BayCom 10Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

	For the quarterly period ended June 30, 2020

	OR

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

	For the transition period from to

COMMISSION FILE NUMBER 001-38483

BAYCOM CORP

(Exact Name of Registrant as Specified in its Charter)


California		37-1849111
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 Ygnacio Valley Road, Suite 200, Walnut Creek, California		94596
(Address of principal executive offices)		(Zip Code)

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

None

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

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

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

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

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

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


Large accelerated filer ☐	Accelerated filer ☒

Non-accelerated filer ☐	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 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

As of August 1, 2020, there were 11,891,793 shares of the registrant’s common stock outstanding.

Table of Contents

BAYCOM CORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION	2

ITEM 1. FINANCIAL STATEMENTS	2

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	59

ITEM 4. CONTROLS AND PROCEDURES	59

PART II — OTHER INFORMATION	61

ITEM 1. LEGAL PROCEEDINGS	61

ITEM 1A. RISK FACTORS	61

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	62

ITEM 3. DEFAULTS OF SENIOR SECURITIES	63

ITEM 4. MINE SAFETY DISCLOSURES	63

ITEM 5. OTHER INFORMATION	63

ITEM 6. EXHIBITS	63

SIGNATURES	64

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

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BAYCOM CORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements


	Condensed Consolidated Balance Sheets (unaudited)	3

	Condensed Consolidated Statements of Income (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (unaudited)	5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	6

	Condensed Consolidated Statements of Cash Flows (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

(unaudited)


	June 30,		December 31,
	2020		2019
ASSETS
Cash and due from banks	$	37,515	$	23,476
Federal funds sold		166,206		271,906
Cash and cash equivalents		203,721		295,382
Interest bearing deposits in banks		14,550		1,739
Investment securities available-for-sale		121,430		119,889
Federal Home Loan Bank ("FHLB") stock, at par		7,737		7,174
Federal Reserve Bank ("FRB") stock, at par		7,491		6,731
Loans held for sale		—		2,226
Loans, net of allowance for loan losses of $13,500 and $7,400 at June 30, 2020 and December 31, 2019, respectively		1,711,175		1,450,229
Premises and equipment, net		14,512		10,529
Other real estate owned ("OREO")		296		574
Core deposit intangible		9,208		9,185
Cash surrender value of bank owned life insurance ("BOLI") policies, net		20,576		20,244
Right-of-use assets ("ROU")		13,754		15,291
Goodwill		38,838		35,466
Interest receivable and other assets		26,543		19,518
Total Assets	$	2,189,831	$	1,994,177
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest and interest bearing deposits	$	1,886,919	$	1,701,183
Lease liabilities		14,130		15,599
Salary continuation plan		3,828		3,658
Interest payable and other liabilities		8,264		11,275
Other borrowings		16,000		—
Junior subordinated deferrable interest debentures, net		8,282		8,242
Total liabilities		1,937,423		1,739,957
Commitments and contingencies (Note 17)
Shareholders' equity
Preferred stock - no par value; 10,000,000 shares authorized; 0 shares issued and outstanding at both June 30, 2020 and December 31, 2019		—		—
Common stock - no par value; 100,000,000 shares authorized; 11,870,164 and 12,444,632 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		174,656		184,043
Additional paid in capital		287		287
Accumulated other comprehensive income , net of tax		2,889		1,251
Retained earnings		74,576		68,639
Total shareholders’ equity		252,408		254,220
Total Liabilities and Shareholders’ Equity	$	2,189,831	$	1,994,177

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share data)

(unaudited)


	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Interest income:
Loans, including fees	$	21,756	$	15,120	$	42,375	$	28,670
Investment securities and interest bearing deposits in banks		888		2,674		2,526		5,328
FHLB dividends		54		92		179		184
FRB dividends		114		62		222		123
Total interest and dividend income		22,812		17,948		45,302		34,305
Interest expense:
Deposits		1,675		1,783		4,002		3,129
Subordinated debt		100		147		219		293
Other borrowings		87		—		94		—
Total interest expense		1,862		1,930		4,315		3,422
Net interest income		20,950		16,018		40,987		30,883
Provision for loan losses		4,398		445		6,111		722
Net interest income after provision for loan losses		16,552		15,573		34,876		30,161
Noninterest income:
Gain on sale of loans		212		903		854		1,169
Service charges and other fees		610		663		1,315		1,396
(Loss) income on investment in SBIC fund		595		514		1,241		469
Loan servicing and other loan fees		(309)		11		35		924
Other income and fees		194		449		435		702
Total noninterest income		1,302		2,540		3,880		4,660
Noninterest expense:
Salaries and employee benefits		8,252		7,198		16,960		13,161
Occupancy and equipment		1,774		1,064		3,585		2,174
Data processing		1,450		3,683		5,074		4,607
Other expense		2,060		2,850		4,835		4,601
Total noninterest expense		13,536		14,795		30,454		24,543
Income before provision for income taxes		4,318		3,318		8,302		10,278
Provision for income taxes		1,199		1,091		2,365		3,110
Net income	$	3,119	$	2,227	$	5,937	$	7,168
Earnings per common share:
Basic earnings per common share	$	0.26	$	0.20	$	0.49	$	0.64
Weighted average shares outstanding		12,025,098		11,384,287		12,186,254		11,139,287

Diluted earnings per common share	$	0.26	$	0.20	$	0.49	$	0.64
Weighted average shares outstanding		12,025,098		11,384,287		12,186,254		11,139,287

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except for per share data)

(unaudited)


		Three months ended			Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Net income	$	3,119	$	2,227	$	5,937		7,168
Other comprehensive income:
Change in unrealized gain on available-for-sale securities		1,164		1,112		2,291		1,945
Deferred tax expense		(336)		(320)		(653)		(556)
Other comprehensive income, net of tax		828		792		1,638		1,389
Total comprehensive income	$	3,947	$	3,019	$	7,575	$	8,557

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except for per share data)

(unaudited)


						Accumulated
		Common		Additional		Other				Total
	Number of	Stock		Paid in		Comprehensive		Retained		Shareholders’
	Shares	Amount		Capital		Income/(Loss)		Earnings		Equity
Balance, December 31, 2018	10,869,275	$	149,248	$	287	$	(103)	$	51,321	$	200,753
Net income									4,941		4,941
Other comprehensive income, net							597				597
Restricted stock granted	22,289										—
Stock based compensation			120								120
Balance, March 31, 2019	10,891,564	$	149,368	$	287	$	494	$	56,262	$	206,411
Net income									2,227		2,227
Other comprehensive income, net							792				792
Restricted stock granted	45,696										—
Stock based compensation			320								320
Stock issued in acquisition	1,115,006		24,887								24,887
Balance, June 30, 2019	12,052,266		174,575		287		1,286		58,489		234,637
Net income									5,563		5,563
Other comprehensive income, net							318				318
Restricted stock granted	9,350										—
Stock based compensation			367								367
Balance, September 30, 2019	12,061,616		174,942		287		1,604		64,052		240,885
Net income									4,587		4,587
Other comprehensive income, net							(353)				(353)
Stock based compensation			347								347
Issuance of shares	876,803		19,711								19,711
Repurchase of shares	(493,787)		(10,957)								(10,957)
Balance, December 31, 2019	12,444,632		184,043		287		1,251		68,639		254,220
Net income									2,818		2,818
Other comprehensive income, net							810				810
Restricted stock granted	15,173										—
Restricted stock forfeited	(1,432)										—
Stock based compensation			309								309
Repurchase of shares	(228,525)		(4,596)								(4,596)
Balance, March 31, 2020	12,229,848		179,756		287		2,061		71,457		253,561
Net income									3,119		3,119
Other comprehensive income, net							828				828
Restricted stock granted	92,294										—
Stock based compensation			363								363
Repurchase of shares	(451,978)		(5,463)								(5,463)
Balance, June 30, 2020	11,870,164	$	174,656	$	287	$	2,889	$	74,576	$	252,408

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for share and per share data)

(unaudited)


	Six months ended
	June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	5,937	$	7,168
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in deferred tax asset		(1,486)		(1,020)
Accretion on acquired loans		(3,534)		(1,356)
Gain on sale of loans		(854)		(1,169)
Proceeds from sale of loans		11,707		13,607
Loans originated for sale		(15,651)		(20,544)
Gain on sale of premises		—		(187)
Gain on sale of OREO		(28)		(112)
Accretion on junior subordinated debentures		40		40
Increase in cash surrender value of life insurance policies securities		(332)		(316)
Provision for loan losses		6,111		722
Amortization/accretion of premium/discount on investment securities, net		376		226
Depreciation and amortization		897		562
Core deposit intangible amortization		926		781
Stock based compensation expense		672		440
Increase in deferred loan origination fees, net		4,121		129
Increase in interest receivable and other assets		(3,080)		(7,413)
Increase in salary continuation plan, net		170		133
(Decrease) increase in interest payable and other liabilities		(5,099)		10,475
Net cash provided by operating activities		893		2,166
Cash flows from investing activities:
Proceeds from maturities of interest bearing deposits in banks		3,229		748
Purchase of investment securities		(9,920)		(6,138)
Proceeds from the maturity and repayment of investment securities		14,676		12,448
Purchase of Federal Home Loan Bank stock		(398)		(477)
Purchase of Federal Reserve Bank stock		(760)		(88)
(Increase) decrease in loans, net		(162,421)		41,831
Proceeds from sale of premises		—		4,961
Proceeds from sale of OREO		518		362
Purchase of equipment and leasehold improvements		(1,001)		(286)
Net cash paid out for acquisition		(8,432)		(9,342)
Net cash (used in) provided by investing activities		(164,509)		44,019

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(In thousands, except for share and per share data)

(unaudited)


	Six months ended
	June 30,
	2020		2019
Cash flows from financing activities:
Increase (decrease) in noninterest and interest bearing deposits, net		133,481		(14,725)
Decrease in time deposits, net		(65,892)		(3,447)
Repurchase of common stock		(10,059)		—
Repayment of junior subordinated debentures		(1,575)		—
Increase in other borrowings		116,000		—
Repayment of other borrowings		(100,000)		—
Net cash provided by (used in) financing activities		71,955		(18,172)
(Decrease) increase in cash and cash equivalents		(91,661)		28,013
Cash and cash equivalents at beginning of period		295,382		323,581
Cash and cash equivalents at end of period	$	203,721	$	351,594

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense	$	5,188	$	2,183
Income tax, net of refunds		4,305		4,040
Non-cash investing and financing activities:
Change in unrealized gain on available-for-sale securities, net of tax	$	1,638	$	1,389
Transfer of loans to other real estate owned		212		—
Recognition of ROU assets		760		11,411
Recognition of lease liability		707		11,727
Acquisition:
Assets acquired, net of cash received	$	109,429	$	289,546
Liabilities assumed		120,409		267,172
Cash consideration		13,886		37,814
Common stock issued		—		24,887
Goodwill		3,372		11,855

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

(unaudited)

NOTE 1 – BASIS OF PRESENTATION

BayCom Corp (the “Company”) is a bank holding company headquartered in Walnut Creek, California. United Business Bank (the “Bank”), the wholly owned banking subsidiary, is a California state-chartered bank which provides a broad range of financial services primarily to local small and mid-sized businesses, service professionals and individuals. In the 16 years of operation, the Bank has grown to 34 full-service banking branches. The main headquarter office and a branch location are located in Walnut Creek, California and additional branch offices are located in Oakland, Castro Valley, Mountain View, Napa, Stockton (2), Pleasanton, Livermore, San Jose, Long Beach, Sacramento, San Francisco, Buena Park, Los Angeles, and Garden Grove, California, and Seattle, Washington (2), New Mexico (5) and Colorado (11). The condensed consolidated financial statements include the accounts of the Company and the Bank.

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto for the year ended December 31, 2019. Results of operations for interim periods are not necessarily indicative of results for the full year. Certain prior year information has been reclassified to conform to current year presentation. The reclassifications had no impact on consolidated net income or shareholders’ equity.

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

On May 24, 2019, the Company completed the acquisition of Uniti Financial Corporation ("UFC”) and its wholly owned subsidiary, Uniti Bank, headquartered in Buena Park, California ("UFC Merger").

On October 21, 2019, the Company completed its acquisition of TIG Bancorp (“TIG”) and its wholly owned subsidiary, First State Bank of Colorado, headquartered in Greenwood Village, Colorado (“TIG Merger”).

On February 4, 2020, the Company completed its acquisition of Grand Mountain Bancshares, Inc. (“GMB”) and its wholly owned subsidiary Grand Mountain Bank, headquartered in Granby, Colorado (“GMB Merger”). See “Note 4 – Acquisitions” for additional information on the Uniti Merger, TIG Merger and GMB Merger.

NOTE 2 - ACCOUNTING GUIDANCE NOT YET EFFECTIVE AND ADOPTED ACCOUNTING GUIDANCE

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) and subsequent amendment to the initial guidance in November 2018, ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and in May 2019, ASU 2019-05 Financial Instruments — Credit Losses, Topic 326, all of which clarifies codification and corrects unintended application of the guidance. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired (“PCI”) debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-05 allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. The amendments in these ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted for smaller reporting companies, such as the Company. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is reviewing the requirements of these ASUs and expects to begin developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. Upon adoption, the Company expects changes in the processes and procedures used to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit-impaired loans; however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The amendments in this ASU are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The Company adopted this ASU on January 1, 2020, with no material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842) - Codification Improvements. The changes in this amendment include: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) presentation on the statement of cash flows – sales types and direct financing leases; and (3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. This ASU specifically provides an exception to the paragraph 250-10-50-3 that would otherwise have required interim disclosures in the period an accounting change including the effect of that change on income from continuing operations, net income, any other financial statement line item, and any affected per share amounts. For items 1 and 2, this ASU is effective for fiscal and interim periods beginning after December 15, 2019. Item 3 does not have an effective date because the amendments related to transition disclosures are included in Topic 842. The Company adopted ASU 2019-01 on January 1, 2020. The adoption of ASU 2019-01 did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 provides that state franchise or similar taxes that are based, at least in part on an entity’s income, be included in an entity’s income tax recognized as income-based taxes. The ASU further clarifies that the effect of any change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the legislation. Technical changes to eliminate exceptions to Topic 740 related to intra-period tax allocations for entities with losses from continuing operations, deferred tax liabilities related to change in ownership of foreign entities, and interim-period tax allocations for businesses with losses where the losses are expected to be realized. The amendments in ASU 2019-12 are effective for public business entities with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial statement.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the novel coronavirus of 2019 (“COVID-19”) pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings.

NOTE 3 – SUBSEQUENT EVENTS

On August 10, 2020, On August 10, 2020, BayCom Corp issued and sold in an underwritten offering $65.0 million aggregate principal amount of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 (“Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of approximately $63.3 million.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

NOTE 4 – ACQUISITIONS

On February 4, 2020, the Company completed its acquisition of Grand Mountain Bancshares, Inc. (“GMB”) in Colorado. As of the acquisition date, GMB merged into the Company and Grand Mountain Bank, GMB’s wholly owned bank subsidiary, merged into United Business Bank. The acquisition increased the Company’s market share in Colorado with the addition of 4 branches located in Grand County, Colorado. Under the terms of the merger agreement, the Company paid GMB shareholders $3.40 in cash for each share or approximately $13.9 million.

On October 21, 2019, the Company completed its acquisition of TIG Bancorp (“TIG”). As of the acquisition date, TIG merged into the Company and First State Bank of Colorado, TIG’s wholly owned bank subsidiary, merged into United Business Bank. The acquisition expanded the Company’s market area into the State of Colorado with the addition of 7 branches throughout Colorado. The Company paid TIG shareholders an aggregate of 876,803 shares of its common stock and paid an aggregate cash consideration of $20.2 million. The total consideration transferred was $39.9 million.

On May 24, 2019, the Company completed its acquisition of Uniti Financial Corporation (“UFC”). As of the acquisition date, UFC merged into the Company and Uniti Bank, UFC’s wholly owned bank subsidiary, merged into United Business Bank. The acquisition increased the Company’s market share in California through the addition of 3 branch offices located in Southern California. The Company paid UFC shareholders an aggregate of 1,115,006 shares of its common stock and paid aggregate cash consideration of $37.8 million. The total consideration transferred was $62.7 million.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

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


	GMB		TIG		Uniti
	Acquisition		Acquisition		Acquisition
	Date		Date		Date
	February 4, 2020		October 21, 2019		May 24, 2019
Fair value of assets:
Cash and due from banks	$	5,494	$	6,146	$	6,392
Federal funds sold		—		55,955		22,080
Total cash and cash equivalents		5,494		62,101		28,472
Interest bearing deposits in banks		16,040		—		—
Investment securities available-for-sale		4,369		26,382		5,096
FHLB stock, at par		165		241		1,535
FRB stock, at par		—		792		—
Loans, net		98,410		137,183		276,719
Premises and equipment, net		3,879		3,480		463
OREO		—		42		76
Core deposit intangible		949		3,038		566
Deferred tax assets, net		728		308		234
Servicing asset		—		—		1,824
Interest receivable and other assets		929		2,079		3,033
Total assets acquired		130,923		235,646		318,018
Liabilities:
Deposits
Noninterest bearing		30,937		77,157		143,082
Interest bearing		87,210		125,597		122,704
Total Deposits		118,147		202,754		265,786

Interest payable and other liabilities		687		2,014		1,386
Junior subordinated debentures, net		1,575		—		—
Total liabilities assumed		120,409		204,768		267,172

Stock issued		—		19,711		24,887
Cash consideration		13,886		20,184		37,814
Goodwill	$	3,372	$	9,017	$	11,855

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

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


	GMB		TIG		Uniti
	Acquisition		Acquisition		Acquisition
	Date		Date		Date
	February 4, 2020		October 21, 2019		May 24, 2019
Book value of net assets acquired	$	10,348	$	29,164	$	47,445
Fair value adjustments:
Investments available-for-sale		(10)		(627)		—
Loans, net		484		382		4,617
Premises and equipment, net		(1,000)		180		—
Write-down on OREO		—		(18)		(32)
Core deposit intangible		949		3,038		566
Tax assets		(139)		(774)		(695)
Time deposits		(25)		(308)		(250)
Write-down on servicing assets		—		—		(805)
Junior subordinated debentures, net		(98)		—		—
Write-down other (assets) liabilities		5		(159)		—
Total purchase accounting adjustments		166		1,714		3,401
Fair value of net assets acquired		10,514		30,878		50,846
Price paid:
Common stock issued		—		19,711		24,887
Cash paid		13,886		20,184		37,814
Total price paid		13,886		39,895		62,701
Goodwill	$	3,372	$	9,017	$	11,855

Pro Forma Results of Operations

The opof the Company for the three and six months ended June 30, 2020 in the condensed consolidated statements of income include the operating results of UFC, TIG and GMB, since their respective acquisition dates. The following table represents the net interest income, net income, basic and diluted earnings per share, as if the mergers with UFC, TIG and GMB were effective January 1, 2019. The unaudited pro forma information in the following table is intended for informational purposes only and is not necessarily indicative of future operating results or operating results that would have occurred had the mergers been completed at the beginning of the respective years. No assumptions have been applied to the pro forma results of operation regarding possible revenue enhancements, expense efficiencies or asset dispositions.

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


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Net interest income	$	20,950	$	21,179	$	41,389	$	43,269
Net income		3,119		1,898		5,140		8,430
Basic earnings per share	$	0.26	$	0.15	$	0.42	$	0.65
Diluted earnings per share		0.26		0.15		0.42		0.65

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

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

Acquisition expenses

Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become fully integrated. The Company incurred third-party acquisition related expenses in the consolidated statements of income for the periods indicated are as follows:


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Professional fees	$	—	$	535	$	369	$	535
Data processing		—		2,657		2,000		2,657
Severance expense		—		578		266		578
Other expenses		—		365		383		365
Total	$	—	$	4,135	$	3,018	$	4,135

NOTE 5 – INVESTMENT SECURITIES

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


			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
June 30, 2020
U.S. Treasuries	$	—	$	—	$	—	$	—
U.S. Government Agencies		7,033		81		(11)		7,103
Municipal securities		17,856		648		—		18,504
Mortgage-backed securities		37,693		2,245		(15)		39,923
Collateralized mortgage obligations		32,114		1,256		(21)		33,349
SBA securities		8,261		56		(54)		8,263
Corporate bonds		14,425		20		(157)		14,288
Total	$	117,382	$	4,306	$	(258)	$	121,430


			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
December 31, 2019
U.S. Treasuries	$	999	$	—	$	—	$	999
U.S. Government Agencies		10,033		64		(7)		10,090
Municipal securities		17,888		408		(5)		18,291
Mortgage-backed securities		42,931		860		(48)		43,743
Collateralized mortgage obligations		28,197		476		(68)		28,605
SBA securities		9,550		2		(66)		9,486
Corporate bonds		8,534		141		—		8,675
Total	$	118,132	$	1,951	$	(194)	$	119,889

During the three and six months ended June 30, 2020 and 2019, the Company did not sell any securities available-for-sale.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

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


	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
June 30, 2020
U.S. Treasuries	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Government Agencies		—		—		1,507		(11)		1,507		(11)
Municipal securities		—		—		—		—		—		—
Mortgage-backed securities		496		(5)		260		(10)		756		(15)
Collateralized mortgage obligations		2,334		(13)		851		(8)		3,185		(21)
SBA securities		3,967		(12)		1,665		(42)		5,632		(54)
Corporate bonds		7,866		(157)		—		—		7,866		(157)
Total	$	14,663	$	(187)	$	4,283	$	(71)	$	18,946	$	(258)


	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
December 31, 2019
U.S. Treasuries	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Government Agencies		1,497		(1)		1,514		(6)		3,011		(7)
Municipal securities		3,147		(5)		—		—		3,147		(5)
Mortgage-backed securities		7,772		(47)		81		(1)		7,853		(48)
Collateralized mortgage obligations		4,155		(56)		883		(12)		5,038		(68)
SBA securities		6,937		(24)		1,530		(42)		8,467		(66)
Corporate bonds		—		—		—		—		—		—
Total	$	23,508	$	(133)	$	4,008	$	(61)	$	27,516	$	(194)

At June 30, 2020, the Company held 301 investment securities, of which 14 were in an unrealized loss position for more than twelve months and 33 were in an unrealized loss position for less than twelve months. These temporary unrealized losses relate principally to current interest rates for similar types of securities. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment. Additional deterioration in market and economic conditions related to the COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in other-than-temporary impairment charges.

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


	June 30, 2020				December 31, 2019
	Amortized		Estimated		Amortized		Estimated
	cost		fair value		cost		fair value
Available-for-sale
Due in one year or less	$	12,637	$	12,762	$	10,737	$	10,781
Due after one through five years		20,044		20,998		24,078		24,560
Due after five years through ten years		27,668		28,214		22,914		23,366
Due after ten years		57,033		59,456		60,403		61,182
Total	$	117,382	$	121,430	$	118,132	$	119,889

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

NOTE 6 - LOANS

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


	June 30,		December 31,
	2020		2019
Commercial and industrial	$	312,870	$	169,291
Construction and land		45,833		36,321
Commercial real estate		1,167,712		1,093,142
Residential		197,270		156,764
Consumer		5,561		2,562
Total loans		1,729,246		1,458,080
Net deferred loan fees		(4,571)		(451)
Allowance for loan losses		(13,500)		(7,400)
Net loans	$	1,711,175	$	1,450,229

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


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Total
June 30, 2020
Recorded investment in impaired loans:
With no specific allowance recorded	$	348	$	2,726	$	3,634	$	1,574	$	—	$	8,282
With a specific allowance recorded		212		80		270		159		—		721
Total recorded investment in impaired loans	$	560	$	2,806	$	3,904	$	1,733	$	—	$	9,003
Specific allowance on impaired loans		146		14		84		25		—		269
December 31, 2019
Recorded investment in impaired loans:
With no specific allowance recorded	$	436	$	2,737	$	2,505	$	1,488	$	1	$	7,167
With a specific allowance recorded		182		—		270		—		12		464
Total recorded investment in impaired loans	$	618	$	2,737	$	2,775	$	1,488	$	13	$	7,631
Specific allowance on impaired loans		95		—		64		—		12		171
Three months ended June 30, 2020
Average recorded investment in impaired loans	$	546	$	2,838	$	3,150	$	1,741	$	—	$	8,275
Interest recognized		4		9		—		—		—		13
Six months ended June 30, 2020
Average recorded investment in impaired loans		585		2,800		2,763		1,679		4		7,831
Interest recognized		4		151		30		—		—		185
Three months ended June 30, 2019
Average recorded investment in impaired loans		2,326		—		1,386		282		—		3,994
Interest recognized		1		—		—		—		—		1
Six months ended June 30, 2019
Average recorded investment in impaired loans		2,347		—		1,162		441		—		3,950
Interest recognized		34		—		20		1		—		55

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans on accrual are comprised solely of TDRs performing under modified loan agreements, whose principal and interest is determined to be collectible. Nonaccrual loans are loans where principal and interest have been determined to not be fully collectible.

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR loan. TDR loans are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt. At June 30, 2020, TDR loans totaled $4.1 million, compared to $4.4 million at December 31, 2019. At June 30, 2020 and at December 31, 2019, $780,000 and $789,000, respectively, of TDR loans were accruing and performing in accordance with their modified terms. There are no commitments to lend additional amounts to borrowers with outstanding loans that are classified as TDR loans at June 30, 2020. All TDR loans are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses.

The following tables present loans by class, modified as TDR loans, for the periods indicated:


	Number of	Rate		Term		Interest only		Rate & term
	loans	modification		modification		modification		modification		Total
Three months ended June 30, 2020
Commercial and industrial	1	$	—	$	24	$	—	$	—	$	24
Construction and land	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Residential	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total	1	$	—	$	24	$	—	$	—	$	24


	Number of	Rate		Term		Interest only		Rate & term
	loans	modification		modification		modification		modification		Total
Six months ended June 30, 2020
Commercial and industrial	1	$	—	$	24	$	—	$	—	$	24
Construction and land	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Residential	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total	1	$	—	$	24	$	—	$	—	$	24

Number of

Rate

Term

Interest only

Rate & term

loans

modification

Total

Three months ended June 30, 2019

Commercial and industrial

—

Construction and land

—

Commercial real estate

—

Residential

—

Consumer

—

Total

—


	Number of	Rate		Term		Interest only		Rate & term
	loans	modification		modification		modification		modification		Total
Six months ended June 30, 2019
Commercial and industrial	—	$	—	$	176	$	—	$	321	$	497
Construction and land	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Residential	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total	—	$	—	$	176	$	—	$	321	$	497

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

For the three and six months ended June 30, 2020 and 2019, the Company recorded 0 charge-offs related to TDR loans. During the three and six months ended June 30, 2020, there were 0 TDR loans for which there was a payment default within the first 12 months of the modification.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”), signed into law on March 27, 2020, provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency by the President, or (B) December 31, 2020. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. See Note 2 – Accounting Guidance Not Yet Effective and Adopted Accounting Guidance.

Risk Rating System

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

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

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

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

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

●

Credit that is currently protected but is potentially a weak asset;

●

Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and

●

Adverse financial trends.

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

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

Some characteristics of Substandard loans are:

●

Inability to service debt from ordinary and recurring cash flow;

●

Chronic delinquency;

●

Reliance upon alternative sources of repayment;

●

Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt;

●

Repayment dependent upon the liquidation of collateral;

●

Inability to perform as agreed, but adequately protected by collateral;

●

Necessity to renegotiate payments to a non-standard level to ensure performance; and

●

The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

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

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

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


			Special
	Pass		mention		Substandard		Doubtful		Total
June 30, 2020
Commercial and industrial	$	305,598	$	5,595	$	1,677	$	—	$	312,870
Construction and land		42,942		85		2,806		—		45,833
Commercial real estate		1,146,709		14,820		6,183		—		1,167,712
Residential		194,256		816		2,198		—		197,270
Consumer		5,556		—		5		—		5,561
Total	$	1,695,061	$	21,316	$	12,869	$	—	$	1,729,246


			Special
	Pass		mention		Substandard		Doubtful		Total
December 31, 2019
Commercial and industrial	$	166,613	$	1,166	$	1,512	$	—	$	169,291
Construction and land		32,879		93		3,349		—		36,321
Commercial real estate		1,071,771		16,021		5,350		—		1,093,142
Residential		153,484		1,215		2,065		—		156,764
Consumer		2,541		—		21		—		2,562
Total	$	1,427,288	$	18,495	$	12,297	$	—	$	1,458,080

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

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


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCI loans		receivable		accruing
June 30, 2020
Commercial and industrial	$	684	$	—	$	527	$	1,211	$	310,950	$	709	$	312,870	$	—
Construction and land		—		—		2,806		2,806		42,835		192		45,833		—
Commercial real estate		271		778		2,192		3,241		1,150,859		13,612		1,167,712		—
Residential		77		—		1,157		1,234		192,896		3,140		197,270		—
Consumer		1		—		—		1		5,560		—		5,561		—
Total	$	1,033	$	778	$	6,682	$	8,493	$	1,703,100	$	17,653	$	1,729,246	$	—


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCI loans		receivable		accruing
December 31, 2019
Commercial and industrial	$	923	$	1,480	$	207	$	2,610	$	166,137	$	544	$	169,291	$	26
Construction and land		325		88		2,961		3,374		32,724		223		36,321		224
Commercial real estate		4,668		4,698		1,460		10,826		1,068,211		14,105		1,093,142		—
Residential		531		122		1,392		2,045		152,261		2,458		156,764		—
Consumer		14		—		13		27		2,533		2		2,562		—
Total	$	6,461	$	6,388	$	6,033	$	18,882	$	1,421,866	$	17,332	$	1,458,080	$	250

At June 30, 2020, there were 0 loans greater than 90 days past due and still accruing interest, compared to $250,000 at December 31, 2019. The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $1.2 million at both June 30, 2020 and December 31, 2019. Interest foregone on nonaccrual loans was approximately $119,500 and $221,000 for the three and six months ended June 30, 2020 compared to $46,000 and $88,000 for the three and six months ended June 30, 2019, respectively. At June 30, 2020, there were 2 loans totaling $350,000 in the process of foreclosure compared to NaN at December 31, 2019.

Purchase Credit Impaired Loans

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

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


	June 30, 2020				December 31, 2019
	Unpaid				Unpaid
	principal		Carrying		principal		Carrying
	balance		value		balance		value
Commercial and industrial	$	1,097	$	709	$	1,225	$	544
Construction and land		273		192		338		223
Commercial real estate		15,487		13,612		15,930		14,105
Residential		3,925		3,140		3,238		2,458
Consumer		—		—		8		2
Total	$	20,782	$	17,653	$	20,739	$	17,332

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

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


	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Balance at beginning of period	$	594	$	231	$	554	$	256
Additions		223		350		531		350
Removals		(229)		—		(356)		(3)
Accretion		(17)		(24)		(158)		(46)
Balance at end of period	$	571	$	557	$	571	$	557

NOTE 7 – ALLOWANCE FOR LOAN LOSSES

The following table provides additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the period indicated:


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Unallocated		Total
Three months ended June 30, 2020
Allowance for loan losses
Beginning balance	$	2,344	$	107	$	5,807	$	527	$	3	$	312	$	9,100
Charge-offs		—		—		—		—		(1)		—		(1)
Recoveries		3		—		—		—		—		—		3
Provision for loan losses		983		229		2,085		840		—		261		4,398
Ending balance	$	3,330	$	336	$	7,892	$	1,367	$	2	$	573	$	13,500

Six months ended June 30, 2020
Allowance for loan losses
Beginning balance	$	1,762	$	164	$	4,926	$	421	$	14	$	113	$	7,400
Charge-offs		—		—		—		(1)		(17)		—		(18)
Recoveries		7		—		—		—		—		—		7
Provision for loan losses		1,561		172		2,966		947		5		460		6,111
Ending balance	$	3,330	$	336	$	7,892	$	1,367	$	2	$	573	$	13,500

June 30, 2020
Allowance for loan losses related to:
Loans individually evaluated for impairment	$	146	$	14	$	84	$	25	$	—	$	—	$	269
Loans collectively evaluated for impairment		3,184		322		7,808		1,342		2		573		13,231
PCI loans		—		—		—		—		—		—		—

Loans receivable:
Individually evaluated for impairment	$	560	$	2,806	$	3,904	$	1,733	$	—	$	—	$	9,003
Collectively evaluated for impairment		311,601		42,835		1,150,196		192,397		5,561		—		1,702,590
PCI loans		709		192		13,612		3,140		—		—		17,653
Total loans	$	312,870	$	45,833	$	1,167,712	$	197,270	$	5,561	$	—	$	1,729,246

The following table provides additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the period indicated:

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Unallocated		Total
Three months ended June 30, 2019
Allowance for loan losses
Beginning balance	$	1,135	$	340	$	3,326	$	235	$	2	$	367	$	5,405
Charge-offs		—		—		—		—		—		—		—
Recoveries		30		—		—		—		—		—		30
Provision (reclassification) for loan losses		85		(74)		527		(10)		—		(83)		445
Ending balance	$	1,250	$	266	$	3,853	$	225	$	2	$	284	$	5,880

Six months ended June 30, 2019
Allowance for loan losses
Beginning balance	$	1,017	$	327	$	3,214	$	215	$	3	$	364	$	5,140
Charge-offs		—		—		(17)		—		(4)		—		(21)
Recoveries		39		—		—		—		—		—		39
Provision (reclassification) for loan losses		194		(61)		656		10		3		(80)		722
Ending balance	$	1,250	$	266	$	3,853	$	225	$	2	$	284	$	5,880

June 30, 2019
Allowance for loan losses related to:
Loans individually evaluated for impairment	$	19	$	—	$	—	$	—	$	—	$	—	$	19
Loans collectively evaluated for impairment		1,233		266		3,490		587		1		284		5,861
PCI loans		—		—		—		—		—		—		—

Loans receivable:
Individually evaluated for impairment	$	2,250	$	—	$	2,215	$	120	$	—	$	—	$	4,585
Collectively evaluated for impairment		148,836		30,282		884,832		126,714		6,052		—		1,196,716
PCI loans		776		220		15,849		1,756		—		—		18,601
Total loans	$	151,862	$	30,502	$	902,896	$	128,590	$	6,052	$	—	$	1,219,902

NOTE 8 – PREMISES AND EQUIPMENT

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


	June 30,		December 31,
	2020		2019
Premises owned	$	11,531	$	7,906
Leasehold improvements		2,996		2,362
Furniture, fixtures and equipment		5,591		5,053
Less accumulated depreciation and amortization		(5,606)		(4,792)
Total premises and equipment, net	$	14,512	$	10,529

Depreciation and amortization included in occupancy and equipment expense totaled $425,000 and $897,000 for the three and six months ended June 30, 2020 compared to $261,000 and $562,000 for the three and six months ended June 30, 2019, respectively.

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

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

The Company leases its headquarters and 19 branches and administration offices under noncancelable operating leases. These leases expire on various dates through 2030. The Company’s leases often have an option to renew one or more times, at the Company’s discretion, following the expiration of the initial term. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company uses the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The Company adopted the requirements of Topic 842 effective January 1, 2019, which required the Company record a right of use lease asset and a lease liability for leases with an initial term of more than 12 months for leases that existed as of January 1, 2019. Future minimum lease payments at June 30, 2020 are for the periods indicated as follows:


For the remainder of 2020	$	3,352
2021		2,853
2022		2,510
2023		1,598
2024		1,290
Thereafter		3,788
Total lease payments		15,391
Less: interest		(1,261)
Present value of lease liabilities	$	14,130

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


	June 30, 2020
Weighted-average remaining lease term	6.24	years
Weighted-average discount rate	2.70	%

Rental expense included in occupancy and equipment on the consolidated statements of income totaled $854,000 and $1.7 million for the three and six months ended June 30, 2020 compared to $693,000 and $1.3 million for the three and six months ended June 30, 2019, respectively.

NOTE 9 – GOODWILL AND INTANGIBLE ASSETS

Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and the liabilities assumed as of the acquisition date. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit). Goodwill that arises from a business combination is evaluated for impairment at least annually, at the reporting unit level. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and amortized over an estimated useful live of seven to ten years.

As of June 30, 2020, and December 31, 2019, goodwill totaled $38.8 million and $35.5 million, respectively. At both June 30, 2020 and December 31, 2019, core deposit intangible from business combinations totaled $9.2 million. A significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant decline in the price of our common stock could necessitate taking charges in the future related to the impairment of goodwill or core deposit intangibles. The core deposit intangible assets represent the value ascribed to the long-term deposit relationships acquired and is being amortized over an estimated average useful life of seven to ten years. At June 30, 2020, the weighted average remaining useful life was 3.8 years.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

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


	June 30,		December 31,
	2020		2019
Balance at beginning of period	$	35,466	$	14,594
Acquired goodwill		3,372		20,872
Impairment		—		—
Balance at end of period	$	38,838	$	35,466

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. As of June 30, 2020, the Company had positive equity, however, as a result of the COVID-19 pandemic, the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the Company exceeded its carrying value, including goodwill. The qualitative assessment indicated that the Company’s continued profitability and non-COVID-19 loan portfolio credit quality, average community bank merger deal values realized during 2020, net interest margin levels, total expected loan losses as of June 30, 2020, and the continued growth in our core deposit portfolio; therefore, it was more likely than not that its fair value exceeded its carrying value, resulting in no impairment. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition.

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


	June 30,		December 31,
	2020		2019
Balance at beginning of period	$	9,185	$	7,205
Additions		949		3,604
Less amortization		(926)		(1,624)
Balance at end of period	$	9,208	$	9,185

Amortization expense in other noninterest expense on the condensed consolidated statements of income totaled $453,000 and $926,000 for the three and six months ended June 30, 2020 compared to $392,000 and $781,000 for the three and six months ended June 30, 2019, respectively.

The following table presents the estimated amortization expense with respect to core deposit intangibles as of June 30, 2020 for the periods indicated:


For the remainder of 2020	$	906
2021		1,813
2022		1,813
2023		1,034
2024		970
Thereafter		2,672
Total	$	9,208

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

NOTE 10 – INTEREST RECEIVABLE AND OTHER ASSETS

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


	June 30,		December 31,
	2020		2019
Tax assets, net	$	7,027	$	5,922
Accrued interest receivable		8,548		5,495
Investment in SBIC Funds		2,410		2,272
Prepaid assets		2,924		1,160
Servicing assets		1,838		2,097
Low income housing partnerships, net		1,971		1,171
Investment in statutory trusts		478		475
All other		1,347		926
Total	$	26,543	$	19,518

NOTE 11 – DEPOSITS

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


	June 30,		December 31,
	2020		2019
Demand deposits	$	703,430	$	572,341
NOW accounts and savings		385,335		314,125
Money market		528,164		489,206
Time deposits under $250,000		153,884		189,063
Time deposits over $250,000		116,106		136,448
Total	$	1,886,919	$	1,701,183

At June 30, 2020 and December 31, 2019, the weighted average stated rate on the Company’s interest bearing deposits were 0.57% and 0.86%, respectively.

NOTE 12 - BORROWINGS

The Bank has an approved secured borrowing facility with the Federal Home Loan Bank of San Francisco (the “FHLB”) for up to 25% of total assets for a term not to exceed five years under a blanket lien of certain types of loans. In May 2020, the Bank secured a $10.0 million advance from the FHLB of San Francisco comprised of 2 $5.0 million tranches, at no cost, maturing on November 9, 2020 and May 7, 2021, respectively. At December 31, 2019, there were 0 FHLB advances outstanding.

The Bank has a Federal Funds line with four corresponding banks. Cumulative available commitments totaled $85.0 million and $55.0 at June 30, 2020 and December 31, 2019, respectively. There were 0 amounts outstanding under these facilities at June 30, 2020 and December 31, 2019.

On April 30, 2020, the Company secured a short-term borrowing for $6.0 million, which matures on October 30, 2020, to repurchase Company common stock.

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

NOTE 13 - INTEREST PAYABLE AND OTHER LIABILITIES

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


	June 30,		December 31,
	2020		2019
Accrued expenses	$	4,272	$	6,241
CDARs deferred fees		182		320
Accounts payable		1,713		2,175
Reserve for unfunded commitments		415		415
Accrued interest payable		889		1,607
All other		793		517
Total	$	8,264	$	11,275

NOTE 14 – OTHER EXPENSES

The Company’s other expenses for the periods indicated consisted of the following:


	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Professional fees	$	629	$	867	$	1,524	$	1,264
Core deposit premium amortization		453		392		926		781
Marketing and promotions		109		396		439		606
Stationary and supplies		127		161		273		298
Insurance (including FDIC premiums)		110		159		165		315
Communication and postage		124		112		318		207
Loan default related expense		87		119		212		150
Director fees and stock compensation		80		375		158		496
Bank service charges		42		19		76		31
Courier expense		124		117		314		231
Other		175		133		430		222
Total	$	2,060	$	2,850	$	4,835	$	4,601

NOTE 15 – EQUITY INCENTIVE PLANS

2017 Omnibus Equity Incentive Plan

The shareholders approved the Omnibus Equity Incentive Plan (“2017 Plan”) in November 2017. The 2017 Plan provides for the awarding by the Company’s Board of Directors of equity incentive awards to employees and non-employee directors. An equity incentive award may be an option, stock appreciation rights, restricted stock units, stock award, other stock-based award or performance award granted under the 2017 Plan. Factors considered by the Board in awarding equity incentives to officers and employees include the performance of the Company, the employee’s or officer’s job performance, the importance of his or her position, and his or her contribution to the organization’s goals for the award period. Generally, awards are restricted and have a vesting period of no longer than ten years. Subject to adjustment as provided in the 2017 Plan, the maximum number of shares of common stock that may be delivered pursuant to awards granted under the 2017 Plan is 450,000. The 2017 Plan provides for an annual restricted stock grant limits to officers, employees and directors. The annual stock grant limit per person for officers and employees is the lessor of 50,000 shares or a value of $2.0 million, and per person for directors, the maximum is 25,000 shares. All unvested restricted shares outstanding vest in the event of a change in control of the Company. Awarded shares of restricted stock vest over (i) a one-

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

year period following the date of grant, in the case of the non-employee directors, and (ii) a three-year or five-year period following the date of grant, with the initial vesting occurring on the one-year anniversary of the date of grant, in the case of the executive officers. As of June 30, 2020, a total of 172,846 shares are available for future issuance under the 2017 Plan.

2014 Omnibus Equity Incentive Plan

In 2014, the shareholders approved the Omnibus Equity Incentive Plan (the “2014 Plan”). A total of 148,962 equity incentive awards were granted under the 2014 Plan. The awards are shares of restricted stock and have a vesting period of one to five years. No future equity awards will be made from the 2014 Plan.

The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date. For the three and six months ended June 30, 2020, total compensation expense for these plans was $363,000 and $672,000, respectively, compared to $320,000 and $440,000 for the three and six months ended June 30, 2019, respectively.

As of June 30, 2020, there was $3.3 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately two years.

The following table provides the restricted stock grant activity for the periods indicated:


	2020			2019
		Weighted-average			Weighted-average
		grant date			grant date
	Shares	fair value		Shares	fair value
Non-vested at January 1,	142,103	$	20.76	131,000	$	19.18
Granted	15,173		22.60	22,289		22.38
Vested	(23,435)		19.62	(19,253)		19.51
Forfeited	(1,432)		18.93	—		—
Non-vested, at March 31	132,409	$	22.10	134,036	$	20.76
Granted	92,294		12.18	45,696		24.60
Vested	(32,264)		23.30	(36,582)		19.55
Non-vested, at June 30	192,439	$	17.14	143,150	$	21.63

NOTE 16 – FAIR VALUE MEASUREMENT

The following tables have information about the Company’s assets and liabilities measured at fair value and the fair value techniques used to determine such fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).

Level 1 – Inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Inputs are inputs other than quoted prices include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 – Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our quarterly valuation process. There were no transfers between levels during 2020 or 2019.

The following assets are measured at fair value on a recurring basis at the dates indicated:


	Total		Level 1		Level 2		Level 3
June 30, 2020
U.S. Treasuries	$	—	$	—	$	—	$	—
U.S. Government Agencies		7,103		—		7,103		—
Municipal securities		18,504		—		18,504		—
Mortgage-backed securities		39,923		—		39,923		—
Collateralized mortgage obligations		33,349		—		33,349		—
SBA securities		8,263		—		8,263		—
Corporate bonds		14,288		—		14,288		—
Total	$	121,430	$	—	$	121,430	$	—


	Total		Level 1		Level 2		Level 3
December 31, 2019
U.S. Treasuries	$	999	$	999	$	—	$	—
U.S. Government Agencies		10,090		—		10,090		—
Municipal securities		18,291		—		18,291		—
Mortgage-backed securities		43,743		—		43,743		—
Collateralized mortgage obligations		28,605		—		28,605		—
SBA securities		9,486		—		9,486		—
Corporate bonds		8,675		—		8,675		—
Total	$	119,889	$	999	$	118,890	$	—

The following assets are measured at fair value on a nonrecurring basis as of the dates indicated:


	Total		Level 1		Level 2		Level 3
June 30, 2020
Performing impaired loans	$	780	$	—	$	—	$	780
Nonperforming impaired loans		8,223		—		—		8,223
OREO		296		—		—		296
Total	$	9,299	$	—	$	—	$	9,299

	Total		Level 1		Level 2		Level 3
December 31, 2019
Performing impaired loans	$	789	$	—	$	—	$	789
Nonperforming impaired loans		6,842		—		—		6,842
OREO		574		—		—		574
Total	$	8,205	$	—	$	—	$	8,205

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise and liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, which uses substantially observable data, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant assumption and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

The Company records OREO at fair value on a nonrecurring basis based on the collateral value of the property. When the fair value of the collateral is based on an observable market price or a current appraised value, which uses substantially observable data, the Company records the OREO as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant assumption, and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also incorporates assumptions regarding market trends or other relevant factors and selling and commission costs ranging from 5% to 7%. Such adjustments and assumptions are typically significant and result in a Level 3 classification of the inputs for determining fair value.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented below:


	Carrying		Fair		Fair value measurements
	amount		value		Level 1		Level 2		Level 3
June 30, 2020
Financial assets:
Cash and cash equivalents	$	203,721	$	203,721	$	203,721	$	—	$	—
Interest bearing deposits in banks		14,550		14,550		14,550		—		—
Investment securities available-for-sale		117,382		121,430		—		121,430		—
Loans held for sale		—		—		—		—		—
Loans, net		1,711,175		1,725,011		—		—		1,725,011
Other equity securities		15,228		15,228		15,228		—		—
Accrued interest receivable		8,548		8,548		—		8,548		—
Financial liabilities:
Deposits		1,886,919		1,890,470		—		1,890,470		—
Other borrowings		16,000		16,000		—		16,000		—
Junior subordinated deferrable interest debentures, net		8,282		8,003		—		—		8,003
Accrued interest payable		889		889		—		889		—
Off-balance sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit		125,452		125,037		—		—		125,037


	Carrying		Fair		Fair value measurements
	amount		value		Level 1		Level 2		Level 3
December 31, 2019
Financial assets:
Cash and cash equivalents	$	295,382	$	295,382	$	295,382	$	—	$	—
Interest bearing deposits in banks		1,739		1,739		1,739		—		—
Investment securities available-for-sale		118,132		119,889		999		118,890		—
Loans held for sale		2,226		2,226		—		2,226		—
Loans, net		1,450,229		1,453,067		—		—		1,453,067
Other equity securities		13,905		13,905		13,905		—		—
Accrued interest receivable		5,495		5,495		—		5,495		—
Financial liabilities:
Deposits		1,701,183		1,704,428		—		1,704,428		—
Junior subordinated deferrable interest debentures, net		8,242		8,086		—		—		8,086
Accrued interest payable		1,607		1,607		—		1,607		—
Off-balance sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit		128,934		128,519		—		—		128,519

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

(In thousands, except for share and per share data)

(unaudited)

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Lending and Letter of Credit Commitments

In the normal course of business, the Company enters into various commitments to extend credit, which are not reflected in the financial statements. These commitments consist of the undisbursed balance on personal, commercial lines, including commercial real estate secured lines of credit, and of undisbursed funds on construction and development loans. At June 30, 2020 and December 31, 2019, undisbursed commitments totaled $123.4 million and $126.6 million, respectively. In addition, at both June 30, 2020 and December 31, 2019, the Company has issued standby letter of credit commitments, primarily issued for the third-party performance obligations of clients totaling $2.1 million and $2.3 million, respectively. There were 0 outstanding balances at June 30, 2020 and December 31, 2019.

Commitments generally have fixed expiration dates or other termination clauses. The actual liquidity needs or the credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit because a significant portion of these commitments are expected to expire without being drawn upon. The commitments are generally variable rate and include unfunded home equity lines of credit, commercial real estate construction where disbursement is made over the course of construction, commercial revolving lines of credit, and unsecured personal lines of credit. The Company’s outstanding loan commitments are made using the same underwriting standards as comparable outstanding loans. The reserve associated with these commitments included in interest payable and other liabilities on the consolidated balance sheets was $415,000 at both June 30, 2020 and December 31, 2019.

Commercial Real Estate Concentrations

At June 30, 2020 and December 31, 2019, in management’s judgment, a concentration of loans existed in commercial real estate related loans. The Company’s commercial real estate loans are secured by owner occupied and non-owner occupied commercial real estate and multifamily properties. Although management believes that loans within these concentrations have no more than the normal risk of collectability, a decline in the performance of the economy in general or a decline in real estate value in the Company’s primary market areas in particular, could have an adverse impact on collectability.

Other Assets

The Company has commitments to fund Low Income Housing Tax Credit Partnerships (“LIHTC”) and a Small Business Investment Company (“SBIC”). At both June 30, 2020 and December 31, 2019, the remaining commitments to the LIHTC and SBIC were approximately $3.0 million and $473,000, respectively.

Deposits

At June 30, 2020, approximately $140.4 million, or 7.4%, of the Company's deposits were derived from its top ten depositors. At December 31, 2019, approximately $157.0 million, or 9.2%, of the Company's deposits were derived from its top ten depositors.

Local Agency Deposits and Other Advances

In the normal course of business, the Company accepts deposits from local agencies. The Company is required to provide collateral for certain local agency deposits in the states of California, Colorado, New Mexico and Washington. As of June 30, 2020 and December 31, 2019, the FHLB issued letters of credit on behalf of the Company totaling $31.5 million and $21.5 million, respectively, as collateral for local agency deposits.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:

●

the effect of the COVID-19 pandemic, including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

●

expected revenues, cost savings, synergies and other benefits from our recent acquisitions of Grand Mountain Bancshares, Inc. (“GMB”) and TIG Bancorp (“TIG”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected;

●

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;

●

changes in economic conditions in general and in California, Colorado, 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;

●

uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks;

●

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 originate loans held for sale and 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, affect our ability to borrow funds or maintain or increase deposits;

●

risks related to our acquisition strategy, including our ability to identify future 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;

●

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

●

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 Wall Street Reform and Consumer Protection Act of 2010 and the implementing regulations;

●

our ability to control operating costs and expenses;

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●

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;

●

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

●

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;

●

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

●

the loss of our large loan and deposit relationships;

●

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;

●

adverse changes in the securities markets;

●

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

●

statements with respect to our intentions regarding disclosure and other changes resulting from the Jumpstart Our Business Startups Act of 2012 ("JOBS Act");

●

changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;

●

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ; and

●

the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”).

In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2020 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.

Executive Overview

General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 34 full service branches, with 16 locations in California, two in Washington, five in Central New Mexico and 11 in Colorado, including four full-service branches recently acquired in our acquisition of GMB. At June 30, 2020, the Company had approximately $2.2 billion in total assets, $1.7 billion in total loans, $1.9 billion in total deposits and $252.4 million in shareholders’ equity. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relate primarily to the Bank.

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Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. In recent years, we have expanded our geographic footprint through ten strategic acquisitions, which includes our most recent acquisition of GMB, which was completed in February 2020. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase our current market share. We believe our geographic footprint, which now includes the San Francisco Bay area and the metropolitan markets of Los Angeles and Seattle and other community markets including Albuquerque, New Mexico and Denver, Colorado, provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high quality, relationship-based client service of a community bank.

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

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

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

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.

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

Provision for loan losses. We established an allowance for loan losses by charging amounts to loan provision at a level required to reflect estimated credit losses in the loan portfolio. Management considers many factors including historical experience, types and amounts of the portfolio and adverse situations that may affect borrowers’ ability to repay, among other factors. See “Critical Accounting Policies and Estimates - Allowance for loan loss” for a description of the manner in which the provision for loan losses is established.

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

Critical Accounting Policies and Estimates

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

The following represent our critical accounting policies:

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

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

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. We measure any loss on the TDR in accordance with the guidance concerning impaired loans set forth above. Additionally, TDRs are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.

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

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

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

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

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

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

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

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

The testing for impairment may begin with an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting unit’s fair value as well as positive and mitigating events. When required, the goodwill impairment test involves a two-step process. The first test for goodwill impairment is done by comparing the reporting unit’s aggregate fair value to its carrying value. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit). Absent other indicators of impairment, if the aggregate fair value exceeds the carrying value, goodwill is not considered impaired

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and no additional analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value, a second test would be performed to measure the amount of impairment loss, if any. To measure any impairment loss the implied fair value would be determined in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill were less than the recorded goodwill an impairment charge would be recorded for the difference. As of June 30, 2020, the Company had positive equity, however, as a result of the COVID-19 pandemic the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the Bank, the reporting unit, exceeds its’ carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the Bank’s fair value exceeded its’ carrying value, resulting in no impairment. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition. See Part II. Item 1A. Risk Factors - “The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our clients. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic” for additional information.

BayCom’s Response to COVID-19

In response to the current global situation surrounding the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our clients and the communities we serve.

Paycheck Protection Program ("PPP") Participation. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program, or PPP. The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as the borrower meets certain criteria. As of July 31, 2020, the Company has accepted 1,310 applications for PPP loans, including applications from new and existing clients who are small to midsize businesses as well as independent contractors, sole proprietors and partnerships as allowed under the PPP guidance issued in April 2020. The deadline for PPP loan applications to the SBA has been extended to August 8, 2020. The Bank continued to accept new PPP applications based on this extended deadline and is assisting small businesses with other borrowing options as they become available, including SBA and other government sponsored lending programs, as appropriate.

As of June 30, 2020, we have funded over $129.9 million in PPP loans, with an average loan amount of $113,000. There were 113 PPP loans, totaling $7.1 million, approved awaiting funding as of June 30, 2020. In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants. The following table summarizes our PPP participation as of July 31, 2020:


	Funded					Approved					In Process
	Total			Average		Total			Average		Total			Average
	Outstanding		Number	Size		Outstanding		Number	Size		Outstanding		Number	Size
Existing clients	$	82,373	644	$	128	$	206	4	$	52	$	33	3	$	11
New clients		54,721	617		89		659	34		19		391	8		49
Total PPP loans	$	137,094	1,261	$	109	$	865	38	$	23	$	424	11	$	39

The PPP loans to our existing clients are in addition to $182.9 million in loans these borrowers had outstanding with the Company at June 30, 2020.

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We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company would pledge its PPP loans as collateral at face value to obtain FRB non-recourse loans.

Allowance for Loan Losses and Loan Modifications

At June 30, 2020, the Company’s allowance for loan losses was $13.5 million, or 0.78% of total loans, compared to $9.1 million, or 0.56% of total loans, at March 31, 2020, and $5.9 million, or 0.48% of loans outstanding, at June 30, 2019. The provision for loan losses totaled $4.4 million for the second quarter of 2020, compared to the prior quarter provision of $1.7 million and $445,000 for the same quarter last year due to the migration of acquired loans out of the discounted acquired loan portfolio and consideration of probable loan losses as a result of the COVID-19 pandemic. We have received numerous requests from borrowers for some type of payment relief. As of June 30, 2020, we had modified 462 loans totaling $411.9 million and had pending requests for payment relief for an additional 21 loans totaling $24.1 million. These modifications were not classified as TDRs at June 30, 2020 in accordance with the guidance of the CARES Act. The CARES Act provided that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

The Company has made available the following short-term relief option to all borrowers affected by COVID-19:

●

Interest only payments on term debt for up to 180 days;

●

Full payment deferrals for up to 90 days upon request with an extension for another 90 days upon submission of specified documentation and recovery plans;

●

Loan re-amortization, especially in cases where significant prepayments of principal have occurred and to provide for continuing payment reduction at the end of the 180-day deferment period;

●

Covenant waivers and resets;

●

Extension of up to six months on loans maturing prior to December 31, 2020;

●

Maturity extensions of up to five years on real estate secured loans subject to certain limitations; and

●

Maturity extensions of up to two years on revolving lines of credit and non-real estate secured term loans subject to certain limitations.

All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

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Our modifications as of June 30, 2020, consisting of the deferral of principal and/or interest and/or the extension of the loan maturity date, are reflected in the following table:


												Payment	As a %
	Maturity		Interest Only Payments				Principal and Interest Deferrals					Relief	of each
Loan Type	Extensions		90 days		180 days		90 days		180 days			Total	loan type
Hospitality	$	—	$	13,290	$	—	$	51,479	$	33,650	$	98,419	66.0%	%
Multifamily		—		16,772		—		34,863		19,583		71,218	28.5%	%
Retail		—		1,233		494		53,775		11,202		66,704	31.1%	%
Commercial		3,608		6,359		4,596		18,870		10,908		44,341	24.2%	%
Gas station		—		100		—		20,735		4,121		24,956	25.1%	%
Restaurant		108		470		—		16,055		1,270		17,903	58.7%	%
Residential		889		183		212		9,629		4,884		15,797	10.5%	%
Office		550		941		114		8,469		4,776		14,850	11.0%	%
Industrial		75		—		—		8,799		352		9,226	10.8%	%
Mixed Use		—		763		—		7,791		274		8,828	35.7%	%
Convalescent		—		—		4,690		2,853		—		7,543	17.4%	%
Construction and land		1,508		2,442		1,517		1,787		87		7,341	16.0%	%
Warehouse		—		—		—		5,331		1,799		7,130	41.9%	%
Church		—		—		—		3,443		2,332		5,775	23.5%	%
Automotive		—		—		—		3,589		2,153		5,742	28.6%	%
All other		82		—		610		1,472		643		2,807	9.6%	%
Specialty use		—		—		—		2,385		—		2,385	7.6%	%
Investor residential		—		141		—		390		290		821	1.7%	%
Consumer		—		—		4		61		21		86	1.5%	%
Total	$	6,820	$	42,694	$	12,237	$	251,776	$	98,345	$	411,872	23.9	%
Loan Count		31		30		31		271		99		462	10.0	%

As of July 31, 2020, the Company has modified 243 loans, for a total of 185.4 million. In addition to the 462 modified loans that totaled $411.9 million at June 30, 2020, $233.3 million, or 237 loans, resumed normal payments on schedule and 82.2 million, or 39 loans, were extended an additional 90 days deferral.

As reflected in the above table, the primary method of relief granted by the Company has been to allow the borrower to defer their loan payments for up to six months. After the deferral period, normal loan payments will continue, however, payments will be applied first to interest until the deferred interest is repaid and thereafter applied to both principal and interest with any deficiency in amortized principal payments added to the balloon payment due at maturity. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

As of June 30, 2020, we had funded $49.0 million in PPP loans to clients who have also been granted some form of loan modification as reflected in the above table.

Branch Operations and Addiitonal Client Support

We have taken various steps to ensure the safety of our clients and our personnel. Many of our employees are working remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. The Family First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges.

The COVID-19 pandemic has caused significant disruptions to our branch operations resulting in the implementation of various social distancing measures at the Company to address client and community needs, including branch lobby closures. To ensure the safety of our clients and employees, services are offered through drive up facilities, ATMs, online banking, our call center operations and/or by appointment. We are taking steps to resume more normal branch activities with specific guidelines in place to ensure the safety of our clients and our personnel. This includes the installation of counter shields and hand sanitizing stations, limiting the number of clients in a branch at any one time, requiring social distancing and the wearing of masks within the branch, diligent disinfecting of common area high touchpoints, such as tables, doorknobs, light switches, countertops, and the like, and encouraging the use of our digital and electronic banking

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channels. We continuously monitor and conform our practices based on updates from the Center for Disease Control, World Health Organization, Financial Regulatory Agencies, and local and state health departments.

For clients that may need access to funds in their certificate of deposits to assist with living expenses during the COVID-19 pandemic, we are waiving early withdrawal penalties for withdrawals up to $25,000. Overdraft and fee reversals are waived on a case-by-case basis. We are cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits.

Comparison of Financial Condition at June 30, 2020 and December 31, 2019

Total assets. Total assets increased $195.7 million, or 9.8%, to $2.2 billion at June 30, 2020, from $2.0 billion at December 31, 2019. The increase was comprised of an increase in loans totaling $260.9 million, or 18.0%, driven by the completion of our acquisition of GMB during the first quarter of 2020, and new loan originations, primarily PPP loans. The increases in investment securities available-for-sale and interest bearing deposits in banks also primarily resulted from the GMB acquisition. These increases were partially offset by a decrease in cash and cash equivalents.

Cash and cash equivalents. Cash and cash equivalents decreased $91.7 million, or 31.0%, to $203.7 million, at June 30, 2020, from $295.4 million at December 31, 2019, primarily to fund loan originations and purchases of loans, as well as cash required for the GMB acquisition. We intend to invest our excess cash in loans and marketable securities until such funds are needed to support acquisitions or other growth oriented operating or strategic initiatives.

Investment securities available-for-sale. Investment securities available-for-sale increased $1.5 million, or 1.3%, to $121.4 million at June 30, 2020 from $119.9 million at December 31, 2019. The increase was primarily due to $4.4 million of securities acquired in the GMB acquisition, partially offset by the routine amortization and repayment of investment principal balances. At June 30, 2020 and December 31, 2019, all of our investment securities were classified as available-for-sale.

Loans receivable, net. We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Loans receivable, net of allowance for loan losses, increased $260.9 million, or 18.0%, to $1.7 billion at June 30, 2020 from $1.5 billion at December 31, 2019. The increase was primarily driven by $129.9 million of PPP loans, $98.4 million of loans acquired in the GMB acquisition and $96.5 million in new loan originations. Loan originations for the first six months of 2020 totaled $226.4 million compared to $83.2 million for the first six months of 2019. The increase in loan originations for the current period compared to the comparable period in 2019 primarily was the result of the growth of our operations from recent acquisitions and PPP loans. Loan originations in 2020 were concentrated in California markets, primarily Los Angeles, Sacramento, and San Francisco Bay Area with commercial and multifamily real estate secured loans accounting for the majority of the originations.

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The following table provides information about our loan portfolio by type of loan at the dates indicated:


	June 30,		December 31,		% Change
	2020		2019

	(Dollars in thousands)
Commercial and industrial (1)	$	312,161	$	168,747	85.0	%
Real estate:
Residential		194,130		154,306	25.8	%
Multifamily residential		248,916		215,073	15.7	%
Owner occupied CRE		398,511		416,141	(4.2)	%
Non-owner occupied CRE		506,673		447,823	13.1	%
Construction and land		45,641		36,098	26.4	%
Total real estate		1,393,871		1,269,441	9.8	%
Consumer		5,561		2,560	117.2	%
PCI loans		17,653		17,332	1.9	%
Total Loans		1,729,246		1,458,080	18.6	%
Net deferred loan fees		(4,571)		(451)	913.5	%
Allowance for loan losses		(13,500)		(7,400)	82.4	%
Loans, net	$	1,711,175	$	1,450,229	18.0	%

(1)	Includes $129.9 million of PPP loans as of June 30, 2020.

The following tables show the geographic distribution of our loan portfolio in dollar amounts and percentages, at the dates indicated:


	San Francisco Bay										Total in State of
	Area (1)					Other California					California					All Other States (2)			Total
			% of					% of					% of				% of				% of
			Total in					Total in					Total in				Total in				Total in
	Amount		Category			Amount		Category			Amount		Category		Amount		Category		Amount		Category

	(Dollars in thousands)
June 30, 2020
Commercial and industrial	$	57,983		12.0	%	$	171,795		24.1	%	$	229,778	19.3	%	$	83,092	15.6	%	$	312,870	18.1	%
Real estate:
Residential		48,548		10.1	%		49,840		7.0	%		98,388	8.2	%		98,882	18.5	%		197,270	11.4	%
Multifamily residential		62,144		12.9	%		127,822		17.9	%		189,966	15.9	%		62,230	11.7	%		252,196	14.6	%
Owner occupied CRE		160,456		33.3	%		156,639		22.0	%		317,095	26.5	%		87,182	16.3	%		404,277	23.4	%
Non-owner occupied CRE		149,830		31.1	%		201,167		28.1	%		350,997	29.4	%		160,242	30.0	%		511,239	29.6	%
Construction and land		2,682		0.6	%		6,205		0.9	%		8,887	0.7	%		36,946	6.9	%		45,833	2.7	%
Total real estate		423,660					541,673					965,333				445,482				1,410,815
Consumer		16		—	%		3		—	%		19	0.0	%		5,542	1.0	%		5,561	0.2	%
Total loans	$	481,659				$	713,471				$	1,195,130			$	534,116			$	1,729,246

December 31, 2019
Commercial and industrial	$	52,140		9.7	%	$	56,272		11.5	%	$	108,412	10.6	%	$	60,879	14.1	%	$	169,291	11.6	%
Real estate:
Residential		54,467		10.2	%		44,428		9.1	%		98,895	9.6	%		57,869	13.4	%		156,764	10.7	%
Multifamily residential		72,248		13.5	%		82,110		16.7	%		154,358	15.1	%		64,052	14.8	%		218,410	15.0	%
Owner occupied CRE		184,255		34.4	%		144,524		29.5	%		328,779	32.1	%		93,774	21.7	%		422,553	29.0	%
Non-owner occupied CRE		169,776		31.7	%		159,363		32.5	%		329,139	32.1	%		123,040	28.4	%		452,179	31.0	%
Construction and land		2,290		0.4	%		3,323		0.7	%		5,613	0.5	%		30,708	7.1	%		36,321	2.5	%
Total real estate	$	483,036				$	433,748				$	916,784			$	369,443			$	1,286,227
Consumer		321		0.1	%		—		0.0	%		321	0.0	%		2,241	0.5	%		2,562	0.2	%
Total loans	$	535,497				$	490,020				$	1,025,517			$	432,563			$	1,458,080

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

(2)

Includes loans located primarily in the states of Colorado, New Mexico and Washington. At June 30, 2020, loans in Colorado, New Mexico and Washington totaled $218.1 million, $85.6 million and $102.7 million, respectively. At December 31, 2019, loans in Colorado, New Mexico and Washington totaled $142.0 million, $89.6 million and $103.7 million, respectively.

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Nonperforming assets and nonaccrual loans. Nonperforming assets consists of nonaccrual loans, accruing loans that are 90 days past due and other real estate owned (“OREO”). Nonperforming assets increased $853,000, or 11.1%, to $8.5 million at June 30, 2020 from $7.7 million at December 31, 2019, primarily due to an increase in nonaccrual loans, partially offset by a decrease in OREO and accruing loans 90 days and more past due. Included in nonaccrual loans at June 30, 2020 and December 31, 2019, are $780,000 and $789,000, respectively, of TDRs, which are performing in accordance with their restructured terms. The Company had nonaccrual loans totaling $8.2 million or 0.48% of total loans, of which $1.2 million are guaranteed by governmental agencies at June 30, 2020, compared to $6.8 million or 0.47% of total loans at December 31, 2019. This increase in nonaccrual loans during the first six months of 2020 was driven primarily by the addition of one non-owner occupied commercial real estate loan and to a lesser extent, three single-family residential loans. At June 30, 2020, accruing loans past due 30 to 89 days totaled $1.0 million, compared to $12.8 million at December 31, 2019. This decrease reflects our efforts to process loan extensions, loan renewals and collect past due payments. OREO totaled $296,000 and $574,000 at June 30, 2020 and December 31, 2019, respectively.

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

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

●

Pass rated loans (typically performing loans) are accounted for in accordance with ASC Topic 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

●

Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if they display at least some level of credit deterioration since origination.

●

Impaired loans (typically substandard loans on nonaccrual status) are accounted for in accordance with ASC Topic 310-30 as they display significant credit deterioration since origination.

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

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

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Troubled debt restructured loans. Troubled debt restructurings, also referred to as “TDRs” herein, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. At June 30, 2020, TDRs totaled $4.3 million, compared to $4.4 million at December 31, 2019. At June 30, 2020 and December 31, 2019, the Company had TDRs that were accruing and performing in accordance with their modified terms of $780,000 and $789,000, respectively. Performing TDRs are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. The CARES Act amended GAAP with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. As of June 30, 2020 the Company had approved 462 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $411.9 million.

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


	June 30,			December 31,
	2020			2019

	(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Commercial and industrial	$	560		$	618
Real estate:
Residential		1,733			1,488
Multifamily residential		271			297
Owner occupied CRE		1,321			1,349
Non-owner occupied CRE		1,532			340
Construction and land		2,806			2,737
Total real estate		7,663			6,211
Consumer		—			13
Total nonaccrual loans		8,223			6,842
More than 90 days past due and still accruing		—			250
Real estate owned		296			574
Total nonperforming assets (1)	$	8,519		$	7,666
Troubled debt restructurings – performing		780			789
PCI loans	$	17,653		$	17,332
Nonperforming assets to total assets (1)		0.39	%		0.38	%
Nonperforming loans to total loans (1)		0.48	%		0.47	%

(1) Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate this ratio. Loans more than 90 days past due still accruing interest are included in nonperforming assets above, and are included in the numerators used to calculate this ratio.

Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above. At June 30, 2020 and December 31, 2019, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

For the three and six months ended June 30, 2020, interest foregone on nonaccrual loans was $119,500 and $221,000, none of which was included in interest income, compared to $46,000 and $88,000 for the three and six months ended June 30, 2019.

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Potential problem loans. Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which we are monitoring because the financial information of the borrower causes us concerns as to their ability to comply with their loan repayment terms. Potential problem loans, not included in our nonperforming loans, totaled $4.6 million and $5.5 million at June 30, 2020 and December 31, 2019, respectively. Additionally, $38.1 million of potential problem loans granted COVID-19 payment relief are considered high risk based on their underlying collateral and cash flow projections.

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

In accordance with acquisition accounting, loans acquired in our acquisitions 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 our recent acquisitions. As of June 30, 2020, acquired loans, net of their discounts, totaled $355.1 million compared to $590.9 million at December 31, 2019. The remaining net discount on these acquired loans was $4.9 million and $8.0 million at June 30, 2020 and December 31, 2019, respectively. The $129.9 million balance of PPP loans was omitted from the allowance for loan losses at June 30, 2020 as these loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven.

Based on the Company’s established comprehensive methodology discussed above, the allowance for loan losses was $13.5 million at June 30, 2020, or 0.78% of total loans and 164.17% of nonperforming loans. This compares to an allowance for loan losses at December 31, 2019 of $7.4 million, or 0.51% of total loans and 108.16% of nonperforming loans.

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The following table presents an analysis of changes in the allowance for loan losses for the periods indicated:


	June 30,			December 31,
	2020			2019

	(Dollars in thousands)
Balance at beginning of period	$	7,400		$	5,140
Provisions for loan losses		6,111			2,224
Recoveries
Commercial and industrial		7			57
Residential		—			1
Owner occupied CRE		—			—
Non-owner occupied CRE		—			—
Consumer		—			—
Total recoveries		7			58
Charge-offs
Commercial and industrial		—			—
Residential		(1)			(1)
Owner occupied CRE		—			—
Non-owner occupied CRE		—			(17)
Consumer		—			(4)
Total charge-offs		(1)			(22)
Net (charge-offs)/recoveries		(11)			36
Balance at end of period	$	13,500		$	7,400

Allowance for loan losses as a percentage of total loans		0.78	%		0.51	%
Allowance for loan losses to total loans excluding PCI loans		0.79	%		0.51	%
Allowance for loan losses excluding acquired loans (loans not covered by the allowance)		0.98	%		0.86	%
Allowance for loan losses excluding acquired loans and PPP loans (loans not covered by the allowance)		1.09	%		0.86	%
Allowance for loan losses as a percentage of total nonperforming loans		164.17	%		108.16	%
Net (charge-offs)/recoveries as a percentage of average loans outstanding for the period		0.00	%		0.00	%

As of June 30, 2020, the Company had $9.0 million in impaired loans, inclusive of $8.2 million of nonperforming loans and $780,000 of performing TDRs. Of these impaired loans, only $721,000 had allowances for loan losses recorded of $269,000, as their estimated collateral value or discounted expected cash flows. As of December 31, 2019, the Company had $7.6 million in impaired loans, inclusive of $6.8 million of nonperforming loans and $789,000 of performing TDRs. Of these impaired loans, only $464,000 had allowances for loan losses recorded of $171,000, as their estimated collateral value or discounted expected cash flow is equal to or exceeds their carrying costs.

Management considers the allowance for loan losses at June 30, 2020 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. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s 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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Right-of-use assets and lease liabilities. On January 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the Condensed Consolidated Balance Sheets as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 8 – Premises and Equipment in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report. The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The recognition of leases existing on January 1, 2019 did not require an adjustment to beginning retained earnings. Upon adoption of the accounting standards, the Company recognized right-of-use assets and lease liabilities of $7.8 million and $8.2 million respectively. Adoption of these accounting standards did not have a significant effect on the Company’s regulatory capital measures.

Right-of-use assets decreased $1.5 million, or 10.0%, to $13.8 million at June 30, 2020 from $15.3 million at December 31, 2019. Lease liabilities decreased $1.5 million, or 9.4%, to $14.1 million at June 30, 2020 from $15.6 million at December 31, 2019. Both decreases were due to reductions caused by monthly rent payments.

Premises and Equipment. Premises and equipment increased $4.0 million, or 37.8%, to $14.5 million at June 30, 2020 from $10.5 million at December 31, 2019. The increase in premises and equipment was due to the GMB acquisition.

Deposits. Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.

Total deposits increased $185.7 million, or 10.9%, to $1.8 billion at June 30, 2020 from $1.7 billion at December 31, 2019. The increase in deposits was primarily driven by $118.1 million of deposits acquired in the GMB acquisition, proceeds from PPP loans deposited directly into customer accounts and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19. Noninterest bearing demand deposits totaled $703.4 million, or 37.3% of total deposits, at June 30, 2020 compared to $572.3 million, or 33.6% of total deposits at December 31, 2019.

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


	June 30,		December 31,
	2020		2019		% Change

	(Dollars in thousands)
Noninterest bearing demand deposits	$	703,430	$	572,341	22.9	%
NOW accounts and savings		385,335		314,125	22.7	%
Money market		528,164		489,206	8.0	%
Time deposits - under $250,000		153,884		189,063	(18.6)	%
Time deposits - $250,000 and over		116,106		136,448	(14.9)	%
Total	$	1,886,919	$	1,701,183	10.9	%

Borrowings. Deposits are our primary source of funds but we may from time to time utilize borrowings as a cost effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. We are a member of and may obtain advances from the FHLB of San Francisco, which is part of the Federal Home Loan Bank System. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.

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At June 30, 2020, the Company had outstanding borrowings totaling $16.0 million compared to no borrowings at December 31, 2019. On April 30, 2020, the Company secured a short-term borrowing for $6.0 million, which matures on October 30, 2020, to repurchase 451,978 shares of Company common shares. In May 2020, the Company secured a $10.0 million advance from the FHLB of San Francisco comprised of two $5.0 million tranches, at no cost, maturing on November 9, 2020 and May 7, 2021, respectively. At both June 30, 2020 and December 31, 2019, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, totaling $8.3 million which were assumed in connection with our previous acquisitions.

If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At June 30, 2020 and December 31, 2019, we had a total of $85.0 million and $55.0 million, respectively, in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.

We are required to provide collateral for certain local agency deposits. As of June 30, 2020 and December 31, 2019, the FHLB of San Francisco had issued a letter of credit on behalf of the Bank totaling $31.5 million and $21.5 million, respectively as collateral for local agency deposits.

Shareholders’ equity. Shareholders’ equity decreased $1.8 million, or 0.7%, to $252.4 million at June 30, 2020 from $254.2 million at December 31, 2019. The decrease in shareholders’ equity at June 30, 2020 compared to December 31, 2019 was primarily due to the repurchase of $10.1 million of our common stock, partially offset by net income of $5.9 million for the six months ended June 30, 2020, and a $1.6 million increase in other comprehensive income representing an increase in the unrealized gains on investments securities, net of tax. During the six months ended June 30, 2020, the Company repurchased a total of 680,503 shares of its common stock at a total cost of $10.1 million, or $14.78 per share, leaving 90,632 shares available for future purchases under our stock repurchase plan.

The Company does not pay a regular cash dividend.

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Comparison of Results of Operations for the Three and Six Months Ended June 30, 2020 and 2019

Earnings summary. Net income was $3.1 million for the three months ended June 30, 2020, compared to $2.2 million for the three months ended June 30, 2019, an increase of $892,000 or 40.1%. Net income for the six months ended June 30, 2020 was $5.9 million, compared to $7.2 million for the six months ended June 30, 2019, a decrease of $1.2 million or 17.2%. Net income for the three and six months ended June 30, 2020, was significantly impacted by the higher provision for loan losses primarily related to the migration of acquired loans out of the discounted acquired loan portfolio and consideration of probable loan losses as a result of the COVID-19 pandemic, and to lesser extent, a decline in noninterest income related to decreases in gain on sale of loans and in income from an investment in a Small Business Investment Company (“SBIC”).

We also completed three acquisitions over the last year which increased both net interest income, before the provision for loan losses, and operational expenses. The Company acquired GMB and its wholly owned subsidiary Grand Mountain Bank in the first quarter 2020, TIG and its wholly owned subsidiary First State Bank of Colorado during the fourth quarter of 2019 and UFC and its wholly owned subsidiary Uniti Bank in the second quarter of 2019. Acquisition-related expenses totaled $3.0 million during the six months ended June 30, 2020, compared to $4.1 million during the six months ended June 30, 2019.

Diluted earnings per share were $0.26 for the three months ended June 30, 2020, an increase of $0.06 from diluted earnings per share of $0.20 for the three months ended June 30, 2019. Diluted earnings per share were $0.49 for the six months ended June 30, 2020, a decrease of $0.16 from diluted earnings per share of $0.64 for the six months ended June 30, 2019. The impact of acquisition-related expenses was none and $0.18 per diluted share for the three and six months ended June 30, 2020, respectively, and $0.27 per diluted share for both the three and six months ended June 30, 2019.

The Company’s efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, was 60.83% and 67.88% for the three and six months ended June 30, 2020, compared to 79.73% and 69.05% for the three and six months ended June 30, 2019. The improvement in the efficiency ratio for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 primarily are attributable to lower acquisition-related expenses in 2020, as noted above.

Interest income. Interest income for the three months ended June 30, 2020 was $22.8 million, compared to $17.9 million for the three months ended June 30, 2019, an increase of $4.9 million or 27.1%. The increase in interest income was due to an increase in average interest earning assets, principally loans, which was driven primarily by our recent acquisitions and PPP lending. Average interest earning assets increased $526.9 million or 35.2% for the three months ended June 30, 2020, compared to the same period in 2019. Interest on loans, including fees, increased $6.9 million, or 46.3%, primarily as a result of a $633.1 million increase in the average loan balance, partially offset by a 46 basis point decrease in the average loan yield during the three months ended June 30, 2020 as compared to this same period in 2019. The average yield on loans for the three months ended June 30, 2020 was 5.13%, compared to 5.59% for the same period in 2019. Interest income included $488,000 in fees earned related to PPP loans in the quarter ended June 30, 2020 compared to none in same period a year ago. For the three months ended June 30, 2020, the average balance of PPP loans was $86.0 million and the average yield was 1.0%. Although the average balance of loans increased, the average yield on net loans decreased compared to the same period in the prior year due primarily to decreases in interest rates on adjustable rate instruments following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic, and secondarily due to the impact of PPP loans. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two-year maturity of the loans. The accretion of the net discount on acquired loans increased the average yield on loans by 47 basis points and 33 basis points during the second quarter of 2020 and 2019, respectively. Interest income on loans for the quarters ended June 30, 2020 and June 30, 2019 included $2.0 million and $881,000, respectively, in accretion of purchase accounting fair value adjustments on acquired loans including the recognition of revenue from purchase credit impaired loans in excess of discounts. The incremental accretion and the impact on loan yield will change during any period based upon the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines.

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Interest income on interest bearing deposits decreased $1.8 million as a result of a $132.6 million decrease in the average balance of interest bearing deposits and a 219 basis point decrease in the average yield on interest bearing deposits to 0.31% for the three months ended June 30, 2020 from 2.50% for the three months ended June 30, 2019.

Interest income on investment securities available-for-sale decreased $187,000 as a result of a 128 basis point decrease in the average yield on investment securities to 2.45% for the three months ended June 30, 2020 from 3.73% for the three months ended June 30, 2019, partially offset by a $21.5 million increase in the average balance of investment securities available-for-sale during the same periods.

Interest income for the six months ended June 30, 2020 was $45.3 million, compared to $34.3 million for the six months ended June 30, 2019, an increase $11.0 million or 32.1%. The increase in interest income was due to an increase in average interest earning assets, principally loans, which was driven primarily by our recent acquisitions and organic growth. Average interest earning assets increased $518.2 million or 35.8% for the six months ended June 30, 2020, compared to the same period in 2019. Interest on loans, including fees, increased $14.0 million, or 49.1%, primarily as a result of a $605.8 million increase in the average loan balance, partially offset by a 40 basis point decrease in the average loan yield during the six months ended June 30, 2020 as compared to this same period in 2019. The average yield on loans for the six months ended June 30, 2020 was 5.23%, compared to 5.63% for the same period in 2019. The average yield on loans for the accretion of the net discount on acquired loans increased the average yield on loans by 33 basis points during the six months ended June 30, 2020 and 2019. During the six months ended June 30, 2020 compared to this same period in 2019, the accretion of the net discount on acquired loans increased the yield on loans by 44 basis points and 33 basis points, respectively. Interest income on loans for the six months ended June 30, 2020 included $3.6 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $1.7 million for the six months ended June 30, 2019. The remaining net discount on these purchased loans was $4.9 million and $9.3 million at June 30, 2020 and 2019, respectively.

Interest income on interest earning deposits decreased $3.0 million as a result of a $115.5 million decrease in the average balance of interest earning deposits and a 152 basis point decrease in the average yield on interest earning deposits to 0.99% for the six months ended June 30, 2020 from 2.51% for the six months ended June 30, 2019.

Interest income on investment securities decreased $75,000 as a result of a 75 basis point decrease in the average yield on investment securities to 2.50% for the six months ended June 30, 2020 from 3.25% for the six months ended June 30, 2019, partially offset by a $22.9 million increase in the average balance of investment securities available-for-sale.

Interest expense. Interest expense decreased $68,000, or 3.5%, to $1.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The average cost of interest bearing liabilities decreased 22 basis points to 0.60% for the three months ended June 30, 2020 from 0.82% for the three months ended June 30, 2019. Total average interest bearing liabilities increased $292.3 million, or 30.9%, to $1.2 billion for the three months ended June 30, 2020 from $947.1 million for the three months ended June 30, 2019. Interest expense on deposits decreased $107,000, or 6.0%, to $1.7 million during the three months ended June 30, 2020 from $1.8 million during this same period in 2019, primarily due to a decrease in the rate paid on interest bearing deposits and despite an increase in the average balance. The average rate paid on interest bearing deposits decreased by 19 basis points to 0.57% for the three months ended June 30, 2020, from 0.76% for the three months ended June 30, 2019, due to lower deposit pricing after the targeted federal funds rate decreases. The overall average cost of deposits for the second quarter of 2020 declined to 0.36%, compared to 0.51% for the second quarter of 2019 due to a reduction in market interest rates over the last year. In addition, the average balance of noninterest bearing deposits increased $201.6 million, or 42.9%, to $671.4 million for the three months ended June 30, 2020 compared to $469.8 million for the same period in 2019. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decreases over the past year typically lags declines in the yield on interest earning assets.

Interest expense on borrowings increased $39,000, or 26.4%, to $187,000 for the three months ended June 30, 2020, from $148,000 for the three months ended June 30, 2019, as a result of a higher average balance of borrowing outstanding. The average balance of borrowing outstanding increased $51.4 million to $59.6 million during the three months ended June 30, 2020, compared to $8.2 million during the comparable period in 2019. The sharp decline in the average cost of borrowing to 1.26% for the three months ended June 30, 2020, from 7.25% for the three months ended June 30, 2019, offset the significant increase in the average balance of borrowings outstanding.

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Interest expense increased by $893,000, or 26.1%, to $4.3 million for the six months ended June 30, 2020 from $3.4 million for the six months ended June 30, 2019. The average cost of interest bearing liabilities decreased seven basis points to 0.72% for the six months ended June 30, 2020 from 0.79% for the same period last year. Total average interest bearing liabilities increased $329.5 million, or 37.5%, to $1.2 million for the six months ended June 30, 2019 from $878.0 million for the six months ended June 30, 2019. Interest expense on deposits increased $874,000, or 27.9%, to $4.0 million during the six months ended June 30, 2020 from $3.1 million the same period in 2019. The average rate paid on interest bearing deposits decreased by four basis points to 0.69% for the six months ended June 30, 2020 from 0.73% for the six months ended June 30, 2019. The overall average cost of deposits for the six months ended June 30, 2020 declined to 0.45%, compared to 0.49% for the same six months of 2019 due to due to a reduction in market interest rates over the last year. In addition, the average balance of noninterest bearing deposits due to the recent acquisitions increased $198.0 million, or 45.2%, to $635.3 million for the six months ended June 30, 2020 compared to $437.3 million for the same period in 2019.

Interest expense on borrowings increased slightly to $313,000 for the six months ended June 30, 2020, from $294,000 for the six months ended June 30, 2019, as a result of a higher average balance of borrowing outstanding. The average balance of borrowing outstanding increased $30.4 million to $38.6 million during the six months ended June 30, 2020, compared to $8.2 million during the comparable period in 2019. The sharp decline in the average cost of borrowing to 1.36% for the six months ended June 30, 2020, from 7.25% for the six months ended June 30, 2019, partially offset the significant increase in the average balance of borrowings outstanding.

Net interest income. Net interest income increased $4.9 million, or 30.8%, to $20.9 million for the three months ended June 30, 2020 compared to $16.0 million for the three months ended June 30, 2019. Annualized net interest margin for the three months ended June 30, 2020 decreased 14 basis points to 4.15% from 4.29% for the same period in 2019. Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased our net interest margin by 47 and 33 basis points during the three months ended June 30, 2020 and the three months ended June 30, 2019, respectively. The average yield on interest earning assets for the three months ended June 30, 2020 was 4.52%, a 29 basic point decrease from the three months ended June 30, 2019, while the average cost of interest bearing liabilities for the three months ended June 30, 2020 decreased to 0.60%, a decrease of 22 basis points from 0.82% during the three months ended June 30, 2019, due primarily to lower market interest rates.

Net interest income increased $10.1 million, or 32.7%, to $41.0 million for the six months ended June 30, 2020 compared to $30.9 million for the six months ended June 30, 2019. Annualized net interest margin for the six months ended June 30, 2020 decreased 12 basis points to 4.19% from 4.31% for the same period in 2019. Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased our net interest margin by 44 and 33 basis points during the six months ended June 30, 2020 and the six months ended June 30, 2019, respectively. The average yield on interest earning assets for the six months ended June 30, 2020 was 4.63%, a 15 basis point decrease from the six months ended June 30, 2019, while the average cost of interest bearing liabilities for the six months ended June 30, 2020 decreased to 0.72%, a decrease of seven basis points from the six months ended June 30, 2019, due primarily to lower market interest rates.

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


	Three months ended June 30,
	2020						2019

	(Dollars in thousands)
					Annualized						Annualized
	Average				Average		Average				Average
	Balance(1)		Interest		Yield		Balance(1)		Interest		Yield

	(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks	$	186,966	$	145	0.31	%	$	319,577	$	1,990	2.50	%
Investments available-for-sale		121,635		743	2.45	%		100,087		930	3.73	%
FHLB Stock		7,620		54	2.84	%		6,090		92	6.06	%
FRB Stock		7,491		114	6.10	%		4,163		62	5.97	%
Total loans		1,699,607		21,756	5.13	%		1,066,486		14,874	5.59	%
Total interest earning assets		2,023,319		22,812	4.52	%		1,496,403		17,948	4.81	%
Noninterest earning assets		168,126						101,353
Total average assets	$	2,191,445					$	1,597,756
Interest bearing liabilities
Savings	$	107,487	$	40	0.15	%	$	56,690	$	20	0.14	%
NOW accounts		269,812		63	0.09	%		193,195		33	0.07	%
Money market		519,595		547	0.42	%		430,102		643	0.60	%
Time deposits		282,930		1,025	1.45	%		258,943		1,086	1.68	%
Total deposit accounts		1,179,824		1,675	0.57	%		938,930		1,782	0.76	%
Junior subordinated debentures, net		8,270		100	4.85	%		8,192		148	7.25	%
Other borrowings		51,286		87	0.68	%		—		—	—
Total interest bearing liabilities		1,239,380		1,862	0.60	%		947,122		1,930	0.82	%
Noninterest bearing liabilties		696,775						432,199
Total average liabilities		1,936,155						1,379,321
Average equity		255,290						218,435
Total average liabilities and equity	$	2,191,445					$	1,597,756
Net interest income			$	20,950					$	16,018

Interest rate spread (2)					3.92	%					3.99	%
Net interest margin (3)					4.15	%					4.29	%
Ratio of average interest earning assets to average interest bearing liabilities					163.25	%					157.99	%

(1)	Average balances are average daily balances.

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

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

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	Six months ended June 30,
	2020						2019
					Annualized						Annualized
	Average				Average		Average				Average
	Balance(1)		Interest		Yield		Balance(1)		Interest		Yield

	(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks	$	203,959	$	1,006	0.99	%	$	319,495	$	3,979	2.51	%
Investments available-for-sale		121,775		1,520	2.50	%		98,901		1,595	3.25	%
FHLB Stock		7,420		179	4.84	%		5,627		184	6.59	%
FRB Stock		7,345		222	6.06	%		4,130		123	6.01	%
Total loans		1,623,602		42,375	5.23	%		1,017,792		28,424	5.63	%
Total interest earning assets		1,964,101		45,302	4.63	%		1,445,945		34,305	4.78	%
Noninterest earning assets		160,639						95,436
Total average assets	$	2,124,740					$	1,541,381
Interest bearing liabilities
Savings	$	102,851	$	85	0.17	%	$	54,531	$	30	0.14	%
NOW accounts		258,691		120	0.09	%		195,448		67	0.07	%
Money market		509,908		1,464	0.58	%		384,537		1,200	0.60	%
Time deposits		297,471		2,333	1.57	%		235,345		1,831	1.68	%
Total deposit accounts		1,168,921		4,002	0.69	%		869,861		3,128	0.76	%
Junior subordinated debentures, net		8,259		219	5.32	%		8,183		294	7.25	%
Other borrowings		30,327		94	0.29	%		—		—	—
Total interest bearing liabilities		1,207,507		4,315	0.72	%		878,044		3,422	0.82	%
Noninterest bearing liabilties		662,063						452,106
Total average liabilities		1,869,570						1,330,150
Average equity		255,170						211,231
Total average liabilities and equity	$	2,124,740					$	1,541,381
Net interest income			$	40,987					$	30,883

Interest rate spread (2)					3.91	%					4.00	%
Net interest margin (3)					4.19	%					4.31	%
Ratio of average interest earning assets to average interest bearing liabilities					162.66	%					164.68	%

(1)	Average balances are average daily balances.

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

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

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


	Three months ended June 30,						Six months ended June 30,
	2020 compared to 2019						2020 compared to 2019
	Increase/(Decrease)						Increase/(Decrease)
	Attributable to						Attributable to
	Rate		Volume		Total		Rate		Volume		Total

	(Dollars in thousands)						(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks	$	(1,019)	$	(826)	$	(1,845)	$	(1,534)	$	(1,439)	$	(2,973)
Investments available-for-sale		(387)		200		(187)		(444)		369		(75)
FHLB stock and FRB stock		(59)		73		14		(64)		158		94
Total loans		(1,931)		8,813		6,882		(3,204)		17,155		13,951
Total interest income		(3,396)		8,260		4,864		(5,246)		16,243		10,997

Interest bearing liabilities
Savings		2		18		20		28		27		55
NOW accounts		17		13		30		31		22		53
Money market accounts		(230)		134		(96)		(127)		391		264
Time deposits		(162)		101		(61)		19		483		502
Total deposit accounts		(373)		266		(107)		(49)		923		874
Junior subordinated debentures, net		(49)		1		(48)		(78)		3		(75)
Other borrowings		87		—		87		94		—		94
Total interest expense		(335)		267		(68)		(33)		926		893
Net interest income	$	(3,061)	$	7,993	$	4,932	$	(5,213)	$	15,317	$	10,104

Provision for loan losses. We recorded a provision for loan losses of $4.4 million and $1.7 million for the three and six months ended June 30, 2020, compared to a provision for loan losses of $445,000 and $722,000 for the three and six months ended June 30, 2019. This increase in the provision for loan losses was primarily a result of the migration of acquired loans out of the discounted acquired loan portfolio and in consideration of probable credit losses due to the deteriorating economic conditions driven by the impact of COVID-19 on the U.S. and global economies. The historical look back period was extended to capture a more volatile economic environment, consistent with the current environment impacted by the COVID-19 pandemic. We had net recoveries of $2,000 and charge-offs on loans of $11,000 for the three and six months ended June 30, 2020, respectively, compared to net recoveries of $30,000 and $18,000 during the three and six months ended June 30, 2019, respectively. The allowance for loan losses to total loans was 0.78% at June 30, 2020 compared to 0.48% at June 30, 2019. See Comparison of Financial Condition - Allowance for loan losses for additional details. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

Noninterest income. Noninterest income decreased $1.2 million, or 48.7%, to $1.3 million for the three months ended June 30, 2020 compared to $2.5 million for the three months ended June 30, 2019. The decrease in noninterest income compared to the same period in 2019 was primarily due to a $691,000 decrease in gain on sale of loans. During the three months ended June 30, 2020, the Company sold $3.3 million of SBA loans (guaranteed portion), which generated a gain on sale of $254,000, compared to the sale of $7.9 million of SBA loans and a gain of $903,000 during the three months ended June 30, 2019. The reduction in noninterest income was also due to a decrease of $319,000 in income on our investment in the SBIC fund during the three months ended June 30, 2020, as we recorded a $309,000 loss on our investment during the three months ended June 30, 2020 compared to income of $10,000 during the same period in 2019. Other income and fees decreased $256,000 primarily due to reduced overdraft or interchange fees attributed to reduced withdrawals from deposit accounts and a decrease in transactions due to a change in customer spending habits during the

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COVID-19 pandemic, partially offset by an increase of $81,000 in loan servicing and other loan fees as the result of an increase in loans serviced for others and an increase in accounts acquired in our recent acquisitions.

Noninterest income decreased $780,000, or 16.7%, to $3.9 million for the six months ended June 30, 2020 compared to $4.7 million for the six months ended June 30, 2019. The decrease in noninterest income compared to the same period in 2019 was primarily due to a $433,000 decrease in income in our investment in the SBIC fund and a $315,000 decrease in gain on sale of loans. During the six months ended June 30, 2020, the Company sold $11.7 million of SBA loans (guaranteed portion), which generated a gain on sale of $896,000, compared to the sale of $12.2 million of SBA loans and a gain of $1.2 million during the six months ended June 30, 2019. These decreases were partially offset by an increase in loan servicing and other loan fees of $317,000, or 34.3%, to $1.2 million for the six months ended June 30, 2020, compared to $924,000 for the six months ended June 30, 2019, for the same reasons discussed above. Other noninterest income decreased $268,000, or 38.1%, to $435,000 during the six months ended June 30, 2020, compared to $703,000 during the same period in 2019, due primarily, and lower fees collected on CDARS.

The following table presents the key components of noninterest income for the periods indicated:


	Three months ended June 30,
	2020		2019		$ Change		% Change

	(Dollars in thousands)
Gain on sale of loans	$	212	$	903	$	(691)	(76.5)	%
Service charges and other fees		610		663		(53)	(8.0)	%
Loan servicing and other loan fees		595		514		81	15.8	%
(Loss) income on investment in SBIC fund		(309)		10		(319)	(3,190.0)	%
Other income and fees		194		450		(256)	(56.9)	%
Total noninterest income	$	1,302	$	2,540	$	(1,238)	(48.7)	%


	Six months ended June 30,
	2020		2019		$ Change		% Change

	(Dollars in thousands)
Gain on sale of loans	$	854	$	1,169	$	(315)	(26.9)	%
Service charges and other fees		1,315		1,396		(81)	(5.8)	%
Loan servicing and other loan fees		1,241		924		317	34.3	%
Income on investment in SBIC fund		35		468		(433)	(92.5)	%
Other income and fees		435		703		(268)	(38.1)	%
Total noninterest income	$	3,880	$	4,660	$	(780)	(16.7)	%

Noninterest expense. Noninterest expense decreased $1.3 million, or 8.5%, to $13.5 million for the three months ended June 30, 2020 compared to $14.8 million for the three months ended June 30, 2019. Salaries and related benefits increased $1.1 million, or 14.6%, to $8.3 million, during the three months ended June 30, 2020, compared to $7.2 million for the comparable period in 2019, as the number of full-time equivalent employees increased to 320 at June 30, 2020, compared to 262 a year earlier. Occupancy and equipment expenses increased $710,000, or 66.7%, to $1.8 million, primarily due to occupancy costs related to the operation of additional acquired branches. As of June 30, 2020, we operated 34 full-service branches, compared to 25 a year earlier. Data processing expenses decreased $2.2 million, or 60.6%, to $1.5 million, primarily due to lower acquisition-related expenses. Other noninterest expense decreased $790,000, or 27.7%, to $2.1 million during the three months ended June 30, 2020, compared to $2.9 million during the same period in 2019, primarily due to a lower marketing and travel expenses, and professional fees. Marketing expense decreased $287,000 primarily due to a reduction in business development related travel and cancellations of sponsored events due to COVID-19 restrictions. Noninterest expense for the second quarter of 2020 did not include any acquisition-related expense, compared to the second quarter of 2019, which included $4.1 million of UFC acquisition-related expenses, comprised $578,000 in salaries and benefits, $2.7 million in data processing expenses, $535,000 in professional fees and $365,000 in all other expenses. Excluding the acquisition related expenses incurred during the second quarter of 2019, noninterest expense for the three months ended June 30, 2020 increased $2.9 million, or 27.0%, compared to the same period in 2019, comprised of increases of $1.6 million in salary and benefits, $710,000 in occupancy and equipment, $424,000 in data processing and $110,000 in other noninterest expense.

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Noninterest expense for the six months ended June 30, 2020 increased $5.9 million, or 24.1%, to $30.5 million from $24.5 million in the same period in 2019, due to our three acquisitions over the last year and organic growth. Salaries and employee benefits increased $3.8 million or 28.9%, to $17.0 million for the six months ended June 30, 2020, compared to $13.2 million during the same period in 2019. The increase in salaries and employee benefits was due primarily to an increase in the number of employees as a result of, and severance benefits paid in connection with the GMB merger, and to a lesser extent normal salary increase. Occupancy and equipment expense increased $1.4 million, or 64.9%, to $3.6 million for the six months ended June 30, 2020, compared to $2.2 million for the same period in 2019 due to the three acquisitions completed over the last year. Data processing expense increased $467,000, or 10.1%, to $5.1 million for the six months ended June 30, 2020, compared to $4.6 million for the same period in 2019 due primarily to higher transaction volumes from the increase in the number of our deposit accounts, partially offset by lower acquisition-related expenses compared to the prior period in 2019. Noninterest expense for the six months ended June 30, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses, compared to $4.1 million UFC acquisition-related expenses during the same period in 2019. Excluding all acquisition-related expenses, noninterest expenses increased $7.0 million, or 34.5%, from the same period of 2019, comprised of increases of $4.1 million in salary and benefits, $1.4 million in occupancy and equipment, $1.1 million in data processing and $382,000 in other noninterest expenses.

The following table details the components of noninterest expense for the periods indicated:


	Three months ended June 30,
	2020		2019		$ Change		% Change

	(Dollars in thousands)
Salaries and related benefits	$	8,252	$	7,198	$	1,054	14.6	%
Occupancy and equipment		1,774		1,064		710	66.7	%
Data processing		1,450		3,683		(2,233)	(60.6)	%
Other		2,060		2,850		(790)	(27.7)	%
Total noninterest expense	$	13,536	$	14,795	$	(1,259)	(8.5)	%


	Six months ended June 30,
	2020		2019		$ Change		% Change

	(Dollars in thousands)
Salaries and related benefits	$	16,960	$	13,161	$	3,799	28.9	%
Occupancy and equipment		3,585		2,174		1,411	64.9	%
Data processing		5,074		4,607		467	10.1	%
Other		4,835		4,601		234	5.1	%
Total noninterest expense	$	30,454	$	24,543	$	5,911	24.1	%

Income taxes. Income tax expense increased $108,000, or 9.9%, to $1.2 million for the three months ended June 30, 2020 compared to $1.1 million for the three months ended June 30, 2019. For the six months ended June 30, 2020, income tax expense decreased $745,000, or 24.0%, to $2.4 million, compared to $3.1 million for the six months ended June 30, 2019. These variations are reflecting fluctuations in the pre-tax income. The Company’s effective tax rate was 27.8% and 28.5% for the three and six months ended June 30, 2020 compared to 32.9% and 30.3% for the same periods in 2019. The decreases in the Company’s effective tax rate during the three and six months ended June 30, 2020 compared to the same periods in 2019 were primarily due to higher non-deductible merger-related expenses in 2019, partially offset by a reduction in our state proportional tax rate.

Liquidity and Capital Resources

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

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources in order to meet our

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potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash, short-term investments, including interest bearing demand deposits and securities available-for-sale. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of June 30, 2020 and December 31, 2019, the Bank had an available borrowing capacity with the FHLB of $604.9 million and $542.4 million, respectively, and Federal Funds lines with available commitments totaling $85.0 million and $55.0 million with four correspondent banks, respectively. In May, the Bank secured a $10.0 million advance from the FHLB of San Francisco comprised of two $5.0 million tranches, at no cost, maturing on November 9, 2020 and May 7, 2021, respectively. Additionally, the Bank classifies its securities portfolio as available-for-sale, providing an additional source of liquidity. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. Additionally, as of June 30, 2020, the Bank was approved to utilize the PPPLF. The Bank may utilize the PPPLF pursuant to which the Bank will pledge PPP loans at face value as collateral to obtain FRB non-recourse loans. During the quarter ended and as of June 30, 2020, the Bank did not utilize the PPPLF as it held a substantial cash and cash equivalent position as a result of PPP disbursed funds remaining unused in borrower deposit accounts and due to deposit clients increasing their balances due to COVID-19.

We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit in the aggregate totaled $125.5 million and $128.9 million at June 30, 2020 and December 31, 2019, respectively. Time deposits scheduled to mature in one year or less at June 30, 2020, totaled $215.9 million. It is management's policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities for the six months ended June 30, 2020 was $893,000, compared to $2.2 million for the six months ended June 30, 2019. During the six months ended June 30, 2020, net cash used in investing activities, which consisted primarily of net change in loans receivable and interest bearing deposits in banks, was $164.5 million, compared to $44.0 million of cash provided by investing activities for the six months ended June 30, 2019. Net cash provided by financing activities, which was comprised primarily of net change in deposits and an increase in short-term borrowings, was $72.0 million, compared to $18.2 million of net cash used in financing activities during the six months ended June 30, 2019.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. At June 30, 2020, the Company, on an unconsolidated basis, had liquid assets of $1.2 million. In addition to its operating expenses, the Company is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on trust-preferred securities and subordinated debt held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

The Bank, as a state-chartered, federally insured savings bank, and member of the Federal Reserve is subject to the capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “well-capitalized” status under the Federal Reserve regulations. Based on capital levels at June 30, 2020, the Bank was considered to be well-capitalized.

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The table below shows the capital ratios under the Basel III capital framework as of the dates indicated:


	At June 30, 2020				At December 31, 2019
	Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
Leverage Ratio
BayCom Corp	$	200,460	9.81	%	$	207,575	11.15	%
Minimum requirement for "Well-Capitalized"		102,161	5.00	%		93,659	5.00	%
Minimum regulatory requirement		81,729	4.00	%		74,927	4.00	%

United Business Bank		212,218	9.92	%		213,749	10.98	%
Minimum requirement for "Well-Capitalized"		106,929	5.00	%		97,313	5.00	%
Minimum regulatory requirement		85,543	4.00	%		77,850	4.00	%

Common Equity Tier 1 Ratio
BayCom Corp		200,460	12.04	%		207,575	13.81	%
Minimum requirement for "Well-Capitalized"		108,197	6.50	%		97,714	6.50	%
Minimum regulatory requirement		74,906	4.50	%		67,648	4.50	%

United Business Bank		212,218	12.76	%		213,749	14.23	%
Minimum requirement for "Well-Capitalized"		108,104	6.50	%		97,624	6.50	%
Minimum regulatory requirement		74,841	4.50	%		67,586	4.50	%

Tier 1 Risk-Based Capital Ratio
BayCom Corp		209,945	12.61	%		217,060	14.44	%
Minimum requirement for "Well-Capitalized"		133,165	8.00	%		120,264	8.00	%
Minimum regulatory requirement		99,874	6.00	%		90,198	6.00	%

United Business Bank		212,218	12.76	%		213,749	14.23	%
Minimum requirement for "Well-Capitalized"		133,051	8.00	%		120,153	8.00	%
Minimum regulatory requirement		99,788	6.00	%		90,114	6.00	%

Total Risk-Based Capital Ratio
BayCom Corp		223,860	13.45	%		224,875	14.96	%
Minimum requirement for "Well-Capitalized"		166,457	10.00	%		150,330	10.00	%
Minimum regulatory requirement		133,165	8.00	%		120,264	8.00	%

United Business Bank		226,133	13.60	%		221,564	14.75	%
Minimum requirement for "Well-Capitalized"		166,313	10.00	%		150,191	10.00	%
Minimum regulatory requirement		133,051	8.00	%		120,153	8.00	%

In addition to the minimum capital ratios, the Bank must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At June 30, 2020, the Bank’s CET1 capital exceeded the required capital conservation buffer.

As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company’s subsidiary bank to be well-capitalized under the prompt corrective action regulations. If the Company were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at June 30, 2020, the Company would have exceeded all regulatory capital requirements.

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Off-Balance Sheet Arrangements

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

For information about our loan commitments, unused lines of credit and standby letters of credit, see Note 17 - Commitment and Contingencies in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate risk through our lending and deposit gathering activities. Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. For information regarding the Company’s market risk, see “Management Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market and Interest Rate Risk,” in the Company’s 2019 Annual Report. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2019 Annual Report.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of June 30, 2020 under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

The Company’s CEO and CFO concluded that based on their evaluation at June 30, 2020, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to BayCom Corp’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.

(b) Changes in Internal Controls

There were no significant changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2020, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions

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about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.

Item 1A. Risk Factors

In light of recent developments relating to the novel coronavirus of 2019 (“COVID-19”), the Company is supplementing its risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 16, 2020. The following risk factor should be read in conjunction with the risk factors described in the 2019 Annual Report.

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our clients. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom were under government issued stay-at-home orders for much of the three months ended June 30, 2020. As an essential business, we continue to provide banking and financial services to our clients at a majority of our branch locations. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our clients.

Although the stay-at-home orders were lifted in our market areas, a majority of our employees continue to work remotely to enable us to continue to provide banking services to our clients. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including a continued low targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

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The impact of the pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our clients to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increase in the allowance for credit 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.

As of June 30, 2020, we hold and service a portfolio of 1,150 PPP loans originated under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (PPP) with a total balance of $129.9 million. The PPP loans are subject to the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the vast majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. We could face additional risks in our administrative capabilities to service our PPP loans and risk with respect to the determination of loan forgiveness depending on the final procedures for determining loan forgiveness.

In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in our 2019 Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

Stock Repurchases. On March 11, 2020, the Company announced that the Board of Directors authorized the repurchase of up to 618,000 shares, or approximately 5% of the Company's outstanding common shares. The actual timing, number and value of shares repurchased under the program will depend on a number of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program does not obligate the Company to purchase any particular number of shares. The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended June 30, 2020:


				Total number of
	Total	Average		shares purchased	Maximum number of
	number of	price		as part of	shares that may yet be
	shares	paid		publicly announced	purchased under the
	purchased	per share		plans or programs	plans or programs
April 1, 2020 - April 30, 2020	—	$	—	—	542,610
May 1, 2020 - May 31, 2020	451,978		12.09	451,978	90,632
June 1, 2020 - June 30, 2020	—		—	—	90,632
	451,978	$	—	451,978	90,632

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Item 3. Defaults of Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits


2.1	Agreement and Plan of Merger by and between BayCom Corp and Uniti Financial Corporation dated December 7, 2018⁽¹⁾
2.2	Agreement and Plan of Merger by and between BayCom Corp and TIG Bancorp dated June 28, 2019⁽²⁾
3.1	Articles of Incorporation of BayCom Corp⁽³⁾
3.2	Amended and Restated Bylaws of BayCom Corp⁽³⁾
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from the Company’s Quarterly Report on Form 10 Q for the quarter ended June 30, 2020 formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Balance Sheets; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Changes in Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Notes to Condensed Consolidated Financial Statements.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

(1)	Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on December 10, 2018 (File No. 001-38483).

(2)	Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 1, 2019 (File No. 001-38483).

(3)	Incorporated herein by reference to the Registration Statement on Form S-1 filed on April 11, 2018 (File No. 333-224236).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		BAYCOM CORP
		Registrant


Date: August 10, 2020	By:	/s/ George Guarini
		George Guarini
		Chief Executive Officer
		(Principal Executive Officer)


Date: August 10, 2020	By:	/s/ Keary Colwell
		Keary Colwell
		Senior Executive Vice President,
		Chief Financial Officer and Chief Administrative Officer
		(Principal Financial and Accounting Officer)

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