health services, technology, agriculture and mining are important industries for the region.
We serve the Stockton-Lodi MSA in Central California though two branches. The market area has a population of approximately 740,596, which is projected to grow 5.4% through 2022, and a median household income of approximately $56,705. The area has a diverse industry mix, including agriculture, e-fulfillment centers, advanced manufacturing, data centers/call centers, and service industries.
We serve the Seattle-Tacoma-Bellevue MSA, which includes King County (which includes the city of Seattle), through our branch in Seattle. King County has the largest population of any county in the state of Washington, covers approximately 2,100 square miles, and is located on Puget Sound. It had
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approximately 2.2 million residents, which is projected to grow 7.5% through 2022, and a median household income of approximately $81,089. King County has a diversified economic base with many employers from various industries including shipping and transportation (Port of Seattle, Paccar, Inc. and Expeditors International of Washington, Inc.), retail (Amazon.com, Inc., Starbucks Corp. and Nordstrom, Inc.) aerospace (the Boeing Company) and computer technology (Microsoft Corp.) and biotech industries.
We serve Albuquerque, New Mexico the most populous city in the state of New Mexico through the branch office we recently acquired in the United Business Bank, FSB acquisition. The Albuquerque MSA has a population of approximately 911,171, ranking it as the 60th MSA in the country. The Albuquerque MSA population is projected to grow approximately 1.7% through 2022 and its median household income is approximately $50,192. Top industries in Albuquerque include aerospace and defense (Honeywell), energy technology including solar energy (SCHOTT Solar), and semiconductor and computer chip manufacturing (Intel Corp).
Risk Factors
As discussed above, our focus is to (i) continue to make strategic acquisitions of financial institutions within the Western United States, (ii) grow organically and (iii) preserve our strong asset quality through disciplined lending practices. Our ability to achieve growth with select acquisitions will be dependent on our ability to successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings.
There are a number of additional risks and other considerations that could negatively affect us, including risks related to this offering and our common stock that you should consider before investing in our common stock. These risks are discussed more fully in the section titled ‘‘Risk Factors,’’ beginning on page 27, and include, but are not limited to, the following:

if general business, economic conditions and real estate values do not continue to improve, particularly within our market areas, our growth and results of operations could be adversely affected;

a substantial portion of our loan portfolio consists of real estate loans, in particular commercial real estate loans, which have a higher degree of risk than other types of loans;

delinquencies and defaults on newly originated loans may be significantly greater than our current level of delinquencies and defaults depending on the characteristics of the newly originated loans;

economic, market, operational, liquidity, credit and interest rate risks associated with our business could adversely affect our business, results of operations and financial condition;

competition within the financial services industry, nationally and within our market area, both for clients and employees, could limit our ability to grow and could adversely affect the pricing and terms that we are able to offer to our clients;

if we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for loan losses;

as we rely heavily on our management team and our bankers, we could be adversely affected by the unexpected departure of key members of our management and bankers; and

we are subject to extensive state and federal financial regulation, and compliance with changing requirements may restrict our activities or have an adverse effect on our results of operations.
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Corporate Information
Our principal executive offices are located at 500 Ygnacio Valley Road, Suite 200, Walnut Creek, California 94596 and our telephone number is (925) 476-1800. Our website is www.unitedbusinessbank.com. We expect to make our periodic reports and other information filed with, or furnished to, the SEC available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with, or furnished to, the SEC. The information on, or otherwise accessible through, our website or any other website does not constitute a part of this prospectus.
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THE OFFERING
Shares of common stock offered by us
2,272,727 shares (or 2,613,636 shares, if the underwriters exercise their over-allotment option in full).
Shares of common stock to be outstanding after this offering
9,769,722 shares (or 10,110,631 shares, if the underwriters exercise their over-allotment option in full).
Option to purchase additional shares
We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase additional shares of our common stock at the initial public offering price less the underwriting discount to cover over-allotments, if any.
Securities owned by directors and executive officers
Our directors and executive officers beneficially owned 494,348 shares of our common stock as of March 31, 2018. In addition, our directors and executive officers will receive an aggregate of approximately $2.7 million, or $3.1 million if the underwriters exercise their over-allotment option in full (based on the gross proceeds received in the offering), in restricted stock awards to be granted in connection with this offering. See “Executive and Director Compensation — Equity Awards in Connection with This Offering.” Our executive officers and directors may also purchase shares in the offering in their discretion, but they have made no commitments to do so.
Our board of directors is not making a recommendation regarding your purchase of shares in the offering. You should make your decision to invest based on your assessment of our business and the offering. Please see “Risk Factors” beginning on page 27 for a discussion of some of the risks involved in investing in our common stock.
Voting rights
One vote per share of common stock.
Use of proceeds
Assuming an initial public offering price of  $22.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from the sale of our common stock in this offering will be $46.0 million (or $53.1 million if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
We will use a portion of the net proceeds to repay a $6.0 million term loan with an interest rate of 4.71% that matures in April 2022 and will use the remaining net proceeds to support our organic growth and for other general corporate purposes, including to fund future acquisitions of financial institutions (although we do not have any definitive agreements in place to make any such acquisitions at this time) and to maintain our capital and liquidity ratios at acceptable levels. See “Use of Proceeds.”
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Dividend policy
We have not historically declared or paid cash dividends on our common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be retained to support our operations and finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors that our board of directors deems relevant. See “Dividend Policy.”
Listing and trading symbol
We have applied to list our common stock on The Nasdaq Global Select Market under the symbol “BCML.”
Risk factors
Investing in our common stock involves risks. You should carefully read and consider the information set forth under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” along with all of the other information set forth in this prospectus before deciding to invest in our common stock.
References in this section to the number of shares of our common stock outstanding after this offering are based on shares of our common stock issued and outstanding as of December 31, 2017. Unless otherwise noted, these references exclude 450,000 shares of common stock reserved for issuance under our 2017 Omnibus Equity Incentive Plan, including the shares of restricted stock we expect to issue to our directors and executive officers in connection with the consummation of this offering.
Unless otherwise indicated, the information contained in this prospectus is as of the date set forth on the cover page of this prospectus, assumes that the underwriters do not exercise their option to purchase any additional shares of common stock to cover over-allotments, if any and assumes that the common stock to be sold in this offering is sold at $22.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.
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SELECTED FINANCIAL AND OTHER DATA
The Financial Condition Data as of December 31, 2017 and 2016 and the Operating Data for the years ended December 31, 2017 and 2016 are derived from the audited financial statements and related notes included elsewhere in the prospectus. The Financial Condition Data as of December 31, 2015, 2014 and 2013 and the Operating Data for the years ended December 31, 2015, 2014 and 2013 are derived from audited financial statements, not included in this prospectus. The following information is only a summary and you should read it in conjunction with our financial statements and related notes beginning on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
At December 31,
2017
2016
2015
2014
2013
(In thousands)
Selected Financial Condition Data:
Total assets
$ 1,245,794 $ 675,299 $ 623,304 $ 504,391 $ 342,304
Cash and due from banks
251,596 130,213 111,391 145,281 80,980
Investments available-for-sale
40,505 13,918 23,615 17,540
FHLB stock and FRB stock, at cost
7,759 3,923 3,846 2,859 2,250
Loans receivable, net
890,109 504,264 460,208 322,908 251,105
Total liabilities
1,127,159 597,236 550,923 446,217 289,982
Deposits
1,104,305 590,759 543,304 437,941 286,464
Borrowed funds
11,387 6,000 2,000
Total equity
118,635 78,063 72,381 58,174 52,322
For the Years Ended December 31,
2017
2016
2015
2014
2013
(Dollars in thousands, except per share data)
Selected Operating Data:
Interest and dividend income
$ 44,253 $ 29,625 $ 25,715 19,637 $ 14,915
Interest expense
4,312 3,074 2,691 2,310 2,010
Net interest income before provision for loan
losses
39,941 26,551 23,024 17,057 12,835
Provision for loan losses
462 598 1,412 1,074 348
Net interest income after provision for loan losses
39,479 25,953 21,612 15,983 12,487
Noninterest income
4,794 1,358 6,902 3,705 628
Noninterest expense
30,124 16,963 19,350 13,063 8,596
Income before provision for income taxes
14,149 10,348 9,164 6,895 4,589
Provision for income taxes
8,889 4,436 1,712 1,717 1,899
Net income
$ 5,260 $ 5,912 $ 7,452 $ 5,178 $ 2,690
Per Share Data:
Earnings per share (EPS):
Basic EPS
$ 0.82 $ 1.10 $ 1.37 $ 1.09 $ 0.56
Diluted EPS
0.81 1.09 1.36 1.08 0.54
Book value per share
15.82 14.26 13.18 11.93 11.07
Tangible book value per share(1)
13.81 14.12 12.96 11.76 11.05
Dividends paid during period
Dividend payout ratio
(1)
Tangible book value is a non-GAAP financial measure generally used by financial analysts and investment bankers to evaluate financial institutions. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value. See “Non-GAAP Financial Measures.”
17

At or For the Years Ended December 31,
2017
2016
2015
2014
2013
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets
0.51% 0.91% 1.24% 1.13% 0.84%
Return on average equity
5.28% 7.87% 10.36% 10.02% 5.24%
Yield on interest-earning assets
4.59% 4.74% 4.47% 4.55% 4.76%
Rate paid on interest-bearing liabilities
0.65% 0.73% 0.72% 0.89% 0.95%
Interest rate spread(1)
3.94% 4.01% 3.75% 3.66% 3.81%
Net interest margin(2)
4.14% 4.25% 4.00% 3.95% 4.10%
Dividend payout ratio
Noninterest expense to average total assets
2.93% 2.61% 3.21% 2.79% 2.65%
Average interest-earning assets to average interest-bearing liabilities
144.87% 149.24% 153.08% 148.15% 143.26%
Efficiency ratio(3)
67.34% 60.78% 64.66% 62.11% 63.85%
Capital Ratios:(4)
Tier 1 leverage
8.92% 10.59% 10.59% 10.67% 15.65%
Common equity tier 1
12.43% 13.43% 13.30% N/A N/A
Tier 1 capital ratio
12.43% 13.43% 13.30% 15.78% 19.49%
Total capital ratio
12.94% 14.18% 14.13% 16.50% 20.53%
Equity to total assets at end of period
9.52% 11.56% 11.61% 11.53% 15.29%
Average equity to average assets
9.70% 11.55% 11.94% 11.28% 15.97%
Asset Quality Ratios:
Nonperforming assets to total assets(5)
0.01% 0.28% 0.05% 0.59% 0.83%
Nonperforming loans to total loans
0.02% 0.22% 0.07% 0.26% 0.32%
Allowance for loan losses to non-performing
loans
2,354.75% 343.18% 1,152.69% 84.49% 97.20%
Allowance for loan losses to total loans
0.47% 0.74% 0.83% 0.77% 1.09%
Other Data:
Number of full service offices
19 10 10 7 5
Number of full-time equivalent employees 
158 110 103 78 49
N/A – Not applicable
(1)
Interest rate spread is calculated as the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(2)
Net interest margin is calculated as net interest income divided by total average earning assets.
(3)
Calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income.
(4)
Regulatory capital ratios are for United Business Bank only.
(5)
Non-performing assets consists of non-accruing loans and other real estate owned.
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RECENT DEVELOPMENTS
The selected financial condition and operating data presented below as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 are unaudited. In the opinion of management, this unaudited selected data contains all adjustments (none of which are other than normal recurring items) necessary for a fair presentation of the results for the periods presented. The following information is only a summary and you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto contained elsewhere in this prospectus. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2018 or any other period.
At March 31,
2018
At December 31,
2017
(In thousands)
Selected Financial Condition Data:
Total assets
$ 1,241,833 $ 1,245,794
Cash and due from banks
256,796 251,596
Investments available-for-sale
36,789 40,505
FHLB stock and FRB stock, at cost
8,295 7,759
Loans receivable, net
886,229 890,109
Total liabilities
1,119,266 1,127,159
Deposits
1,098,773 1,104,305
Borrowed funds
11,402 11,387
Total equity
122,567 118,635
For the Three Months Ended
March 31,
2018
2017
(Dollars in thousands,
except per share data)
Interest income
$ 13,552 $ 7,402
Interest expense
1,138 918
Net interest income before provision for loan losses
12,414 6,484
Provision for loan losses
254 143
Net interest income after provision for loan losses
12,160 6,341
Noninterest income
1,726 736
Noninterest expense
8,123 4,637
Income before provision for income taxes
5,763 2,446
Provision for income taxes
1,694 1,022
Net income
$ 4,069 $ 1,418
Per Share Data:
Earnings per share (EPS):
Basic EPS
$ 0.54 $ 0.26
Diluted EPS
0.54 0.26
Book value per share
16.32 14.54
Tangible book value per share(1)
14.34 14.41
Dividends paid during period
Dividend payout ratio
(1)
Tangible book value is a non-GAAP financial measure generally used by financial analysts and investment bankers to evaluate financial institutions. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value. See “Non-GAAP Financial Measures.”
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At or For the Three Months Ended
March 31,
2018
2017
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets
1.31% 0.83%
Return on average equity
13.41% 7.17%
Yield on interest-earning assets
4.66% 4.58%
Rate paid on interest-bearing liabilities
0.59% 0.81%
Interest rate spread(1)
4.07% 3.77%
Net interest margin(2)
4.27% 4.02%
Dividend payout ratio
Noninterest expense to average total assets
2.65% 2.77%
Average interest-earning assets to average interest-bearing liabilities
149.83% 142.32%
Efficiency ratio(3)
57.45% 64.23%
Capital Ratios:(4)
Tier 1 leverage
9.45% 11.09%
Common equity tier 1
13.17% 13.56%
Tier 1 capital ratio
13.17% 13.56%
Total capital ratio
13.73% 14.32%
Equity to total assets at end of period
9.87% 11.41%
Average equity to average assets
9.76% 11.61%
Asset Quality Ratios:
Nonperforming assets to total assets(5)
0.02% 0.29%
Nonperforming loans to total loans
0.03% 0.19%
Allowance for loan losses to non-performing loans
2008.73% 395.76%
Allowance for loan losses to total loans
0.52% 0.73%
Other Data:
Number of full service offices
18 10
Number of full-time equivalent employees
158 107
(1)
Interest rate spread is calculated as the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(2)
Net interest margin is calculated as net interest income divided by total average earning assets.
(3)
Calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income.
(4)
Regulatory capital ratios are for United Business Bank only.
(5)
Non-performing assets consists of non-accruing loans and other real estate owned.
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Comparison of Financial Condition at March 31, 2018 and December 31, 2017
Total assets.   Total assets decreased $4.0 million, or 0.3%, to $1.24 billion at March 31, 2018 from $1.25 billion at December 31, 2017. The decrease was primarily due to a $3.9 million, or 0.4%, decrease in total loans receivable, net.
Cash and cash equivalents.   Cash and cash equivalents increased $5.2 million, or 2.1%, to $256.8 million at March 31, 2018 from $251.6 million at December 31, 2017. The increase was primarily due to cash received from an increase in client deposits. 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 decreased $3.7 million, or 9.2%, to $36.8 million at March 31, 2018 from $40.5 million at December 31, 2017. The decrease was primarily due to maturities of investment securities of  $2.0 million during the three months ended March 31, 2018, in addition to routine amortization and accretion of investment premiums and discounts. At March 31, 2018, all of our investment securities were classified as available-for-sale.
Loans receivable, net.   Loans receivable, net of allowance for loan losses, decreased $3.9 million, or 0.4%, to $886.2 million at March 31, 2018 from $890.1 million at December 31, 2017. The decrease in loans receivable was primarily due to loans sold and prepayments on loans in excess of new loan originations. Loan originations for quarter ended March 31, 2018 totaled $29.2 million compared to $31.6 million during the three months ended December 31, 2017.
Nonperforming assets and nonaccrual loans.   Nonperforming assets consists of nonaccrual loans and other real estate owned. Nonperforming assets increased $50,000, or 27.9%, to $229,000 at March 31, 2018 from $179,000 at December 31, 2017. At March 31, 2018, accruing loans past due 30 to 89 days totaled $1.1 million, compared to $1.9 million at December 31, 2017.
The allowance for loan losses increased by $385,000, or 9.1%, to $4.6 million at March 31, 2018 from $4.2 million at December 31, 2017. 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. As of March 31, 2018, acquired loans net of their discounts totaled $378.1 million compared to $400.0 million at December 31, 2017.
Management believes it has established our allowance for loan losses in accordance with GAAP, however, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is appropriate or that increased provisions will not be necessary should the quality of the loans deteriorate. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.
Deposits.   Total deposits decreased $5.5 million, or 0.5%, to $1.10 billion at March 31, 2018 from $1.10 billion at December 31, 2017, primarily due to normal fluctuations within our deposit portfolio. Demand deposits as a percentage of total deposits increased to 80.0% at March 31, 2018 from 79.2% at December 31, 2017.
Borrowings.   Borrowed funds were $11.4 million at both March 31, 2018 and December 31, 2017. The totals in both periods included $6.0 million in long-term secured borrowings and $5.4 million (net of mark-to-market adjustments), of junior subordinated debentures issued in connection with the sale of trust preferred securities from our acquisition of United Business Bank, FSB in 2017. At March 31, 2018, we had no FHLB advances outstanding and the ability to borrow up to $310.3 million.
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In addition to FHLB advances, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At March 31, 2018, we had a total of  $55.0 million of federal funds lines available from four third-party financial institutions, in addition to a $9.0 million line of credit which will expire in April 2018 that we do not intend to renew.
We are required to provide collateral for certain local agency deposits. As of March 31, 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.   Shareholders’ equity increased $3.9 million, or 3.3%, to $122.6 million at March 31, 2018 from $118.6 million at December 31, 2017. This increase was primarily due to net income of  $4.1 million for the three months ended March 31, 2018.
Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017
Earnings summary.   We reported net income of  $4.1 million for the three months ended March 31, 2018, compared to $1.4 million for the three months ended March 31, 2017, an increase of  $2.7 million, or 187.3%. The increase in net income primarily was the result of increases in net interest income before provision for loan losses 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 $0.54 for the three months ended March 31, 2018, an increase of  $0.28 from diluted earnings per share of  $0.26 for the three months ended March 31, 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 57.45% for the three months ended March 31, 2018, compared to 64.24% for the three months ended March 31, 2017. The change in the efficiency ratio for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is attributable primarily to the increase in net interest income and noninterest income, partially offset by an increase in noninterest expense.
Interest income.   Interest income for the three months ended March 31, 2018 was $13.6 million, compared to $7.4 million for the three months ended March 31, 2017, an increase of  $6.2 million, or 83.1%. The increase in interest income primarily was due to an increase in average interest earning assets, principally loans, which was driven by the two whole-bank acquisitions completed during 2017. Interest income on loans increased $4.6 million as a result of a $372.2 million increase in the average loan balance, further supplemented by a two basis point increase in the average loan yield. The average yield earned on loans for the three months ended March 31, 2018 was 4.91%, compared to 4.89% for the three months ended March 31, 2017. Interest income on loans for the three months ended March 31, 2018 included $1.2 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $557,000 for the three months ended March 31, 2017. The remaining net discount on these purchased loans was $7.7 million and $4.7 million at March 31, 2018 and 2017, respectively.
Interest income on interest-bearing deposits increased $563,000 as a result of a $125.9 million increase in the average balance of interest-earning deposits and a 67 basis point increase in the yield on interest-earning deposits to 1.56% for the three months ended March 31, 2018 from 0.89% for the three months ended March 31, 2017. Interest income on investment securities increased $312 thousand as a result of a $25.7 million increase in the average balance of investment securities and a 61 basis point increase in the yield on investment securities to 2.00% for the three months ended March 31, 2018 from 1.38% for the three months ended March 31, 2017.
Interest expense.   Interest expense increased by $220,000, or 23.9%, to $1.1 million for the three months ended March 31, 2018 from $918,000 for the three months ended March 31, 2017. The average cost of interest bearing liabilities decreased 22 basis points to 0.59% for the three months ended March 31, 2018 from 0.81% for the three months ended March 31, 2017. Total average interest-bearing liabilities increased by $516.9 million, or 86.9%, to $1.1 billion for the three months ended March 31, 2018 from $516.9 million for the three months ended March 31, 2017.
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Interest expense on deposits increased $60,000, or 6.6%, to $979,000 during the three months ended March 31, 2018 from $918,000 the same period in 2017, primarily due to the deposits acquired in the United Business Bank, FSB and Plaza Bank acquisitions. The effect 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 0.51% for the three months ended March 31, 2018 from 0.81% for the three months ended March 31, 2017. Interest expense on borrowings was $159,000 for the three months ended March 31, 2018 compared to none for the same period in 2017, as a result of the junior subordinated debentures assumed and another borrowing obtained in connection with our United Business Bank, FSB acquisition. The Company replaced a term loan of United Business Bank, FSB that matured upon its acquisition with a similar $6.0 million term loan. This term loan will be repaid from the net proceeds of this offering.
Net interest income.   Net interest income increased $5.9 million, or 91.5%, to $12.4 million for the three months ended March 31, 2018 compared to $6.5 million for the three months ended March 31, 2017. Net interest margin for the three months ended March 31, 2018 increased 25 basis points to 4.27% from 4.02% for the same period in 2017. 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 42 basis points and 35 basis points during three months ended March 31, 2018 and 2017, respectively. The average yield on interest-earning assets for the three months ended March 31, 2018 was 4.66%, an eight basis point increase from the three months ended March 31, 2017, while the average cost of interest-bearing liabilities for the three months ended March 31, 2018 was 0.59%, down 20 basis points from the 0.81% cost of funds during the three months ended March 31, 2017.
Provision for loan losses.   We recorded a provision for loan losses of  $254,000 for the three months ended March 31, 2018, compared to a provision for loan losses of  $143,000 for the three months ended March 31, 2017, an increase of  $111,000 or 77.3%. 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  $131,000 for the three months ended March 31, 2018 compared to net recoveries of  $7,000 during the three months ended March 31, 2017. The ratio of net recoveries to average total loans outstanding was (0.01)% for the three months ended March 31, 2018 and 0.00% for the three months ended March 31, 2017. The allowance for loan losses to loans receivable was 0.52% at March 31, 2018 compared to 0.73% at March 31, 2017.
Management considers the allowance for loan losses at March 31, 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.
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Noninterest income.   Noninterest income increased $990,000, or 134.6%, to $1.7 million for the three months ended March 31, 2018 compared to $736,000 for the three months ended March 31, 2017. The increase primarily relates to higher gain on sale of loans, service charges and other fees and loan fee income. During the three months ended March 31, 2018, the Company sold $6.4 million of SBA loans, which generated a net gain on sale of  $651,000 compared to a gain of  $400,000 during the three months ended March 31, 2017. Additionally, our acquisitions and organic growth significantly increased our deposit accounts, which resulted in a $304,000, or 213.0%, increase in service charges and other fees. Loan fee income increased $188,000, or 329.6%, to $245,000 for the three months ended March 31, 2018, compared to $57,000 for the three months ended March 31, 2017. All other components of noninterest income increased $248,000, net between these two periods.
Three Months Ended
March 31,
Increase (Decrease)
2018
2017
Amount
Percent
(Dollars in thousands)
Gain on sale of loans
$ 651 $ 400 $ 251 62.8%
Service charges and other fees
446 143 303 211.9%
Loan fee income
245 57 188 329.8%
Other income and fees
384 136 248 182.4%
Total noninterest income
$ 1,726 $ 736 $ 990 134.6%
Noninterest expense.   Noninterest expense increased $3.5 million, or 75.2%, to $8.1 million for the three months ended March 31, 2018 compared to $4.6 million for the three months ended March 31, 2017. Each line category of noninterest expense was higher than the previous year, as we nearly doubled in size due to the acquisitions and organic growth. Salaries and related benefits increased $1.8 million, or 59.4%, to $4.9 million, as the number of full-time equivalent employees increased to 158 at March 31, 2018, compared to 107 a year earlier. Occupancy and equipment expenses increased $406,000, or 71.3%, to $975,000, primarily due to the increase in the number of branch office resulting from our acquisitions. As of March 31, 2018, we operated 17 full service branches, compared to 10 a year earlier. As we build our market presence, we regularly evaluate the appropriate number and locations of our branches, and have recently closed one of our two locations in San Jose, California in March 2018, due to overlapping market areas. We may also close branches from time to time in the future that do not meet our objectives or based on acquisitions of other banks with branches located near our existing branches, advances in technology such as e-commerce, telephone, internet and mobile banking, as well as an increasing customer preference for these other methods of accessing our products and services, and other factors. Data processing expenses increased $348,000, or 96.8%, to $708,000, related to the acquisitions and the systems conversion we undertook during 2017, as well as a result of higher transaction volume. Other noninterest expense increased $899,000, or 143.7%, to $1.5 million during the three months ended March 31, 2018, compared to $626,000 during the same period in 2017, primarily due to increases in office expenses of  $216,000, professional fees of  $211,000, amortization of our core deposit intangible asset of  $206,000, and in marketing expenses of  $156,000.
Three Months Ended
March 31,
Increase (Decrease)
2018
2017
Amount
Percent
(Dollars in thousands)
Salaries and related benefits
$ 4,914 $ 3,082 $ 1,832 59.4%
Occupancy and equipment
975 569 406 71.4%
Data processing
708 360 348 96.7%
Other
1,525 626 899 143.6%
Total noninterest expense
$ 8,123 $ 4,637 $ 3,485 75.2%
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Income taxes.   Income tax expense increased $672,000, or 65.7%, to $1.7 million for the three months ended March 31, 2018 compared to $1.0 million for the three months ended March 31, 2017, reflecting the increase in pre-tax income. The Company’s effective tax rate was 29.39% for the three months ended March 31, 2018 compared to 41.91% for the same period in 2017. The decrease in the Company’s effective tax rate during the three months ended March 31, 2018 compared to the same period in 2017 is primarily the result of recent changes in the U.S. tax laws enacted December 22, 2017, wherein the statutory corporate income tax rate was lowered from 35.0% to 21.0%.
Non-GAAP Financial Measures
We identify certain financial measures discussed in this prospectus as being “non-GAAP financial measures.” In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time in the United States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this prospectus should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this prospectus may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this prospectus when comparing such non-GAAP financial measures.
Tangible Book Value Per Common Share:    Tangible book value is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total shareholders’ equity less preferred stock and goodwill and core deposit intangibles, net of accumulated amortization; and (b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock outstanding. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.
Tangible Common Equity to Tangible Assets:   Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total shareholders’ equity less goodwill and core deposit intangibles, net of accumulated amortization; (b) tangible assets as total assets less goodwill and core deposit intangibles, net of accumulated amortization; and (c) tangible common equity to tangible assets as tangible common equity (as described in clause (a)) divided by tangible assets (as described in clause (b)). For common equity to tangible assets, the most directly comparable financial measure calculated in accordance with GAAP is total shareholders’ equity to total assets.
Management believes that these measures are important to many investors who are interested in the relative changes from period to period in book value per common share, common equity and total assets, exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value and increasing both total shareholders’ equity and total assets while not increasing tangible common equity or tangible assets.
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The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets and compares book value per common share to tangible book value per common share (dollars in thousands, except per share data).
At March 31,
At December 31,
2018
2017
2017
2016
2015
2014
2013
Tangible Common Equity
Total shareholders’ equity
$ 122,567 $ 79,580 $ 118,635 $ 78,063 $ 72,381 $ 58,174 $ 52,322
Less:
Core deposit intangibles
4,483 719 (4,772) (802) (1,201) (812) (62)
Goodwill
10,365 (10,365)
Tangible common equity
$ 107,719 $ 78,861 $ 103,498 $ 77,261 $ 71,179 $ 57,362 $ 52,260
Tangible Assets
Total assets
$ 1,241,833 $ 1,245,794 $ 1,245,794 $ 675,299 $ 623,304 $ 504,391 $ 342,304
Less:
Core deposit intangibles
4,483 719 (4,772) (802) (1,201) (812) (62)
Goodwill
10,365 (10,365)
Tangible assets
$ 1,226,985 $ 1,245,075 $ 1,230,657 $ 674,497 $ 622,103 $ 503,579 $ 342,242
Common shares outstanding
7,512,227 5,472,503 7,496,995 5,472,426 5,493,209 4,875,787 4,727,457
Book value per common share
$ 16.32 $ 14.54 $ 15.82 $ 14.26 $ 13.18 $ 11.93 $ 11.07
Tangible book value per common
share
$ 14.34 $ 14.41 $ 13.81 $ 14.12 $ 12.96 $ 11.76 $ 11.05
Tangible common equity to tangible assets
8.78% 6.33% 8.41% 11.45% 11.44% 11.39% 15.27%
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RISK FACTORS
Investment in our common stock involves risks. In addition to the other information contained in this prospectus, including the matters addressed under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the following factors before deciding to invest in shares of our common stock. The occurrence of any of these risks could have a material adverse effect on our business, prospects, results of operations or financial condition, in which case the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations.
Risks Related to Our Business
Our business may be adversely affected by downturns in the national economy and the regional economies in which we operate.
Our operations are significantly affected by national and regional economic conditions. Weakness in the national economy or the economies of the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects. We provide banking and financial services primarily to businesses and individuals in the states of California, Washington, and New Mexico. All of our branches and most of our deposit clients are also located in these three states. Further, as a result of a high concentration of our client base in the San Francisco Bay area, the deterioration of businesses in this market, or one or more businesses with a large employee base in this marked, could have a material adverse effect on our business, financial condition and results of operations. Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade. In addition, adverse weather conditions as well as decreases in market prices for agricultural products grown in our primary markets can adversely affect agricultural businesses in our markets.
A deterioration in economic conditions in the market areas we serve, in particular the San Francisco metropolitan area, Seattle, Washington, and Albuquerque, New Mexico and the agricultural region of the California Central Valley, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

demand for our products and services may decline;

loan delinquencies, problem assets and foreclosures may increase;

collateral for loans, especially real estate, may decline in value, in turn reducing clients’ borrowing power, reducing the value of assets and collateral associated with existing loans;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and

the amount of our low-cost or non-interest-bearing deposits may decrease.
Many of the loans in our portfolio are secured by real estate. A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes, floods, fires and mudslides.
We rely heavily on our management team and could be adversely affected by the unexpected loss of key officers.
We are led by an experienced management team with substantial experience in the markets that we serve and the financial products that we offer. The members of our executive management team, on average, have many years of experience working for financial institutions and have significant merger and
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acquisition experience in the financial services industry. Our operating strategy focuses on providing products and services through long-term relationship managers. In addition, an important part of our future growth strategy includes growing our business through strategic acquisitions. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management with specific skill sets. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our operating and growth strategies may be lengthy. We may not be successful in retaining our key employees and the unexpected loss of services of one or more of our key personnel could have a material adverse effect on our business because of their skills, knowledge of our market and financial products, years of industry experience, long-term client relationships and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, which could have an adverse effect on our business, financial condition and results of operations.
Our business and profitability may be harmed if we are unable to identify and acquire other financial institution or manage our growth, which may cause our stock price to decline.
A substantial part of our historical growth has been a result of acquisitions of other financial institutions. We intend to continue our strategy of evaluating and selectively acquiring other financial institutions that serve clients or markets we find desirable. The market for acquisitions, however, remains highly competitive and we may be unable to find satisfactory acquisition candidates in the future that fit our acquisition strategy and standards. We face significant competition in pursuing acquisition targets from other financial institutions, many of which possess greater financial, human, technical and other resources than us. Our ability to compete in will depend on our available financial resources to fund acquisitions, including the amount of cash and cash equivalents we have and the liquidity and market price of our common stock. In addition, increased competition may also drive up the price that we will be required to pay for acquisitions. Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable to us and expect that we will experience this condition in the future. If we are able to identify attractive acquisition opportunities, we must generally satisfy a number of conditions prior to completing any such transaction, including certain bank regulatory approvals, which have become substantially more difficult, time-consuming and unpredictable. An important component of our growth strategy may not be realized if we are unable to find suitable acquisition targets. Additionally, any future acquisition may not produce the revenue, earnings or synergies that we anticipated.
Further, acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future acquisition, and the carrying amount of any goodwill that we currently maintain or may acquire may be subject to impairment in future periods.
If we continue to grow, we will face risks arising from our increased size. If we do not manage such growth effectively, we may be unable to realize the benefit from the investments in technology, infrastructure and personnel that we have made to support our expansion. In addition, we may incur higher costs and realize less revenue growth than we expect, which would reduce our earnings and diminish our future prospects, and we may not be able to continue to implement our business strategy and successfully conduct our operations. Risks associated with failing to maintain effective financial and operational controls as we grow, such as maintaining appropriate loan underwriting procedures, information technology systems, determining adequate allowances for loan losses and complying with regulatory accounting requirements, including increased loan losses, reduced earnings and potential regulatory penalties and restrictions on growth, all could have a negative effect on our business, financial condition and results of operations.
Our strategy of pursuing acquisitions exposes us to financial, execution, compliance and operational risks that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We have recently expanded our business through acquisitions. During 2017, we completed the acquisitions of United Business Bank, FSB and Plaza Bank. We have grown our consolidated assets from $675.3 million as of December 31, 2016, to $1.25 billion as of December 31, 2017, and our deposits from
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$590.8 million as of December 31, 2016, to $1.10 billion as of December 31, 2017. Because we intend to continue to grow our business through strategic acquisitions coupled with organic loan growth, we anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth strategy.
Our pursuit of acquisitions may disrupt our business, and any equity that we issue as merger consideration may have the effect of diluting the value of your investment. In addition, we may fail to realize some or all of the anticipated benefits of completed acquisitions.
Our acquisition activities strategy involves a number of significant risks, including the following:

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, diverting management’s attention from the operation of our existing business;

using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target company or the assets and liabilities that we seek to acquire;

exposure to potential asset quality and credit quality;

higher than expected deposit attrition;

potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without limitation, liabilities for regulatory and compliance issues;

inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits of the acquisition;

incurring time and expense required to integrate the operations and personnel of the combined businesses;

inconsistencies in standards, procedures, and policies that would adversely affect our ability to maintain relationships with clients and employees;

experiencing higher operating expenses relative to operating income from the new operations;

creating an adverse short-term effect on our results of operations;

significant problems relating to the conversion of the financial and client data of the entity;

integration of acquired clients into our financial and client product systems;

to finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or pursue other forms of financing, such as issuing voting and/or non-voting common stock or convertible preferred stock which may have high dividend rights or may be highly dilutive to our existing shareholders; and

risks of impairment to goodwill.
Any of the foregoing could have an adverse effect on our business, financial condition, and results of operation.
In addition we face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.
If the goodwill that we have recorded or may record in the future in connection with a business acquisition becomes impaired, it could require charges to earnings.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired.
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We determine impairment by comparing the implied fair value of the goodwill with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2017, our goodwill totaled $10.4 million. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our business, financial condition and results of operations.
We have entered into employment agreements with certain of our officers, which may increase our compensation costs upon the occurrence of certain events or increase the cost of acquiring us.
We have entered into employment agreements with certain of our officers, which may increase our compensation costs upon the occurrence of certain events or increase the cost of acquiring us. In the event of termination of employment other than for cause, or in the event of certain types of termination following a change in control, as set forth in the relevant employment agreement, the agreement will provide for cash severance benefits based on such officer’s current base salary and the terms of such agreement. For additional information see “Executive and Director Compensation — Employment Agreements with Mr. Guarini, Ms. King and Ms. Colwell.”
Our ability to grow our loan portfolio may be limited by, among other things, economic conditions, competition within our market areas, the timing of loan repayments and seasonality.
Our ability to continue to improve our operating results is dependent upon, among other things, growing our loan portfolio. While we believe that our strategy to grow our loan portfolio is sound and our growth targets are achievable over an extended period of time, competition within our market areas is significant. We compete with both large regional and national financial institutions, who are sometimes able to offer more attractive interest rates and other financial terms than we choose to offer, as well as other community-based banks who seek to offer a similar level of service to that which we offer. This competition can make loan growth challenging, particularly if we are unwilling to price loans at levels that would cause unacceptable levels of compression of our net interest margin or if we are unwilling to structure a loan in a manner that we believe results in a level of risk to us that we are not willing to accept. Moreover, loan growth throughout the year can fluctuate due in part to seasonality of the businesses of our borrowers and potential borrowers and the timing on loan repayments, particularly those of our borrowers with significant relationships with us, resulting from, among other things, excess levels of liquidity. To the extent that we are unable to increase loans, we may be unable to successfully implement our growth strategy, which could materially and adversely affect our business, financial condition and results of operations.
Our financial performance will be negatively impacted if we are unable to execute our growth strategy.
Our current growth strategy is to grow with select acquisitions supplemented by organic growth. Our ability to grow organically depends primarily on generating loans and deposits of acceptable risk and expense, and we may not be successful in continuing this organic growth. Our ability to identify appropriate markets for expansion, recruit and retain qualified personnel, and fund growth at a reasonable cost depends upon prevailing economic conditions, maintenance of sufficient capital, competitive factors, and changes in banking laws, among other factors. Conversely, if we grow too quickly and are unable to control costs and maintain asset quality, such growth, whether organic or through select acquisitions, could materially and adversely affect our financial condition and results of operations.
The required accounting treatment of loans acquired through acquisitions, including purchase credit impaired loans, could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Under U.S. generally accepted accounting principles, or GAAP, we are required to record loans acquired through acquisitions, including purchase credit impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition date. Actual performance could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net
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interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods. For example, the total loan yield for the year ended December 31, 2017 was 5.44%, which included two basis points from excess accretion related to purchase credit impaired loans. As a result of the foregoing, we are unlikely to be able to replace loans in our existing portfolio with comparable high-yielding loans and without a larger volume of high-yielding loans our results of operations may be adversely affected. Our business, financial condition and results of operations may also be materially and adversely affected if we choose to pursue riskier higher-yielding loans that fail to perform.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
At December 31, 2017, approximately 87.0% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
At December 31, 2017, we had $808.9 million of commercial loans, consisting of  $694.5 million of commercial real estate loans and $114.4 million of commercial and industrial loans for which real estate is not the primary source of collateral. Of the $694.5 million of commercial real estate loans, $118.1 million consisted of multifamily loans and $22.7 million consisted of commercial construction and land development loans. Commercial and industrial loans represented 12.8% of our total loan portfolio at December 31, 2017. In addition, at December 31, 2017, $297.2 million, or 33.2% of our total loan portfolio, consisted of loans secured by non-owner occupied commercial real estate properties.
These loans typically involve higher principal amounts than other types of loans, and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Because payments on such loans are often dependent on the cash flow of the commercial venture and the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy in one of our markets or in occupancy rates where a property is located. Repayments of loans secured by non-owner occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. Accordingly, a downturn in the real estate market or a challenging business and economic environment may increase our risk related to commercial loans. In addition, many of our commercial real estate loans are not fully amortizing and require large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. The borrowers’ cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral consists of accounts receivable, inventory and equipment. Significant adverse changes in our borrowers’ industries and businesses could cause rapid
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declines in values of, and collectability associated with, those business assets, which could result in inadequate collateral coverage for our commercial and industrial loans and expose us to future losses. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Inventory and equipment may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. An increase in specific reserves and charge-offs related to our commercial and industrial loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects.
The foregoing risks are enhanced as a result of the limited geographic scope of our principal markets. Most of the real estate securing our loans is located in our California markets. Because the value of this collateral depends upon local real estate market conditions and is affected by, among other things, neighborhood characteristics, real estate tax rates, the cost of operating the properties, and local governmental regulation, adverse changes in any of these factors in our markets could cause a decline in the value of the collateral securing a significant portion of our loan portfolio. Further, the concentration of real estate collateral in California limits our ability to diversify the risk of such occurrences.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The Federal Deposit Insurance Corporation (the “FDIC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our balance in commercial real estate loans at December 31, 2017 represents more than 300% of total capital. Owner occupied commercial real estate totals 229.6% of total capital, while non-owner occupied commercial real estate totals an additional 371.9% of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
Our high concentration of large loans to certain borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to originate and retain large loans. We have established an informal, internal limit on loans to one borrower, principal or guarantor. Our limit is based on “total exposure” which represents the aggregate exposure of economically related borrowers for approval purposes. However, we may, under certain circumstances, consider going above this internal limit in situations where management’s understanding of the industry and the credit quality of the borrower are commensurate with the increased size of the loan. Many of these loans have been made to a small number of borrowers, resulting in a high concentration of large loans to certain borrowers. As of December 31, 2017, our 10 largest borrowing relationships accounted for approximately 15.9% of our total loan portfolio, including undisbursed commitments to these borrowers. Along with other
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risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death, our non-accruing loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our business, financial condition and results of operations.
Several of our large depositors have relationships with each other, which creates a higher risk that one client’s withdrawal of its deposit could lead to a loss of other deposits from clients within the relationship, which, in turn, could force us to fund our business through more expensive and less stable sources.
As of December 31, 2017, our ten largest non-brokered depositors accounted for $120.3 million in deposits, or approximately 10.9% of our total deposits. Several of our large depositors are affiliated locals of labor unions or have business, family, or other relationships with each other, which creates a risk that any one client’s withdrawal of its deposit could lead to a loss of other deposits from clients within the relationship. See “— Deposits from labor unions and their related businesses are one important source of funds for us and a reduced level of such deposits may hurt our profits” risk factor below.
Withdrawals of deposits by any one of our largest depositors or by one of our related client groups could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
Our ability to retain and recruit top bankers is critical to the success of our business.
Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities and the reputation, relationship management skills and acquisition experience of our officers and other employees. If we were to lose the services of any of our key employees, including successful bankers employed by banks that we acquire, to a new or existing competitor or otherwise, we may not be able to retain valuable client relationships or successfully execute on potential future acquisitions. Competition for loan officers and other personnel is strong and we may not be successful in attracting or retaining the personnel we require. In particular, many of our competitors are significantly larger with greater financial resources, and may be able to offer more attractive compensation packages and broader career opportunities. Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before we are able to determine whether a new loan officer will be profitable or effective. If we are unable to attract and retain successful loan officers and other personnel, or if our loan officers and other personnel fail to meet our expectations in terms of client relationships and profitability, we may be unable to execute our business strategy and our business, financial condition and results of operations may be adversely affected.
Any expansion into new markets or new lines of business might not be successful.
As part of our ongoing strategic plan, we may consider expansion into new geographic markets. Such expansion might take the form of the establishment of de novo branches or the acquisition of existing banks or bank branches. There are considerable costs associated with opening new branches, and new branches generally do not generate sufficient revenues to offset costs until they have been in operation for some time. Additionally, we may consider expansion into new lines of business through the acquisition of third parties or organic growth and development. There are substantial risks associated with such efforts, including risks that (i) revenues from such activities might not be sufficient to offset the development, compliance, and other implementation costs, (ii) competing products and services and shifting market preferences might affect the profitability of such activities, and (iii) our internal controls might be inadequate to manage the risks associated with new activities. Furthermore, it is possible that our unfamiliarity with new markets or lines of business might adversely affect the success of such actions. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also affect the ultimate implementation of a new line of business or offerings of new products, product enhancements or services. If any such expansions into new geographic or product markets are not successful, there could be an adverse effect on our financial condition and results of operations.
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Our small to medium-sized business and entrepreneurial clients may have fewer financial resources than larger entities to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our financial condition and results of operations.
We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to midsized businesses, which we define as commercial borrowing relationships at the Bank of less than $10.0 million in aggregate loan exposure. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be adversely affected.
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for loan losses.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We could sustain losses if borrowers, guarantors, and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies that we believe are appropriate to minimize this risk, including the establishment and review of the allowance for loan losses, periodic assessment of the likelihood of nonperformance, tracking loan performance, and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our financial condition and results of operations. In particular, we face credit quality risks presented by past, current, and potential economic and real estate market conditions. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
While conditions in the housing and real estate markets and economic conditions in our market areas have recently improved, if slow economic conditions return or real estate values and sales deteriorate, we may experience higher delinquencies and credit losses. As a result, we could be required to increase our provision for loan losses and to charge-off additional loans in the future. If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses.
We maintain our allowance for loan losses at a level that management considers adequate to absorb probable incurred loan losses based on an analysis of our portfolio and market environment. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable incurred losses inherent in the loan portfolio and credit undertakings that are not specifically identified. The amount of this allowance is determined by our management through periodic reviews and consideration of a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other conditions within our markets, which may be beyond our control may require an increase in the allowance for loan losses.
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As of December 31, 2017, our allowance for loan losses as a percentage of total loans was 0.47% and as a percentage of total nonperforming loans, excluding the allowance allocated to loans accounted for acquired credit impaired loans accounted for pursuant to ASC Topic 310-30, was 2,354%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” for further information about ASC 310-30. Although management believes that the allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management’s decision to do so or because our banking regulators require us to do so. Bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
The acquisition method of accounting requires that acquired loans are initially recorded at fair value at the time of acquisition, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition because credit quality, among other elements, was considered in the determination of fair value. To the extent that our estimates of fair value are too high, we will incur losses associated with the acquired loans.
In addition, in June 2016, the FASB issued a new accounting standard that will replace the current approach under GAAP for establishing the allowance for loan losses, which generally considers only past events and current conditions, with a new forward-looking methodology that reflects the expected credit losses over the lives of financial assets starting when such assets are first originated or acquired. Under this new standard, referred to as Current Expected Credit Loss, or CECL, credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. The new standard is expected to generally result in increases to allowance levels and will require the application of the revised methodology to existing financial assets through a one-time adjustment to retained earnings upon initial effectiveness, which may be material. As an emerging growth company, this standard will be effective for us for fiscal years beginning after December 15, 2020 and interim reporting periods beginning after December 15, 2021. External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations.
Our profitability is vulnerable to interest rate fluctuations.
As with most financial institutions, our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Interest rates, which remain largely at historically low levels, are highly sensitive to many factors that are beyond our control such as general economic conditions and policies of the federal government, in particular the Federal Open Market Committee. In an attempt to help the overall economy, the Federal Reserve has kept interest rates low through its targeted Fed Funds rate. During 2017, the FRB increased the targeted Fed Funds rate three times, each time by 25 basis points, and in March 2018 increased the targeted Fed Funds rate another 25 basis points. The Federal Reserve has indicated that further increases are likely during 2018, subject to economic conditions. As the Federal Reserve increases the targeted Fed Funds rate, overall interest rates will likely rise, which may negatively impact the U.S. economic recovery. Further, changes in monetary policy, including changes in interest rates, could influence (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits, (iv) the fair value of our assets and liabilities, and (v) the reinvestment risk associated with a reduced duration of our mortgage-backed securities portfolio as borrowers refinance to reduce borrowing costs. When interest-bearing liabilities reprice or mature more quickly than interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.
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A sustained increase in market interest rates could adversely affect our earnings. A significant portion of our loans have fixed interest rates and longer terms than our deposits and borrowings. As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of certificates of deposit and other deposits yielding no or a relatively low rate of interest having a shorter duration than our assets. At December 31, 2017, we had $170.3 million in certificates of deposit that mature within one year and $875.5 million in non-interest bearing, NOW checking, savings and money market accounts. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see “Management Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity and Market Risk,” for a discussion of interest rate risk modeling and the inherent risks in modeling assumptions.
Greater seasoning of our loan portfolio could increase risk of credit defaults in the future.
A significant portion of our organic loan portfolio at any given time is of relatively recent origin. Typically, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time (which varies by loan duration and loan type), a process referred to as “seasoning.” As a result, a portfolio of more seasoned loans may more predictably follow a bank’s historical default or credit deterioration patterns than a newer portfolio. At December 31, 2017, the weighted average seasoning of our total loan portfolio was 40 months. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comparison of Financial Condition at December 31, 2017 and 2016” for more detailed disclosure of the weighted average seasoning of our total loan portfolio by type of loan. The current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Construction and land development loans totaled $22.7 million, or 2.5%, of our total loan portfolio as of December 31, 2017, of which $22.2 million were commercial real estate construction loans and $489,000 were residential real estate construction loans. These loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. Higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders. A downturn in the commercial real estate market could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition, during the term of some of our construction loans, no payment from the
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borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working our problem construction loans. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. Further, in the case of speculative construction loans, there is the added risk associated with the borrower obtaining a take-out commitment for a permanent loan. Loans on land under development or held for future construction also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. At December 31, 2017, all construction loans were performing in accordance to their repayment terms. Any material increase in our nonperforming construction loans could have a material adverse effect on our financial condition and results of operation.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2017, $76.6 million, or 8.6% of our total loan portfolio, was secured by first liens on one- to four-family residential loans. In addition, at December 31, 2017, our home equity loans and lines of credit totaled $8.2 million. A portion of our one- to four-family residential real estate loan portfolio consists of jumbo loans that do not conform to secondary market mortgage requirements, and therefore are not immediately saleable to Fannie Mae or Freddie Mac because such loans exceed the maximum balance allowable for sale (generally $424,100 – $625,500 for single-family homes in our markets, depending on the area). Jumbo one- to four-family residential loans may expose us to increased risk because of their larger balances and because they cannot be immediately sold to government sponsored enterprises.
In addition, one- to four-family residential loans are generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the housing market in our market areas may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses and adversely affect our business, financial condition and results of operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.
At December 31, 2017, nonperforming loans were $179.000, or 0.02% of the total loan portfolio, and nonperforming assets were also $179,000, or 0.01% of total assets. In addition to the nonperforming loans, there were $1.0 million in loans classified as performing troubled debt restructurings at December 31, 2017. Nonperforming assets adversely affect our earnings in various ways. We do not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting our income, and increasing our loan administration costs. Upon foreclosure or similar proceedings, we record the repossessed asset at the estimated fair value, less costs to sell, which may result in a write down or losses. If we experience increases in nonperforming loans and nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations as our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity. A significant increase in the level of nonperforming assets from current levels would also increase our risk profile and may impact the capital
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levels our regulators believe are appropriate in light of the increased risk profile. While we reduce problem assets through collection efforts, asset sales, workouts and restructurings, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.
The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a preferred lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.
As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we would experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations and financial condition.
Historically, we have sold the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales have resulted in gains or premiums on the sale of the loans and have created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the retained, non-guaranteed portion of the loans.
In order for a borrower to be eligible to receive an SBA loan, the lender must establish that the borrower would not be able to secure a bank loan without the credit enhancements provided by a guaranty under the SBA program. Accordingly, the SBA loans in our portfolio generally have weaker credit characteristics than the rest of our portfolio, and may be at greater risk of default in the event of deterioration in economic conditions or the borrower’s financial condition. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced by us, the SBA may require us to repurchase the previously sold portion of the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us. Management has estimated losses inherent in the outstanding guaranteed portion of SBA loans and recorded a recourse reserve at a level determined to be appropriate. Significant increases to the recourse reserve may materially decrease our net income, which may adversely affect our business, results of operations and financial condition.
Deposits from labor unions and their related businesses are one important source of funds for us and a reduced level of such deposits may hurt our profits.
Deposits from labor unions and their related businesses are an important source of funds for our lending and investment activities. At December 31, 2017, $482.4 million, or 43.7%, of our total deposits were comprised of deposits from labor unions, representing 554 different local unions with an average deposit balance per local union of approximately $871,000. At that date, five labor unions had aggregate deposits of  $10.0 million or more totaling $102.8 million or more accounting for 9.31% of our total deposits with the largest union relationship totaling $46.4 million or 4.2% of total deposits representing accounts from eight local unions. Given our use of these high-average balance deposits as a source of funds, our inability to retain these funds could have an adverse effect on our liquidity. In addition, these deposits are primarily demand deposit accounts or short-term deposits and therefore may be more sensitive to
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changes in interest rates. If we are forced to pay higher rates on these deposits to retain the funds, or if we are unable to retain the funds and are forced to turn to borrowing and other funding sources for our lending and investment activities, the interest expense associated with such borrowings may be higher than the rates we are paying on these deposits, which could adversely affect our net margin and net income. We may also be forced, as a result of any material withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or deterioration in credit markets.
Our liquidity is dependent on dividends from the Bank.
The Company is a legal entity separate and distinct from the Bank. A substantial portion of our cash flow, including cash flow to pay principal and interest on any debt we may incur, comes from dividends the Company receives from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. Because our ability to receive dividends or loans from the Bank is restricted, our ability to pay dividends to our shareholders may also be restricted. As of December 31, 2017, the Bank had the capacity to pay the Company a dividend of up to $4.8 million without the need to obtain prior regulatory approval. Also, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to us, we may not be able to service any debt we may incur, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. Although management believes that funds raised in this offering will be sufficient to fund operations and growth initiatives for at least the next 18 to 24 months based on our estimated future operations, we may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital, if and when needed, or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our business, financial condition and results of operations would be materially and adversely affected.
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We operate in a highly competitive industry which may affect our growth prospects and profitability.
Our operations consist of offering banking and mortgage services, and we also offer SBA lending, and escrow services to generate noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Some of these competitors may have a long history of successful operations in our market areas and greater ties to local businesses and more expansive banking relationships, as well as more established depositor bases, fewer regulatory constraints, and lower cost structures than we do. Competitors with greater resources may possess an advantage through their ability to maintain numerous banking locations in more convenient sites, to conduct more extensive promotional and advertising campaigns, or to operate a more developed technology platform. Due to their size, many competitors may offer a broader range of products and services, as well as better pricing for certain products and services than we can offer. For example, in the current low interest rate environment, competitors with lower costs of capital may solicit our clients to refinance their loans with a lower interest rate. Increased competition in our markets may result in reduced loans and deposits, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking clients, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.
Our ability to compete successfully depends on a number of factors, including:

our ability to develop, maintain, and build upon long-term client relationships based on quality service and high ethical standards;

our ability to attract and retain qualified employees to operate our business effectively;

our ability to expand our market position;

the scope, relevance, and pricing of products and services that we offer to meet client needs and demands;

the rate at which we introduce new products and services relative to our competitors;

client satisfaction with our level of service; and

industry and general economic trends.
Failure to perform in any of the aforementioned areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could adversely affect our business, financial condition and results of operations.
We also face competition for acquisition opportunities from other banks and financial institutions, many of which possess greater financial, human, technical and other resources than we do. Our ability to compete in acquiring target institutions will depend on our available financial resources to fund the acquisitions, including the amount of cash and cash equivalents we have and the liquidity and market price of our common stock. In addition, increased competition may also drive up the price that we will be required to pay in order to be the successful bidder on an acquisition.
Our reputation is critical to the success of our business.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring, and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our clients, and caring about our clients and associates.
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If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected. Further, negative public opinion can expose us to litigation and regulatory action as we seek to implement our growth strategy.
Our business plans and financial projections are based upon numerous assumptions about future events, and our actual financial performance may differ materially from our anticipated performance if our assumptions are inaccurate.
If the communities in which we operate do not grow, or if the prevailing economic conditions locally or nationally are less favorable than we have assumed, our ability to implement our business strategies may be adversely affected and our actual financial performance may be materially different from our projections. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market areas even if they do occur. If our senior management team is unable to provide the effective leadership necessary to implement our strategic plan, our actual financial performance may be materially adversely different from our projections. Additionally, to the extent that any component of our strategic plan requires regulatory approval, if we are unable to obtain necessary approval, we will be unable to completely implement our strategy, which may adversely affect our actual financial results. Our inability to successfully implement our strategic plan could adversely affect the price of our common stock.
Agricultural lending and volatility in commodity prices may adversely affect our financial condition and results of operations.
At December 31, 2017, agricultural loans, including agricultural real estate, were $24.6 million, or 2.8% of our total loan portfolio. Agricultural lending involves a greater degree of risk and typically involves higher principal amounts than other types of loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either us or the borrowers. These factors include adverse weather conditions that prevent the planting of a crops or limit crop yields (such as hail, drought, fires and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including tariffs, changes in price supports, subsidies and environmental regulations). Volatility in commodity prices could adversely impact the ability of borrowers in these industries to perform under the terms of their borrowing arrangements with us, and as a result, a severe and prolonged decline in commodity prices may adversely affect our financial condition and results of operations. It is also difficult to project future commodity prices as they are dependent upon many different factors beyond our control. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. Consequently, agricultural loans may involve a greater degree of risk than other types of loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops. In such cases, any repossessed collateral for a defaulted agricultural operating loan my not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value.
Another factor that could have a major impact on the agricultural industry involves water availability and distribution rights. If the amount of water available to agriculture becomes increasingly scarce due to drought and/or diversion to other uses, farmers may not be able to continue to produce agricultural products at a reasonable profit, which has the potential to force many out of business. Such conditions have affected and may continue to adversely affect our borrowers and, by extension, our business, and if general agricultural conditions decline our level of nonperforming assets could increase.
Adverse weather or manmade events could negatively affect our markets or disrupt our operations.
A significant portion of our business is generated in our California and Washington markets, which have been, and may continue to be, susceptible to natural disasters, such as flooding, mudslides, brush fires, earthquakes, droughts and other natural disasters and adverse weather. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and increase the risk of delinquencies, foreclosures, or loss on loans originated by us, damage our
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banking facilities and offices, and negatively impact our growth strategy. Such weather events could disrupt operations, result in damage to properties, and negatively affect the local economies in the markets where we operate. We cannot predict whether or to what extent damage that may be caused by future weather or manmade events will affect our operations or the economies in our current or future market areas, but such events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans, and an increase in delinquencies, foreclosures, or loan losses as uninsured property losses, interruptions of our clients’ operations or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans. Our business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters. Further, severe weather, natural disasters, acts of war or terrorism, and other external events could adversely affect us in a number of ways, including an increase in delinquencies, bankruptcies, or defaults that could result in a higher level of non-performing assets, net charge-offs, and provision for loan losses. A natural disaster or other catastrophic event could, therefore, result in decreased revenue and loan losses that have a material adverse effect on our business, financial condition and results of operations.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may rely upon our clients’ representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the client. We also may rely on client representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting, and reputation could be negatively affected if we rely on materially misleading, false, inaccurate, or fraudulent information.
We are subject to environmental risk in our lending activities.
Because a significant portion of our loan portfolio is secured by real property, we may foreclose upon and take title to such property in the ordinary course of business. If hazardous substances are found on such property, we could be liable for remediation costs, as well as for personal injury and property damage. Environmental laws might require us to incur substantial expenses, materially reduce the property’s value, or limit our ability to use or sell the property. Although management has policies requiring environmental reviews before loans secured by real property are made and before foreclosure is commenced, it is still possible that environmental risks might not be detected and that the associated costs might have a material adverse effect on our financial condition and results of operations.
We face risks related to our operational, technological and organizational infrastructure.
Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as we expand. Operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees, or outside persons and exposure to external events. As discussed below, we are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems which we use both to interface with our clients and to manage our internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing clients and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these infrastructures.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. Our future success will depend in part upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client
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demands for convenience as well as to provide secure electronic environments and create additional efficiencies in our operations as we continue to grow and expand our market area. We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. In connection with implementing new operational and technology enhancements or products in the future, we may experience certain operational challenges (e.g. human error, system error, incompatibility, etc.) which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner. Many of our larger competitors have substantially greater resources to invest in operational and technological infrastructure. As a result, they may be able to offer additional or more convenient products compared to those that we will be able to provide, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our clients, which could adversely affect our business, financial condition and results of operations.
In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition and results of operations.
As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyber-attacks. There continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients and employees and subjecting them to potential fraudulent activity. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, some of our clients may have been affected by these breaches, which could increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.
The secure maintenance and transmission of confidential information, as well as execution of transactions over the networks and systems maintained by us, our clients and third party vendors, such as our online banking or reporting systems, are essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information, including employees. Furthermore, our cardholders use their debit
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and credit cards to make purchases from third parties or through third party processing services. As such, we are subject to risk from data breaches of such third party’s information systems or their payment processors. Such a data security breach could compromise our account information. We may suffer losses associated with reimbursing our clients for such fraudulent transactions on clients’ card accounts, as well as for other costs related to data security breaches, such as replacing cards associated with compromised card accounts.
In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, a breach of our systems could result in losses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including client relationship management, internet banking, website, general ledger, deposit, loan servicing and wire origination systems. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our client relationship management, internet banking, website, general ledger, deposit, loan servicing and/or wire origination systems.
We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The Company may not be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
We are subject to certain operational risks, including, but not limited to, client or employee fraud and data processing system failures and errors.
Employee errors and employee and client misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our clients or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
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We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and client or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing shareholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert management attention from our business or subject us to regulatory actions and increased regulatory scrutiny. If our framework is not effective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially and adversely affected. We could also be subject to potentially adverse regulatory consequences.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting standards could materially impact our financial statements.
From time to time, the Financial Accounting Standards Board or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators, outside auditors or management) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict, and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
We are or may become involved from time to time in legal proceedings, information-gathering requests, investigations, and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. This focus has only intensified since the financial crisis, with regulators and prosecutors focusing on a variety of financial institution practices and
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requirements, including foreclosure practices, compliance with applicable consumer protection laws, classification of  “held for sale” assets and compliance with anti-money laundering statutes, the Bank Secrecy Act and sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury.
Many aspects of our business involve substantial risk of legal liability. We have been named or threatened to be named as defendants in various lawsuits arising from our business activities (and in some cases from the activities of companies that we have acquired), including, but not limited to, commercial real estate mortgages. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. In addition, from time to time, we may become the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, the Consumer Financial Protection Bureau (“CFPB”), the SEC, and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which we conduct our business, or reputational harm.
Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
A change in the tax laws relating to like-kind exchanges could adversely affect our business.
We offer escrow services and facilitate tax-deferred commercial exchanges under Section 1031 of the Code to generate non-interest income and low cost deposits. As of December 31, 2017, deposit balances associated with these operations totaled $14.1 million.
Section 1031 of the Code provides for tax-free exchanges of real property for other real property. Legislation has been proposed on several occasions that would repeal or restrict the application of Section 1031. Any repeal or significant change in the tax rules pertaining to like-kind exchanges could adversely affect results of operations.
Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to the manner in which we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include policies related to the allowance for loan losses, securities, purchased credit impaired (“PCI”) loans, business combinations, loan sales and servicing of financial assets, goodwill and income taxes. See Note 1 of the Company’s Consolidated Financial Statements included as part of this prospectus for further information. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the reserve
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provided, experience additional impairment in our securities portfolio or record a valuation allowance against our deferred tax assets. Any of these could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The obligations associated with being a public company will require significant resources and management attention, which may divert from our business operations.
As a result of this offering, we will become subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition with the SEC. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. We anticipate that these costs will materially increase our general and administrative expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our strategic plan, which could prevent us from successfully implementing our growth initiatives and improving our business, results of operations and financial condition.
As an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain temporary exemptions from various reporting requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and an exemption from the requirement to obtain an attestation from our auditors on management’s assessment of our internal control over financial reporting. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
The financial reporting resources we have put in place may not be sufficient to ensure the accuracy of the additional information we are required to disclose as a publicly listed company.
As a result of becoming a publicly listed company, we will be subject to the heightened financial reporting standards under GAAP and SEC rules, including more extensive levels of disclosure. Complying with these standards requires enhancements to the design and operation of our internal control over financial reporting as well as additional financial reporting and accounting staff with appropriate training and experience in GAAP and SEC rules and regulations.
If we are unable to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses or other deficiencies occur, our ability to report our financial results accurately and timely could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the Nasdaq Global Select Market, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Even if we are able to report our financial statements accurately and in a timely manner, any failure in our efforts to implement the improvements or disclosure of material weaknesses in our future filings with the SEC could cause our reputation to be harmed and our stock price to decline significantly.
We have not performed an evaluation of our internal control over financial reporting, as contemplated by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, material weaknesses may have been identified. In addition, the JOBS Act provides that, so long as we qualify as an emerging growth company, we will be exempt from the provisions of Section 404(b) of the
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Sarbanes-Oxley Act, which would require that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. We may take advantage of this exemption so long as we qualify as an emerging growth company.
Risks Related to the Regulation of Our Industry
Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.
The banking industry is highly regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, clients, the public, the banking system as a whole or the FDIC Deposit Insurance Fund, not for the protection of our shareholders and creditors. We are subject to regulation and supervision by the Federal Reserve, and our Bank is subject to regulation and supervision by the Federal Reserve and the California Department of Business Oversight, Division of Financial Institutions, or DBO. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs. The Dodd-Frank Act, which imposes significant regulatory and compliance changes on financial institutions, is an example of this type of federal regulation. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept and the rates we may pay on such deposits, maintenance of adequate capital and liquidity, changes in control of us and our Bank, transactions between us and our Bank, handling of nonpublic information, restrictions on dividends and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities, including our merger and acquisition transaction, and there is risk that such approvals may not be granted, either in a timely manner or at all. These requirements may constrain our operations, and the adoption of new laws and changes to or repeal of existing laws may have a further impact on our business, financial condition and results of operations. Also, the burden imposed by those federal and state regulations may place banks in general, including our Bank in particular, at a competitive disadvantage compared to their non-bank competitors. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.
Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes. Future changes may have a material adverse effect on our business, financial condition and results of operations.
Federal and state regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulations to us. Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations. We may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations, particularly as a result of regulations adopted under the Dodd-Frank Act. This allocation of resources, as well as any failure to comply with applicable requirements, may negatively impact our financial condition and results of operations.
In addition, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management or other operational practices for financial service companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways, and could have a material adverse effect on our business, financial condition and results of operations. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of laws and regulations and their assessment of the
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quality of our loan portfolio, securities portfolio and other assets. If any regulatory agency’s assessment of the quality of our assets, operations, lending practices, investment practices, capital structure or other aspects of our business differs from our assessment, we may be required to take additional charges or undertake, or refrain from taking, actions that could have a material adverse effect on our business, financial condition and results of operations. Our banking regulators also have the ability to imposed conditions on us in connection with their approval of a merger or acquisition transaction.
We may be adversely affected by changes in U.S. tax laws and regulations.
The Tax Cuts and Jobs Act was signed into law in December 2017 reforming the U.S. tax code. The legislation includes lowering the 35% corporate tax rate to 21%, modifying the U.S. taxation of income earned outside the U.S. and limiting or eliminating various deductions, tax credits and/or other tax preferences. While we expect to benefit on a prospective net income basis from the decrease in corporate tax rates, the legislation has resulted in a $2.7 million decrease in the value of our deferred tax asset, which resulted in a material reduction to net income during the year ended December 31, 2017. In addition, the legislation could negatively impact our clients because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments and could also negatively impact the housing market, which could adversely affect our business and loan growth.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to remediate adverse examination findings or comply with any supervisory actions to which we become subject as a result of such examinations could materially and adversely affect our business.
We are subject to supervision and regulation by federal and state banking agencies that periodically conduct examinations of our business, including compliance with laws and regulations. Specifically, our subsidiary, United Business Bank, is subject to examination by the Federal Reserve and the DBO, and the Company is subject to examination by the Federal Reserve. Accommodating such examinations may require management to reallocate resources, which would otherwise be used in the day-to-day operation of other aspects of our business. If, as a result of an examination, any such banking agency was to determine that the financial condition, capital resources, allowance for loan losses, asset quality, earnings prospects, management, liquidity, or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any law or regulation, such banking agency may take a number of different remedial actions as it deems appropriate. These actions include the power to require us to remediate any such adverse examination findings.
In addition, these agencies have the power to take enforcement action against us to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation of law or regulation or unsafe or unsound practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to direct the sale of subsidiaries or other assets, to limit dividends and distributions, to restrict our growth, to assess civil money penalties against us or our officers
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or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is imminent risk of loss to depositors, to terminate our deposit insurance and place our Bank into receivership or conservatorship. Any regulatory enforcement action against us could have a material adverse effect on our business, financial condition and results of operations.
Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of financial institutions and other complementary businesses. Generally, we must receive state and federal regulatory approval before we can acquire an FDIC-insured depository institution or related business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. We may also be required to sell branches as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.
Federal Deposit Insurance Corporation (“FDIC”) deposit insurance assessments may continue to materially increase in the future, which would have an adverse effect on earnings.
As a member institution of the FDIC, our subsidiary, United Business Bank, is assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. The FDIC has adopted a Deposit Insurance Fund, or DIF, Restoration Plan, which requires the DIF to attain a 1.35% reserve ratio by December 31, 2020. As a result of this requirement, the Bank could be required to pay significantly higher premiums or additional special assessments that would adversely affect its earnings, thereby reducing the availability of funds to pay dividends to us.
As a result of the Dodd-Frank Act and rulemaking, we are subject to more stringent capital requirements.
In July 2013, the U.S. federal banking authorities approved new regulatory capital rules implementing the Basel III regulatory capital reforms effecting certain changes required by the Dodd-Frank Act. The new regulatory capital requirements are generally applicable to all U.S. banks as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1.0 billion). The new regulatory capital rules not only increase most of the required minimum regulatory capital ratios, but also introduce a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. The new regulatory capital rules also expand the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital. In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. In order to be a “well-capitalized” bank holding company, an institution must maintain a Tier 1 capital ratio of 6% or more; and a total capital ratio of 10% or more. Banks and bank holding companies must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. The new regulatory capital rules became effective on January 1, 2015 with a phase-in period that generally extends through January 1, 2019 for certain of the changes. Previously, as a bank holding company with less than $1.0 billion in consolidated assets, the Company was not subject to consolidated capital requirements. During the course of 2017, the Company’s consolidated assets exceeded $1.0 billion and, as a result, the Company is now subject to capital requirements with a phase-in period that generally extends through January 1, 2019 for certain of the changes, as discussed above.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting
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the commencement of new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal and state banking and other agencies, and other federal agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively affected by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things (i) imposes certain limitations on our ability to share nonpublic personal information about our clients with nonaffiliated third parties, (ii) requires that we provide certain disclosures to clients about our information collection, sharing and security practices and afford clients the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities and the sensitivity of client information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information and some of our current or planned business activities. This could also increase our costs of compliance
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and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission and the CFPB, as well as at the state level, such as with regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting client or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The Federal Reserve may require us to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.
Risks Related to Our Common Stock and This Offering
An active, liquid trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the public offering price, or at all.
Prior to this offering, the market for our common stock has been illiquid and the stock did not trade frequently. While we expect our common stock to be listed on the Nasdaq Global Select Market, an active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The public offering price for our common stock will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an acquisition.
The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volumes, prices, and times desired.
The trading price of our common stock may be volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may impact the market price and trading volume of our common stock, including:

general economic conditions and overall market fluctuations;

actual or anticipated fluctuations in our quarterly or annual operating results;
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operating and stock price performance of other companies that investors deem comparable to us;

announcements by us or our competitors of significant acquisitions, dispositions, innovations or new programs and services;

the public reaction to our press releases, our other public announcements and our filings with the SEC;

changes in financial estimates and recommendations by securities analysts following our stock, or the failure of securities analysts to cover our common stock after this offering;

changes in earnings estimates by securities analysts or our ability to meet those estimates;

the operating and stock price performance of other comparable companies;

the trading volume of our common stock;

new technology used, or services offered by, competitors;

changes in business, legal or regulatory conditions, or other developments affecting participants in our industry, and publicity regarding our business or any of our significant clients or competitors;

changes in accounting standards, policies, guidance, interpretations or principles;

future sales of our common stock by us, directors, executives and significant shareholders; and

other news, announcements, or disclosures (whether by us or others) related to us, our competitors, our core markets, or the bank and non-bank financial services industries.
The realization of any of the risks described in this “Risk Factors” section could have a material adverse effect on the market price of our common stock and cause the value of your investment to decline. In addition, the stock market experiences extreme volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect investor confidence and could affect the trading price of our common stock over the short, medium or long term, regardless of our actual performance. If the market price of our common stock reaches an elevated level following this offering, it may materially and rapidly decline. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation. If we were to be involved in a class action lawsuit, we could incur substantial costs and it could divert the attention of senior management and have a material adverse effect on our business, financial condition and results of operations.
Our management will have broad discretion as to the use of proceeds from this offering, and we may not use the proceeds effectively.
We will use a portion of the net proceeds from the offering to repay a $6.0 million term loan with an interest rate of 4.71% and will use the remaining net proceeds to support our organic growth and for other general corporate purposes, including to fund future acquisitions of financial institutions (although we do not have any definitive agreements in place to make any such acquisitions at this time) and to maintain our capital and liquidity ratios at acceptable levels. We are not required, however, to apply any portion of the remaining net proceeds of this offering for any particular purpose. Accordingly, our management will have broad discretion as to the application of the remaining net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. Our shareholders may not agree with the manner in which our management chooses to allocate and invest the net proceeds. As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds. We may not be successful in using the net proceeds from this offering to increase our profitability or market value and we cannot predict whether the proceeds will be invested to yield a favorable return. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the net proceeds from this offering favorably.
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We have not historically declared or paid cash dividends on our common stock and we do not expect to pay dividends on our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in the foreseeable future is if the price of our common stock appreciates.
Our board of directors has not declared a dividend on our common stock since our inception. Our ability to pay dividends on our common stock is dependent on the Bank’s ability to pay dividends to us, which is limited by applicable laws and banking regulations. Our ability to pay dividends on our common stock may in the future be restricted by the terms of any debt or preferred securities we may incur or issue. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. In addition, if required payments on our outstanding debt obligations, including our junior subordinated debentures held by our unconsolidated subsidiary trust, are not made or suspended, we may be prohibited from paying dividends on our common stock. Accordingly, shares of common stock should not be purchased by persons who need or desire dividend income from their investment.
New investors in our common stock will experience immediate and substantial book value dilution after this offering.
The initial public offering price of our common stock will be substantially higher than the pro forma tangible book value per share of the outstanding common stock immediately after the offering. Based on the initial public offering price of  $22.00 per share, which is the midpoint of the prince range set forth on the cover page of this prospectus, and our net tangible book value as of December 31, 2017, if you purchase common stock in this offering, you will pay more for your shares than our existing tangible book value per share and you will suffer immediate dilution from the public offering price of approximately $6.70 per share in pro forma net tangible book value. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation.
If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our common stock could decline.
If our existing shareholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decrease significantly. The perception in the public market that our existing shareholders might sell shares of common stock could also depress our market price. Upon completion of this offering, we will have 9,769,722 shares of common stock outstanding, or 10,110,631 shares if the underwriters exercise in full their option to purchase additional shares. Our directors and executive officers, will be subject to the 180 day lock-up agreements described in “Underwriting” and the Rule 144 holding period requirements described in “Shares Eligible for Future Sale.” After all of the lock-up periods have expired and the holding periods have elapsed, 494,348 additional shares of our outstanding common stock will be eligible for sale in the public market. In addition, the underwriters may, at any time and without notice, release all or a portion of the shares subject to lock-up agreements. The market price of shares of our common stock may drop significantly when the restrictions on resale by our existing shareholders lapse. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities and could result in a decline in the value of the shares of our common stock purchased in this offering.
In addition, immediately following this offering, we intend to file a registration statement on Form S-8 registering under the Securities Act of 1933, as amended, or the Securities Act, covering the 450,000 shares of our common stock that may be issued in the future under our 2017 Omnibus Equity Incentive Plan, as described further under “Executive and Director Compensation — Equity Incentive Compensation Plans.” Accordingly, subject to certain vesting requirements, shares registered under that registration statement will be available for sale in the open market immediately by persons other than our executive officers and directors and immediately after the lock-up agreements expire by our executive officers and directors. If a large number of shares are sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.
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We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments and pursuant to compensation and incentive plans. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.
If equity research analysts do not publish research or reports about our business, or if they do publish such reports but issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline.
The trading market for our common stock could be affected by whether equity research analysts publish research or reports about us and our business. We cannot predict at this time whether any research analysts will publish research and reports on us and our common stock. If one or more equity analysts do cover us and our common stock and publish research reports about us, the price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
If any of the analysts who elect to cover us downgrades our stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.
A future issuance of stock could dilute the value of our common stock.
We may sell additional shares of common stock, or securities convertible into or exchangeable for such shares, in subsequent public or private offerings. Upon completion of this offering, there will be 9,769,722 shares of our common stock issued and outstanding. Those shares outstanding do not include the potential issuance, as of December 31, 2017, of 450,000 shares of our common stock subject to issuance under our equity incentive plan including the shares of restricted stock we expect to issue to our directors and executive officers in connection with the consummation of this offering. Future issuance of any new shares could cause further dilution in the value of our outstanding shares of common stock. We cannot predict the size of future issuances of our common stock, or securities convertible into or exchangeable for such shares, or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Although there are currently no shares of our preferred stock issued and outstanding, our articles of incorporation authorize us to issue up to 10,000,000 shares of one or more series of preferred stock. The board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
The holders of our existing debt obligations, as well as debt obligations that may be outstanding in the future, will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest.
In the event of any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of debt holders against us. As of the date of this prospectus, we had outstanding
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approximately $6.0 million of senior debt obligations relating to a term loan which we will repay with the proceeds from this offering, and $5.4 million aggregate principal (net of mark-to-market adjustments) of junior subordinated debentures issued in connection with the sale of trust preferred securities by a statutory business trust which we assumed in our acquisition of United Business Bank, FSB. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. Our debt obligations are senior to our shares of common stock. We must make payments on our debt obligations before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our debt obligations must be satisfied before any distributions can be made to the holders of our common stock. We may defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of our common stock. At December 31, 2017, we were current on all interest payments. To the extent that we issue additional debt obligations or junior subordinated debentures, the additional debt obligations or additional junior subordinated debentures will be of equal rank with, or senior to, our existing debt obligations and senior to our shares of common stock.
An investment in our common stock is not an insured deposit.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.
We are an “emerging growth company,” and the reduced regulatory and reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” as described in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The JOBS Act also permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to, and expect to continue to, take advantage of certain of these and other exemptions until we are no longer an emerging growth company.
In addition, even if we comply with the greater disclosure obligations of public companies that are not emerging growth companies immediately after this offering, we may avail ourselves of these reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years, unless we earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.07 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. Investors and securities analysts may find it more difficult to evaluate our common stock because we may rely on one or more of these exemptions, and, as a result, investors may find our common stock less attractive if we rely on the exemptions, which may result in a less active trading market, increased volatility in our stock price and investor confidence and the market price of our common stock may be materially and adversely affected.
Because we have elected to use the extended transition period for complying with new or revised accounting standards for an emerging growth company, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies
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until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Because our financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, financial results or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Certain laws and provisions of our corporate governance documents may have an anti-takeover effect.
The following is a summary of certain provisions of law and our Articles of Incorporation and Bylaws that may have the effect of discouraging, delaying or preventing a change of control, change in management or an unsolicited acquisition proposal that a shareholder might consider favorable, including proposals that might result in the payment of a premium over the market price for the shares held by our shareholders. This summary does not purport to be complete and is qualified in its entirety by reference to the laws and documents referenced.
Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. Acquisition of 10% or more of any class of voting stock of a bank holding company or depository institution, including shares of our common stock following completion of this offering, generally creates a rebuttable presumption that the acquirer “controls” the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including our bank.
Under the California Financial Code, no person shall, directly or indirectly, acquire control of a California state bank or its holding company unless the DBO has approved such acquisition of control. A person would be deemed to have acquired control of BayCom if such person, directly or indirectly, has the power (1) to vote 25% or more of the voting power of BayCom, or (2) to direct or cause the direction of the management and policies of BayCom. For purposes of this law, a person who directly or indirectly owns or controls 10% or more of our outstanding common stock would be presumed to control BayCom.
Our authorized shares of common stock or preferred stock may be used by our Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of us. Under our Articles of Incorporation, our Board of Directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, our Board of Directors has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a post-tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. In addition, our Bylaws impose certain notice and information requirements in connection with the nomination by shareholders of candidates for election to our Board of Directors or the proposal by shareholders of business to be acted upon at any annual or special meeting of shareholders.
For additional information, see “Description of Capital Stock — Anti-Takeover Considerations and Special Provisions of Our Articles, Bylaws and California Law.”
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this prospectus includes “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in “Risk Factors” or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or the following:

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves;

changes in economic conditions in general and in California, Washington, and New Mexico;

changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates;

our net interest margin and funding sources;

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

secondary market conditions for loans and our ability to sell loans in the secondary market;

results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

risks related to our acquisition strategy, including our ability to identify suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;

challenges arising from attempts to expand into new geographic markets, products, or services;

our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, and regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III;

the impact of the Dodd-Frank Act and the implementing regulations;

our ability to attract and retain deposits;
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increases in premiums for deposit insurance;

our ability to control operating costs and expenses;

the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;

difficulties in reducing risk associated with the loans and securities on our balance sheet;

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

the failure or security breach of computer systems on which we depend, or the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;

the effectiveness of our risk management framework;

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;

an inability to keep pace with the rate of technological advances;

our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;

costs and effects of litigation, including settlements and judgments;

our ability to implement our business strategies and manage our growth;

future goodwill impairment due to changes in our business, changes in market conditions, or other factors;

our ability to manage loan delinquency rates;

liquidity issues, including our ability to raise additional capital, if necessary;

the loss of our largest loan and depositor relationships;

the occurrence of adverse weather or manmade events, which could negatively affect our core markets or disrupt our operations;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

our ability to pay dividends on our common stock, and interest or principal payments on our junior subordinated debentures;

adverse changes in the securities markets;

inability of key third-party providers to perform their obligations to us;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

the costs and obligations associated with being a public company;

the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and

other factors that are discussed in “Risk Factors.”
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The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this prospectus. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
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USE OF PROCEEDS
Assuming an initial public offering price of  $22.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from the sale of our common stock in this offering will be $46.0 million (or $53.1 million if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $2.1 million (or $2.5 million if the underwriters exercise their over-allotment option in full), assuming the number of shares we sell, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
We will use a portion of the net proceeds from the offering to repay our $6.0 million term loan with an interest rate of 4.71% that matures in April 2022 and intend to use the remainder to support our organic growth and for other general corporate purposes, including to fund potential future acquisitions of bank and non-bank financial services companies that we believe are complementary to our business and consistent with our growth strategy, and to maintain our capital and liquidity ratios at acceptable levels. We do not have any definitive agreements in place to make any acquisitions at this current time.
Except for the repayment of the $6.0 million term loan, we have not allocated any portion of net proceeds to be received by us in this offering for a particular purposes. Our management will have broad discretion over how the remaining proceeds received by us in the offering are used. Proceeds received in the offering will be invested in short-term investments until needed for the uses described above.
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DIVIDEND POLICY
We have not historically declared or paid cash dividends on our common stock and we do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend on a number of factors, including:

our historical and projected financial condition, liquidity and results of operations;

our capital levels and requirements;

statutory and regulatory prohibitions and other limitations;

any contractual restriction on our ability to pay cash dividends, including pursuant to the terms of any of our credit agreements or other borrowing arrangements;

our business strategy, including any potential acquisitions;

tax considerations;

general economic conditions; and

other factors deemed relevant by our board of directors.
As a California corporation, we are subject to certain restrictions on dividends under the California General Corporation Code (“CGCL”). Generally, a California corporation may pay dividends to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution plus the preferential dividend arrears amount (if any) of the corporation, or if immediately after the distribution, the value of the corporation’s assets would equal or exceed its total liabilities plus the preferential dividend arrears amount (if any). In addition, if required payments on our outstanding debt obligations, including our junior subordinated debentures held by our unconsolidated subsidiary trust, are not made or suspended, we may be prohibited from paying dividends on our common stock.
Since we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay dividends to our shareholders depends, in large part, upon our receipt of dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. The present and future dividend policy of the Bank is subject to the discretion of its board of directors. The Bank is not obligated to pay dividends. If the Bank is “significantly undercapitalized” under the applicable federal bank capital standards, or if the Bank is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, the FDIC may choose to require the Bank to receive prior approval for any capital distribution from the Federal Reserve. In addition, the Bank generally is prohibited from making a capital distribution if such a distribution would cause the Bank to be “undercapitalized” under applicable federal bank capital standards. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us under California law. For more information, see “Supervision and Regulation — United Business Bank — Capital Requirements,” “—  United Business Bank — Dividends” and “— BayCom Corp — Dividends.”
We anticipate that this offering and the listing of our common stock on the NASDAQ Global Select Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See “Underwriting” for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.
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CAPITALIZATION
The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis, as of December 31, 2017:

on an actual basis; and

on an as adjusted basis after giving effect to (i) the $46.0 million of net proceeds from the sale by us of our common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares from us to cover over-allotments, if any) at an initial public offering price of  $22.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses, and (ii) the repayment in full of the outstanding balance on our $6.0 million term loan. See “Use of Proceeds” for additional information.
This table should be read in conjunction with, and is qualified in its entirety by reference to, “Selected Financial and Other Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
As of December 31, 2017
Actual
As Adjusted
(Dollars in thousands)
Indebtedness:
Subordinated debentures(1)
$ 6,392 $ 6,392
Long-term debt(2)
6,000
Total indebtedness
$ 12,392 $ 6,392
Shareholders’ equity:
Preferred stock – no par value, 10,000,000 authorized; no shares issued and outstanding
Common stock – no par value, 100,000,000 authorized; 7,496,995 shares outstanding (actual) and 9,769,722 shares outstanding as adjusted
$ 81,307 $ 127,307
Additional paid-in capital
287 287
Accumulated other comprehensive income
213 213
Retained earnings
36,828 36,828
Total shareholders’ equity
$ 118,635 $ 164,635
Book value and tangible book value per share
Book value per share
$ 15.82 $ 16.85
Tangible book value per share(3)
13.81 15.30
Capital ratios (Basel III guidelines):
Tier 1 leverage ratio
8.73% 12.02%
Common equity Tier 1 capital ratio
11.43% 15.84%
Tier 1 risk-based capital ratio
12.16% 16.53%
Total risk-based capital ratio
12.67% 17.01%
Tangible common equity to tangible assets(3)
8.41% 11.71%
(1)
Consists of debt issued in connection with our trust preferred securities.
(2)
Consists of a term loan which will be paid off with the net proceeds from the offering.
(3)
Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures, see “Non-GAAP Financial Measures.”
(4)
The number of as adjusted shares of common stock issued assumes the issuance of 2,272,727 shares of our common stock upon the consummation of this offering. The actual and as adjusted numbers of shares of common stock issued excludes the shares of restricted stock that we expect to issue under our 2017 Omnibus Equity Incentive Plan in connection with the consummation of this offering. See “Executive and Director Compensation — Equity Awards in Connection with This Offering.”
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DILUTION
If you invest in our common stock, your ownership interest will be diluted to the extent that the initial public offering price per share of our common stock exceeds the tangible book value per share of our common stock immediately following this offering. Tangible book value per common share is equal to our total shareholders’ equity, less intangible assets, divided by the number of common shares outstanding. Our tangible equity as of December 31, 2017 was $103.5 million, or a tangible book value of  $13.81 per share.
After giving effect to our sale of 2,272,727 shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase any additional shares of our common stock to cover over-allotments, if any) at an assumed initial public offering price of  $22.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting underwriting discounts and commissions and the estimated offering expenses, the pro forma tangible book value of our common stock at December 31, 2017 would have been approximately $149.5 million, or $15.30 per share. Therefore, this offering will result in an immediate increase of approximately $1.49 in the tangible book value per share of our common stock of existing shareholders and an immediate dilution of approximately $6.70 in the tangible book value per share of our common stock to investors purchasing shares in this offering, or approximately 30.4% of the assumed public offering price (which is the midpoint of the price range set forth on the cover page of this prospectus). If the initial public offering price is higher or lower, the dilution to new shareholders will be greater or less, respectively.
The following table illustrates the calculation of the amount of dilution per share that a purchaser of our common stock in this offering will incur given the assumptions above:
Assumed initial public offering price per share
$ 22.00
Tangible book value per share of common stock as of December 31, 2017
13.81
Increase in tangible book value per common share attributable to new investors
1.49
Pro forma tangible book value per common share upon completion of this offering
15.30
Dilution per common share to new investors in this offering
6.70
A $1.00 increase (or decrease) in the assumed initial public offering price of  $22.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase (or decrease) the as adjusted net tangible book value per common share after this offering by approximately $1.71, and dilution in net tangible book value per common share to new investors by approximately $7.48, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment in full, then our pro forma tangible book value as of December 31, 2017, would be approximately $156.5 million, or $15.48 per share, representing an immediate increase in tangible book value to our existing shareholders of approximately $1.67 per share and immediate dilution in tangible book value to investors purchasing shares in this offering of approximately $6.52 per share, in each case assuming an initial public offering price of  $22.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.
The following table summarizes, as of December 31, 2017, the number of shares of our common stock, the total consideration paid to us, and the average price per share paid by existing shareholders and by investors purchasing common stock in this offering, and the sale of the common stock offered hereby, at an assumed initial public offering price of  $22.00 per share, (which is the midpoint of the price range set forth on the cover page of this prospectus), before deducting the underwriting discounts and commissions and the estimated offering expenses (assuming the underwriters do not exercise their option to purchase additional shares from us):
Shares Purchased
Total Consideration
Average
Price
Per Share
Number
Percent
Amount
(in thousands)
Percent
Existing shareholders as of December 31, 2017
7,496,995 76.7% $ 103,498 67.4% $ 13.81
Investors in this offering
2,272,727 23.3% 50,000 32.6% 22.00
Total
9,769,722 100.0% $ 153,498 100.0% $ 15.71
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In addition, if the underwriter’s option to purchase additional shares is exercised in full, the number of shares of common stock held by existing shareholders as of December 31, 2017 will be further reduced to 64.3% of the total number of shares of common stock to be outstanding upon the completion of this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 2,613,636 shares or 35.7% of the total number of shares of common stock to be outstanding upon the completion of this offering.
The table above excludes 450,000 shares of common stock reserved at December 31, 2017 for issuance under our 2017 Omnibus Equity Incentive Plan, including the shares of restricted stock that we expect to issue under the plan in connection with the consummation of this offering. See “Executive and Director Compensation — Equity Awards in Connection with This Offering.” In connection with the exercise of any stock options or if other equity awards are issued under our 2017 Omnibus Equity Incentive Plan, investors purchasing in this offering will experience further dilution.
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PRICE RANGE OF OUR COMMON STOCK
Prior to this offering, there has been no established public market for our common stock. Our common stock is currently quoted on the OTCQB, Over the Counter Marketplace, under the symbol “BCML.” Trading in shares of our common stock has not been extensive and such trades cannot be characterized as constituting an active trading market. As of December 31, 2017, there were approximately 615 holders of record of our common stock.
We anticipate that this offering and the listing of our common stock on the Nasdaq Global Select Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See “Underwriting” for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.
The following table sets forth the high and low bid prices per share for the calendar quarters indicated for our common stock on the OTCQB based upon information provided by OTCQB or other reliable sources. There is no assurance that trading in our common stock will be at prices similar to those at which our common stock has been traded. High and low bid prices reported on the OTCQB reflect inter-dealer quotations without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
Trading Price
Shares
Traded
High
Low
2016
First quarter
$ 13.25 $ 11.96 107,500
Second quarter
12.15 11.56 225,000
Third quarter
12.42