BayCom 10Q 2022 Q3 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 September 30, 2022

	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 November 7, 2022, there were 12,985,190 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	34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60

ITEM 4. CONTROLS AND PROCEDURES	60

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	61

ITEM 3. DEFAULTS OF SENIOR SECURITIES	61

ITEM 4. MINE SAFETY DISCLOSURES	62

ITEM 5. OTHER INFORMATION	62

ITEM 6. EXHIBITS	62

SIGNATURES	63

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 data)

(unaudited)


	September 30,		December 31,
	2022		2021
ASSETS
Cash and due from banks	$	32,206	$	21,178
Federal funds sold and interest bearing balances in banks		192,475		358,509
Cash and cash equivalents		224,681		379,687
Time deposits in banks		2,490		3,585
Investment securities available-for-sale		167,213		174,435
Federal Home Loan Bank ("FHLB") stock, at par		10,679		8,385
Federal Reserve Bank ("FRB") stock, at par		9,595		7,650
Loans held for sale		3,491		6,470
Loans, net of allowance for loan losses of $18,050 at September 30, 2022 and $17,700 December 31, 2021		1,976,916		1,647,190
Premises and equipment, net		13,697		14,370
Other real estate owned ("OREO")		21		21
Core deposit intangible, net		5,718		6,489
Cash surrender value of bank owned life insurance ("BOLI") policies, net		22,043		21,590
Right-of-use assets ("ROU"), net		15,875		12,127
Goodwill		38,838		38,838
Interest receivable and other assets		43,241		29,860
Total assets	$	2,534,498	$	2,350,697
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest and interest bearing deposits	$	2,115,451	$	1,985,239
Junior subordinated deferrable interest debentures, net		8,464		8,403
Subordinated debt, net		63,669		63,542
Salary continuation plan		4,724		4,393
Lease liabilities		16,411		12,657
Interest payable and other liabilities		11,376		13,856
Total liabilities		2,220,095		2,088,090
Commitments and contingencies (Note 18)
Shareholders' equity
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding at both September 30, 2022 and December 31, 2021		—		—
Common stock, no par value; 100,000,000 shares authorized; 13,075,447 and 10,680,386 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		208,483		157,098
Additional paid in capital		287		287
Accumulated other comprehensive (loss) income, net of tax		(14,338)		2,166
Retained earnings		119,971		103,056
Total shareholders’ equity		314,403		262,607
Total liabilities and shareholders’ equity	$	2,534,498	$	2,350,697

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest income:
Loans, including fees	$	24,010	$	18,451	$	69,921	$	56,348
Investment securities		1,555		1,077		4,483		2,714
Fed funds sold and interest bearing balances in banks		1,286		198		2,303		479
FHLB dividends		160		125		467		346
FRB dividends		126		112		387		341
Total interest and dividend income		27,137		19,963		77,561		60,228
Interest expense:
Deposits		1,387		1,240		4,310		3,674
Subordinated debt		896		896		2,687		2,686
Other borrowings		129		85		319		261
Total interest expense		2,412		2,221		7,316		6,621
Net interest income		24,725		17,742		70,245		53,607
Provision for (reversal of) loan losses		1,194		477		3,824		(30)
Net interest income after provision for loan losses		23,531		17,265		66,421		53,637
Noninterest income:
Gain on sale of loans		1,278		2,176		2,714		3,705
Service charges and other fees		817		611		2,165		1,819
Loan servicing and other loan fees		488		458		1,670		1,423
(Loss) income on investment in Small Business Investment Company (“SBIC”) fund		(63)		526		155		1,021
Bargain purchase gain		—		—		1,665		—
Other income and fees		224		236		796		731
Total noninterest income		2,744		4,007		9,165		8,699
Noninterest expense:
Salaries and employee benefits		10,164		8,163		29,751		25,158
Occupancy and equipment		2,043		1,945		6,388		5,610
Data processing		1,562		1,482		5,502		4,235
Other expense		2,327		2,290		7,986		6,371
Total noninterest expense		16,096		13,880		49,627		41,374
Income before provision for income taxes		10,179		7,392		25,959		20,962
Provision for income taxes		2,950		1,980		7,024		5,709
Net income	$	7,229	$	5,412	$	18,935	$	15,253
Earnings per common share:
Basic earnings per common share	$	0.54	$	0.51	$	1.44	$	1.39
Weighted average shares outstanding		13,307,555		10,692,781		13,179,263		10,949,286

Diluted earnings per common share	$	0.54	$	0.51	$	1.44	$	1.39
Weighted average shares outstanding		13,307,555		10,692,781		13,179,263		10,949,286

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)


		Three months ended			Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	7,229	$	5,412	$	18,935	$	15,253
Other comprehensive income (loss):
Change in unrealized loss on available-for-sale securities		(7,198)		(830)		(23,172)		(282)
Deferred tax benefit		2,071		239		6,668		77
Other comprehensive loss, net of tax		(5,127)		(591)		(16,504)		(205)
Total comprehensive income	$	2,102	$	4,821	$	2,431	$	15,048

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except for share and 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, 2020	11,295,397	$	167,242	$	287	$	2,697	$	82,365	$	252,591
Net income									4,532		4,532
Other comprehensive loss, net							(785)				(785)
Restricted stock granted	24,187										—
Stock based compensation			413								413
Repurchase of shares	(132,123)		(2,201)								(2,201)
Balance, March 31, 2021	11,187,461	$	165,454	$	287	$	1,912	$	86,897	$	254,550
Net income									5,308		5,308
Other comprehensive income, net							1,171				1,171
Stock based compensation			351								351
Repurchase of shares	(488,020)		(8,831)								(8,831)
Balance, June 30, 2021	10,699,441	$	156,974	$	287	$	3,083	$	92,205	$	252,549
Net income									5,412		5,412
Other comprehensive loss, net							(591)				(591)
Restricted stock granted	12,228										—
Restricted stock forfeited	(2,692)										—
Stock based compensation			326								326
Repurchase of shares	(23,466)		(426)								(426)
Balance, September 30, 2021	10,685,511	$	156,874	$	287	$	2,492	$	97,617	$	257,270

Balance, December 31, 2021	10,680,386		157,098		287		2,166		103,056		262,607
Net income									6,488		6,488
Other comprehensive loss, net							(6,952)				(6,952)
Restricted stock granted	22,473										—
Restricted stock forfeited	(532)										—
Issuance of common shares to acquire Pacific Enterprise Bancorp	3,032,579		64,140								64,140
Cash dividends of $0.05 per share									(685)		(685)
Stock based compensation			324								324
Repurchase of shares	(57,177)		(1,268)								(1,268)
Balance, March 31, 2022	13,677,729	$	220,294	$	287	$	(4,786)	$	108,859	$	324,654
Net income									5,218		5,218
Other comprehensive loss, net							(4,425)				(4,425)
Restricted stock forfeited	(1,322)										—
Cash dividends of $0.05 per share									(677)		(677)
Stock based compensation			233								233
Repurchase of shares	(205,044)		(4,448)								(4,448)
Balance, June 30, 2022	13,471,363	$	216,079	$	287	$	(9,211)	$	113,400	$	320,555
Net income									7,229		7,229
Other comprehensive loss, net							(5,127)				(5,127)
Restricted stock granted	10,618										—
Cash dividends of $0.05 per share									(658)		(658)
Stock based compensation			232								232
Repurchase of shares	(406,534)		(7,828)								(7,828)
Balance, September 30, 2022	13,075,447	$	208,483	$	287	$	(14,338)	$	119,971	$	314,403

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine months ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	18,935	$	15,253
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (reversal of) loan losses		3,824		(30)
Decrease in deferred tax assets		(7)		(671)
Accretion on acquired loans		(417)		(1,067)
Gain on sale of loans		(2,714)		(3,705)
Gain on sale of securities		—		22
Proceeds from sale of loans		41,833		36,025
Loans originated for sale		(35,948)		(43,612)
Loss on sale of premises, net		—		(12)
Gain on sale of OREO		—		(15)
Bargain purchase gain		(1,665)		—
Accretion on junior subordinated debentures		61		61
Increase in cash surrender value of life insurance policies		(453)		(512)
Amortization/accretion of premiums/discounts on investment securities, net		452		442
Depreciation and amortization		1,500		1,535
Core deposit intangible amortization		1,527		1,359
Stock based compensation expense		789		1,090
(Decrease) increase in deferred loan origination fees, net		(1,645)		118
Increase in interest receivable and other assets		(90)		(223)
Increase in salary continuation plan, net		331		277
Decrease in interest payable and other liabilities		(2,557)		(944)
Net cash provided by operating activities		23,756		5,391
Cash flows from investing activities:
Proceeds from maturities of time deposits in banks		1,095		3,635
Purchase of investment securities		(25,679)		(49,749)
Proceeds from the maturities, repayments and calls of investment securities		9,217		20,966
Proceeds from the sales of investment securities		63		1,306
Purchase of Federal Home Loan Bank stock		—		(648)
Purchase of Federal Reserve Bank stock		(1,003)		(35)
Increase in loans, net		81,107		11,990
Proceeds from sale of premises		—		46
Proceeds from sale of OREO		—		423
Purchase of equipment and leasehold improvements, net		(606)		(1,092)
Net cash received for acquisitions		18,423		—
Net cash provided by (used in) investing activities		82,617		(13,158)

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(In thousands)

(unaudited)


	Nine months ended
	September 30,
	2022			2021
Cash flows from financing activities:
(Decrease) increase in noninterest and interest bearing deposits		(19,205)			506,667
Decrease in time deposits, net		(227,268)			(337,313)
Repayment of Federal Home Loan Bank borrowings		—			(5,000)
Repurchase of common stock		(13,544)			(11,458)
Cash dividends declared on common stock		(1,362)			—
Net cash (used in) provided by financing activities		(261,379)			152,896
(Decrease) increase in cash and cash equivalents		(155,006)			145,129
Cash and cash equivalents at beginning of period		379,687			299,329
Cash and cash equivalents at end of period	$	224,681		$	444,458
			��
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense	$	8,295		$	7,704
Income taxes paid, net		5,898			5,218
Non-cash investing and financing activities:
Change in unrealized (loss) gain on available-for-sale securities, net of tax	$	(16,504)		$	(205)
Recognition of ROU assets		1,425			832
Recognition of lease liability		1,429			833
Cash dividends declared on common stock		(2,020)			—

Acquisition:
Assets acquired, net of cash received	$	440,785		$	—
Liabilities assumed		380,055			—
Common stock issued		64,140			—

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Tables in thousands, except for share data 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 Company’s 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 18 years of operation, the Bank has grown to 34 full-service banking branches with 16 locations in California, two in Washington, five in Central New Mexico and 11 in Colorado. 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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 the current year presentation. None of the reclassifications impacted consolidated net income, earnings per share or shareholders’ equity.

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for public companies that qualify as an “emerging growth company”, or EGC. The Company qualifies as an EGC and will remain an EGC until December 31, 2023, the last day of the Company’s fiscal year following the fifth anniversary of the completion of the Company’s initial public offering, or sooner under certain circumstances none of which currently apply. As an EGC, 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 February 1, 2022, the Company completed its acquisition of Pacific Enterprise Bancorp (“PEB”) and its wholly owned subsidiary of Pacific Enterprise Bank, headquartered in Irvine, California (“PEB Merger”). See “Note 3 – Acquisitions” for additional information on the PEB Merger.

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

Recent Accounting Guidance Not Yet Effective

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, and March 2020, ASU 2020-03, all of which clarifies codification and corrects unintended application of the guidance. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. 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

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

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. 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). We plan to adopt this new standard on January 1, 2023.

The Company has established a multidisciplinary project team and implementation plan, evaluated various loss methodologies to determine their correlation to our various loan categories historical performance, captured and validated data, and engaged an outside third-party CECL vendor to develop loan loss driver models. Based on these activities, we determined that our primary credit loss methodology will utilize a discounted cash flow approach that considers the probability of default and loss given default. Ongoing CECL implementation activities include, among other things, refining segmentation of the loan portfolio, refining forecast methodologies and sourcing tools to forecast future economic conditions, running multiple loan loss driver analyses that correlate our credit loss experience with one or more economic factors, and evaluating the qualitative factor framework and assumptions. In addition, the Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures. The magnitude of the change in the Company’s allowance for credit losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time, and other management judgements. We are not yet able to disclose the quantitative effect on our consolidated financial position and results of operations as we are continuing to evaluate the impact of the adoption of this ASU.

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 (e.g., loans, debt securities, derivatives, borrowings) or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this ASU on a full retrospective basis. The amendments in this ASU have differing effective dates, beginning with an interim period including and subsequent to 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.

In March 2022 the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for loans modified as troubled debt restructurings (“TDR loans”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires disclosure

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

of current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Corporation’s adoption of the amendments in ASU 2016-13, which is referred to as the current expected credit loss model.

NOTE 3 – ACQUISITIONS

Acquisition of Pacific Enterprise Bancorp (“PEB”)

On February 1, 2022, the Company completed the PEB Merger. As of the acquisition date, PEB merged into the Company and Pacific Enterprise Bank, PEB’s wholly owned bank subsidiary, merged into United Business Bank. The acquisition expanded the Company’s market share in California with one branch in Irvine. Pursuant to the merger agreement, at the effective time of the PEB Merger, BayCom paid aggregate consideration to PEB shareholders of approximately $64.1 million consisting of 3,032,579 shares of BayCom common stock and $275,000 in cash. Noninterest income for the nine months ended September 30, 2022 included $1.6 million in bargain purchase gain, and included in noninterest expense was $3.1 million of nonrecurring acquisition-related expenses related to the Company’s acquisition of PEB.

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


	PEB
	Acquisition
	Date
	February 1, 2022
Fair value of assets:
Cash and due from banks	$	5,350
Total cash and cash equivalents		5,350

Interest bearing deposits in banks		13,348
Investment securities available-for-sale		3
FHLB stock, at par		2,294
FRB stock, at par		942
Loans, net		412,851
Premises and equipment, net		221
Core deposit intangible		756
Deferred tax assets, net		1,192
Interest receivable and other assets		9,178
Total assets acquired		446,135
Liabilities:
Deposits
Noninterest bearing		60,006
Interest bearing		316,679
Total Deposits		376,685

Interest payable and other liabilities		3,370
Total liabilities assumed		380,055

Stock consideration		64,140
Cash consideration		275
Bargain purchase gain	$	1,665

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables 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 bargain purchase gain at the acquisition date:


	PEB
	Acquisition
	Date
	February 1, 2022
Book value of net assets acquired	$	61,469
Fair value adjustments:
Loans, net		5,840
Premises and equipment, net		26
Core deposit intangible		756
Time deposits		(869)
Reserve for unfunded commitments		283
Write-up right-of-use asset		439
Total purchase accounting adjustments		6,475

Tax effect of purchase accounting adjustments at 27.9%		(1,864)
Fair value of assets acquired		66,080
Value of stock issued/cash paid for stock options		64,415
Bargain purchase gain	$	(1,665)

Pro Forma Results of Operations

The operating results of the Company for the three and nine months ended September 30, 2022 in the condensed consolidated statements of income include the operating results of PEB, since its acquisition date. The following table represents the net interest income, net income, basic and diluted earnings per share, as if the PEB Merger was effective January 1, 2021. 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 September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021
Net interest income	$	24,725	$	24,761	$	71,097	$	73,497
Net income		7,229		7,933		15,575		21,109
Basic earnings per share	$	0.54	$	0.58	$	1.15	$	1.51
Diluted earnings per share		0.54		0.58		1.15		1.51

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.

Acquisition expenses

Acquisition expenses are recognized as incurred and continue until all systems are converted and operational functions become fully integrated. No third-party acquisition expenses were recognized in the consolidated statements of

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

income for the three and nine months ended September 30, 2021. The Company recognized third-party acquisition expenses for the three and nine months ended September 30, 2022, as follows:


	2022
		Three month ended		Nine months ended
		September 30		September 30
Severance expense	$	—	$	556
Occupancy expense		—		375
Data processing		—		1,073
Professional fees				724
Other expenses		—		347
Total	$	—	$	3,075

NOTE 4 – INVESTMENT SECURITIES

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


			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
September 30, 2022
U.S. Government Agencies	$	1,506	$	—	$	—	$	1,506
Preferred equity securities		18,374		—		(3,971)		14,403
Municipal securities		21,494		3		(2,194)		19,303
Mortgage-backed securities		35,472		30		(4,256)		31,246
Collateralized mortgage obligations		28,653		—		(2,768)		25,885
SBA securities		4,694		25		(107)		4,612
Corporate bonds		77,150		92		(6,984)		70,258
Total	$	187,343	$	150	$	(20,280)	$	167,213


			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
December 31, 2021
U.S. Government Agencies	$	1,510	$	—	$	—	$	1,510
Preferred equity securities		18,331		446		—		18,777
Municipal securities		23,646		493		(16)		24,123
Mortgage-backed securities		33,973		1,333		(210)		35,096
Collateralized mortgage obligations		27,228		436		(158)		27,506
SBA securities		6,055		53		(20)		6,088
Corporate bonds		60,650		851		(166)		61,335
Total	$	171,393	$	3,612	$	(570)	$	174,435

During the three and nine months ended September 30, 2022, the Company sold none and one available-for-sale securities for minimal realized gains, respectively, and the Company sold six securities available-for-sale for net realized gains of $22,000 during the three and nine months ended September 30, 2021.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables 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
September 30, 2022
Preferred Equity Securities		18,372		(3,971)		—		—		18,372		(3,971)
Municipal securities		15,518		(1,874)		2,216		(320)		17,734		(2,194)
Mortgage-backed securities		25,682		(2,988)		5,089		(1,268)		30,771		(4,256)
Collateralized mortgage obligations		51,074		(1,673)		7,291		(1,095)		58,365		(2,768)
SBA securities		1,063		(99)		499		(8)		1,562		(107)
Corporate bonds		54,417		(5,742)		11,508		(1,242)		65,925		(6,984)
Total	$	166,126	$	(16,347)	$	26,603	$	(3,933)	$	192,729	$	(20,280)


	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, 2021
Municipal securities	$	3,932	$	(16)	$	—	$	—	$	3,932	$	(16)
Mortgage-backed securities		2,954		(111)		2,133		(99)		5,087		(210)
Collateralized mortgage obligations		9,236		(108)		1,605		(50)		10,841		(158)
SBA securities		134		—		1,058		(20)		1,192		(20)
Corporate bonds		23,084		(166)		—		—		23,084		(166)
Total	$	39,340	$	(401)	$	4,796	$	(169)	$	44,136	$	(570)

At September 30, 2022, the Company held 348 investment securities, of which 38 were in an unrealized loss position for more than twelve months and 256 were in an unrealized loss position for less than twelve months. These temporary unrealized losses relate principally to current interest rates for similar types of securities. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

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


	September 30, 2022				December 31, 2021
	Amortized		Estimated		Amortized		Estimated
	cost		fair value		cost		fair value
Available-for-sale
Due in one year or less	$	1,007	$	1,000	$	862	$	865
Due after one through five years		41,833		37,073		41,850		42,950
Due after five years through ten years		95,356		85,813		79,116		79,993
Due after ten years		49,147		43,327		49,565		50,627
Total	$	187,343	$	167,213	$	171,393	$	174,435

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

NOTE 5 – LOANS

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


	September 30,		December 31,
	2022		2021
Commercial and industrial (1)	$	219,514	$	230,177
Construction and land		12,231		13,371
Commercial real estate		1,670,283		1,299,684
Residential		88,902		118,423
Consumer		4,294		5,138
Total loans		1,995,224		1,666,793
Net deferred loan fees		(258)		(1,903)
Allowance for loan losses		(18,050)		(17,700)
Net loans	$	1,976,916	$	1,647,190

(1)

During the third quarter of 2022, the Bank continued its participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), by processing applications for PPP loan forgiveness. Total loans include $35.4 million and $69.6 million of PPP loans as of September 30, 2022 and December 31, 2021, respectively.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

The Company’s total impaired loans, including nonaccrual loans 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
September 30, 2022
Recorded investment in impaired loans:
With no specific allowance recorded	$	1,780	$	—	$	12,123	$	2,001	$	—	$	15,904
With a specific allowance recorded		840		—		259		125		—		1,224
Total recorded investment in impaired loans	$	2,620	$	—	$	12,382	$	2,126	$	��	$	17,128
Specific allowance on impaired loans	$	725	$	—	$	259	$	14	$	—	$	998

December 31, 2021
Recorded investment in impaired loans:
With no specific allowance recorded	$	112	$	36	$	5,015	$	1,441	$	—	$	6,604
With a specific allowance recorded		681		—		262		146		—		1,089
Total recorded investment in impaired loans	$	793	$	36	$	5,277	$	1,587	$	—	$	7,693
Specific allowance on impaired loans	$	681	$	—	$	224	$	25	$	—	$	930

Three months ended September 30, 2022
Average recorded investment in impaired loans	$	2,899	$	—	$	8,490	$	1,998	$	—	$	13,387
Interest recognized		17		—		17		18		—		52
Nine months ended September 30, 2022
Average recorded investment in impaired loans	$	3,068	$	406	$	6,992	$	1,448	$	—	$	11,914
Interest recognized		18		5		34		27		—		84

Three months ended September 30, 2021
Average recorded investment in impaired loans	$	683	$	36	$	5,338	$	2,363	$	—	$	8,420
Interest recognized		17		—		15		27		—		59
Nine months ended September 30, 2021
Average recorded investment in impaired loans	$	796	$	36	$	5,711	$	2,609	$	—	$	9,152
Interest recognized		53		—		92		43		—		188

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 TDR loans 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.

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.

For the three and nine months ended September 30, 2022, the Company recorded TDR loan charge-offs of $750,000 and $3.2 million, respectively, related to a participation interest in a national shared credit. For additional information see “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021-Provision for Loan Losses” included in “Item 2. Management’s Discussion and Analysis of Financial Condition” of Part I this report. For the three and nine months ended September 30, 2021, the Company recorded no charge-offs

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

related to TDR loans. During the three and nine months ended September 30, 2022 and 2021, there were no TDR loans for which there was a payment default within the first 12 months of the modification. As of September 30, 2022 and December 31, 2021, TDR loans had a related allowance of $282,000 and $259,000, respectively. As of September 30, 2022 and December 31, 2021, $759,000 and $765,000, respectively, of TDR loans were performing in accordance with their modified terms. All TDR loans are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses. There were no commitments to lend additional amounts to borrowers with outstanding loans that are classified as TDR loans at September 30, 2022.

A summary of TDR loans by type of concession and type of loan, as of the periods indicated:


	Number of	Rate		Term		Rate & term
	loans	modification		modification		modification		Total
September 30, 2022
Commercial and industrial	3	$	—	$	1,699	$	—	$	1,699
Construction and land	—		—		—		—		—
Commercial real estate	6		—		5,345		—		5,345
Residential	2		—		974		—		974
Consumer	—		—		—		—		—
Total	11	$	—	$	8,018	$	—	$	8,018


	Number of	Rate		Term		Rate & term
	loans	modification		modification		modification		Total
September 30, 2021
Commercial and industrial	2	$	—	$	26	$	—	$	26
Construction and land	—		—		—		—		—
Commercial real estate	4		—		2,267		—		2,267
Residential	1		—		146		—		146
Consumer	—		—		—		—		—
Total	7	$	—	$	2,439	$	—	$	2,439

There were three loans and four loans modified as a TDR during the three and nine months ended September 30, 2022, respectively. There were no loans and one loan modified as TDRs during the three and nine months ended September 30, 2021, respectively.

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.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

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

●

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

●

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

●

Adverse financial trends.

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

Some characteristics of Substandard loans are:

●

Inability to service debt from ordinary and recurring cash flow;

●

Chronic delinquency;

●

Reliance upon alternative sources of repayment;

●

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

●

Repayment dependent upon the liquidation of collateral;

●

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

●

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

●

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

Doubtful loans have all the weaknesses inherent in 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
September 30, 2022
Commercial and industrial	$	208,422	$	4,846	$	6,246	$	—	$	219,514
Construction and land		12,165		66		—		—		12,231
Commercial real estate		1,602,109		52,693		15,481		—		1,670,283
Residential		86,490		258		2,154		—		88,902
Consumer		4,273		—		21		—		4,294
Total	$	1,913,459	$	57,863	$	23,902	$	—	$	1,995,224

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)


			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2021
Commercial and industrial	$	216,611	$	9,178	$	4,388	$	—	$	230,177
Construction and land		13,264		71		36		—		13,371
Commercial real estate		1,264,269		28,438		6,977		—		1,299,684
Residential		115,534		1,250		1,639		—		118,423
Consumer		5,116		—		22		—		5,138
Total	$	1,614,794	$	38,937	$	13,062	$	—	$	1,666,793

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
September 30, 2022
Commercial and industrial	$	759	$	3,717	$	5,862	$	10,338	$	205,013	$	4,163	$	219,514	$	3,315
Construction and land		391		—		—		391		7,780		4,060		12,231		—
Commercial real estate		293	��	—		6,071		6,364		1,643,105		20,814		1,670,283		—
Residential		188		—		758		946		86,849		1,107		88,902		—
Consumer		—		—		—		—		4,294		—		4,294		—
Total	$	1,631	$	3,717	$	12,691	$	18,039	$	1,947,041	$	30,144	$	1,995,224	$	3,315


															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, 2021
Commercial and industrial	$	275	$	10	$	606	$	891	$	228,980	$	306	$	230,177	$	—
Construction and land		—		338		36		374		12,997		—		13,371		—
Commercial real estate		196		410		2,621		3,227		1,286,311		10,146		1,299,684		—
Residential		1,442		21		1,031		2,494		114,162		1,767		118,423		—
Consumer		3		—		—		3		5,135		—		5,138		—
Total	$	1,916	$	779	$	4,294	$	6,989	$	1,647,585	$	12,219	$	1,666,793	$	—

The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $862,000 at September 30, 2022 compared to $822,000 at December 31, 2021. At September 30, 2022, nonaccrual loans included $19,000 of loans 30-89 days past due and $7.0 million of loans less than 30 days past due. At December 31, 2021, nonaccrual loans included $113,000 of loans 30-89 days past due and $2.5 million of loans less than 30 days past due. At September 30, 2022, nonaccrual loans 30-89 days past due of $19,000 was comprised of one loan and the $7.0 million of loans less than 30 days past due was comprised of 20 loans. All of these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were 21 loans totaling $3.3 million in accruing SBA guaranteed PPP loans which matured, are 90 days or more past due, and are in the process of forgiveness at September 30, 2022. There were no other loans that were 90 days or more past due and still accruing at December 31, 2021. Interest foregone on nonaccrual loans was approximately $230,000 and $388,000 for the three and nine months ended September 30, 2022 compared to $61,000 and $157,500 for the three and nine months ended September 30, 2021, respectively.

Purchased Credit Impaired Loans

In connection with the Company's acquisitions, the contractual amount and timing of undiscounted principal and interest payments and the estimated amount and timing of undiscounted expected principal and interest payments were

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

used to estimate the fair value of PCI loans at the acquisition date. The difference between these two amounts represented the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represented the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. For PCI loans the accretable yield is accreted into interest income over the life of the estimated remaining cash flows. At each financial reporting date, the carrying value of each PCI loan is compared to an updated estimate of expected principal payment or recovery on each loan. To the extent that the loan carrying amount exceeds the updated expected principal payment or recovery, a provision of loan loss would be recorded as a charge to income and an allowance for loan loss established.

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


	September 30, 2022				December 31, 2021
	Unpaid				Unpaid
	principal		Carrying		principal		Carrying
	balance		value		balance		value
Commercial and industrial	$	5,145	$	4,163	$	546	$	306
Construction and land		4,309		4,060		—		—
Commercial real estate		22,472		20,814		11,519		10,146
Residential		1,265		1,107		2,202		1,767
Total	$	33,191	$	30,144	$	14,267	$	12,219

The following table reflects the changes in the accretable yield of PCI loans for the periods indicated:


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Balance at beginning of period	$	1,572	$	316	$	508	$	383
Additions		—		—		1,277		—
Removals		(71)		(4)		(133)		(153)
Accretion		(133)		(139)		(284)		(57)
Balance at end of period	$	1,368	$	173	$	1,368	$	173

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

NOTE 6 – ALLOWANCE FOR LOAN LOSSES

The following tables summarize the Company’s allowance for loan losses and loan balances individually and collectively evaluated for impairment by type of loan as of or for the three and nine months ended September 30, 2022 and 2021:


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Total
Three months ended September 30, 2022
Allowance for loan losses
Beginning balance	$	2,871	$	74	$	13,830	$	1,007	$	18	$	17,800
Charge-offs		(1,095)		—		—		—		—		(1,095)
Recoveries		151		—		—		—		—		151
Provision for (reversal of) loan losses		1,029		(12)		13		162		2		1,194
Ending balance	$	2,956	$	62	$	13,843	$	1,169	$	20	$	18,050

Nine months ended September 30, 2022
Allowance for loan losses
Beginning balance	$	3,261	$	175	$	12,709	$	1,536	$	19	$	17,700
Charge-offs		(3,620)		—		(1)		(6)		(6)		(3,633)
Recoveries		159		—		—		—		—		159
Provision for (reversal of) loan losses		3,156		(113)		1,135		(361)		7		3,824
Ending balance	$	2,956	$	62	$	13,843	$	1,169	$	20	$	18,050

September 30, 2022
Allowance for loan losses by methodology:
Loans individually evaluated for impairment	$	725	$	—	$	259	$	14	$	—	$	998
Loans collectively evaluated for impairment		2,231		62		13,584		1,155		20		17,052
PCI loans		—		—		—		—		—		—

Loans receivable by methodology:
Individually evaluated for impairment	$	2,620	$	—	$	12,382	$	2,126	$	—	$	17,128
Collectively evaluated for impairment		212,731		8,171		1,637,087		85,669		4,294		1,947,952
PCI loans		4,163		4,060		20,814		1,107		—		30,144
Total loans	$	219,514	$	12,231	$	1,670,283	$	88,902	$	4,294	$	1,995,224

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Total
Three months ended September 30, 2021
Allowance for loan losses
Beginning balance	$	3,645	$	224	$	11,328	$	1,782	$	21	$	17,000
Charge-offs		(180)		—		(1)		—		—		(181)
Recoveries		3		1		—		—		—		4
Provision for (reversal of) loan losses		(113)		15		717		(141)		(1)		477
Ending balance	$	3,355	$	240	$	12,044	$	1,641	$	20	$	17,300

Nine months ended September 30, 2021
Allowance for loan losses
Beginning balance	$	4,042	$	378	$	11,211	$	1,856	$	13	$	17,500
Charge-offs		(182)		—		(1)		—		—		(183)
Recoveries		9		4		—		—		—		13
Provision for (reversal of) loan losses		(514)		(142)		834		(215)		7		(30)
Ending balance	$	3,355	$	240	$	12,044	$	1,641	$	20	$	17,300

September 30, 2021
Allowance for loan losses by methodology:
Loans individually evaluated for impairment	$	580	$	—	$	98	$	22	$	—	$	700
Loans collectively evaluated for impairment		2,775		240		11,928		1,616		20		16,579
PCI loans		—		—		18		3		—		21

Loans receivable by methodology:
Individually evaluated for impairment	$	692	$	36	$	5,681	$	1,688	$	—	$	8,097
Collectively evaluated for impairment		282,635		16,348		1,199,601		121,487		4,060		1,624,131
PCI loans		304		40		10,329		1,900		—		12,573
Total loans	$	283,631	$	16,424	$	1,215,611	$	125,075	$	4,060	$	1,644,801

As part of the acquisition of PEB, the Company acquired certain small business loans to borrowers qualified under The California Capital Access Program for Small Business, a state guaranteed loan program sponsored by the California Pollution Control Financing Authority (“CalCAP”). PEB ceased originating loans under this loan program in 2017. Under this loan program, the borrower, CalCAP and the Company contributed funds to a loss reserve account that is held in a demand deposit account at the Bank. The borrower contributions to the loss reserve account are attributed to the Company. Losses on qualified loans are charged to this account after approval by CalCAP. Under the program, if a loan defaults, the Company has immediate coverage of 100% of the loss. The Company must return recoveries from the borrower, less expenses, to the loan loss reserve account. The funds in the loss reserve account are the property of CalCAP, however, in the event that the Company leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the Company and provided there are no pending claims for reimbursement, are distributed to CalCAP and the Company based on their respective contributions to the loss reserve account. Funds contributed by the Company to the loss reserve account are treated as a receivable from CalCAP and evaluated for impairment quarterly. As of September 30, 2022, the Company had $30.0 million of loans enrolled in this loan program. The Company had a loss reserve account of $13.7 million as of September 30, 2022.

In addition, as successor to PEB, the Company was approved by the CalCAP, in partnership with the California Air Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program. Under this loan program, CalCAP solely contributes funds to a loss reserve account that is held in a demand deposit account at the Bank. Losses are handled in the same manner as described above. The funds are the property of CalCAP and are payable upon termination of the program. When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to CalCAP. The Company has originated $4.4 million of loans under this program during the nine months ended September 30, 2022. As of September 30, 2022, the Company had $29.3

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

million of loans enrolled in this program. The Company had a loss reserve account of $6.1 million as of September 30, 2022.

NOTE 7 – PREMISES AND EQUIPMENT

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


	September 30,		December 31,
	2022		2021
Premises owned	$	11,120	$	11,015
Leasehold improvements		2,233		2,608
Furniture, fixtures and equipment		6,730		6,201
Less accumulated depreciation and amortization		(6,386)		(5,454)
Total premises and equipment, net	$	13,697	$	14,370

Depreciation and amortization included in occupancy and equipment expense totaled $489,000 and $1.5 million for the three and nine months ended September 30, 2022 and $519,000 and $1.5 million for the three and nine months ended September 30, 2021, respectively.

NOTE 8 – LEASES

The Company leases 19 branches 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.

The below maturity schedule represents the undiscounted lease payments for the five-year period and thereafter as of September 30, 2022:


For remainder of 2022	$	3,895
2023		3,888
2024		3,669
2025		2,803
2026		2,065
Thereafter		4,991
Total undiscounted cash flows		21,311
Less: interest		(4,900)
Present value of lease payments	$	16,411

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


	September 30, 2022
Weighted-average remaining lease term	5.5	years
Weighted-average discount rate	3.10	%

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

Rental expense included in occupancy and equipment expense totaled $934,000 and $3.2 million for the three and nine months ended September 30, 2022 and $906,000 and $2.6 million for the three and nine months ended September 30, 2021, 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. Goodwill and other intangible assets are assessed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. 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.

Goodwill

The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment exists when a reporting unit’s fair value is less than its carrying amount, including goodwill.

Changes in the Company's goodwill at September 30, 2022 and December 31, 2021 are as follows:


	September 30,		December 31,
	2022		2021
Balance at beginning of period	$	38,838	$	38,838
Acquired goodwill		—		—
Impairment		—		—
Balance at end of period	$	38,838	$	38,838

Core Deposit Intangible

Changes in the Company’s core deposit intangible at September 30, 2022 and December 31, 2021 were as follows:


	September 30,		December 31,
	2022		2021
Balance at beginning of period	$	6,489	$	8,302
Additions		756		—
Less amortization		(1,527)		(1,813)
Balance at end of period	$	5,718	$	6,489

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

Estimated annual amortization expense at September 30, 2022 is as follows:


For remainder of 2022	$	517
2023		1,286
2024		1,222
2025		948
2026		455
Thereafter		1,290
Total	$	5,718

NOTE 10 – INTEREST RECEIVABLE AND OTHER ASSETS

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


	September 30,		December 31,
	2022		2021
Tax assets, net	$	16,548	$	10,573
Accrued interest receivable		7,587		5,929
Investment in Small Business Investment Company ("SBIC") fund		4,887		4,731
Investment in Community Reinvestment Act fund		2,000		—
Prepaid assets		1,713		1,598
Servicing assets		2,299		1,947
Investment in Low Income Housing Tax Credit ("LIHTC") partnerships, net		2,778		3,129
Investment in statutory trusts		489		484
Other assets		4,940		1,469
Total	$	43,241	$	29,860

NOTE 11 – DEPOSITS

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


	September 30,		December 31,
	2022		2021
Demand deposits	$	813,510	$	710,137
NOW accounts and savings		463,039		484,847
Money market		614,414		568,094
Time deposits		224,488		222,161
Total	$	2,115,451	$	1,985,239

NOTE 12 – BORROWINGS

Other 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. At both September 30, 2022 and December 31, 2021, the Company had no FHLB advances outstanding.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

The Company has Federal Funds lines with four corresponding banks. Cumulative available commitments totaled $65.0 million at both September 30, 2022 and December 31, 2021. There were no amounts outstanding under these facilities at September 30, 2022 or December 31, 2021.

Junior subordinated deferrable interest debentures – In connection with its previous acquisitions, the Company acquired junior subordinated deferrable interest debentures, totaling $8.5 million net of mark-to-market adjustments September 30, 2022 with a weighted average interest rate of 5.95%, compared to $8.4 million with a weighted average rate of 2.79% at December 31, 2021. The junior subordinated deferrable interest debentures have a stated maturity term of 30 years.

Subordinated debt – On August 6, 2020, the Company issued and sold $65.0 million aggregate principal amount of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The offering of the Notes closed on August 10, 2020. The Notes initially bears a fixed interest rate of 5.25% per year. Commencing on September 15, 2025, the interest rate on the Notes resets quarterly to the three-month Secured Overnight Financing rate plus a spread of 521 basis points (5.21%), payable quarterly in arrears. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year through September 15, 2025 and quarterly thereafter on March 15, June 15, September 15 and December 15 of each year through the maturity date or early redemption date. The Company, at its option, may redeem the Notes, in whole or in part, on any interest payment date on or after September 15, 2025, without a premium. At September 30, 2022 and December 31, 2021, the Company had outstanding Notes, net of cost to issue, totaling $63.7 million and $63.5 million, respectively.

NOTE 13 – INTEREST PAYABLE AND OTHER LIABILITIES

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


	September 30,		December 31,
	2022		2021
Accrued expenses	$	7,124	$	7,339
Accounts payable		535		506
Reserve for unfunded commitments		315		315
Accrued interest payable		293		1,180
Other liabilities		3,109		4,516
Total	$	11,376	$	13,856

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

NOTE 14 – OTHER EXPENSES

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Professional fees	$	453	$	620	$	2,335	$	1,668
Core deposit premium amortization		516		453		1,527		1,359
Marketing and promotions		235		196		769		413
Stationery and supplies		89		84		266		274
Insurance (including FDIC premiums)		235		206		704		618
Communication and postage		232		190		689		595
Loan default related expense		119		59		257		119
Director fees		83		81		282		241
Bank service charges		21		68		145		191
Courier expense		193		175		558		506
Other		151		158		454		387
Total	$	2,327	$	2,290	$	7,986	$	6,371

The Company expenses marketing and promotions costs as they are incurred. Advertising expense included in marketing and promotions totaled $12,000 and $54,000 for the three and nine months ended September 30, 2022 and $13,000 and $55,000 for the three and nine months ended September 30, 2021, respectively.

NOTE 15 – EQUITY INCENTIVE PLANS

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-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 September 30, 2022, a total of 86,085 shares were available for future issuance under the 2017 Plan.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

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. Total compensation expense for these plans was $232,000 and $797,000 for the three and nine months ended September 30, 2022 and $325,000 and $1.1 million for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022, there was $1.2 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 three years.

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


	2022			2021
		Weighted-average			Weighted-average
		grant date			grant date
	Shares	fair value		Shares	fair value
Non-vested at January 1,	139,275	$	16.29	204,515	$	17.71
Granted	22,473		18.79	24,187		15.17
Vested	(15,560)		18.34	(14,164)		18.50
Forfeited	(532)		18.79	—		—
Non-Vested, at March 31,	145,656		16.45	214,538		16.06
Vested	(45,997)		16.29	(63,028)		17.84
Forfeited	(1,322)		18.16	—		—
Non-Vested, at June 30,	98,337		16.50	151,510		15.32
Granted	10,618		20.98	12,228		18.16
Vested	(11,078)		18.14	(21,771)		10.33
Forfeited	—		—	(2,692)		18.45
Non-Vested, at September 30,	97,877	$	16.80	139,275	$	16.29

NOTE 16 – FAIR VALUE MEASUREMENT

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the reporting entity has the ability to access at the measurement date.

Level 2 – Observable prices in active markets for similar assets and liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

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

We use fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, core deposit intangible, and other long-lived assets.

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 2022 or 2021.

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


	Total		Level 1		Level 2		Level 3
September 30, 2022
U.S. Government Agencies	$	1,506	$	—	$	1,506	$	—
Preferred equity securities		14,403		14,403		—		—
Municipal securities		19,303		—		19,303		—
Mortgage-backed securities		31,246		—		31,246		—
Collateralized mortgage obligations		25,885		—		25,885		—
SBA securities		4,612		—		4,612		—
Corporate bonds		70,258		—		70,258		—
Total	$	167,213	$	14,403	$	152,810	$	—


	Total		Level 1		Level 2		Level 3
December 31, 2021
U.S. Government Agencies	$	1,914	$	—	$	1,914	$	—
Preferred equity securities		18,777		18,777		—		—
Municipal securities		24,123		—		24,123		—
Mortgage-backed securities		34,692		—		34,692		—
Collateralized mortgage obligations		27,506		—		27,506		—
SBA securities		6,088		—		6,088		—
Corporate bonds		61,335		—		61,335		—
Total	$	174,435	$	18,777	$	155,658	$	—

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

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NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)


	Total		Level 1		Level 2		Level 3
September 30, 2022
Performing impaired loans	$	759	$	—	$	—	$	759
Nonperforming impaired loans		16,369		—		—		16,369
OREO		21		—		—		21
Total	$	17,149	$	—	$	—	$	17,149

	Total		Level 1		Level 2		Level 3
December 31, 2021
Performing impaired loans	$	805	$	—	$	—	$	805
Nonperforming impaired loans		6,888		—		—		6,888
OREO		21		—		—		21
Total	$	7,714	$	—	$	—	$	7,714

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)

(Tables in thousands, except for share and per share data)

(unaudited)

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value disclosure for financial instruments:


	Carrying		Fair		Fair value measurements
	amount		value		Level 1		Level 2		Level 3
September 30, 2022
Financial assets:
Cash and cash equivalents	$	224,681	$	224,681	$	224,681	$	—	$	—
Time deposits in banks		2,490		2,490		2,490		—		—
Investment securities available-for-sale		167,213		167,213		14,403		152,810		—
Investment in FHLB and FRB Stock		20,274		20,274		20,274		—		—
Loans held for sale		3,491		3,491		—		3,491		—
Loans, net		1,976,916		1,966,985		—		—		1,966,985
Accrued interest receivable		7,587		7,587		—		7,587		—
Financial liabilities:
Deposits		2,115,451		2,117,020		—		2,117,020		—
Junior subordinated deferrable interest debentures, net		8,464		7,775		—		—		7,775
Subordinated debt, net		63,669		63,669		—		63,669		—
Accrued interest payable		293		293		—		293		—
Off-balance sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit		102,713		102,398		—		—		102,398


	Carrying		Fair		Fair value measurements
	amount		value		Level 1		Level 2		Level 3
December 31, 2021
Financial assets:
Cash and cash equivalents	$	379,687	$	379,687	$	379,687	$	—	$	—
Time deposits in banks		3,585		3,585		3,585		—		—
Investment securities available-for-sale		174,435		174,435		18,777		155,658		—
Investment in FHLB and FRB Stock		16,035		16,035		16,035		—		—
Loans held for sale		6,470		6,470		—		6,470		—
Loans, net		1,647,190		1,659,811		—		—		1,659,811
Accrued interest receivable		5,929		5,929		—		5,929		—
Financial liabilities:
Deposits		1,985,239		1,986,651		—		1,986,651		—
Junior subordinated deferrable interest debentures, net		8,403		8,612		—		—		8,612
Subordinated debt, net		63,542		63,542		—		63,542		—
Accrued interest payable		1,180		1,180		—		1,180		—
Off-balance sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit		104,139		103,824		—		—		103,824

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

NOTE 18 – COMMITMENTS AND CONTINGENCIES

Lending and Letter of Credit Commitments

We operate in a highly regulated environment. From time to time we are a party to various claims and litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings where we believe the resolution would have a material adverse effect on our business, financial condition, or results of operations.

Nevertheless, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.

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. The Company also issues standby letter of credit commitments, primarily for the third-party performance obligations of clients.

The following table presents a summary of commitments described above as of the dates indicated:


	September 30,		December 31,
	2022		2021
Commitments to extend credit	$	101,947	$	100,686
Standby letters of credit		766		3,453
Total commitments	$	102,713	$	104,139

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 $315,000 at both September 30, 2022 and December 31, 2021.

Commercial Real Estate Concentrations

At September 30, 2022 and December 31, 2021, 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 investments in LIHTC partnerships and an SBIC fund. At September 30, 2022, the remaining commitments to the LIHTC partnerships and the SBIC fund were approximately $3.1 million and $122,000, respectively. At December 31, 2021, the remaining commitments to the LIHTC partnerships and the SBIC fund were $2.3 million and $122,000, respectively.

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS – (continued)

(Tables in thousands, except for share and per share data)

(unaudited)

Deposits

At September 30, 2022, approximately $190.8 million, or 9.17%, of the Company's deposits were derived from its top ten depositors. At December 31, 2021, approximately $198.6 million, or 10.0%, 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. At both September 30, 2022 and December 31, 2021, the FHLB issued letters of credit on behalf of the Company totaling $42.0 million 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:

●

potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus disease 2019 (“COVID-19”) pandemic, including the possibility of new COVID-19 variants;

●

expected revenues, cost savings, synergies and other benefits from our recent acquisition of Pacific Enterprise Bancorp (the “PEB Merger”) 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 client 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, New Mexico and Washington specifically, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions;

●

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

●

the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest rate benchmarks;

●

our net interest margin and funding sources;

●

fluctuations in the demand for loans and the number of unsold homes, land and other properties;

●

fluctuations in real estate values in our market areas;

●

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

●

results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan 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, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry;

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●

our ability to attract and retain deposits;

●

our ability to control operating costs and expenses;

●

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

●

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

●

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

●

the 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;

●

our ability to pay dividends on our common stock;

●

the quality and composition of our securities portfolio and the impact of any 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;

●

the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

●

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and

●

other risks described elsewhere in this Form 10-Q and other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 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 2022 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.

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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. 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.

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. Since 2010, we have expanded our geographic footprint through 10 strategic acquisitions. 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 metropolitan and community markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase both interest-earning assets and market share. We believe our geographic footprint, which now includes the San Francisco Bay area, the metropolitan markets of Los Angeles, California, Seattle, Washington, and Denver, Colorado, and community markets including Albuquerque, New Mexico, and Custer, Delta, and Grand counties, 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. At September 30, 2022, the Company had approximately $2.5 billion in total assets, $2.0 billion in total loans, $2.1 billion in total deposits and $314.4 million in shareholders’ equity.

We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At September 30, 2022, our $2.0 billion total loan portfolio included $299.4 million, or 15.0%, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.7 billion, or 85.0%, consisted of loans we originated.

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. Our net income is also affected by other factors, including the provision for credit losses on loans, noninterest income and noninterest expense.

On February 1, 2022, the Company completed its acquisition of Pacific Enterprise Bancorp (“PEB”), which was headquartered in Irvine, California. Pursuant to an Agreement and Plan of Merger, dated September 7, 2021 (the “Merger Agreement”), by and between BayCom and PEB. Under the terms of the Merger Agreement, PEB merged with and into BayCom (the “Merger”), with BayCom as the surviving corporation in the Merger. Immediately following the Merger, Pacific Enterprise Bank, a wholly-owned subsidiary of PEB, merged with and into United Business Bank, a wholly-owned subsidiary of BayCom (the “Bank Merger”), with United Business Bank as the surviving bank in the Bank Merger. For additional information regarding the PEB Merger, see “Note 3 – Acquisitions” contained in the Notes to Condensed Consolidated Financial Statements included in “Item 1. Financial Information” of Part I this report.

Set forth below is a discussion of the primary factors affecting 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

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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. Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022. In November 2022, the FOMC increased the target range for the federal funds rate another 75 basis points to a range of 3.75% to 4.00%. The increase in the average yield on interest-earning assets during the current year reflects the lagging benefit of variable rate interest-earnings assets beginning to reprice higher. We believe our balance sheet is structured to enhance our net interest margin if the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent Federal Reserve communications and interest rate forecasts.

Noninterest income. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) other noninterest income. Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of 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.

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) other general and administrative expenses, including amortization of intangible assets. 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

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the condensed consolidated financial statements included in this Form 10-Q report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. The following represent our critical accounting policies:

Allowance for loan losses. The allowance for loan losses is evaluated on a regular basis by management. Periodically, we charge current earnings with provisions for estimated probable losses of loans receivable. The provision

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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. Our evaluation of the allowance for loan losses 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 losses 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. 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 Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In situations where such purchase credit impaired (“PCI”) loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation.

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

Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amounts of the future cash flows of the pool are reasonably estimable. Subsequent to the acquisition date, any increase in cash flow over those expected at purchase date in excess of fair value is 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

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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. Goodwill, which has resulted from a number of our acquisitions, is reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit being below its carrying amount. We make a qualitative assessment whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. 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. As of September 30, 2022, the Company concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.

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BayCom’s Response to COVID-19

The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients. As of September 30, 2022, all Bank branches were open with normal hours. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total assets. Total assets increased $183.8 million, or 7.8%, to $2.5 billion at September 30, 2022, from $2.4 billion at December 31, 2021. The increase primarily was due to loans receivable, net, increasing $329.7 million as a result of the PEB Merger and new loan originations, partially offset by loan repayments and sales during the period. In addition, other assets increased $13.4 million or 44.8% and right-of-use assets (“ROU”) increased $3.7 million or 30.9%, partially offset by cash and cash equivalent decreasing $155.0 million or 40.8% and investment securities available-for-sale decreasing $7.2 million, or 4.1%.

Cash and cash equivalents. Cash and cash equivalents decreased $155.0 million, or 40.8%, to $224.7 million, at September 30, 2022, from $379.7 million at December 31, 2021. The decrease primarily was due to $166.0 million decrease in federal funds sold and interest bearing balances in banks during nine months ended September 30, 2022, which was used to fund new loan originations and the managed run-off of higher cost time deposits.

Securities. Investment securities, all of which are classified as available-for-sale, decreased $7.2 million, or 4.1%, to $167.2 million at September 30, 2022 from $174.4 million at December 31, 2021. The decrease primarily was due to fair value adjustments related to unrealized losses on investment securities available-for-sale of $23.2 million and the routine amortization and repayment of investment principal balances and securities called and matured, partially offset by the purchase of $25.7 million of investment securities during the nine months ended September 30, 2022.

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 $329.7 million, or 20.0%, to $2.0 billion at September 30, 2022 from $1.7 billion at December 31, 2021. The increase was due to $412.9 million of net loans acquired from PEB and $364.0 million of new loan originations, partially offset by $409.2 million of loan repayments, including $130.8 million in Paycheck Protection Program (“PPP”) loan repayments, and $33.4 million in loan sales.

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The following table provides information about our loan portfolio by type of loan, with PCI loans presented as a separate balance, at the dates presented.


	September 30,		December 31,		% Change
	2022		2021

	(Dollars in thousands)
Commercial and industrial (1)	$	215,351	$	229,871	(6.3)	%
Real estate:
Residential		87,795		116,656	(24.7)
Multifamily residential		261,339		206,960	26.3
Owner occupied CRE		627,917		393,978	59.4
Non-owner occupied CRE		760,213		688,600	10.4
Construction and land		8,171		13,371	(38.9)
Total real estate		1,745,435		1,419,565	23.0
Consumer		4,294		5,138	(16.4)
PCI loans		30,144		12,219	146.7
Total Loans		1,995,224		1,666,793	19.7
Net deferred loan fees		(258)		(1,903)	(86.5)
Allowance for loan losses		(18,050)		(17,700)	2.0
Loans, net	$	1,976,916	$	1,647,190	20.0	%

(1)

Includes $35.4 million and $69.6 million of PPP loans as of September 30, 2022 and December 31, 2021, respectively.

The following table shows as of September 30, 2022, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:


	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)
September 30, 2022
Commercial and industrial	$	48,726		7.4	%	$	120,491		13.0	%	$	169,217	10.7	%	$	50,297	12.0	%	$	219,514	11.0	%
Real estate:
Residential		17,781		2.7			27,622		3.0			45,403	2.9			43,499	10.4			88,902	4.5
Multifamily residential		60,072		9.2			138,405		15.0			198,477	12.6			65,724	15.7			264,201	13.2
Owner occupied CRE		232,545		35.5			357,061		38.7			589,606	37.4			55,382	13.3			644,988	32.3
Non-owner occupied CRE		294,660		45.0			269,661		29.2			564,321	35.8			196,773	47.1			761,094	38.1
Construction and land		—		0.0			8,723		0.9			8,723	0.6			3,508	0.8			12,231	0.6
Total real estate		605,058					801,472					1,406,530				364,886				1,771,416
Consumer		390		0.1	%		1,679		0.2	%		2,069	0.1	%		2,225	0.4	%		4,294	0.1	%
Total loans	$	654,174				$	923,642				$	1,577,816			$	417,408			$	1,995,224

December 31, 2021
Commercial and industrial	$	80,457		13.6	%	$	68,586		11.8	%	$	149,043	12.7	%	$	81,134	16.3	%	$	230,177	13.8	%
Real estate:
Residential		23,135		3.9			42,218		7.3		$	65,353	5.6			53,070	10.7			118,423	7.1
Multifamily residential		66,425		11.3			80,328		13.8			146,753	12.5			60,207	12.1			206,960	12.4
Owner occupied CRE		185,046		31.4			143,122		24.6			328,168	28.0			65,810	13.3			393,978	23.6
Non-owner occupied CRE		233,587		39.6			243,358		41.9			476,945	40.8			221,801	44.7			698,746	41.9
Construction and land		889		0.2			1,310		0.2			2,199	0.2			11,172	2.2			13,371	0.8
Total real estate	$	509,082				$	510,336				$	1,019,418			$	412,060			$	1,431,478
Consumer		13		0.0	%		1,703		0.3	%		1,716	0.1	%		3,422	0.7	%		5,138	0.3	%
Total loans	$	589,552				$	580,625				$	1,170,177			$	496,616			$	1,666,793

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

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(2)

Includes loans located primarily in the states of Colorado, New Mexico and Washington. At September 30, 2022, loans in Colorado, New Mexico and Washington totaled $94.5 million, $53.1 million and $88.4 million, respectively. At December 31, 2021, loans in Colorado, New Mexico and Washington totaled $123.2 million, $69.5 million and $86.6 million, respectively.

Nonperforming assets and nonaccrual loans. Nonperforming assets consists of nonaccrual loans, accruing loans that are 90 days or more past due and other real estate owned (“OREO”). Nonperforming assets increased $12.8 million, or 185.2%, to $19.7 million at September 30, 2022 from $6.9 million at December 31, 2021, primarily due to a $9.5 million increase in nonaccrual loans and $3.3 million increase in accruing loans 90 days and more past due. The increase in nonperforming loans was primarily due to a $5.1 million multi-family real estate loan which was placed on nonaccrual status during the current quarter, a $1.7 million participation interest in a shared national credit, which was restructured as a TDR and placed on non-accrual during the first quarter of 2022 and $3.3 million in accruing SBA guaranteed PPP loans which were 90 days or more past due and in the process of forgiveness at September 30, 2022. At September 30, 2022, the Bank had participation interests in two other shared national credit loans totaling $3.5 million, both of which were performing in accordance with their payment terms as of that date. Subsequent to quarter-end the $1.7 million participation interest in the shared national credit was repaid with no additional charge-offs required.

The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling $19.7 million, or 0.99% of total loans, of which $862,000 were guaranteed by governmental agencies at September 30, 2022, compared to $6.9 million or 0.41% of total loans, of which $822,000 were guaranteed by governmental agencies at December 31, 2021. Included in nonperforming loans at September 30, 2022 and December 31, 2021, were $7.2 million and $1.6 million, respectively, of TDR loans.

At September 30, 2022 and December 31, 2021, nonaccrual loans included $19,000 and $113,000 of loans 30-89 days past due and $7.0 million and $2.5 million of loans less than 30 days past due, respectively. At September 30, 2022, the $7.0 million of loans less than 30 days past due was comprised of 20 loans all of which were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were 21 loans totaling $3.3 million in accruing SBA guaranteed PPP loans which matured, are 90 days or more past due, and are in the process of forgiveness at September 30, 2022. There were no other loans that were 90 days or more past due and still accruing at December 31, 2021.

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 will remain on accrual status.

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

●

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

●

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

●

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

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

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

Troubled debt restructured loans. Troubled debt restructured loans, or TDR loans, 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. TDR loans as of September 30, 2022 totaled $8.0 million, of which $759,000 were accruing and performing according to their restructuring terms. TDR loans as of December 31, 2021 totaled $3.9 million, of which $765,000 were accruing and performing according to their restructuring terms. The accruing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. The related allowance for loan losses on TDR loans totaled $282,000 and $259,000 at September 30, 2022 and December 31, 2021, respectively.

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


	September 30,			December 31,
	2022			2021

	(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial	$	2,620		$	753
Real estate:
Residential		2,126			1,587
Multifamily residential		5,354			200
Owner occupied CRE		5,895			3,990
Non-owner occupied CRE		374			322
Construction and land		—			36
Total real estate		13,749			6,135
Consumer		—			—
Total nonaccrual loans		16,369			6,888
Accruing loans 90 days or more past due		3,315			—
Total nonperforming loans (1)		19,684			6,888
Real estate owned		21			21
Total nonperforming assets (2)	$	19,705		$	6,909
Troubled debt restructurings – performing		759			805
PCI loans	$	30,144		$	12,219
Nonperforming assets to total assets (2)		0.78	%		0.29	%
Nonperforming loans to total loans (2)		0.99	%		0.41	%

(1)	Includes $7.2 million and $1.6 million of nonaccrual TDR loans at September 30, 2022 and December 31, 2021, respectively. Excludes the performing (accruing) TDR loans which are set forth separately in the table.

(2) PCI and performing TDR loans are neither included in nonperforming loans above nor are they included in the numerators used to calculate this ratio.

Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above. At September 30, 2022 and December 31, 2021 we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

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Interest foregone on nonaccrual loans was approximately $230,000 and $388,000 for the three and nine months ended September 30, 2022 and $61,000 and $157,500 for the three and nine months ended September 30, 2021, respectively, none of which was included in interest income.

Allowance for loan losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with GAAP. It is our estimate of loan losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios. Management and the Board of Directors sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. Management and the Board of Directors also considers credit quality and trends relating to delinquency, nonperforming and classified loans within our loan portfolio when evaluating qualitative loss factors. Additionally, management and the Board of Directors adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy, capitalization rates, commodity prices and other pertinent economic data specific to our primary market area and lending portfolios.

For the specific component, the allowance for loan losses is established for impaired loans. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

At September 30, 2022, the Company’s allowance for loan losses was $18.1 million, or 0.90% of total loans, compared to $17.7 million, or 1.06% of total loans, at December 31, 2021. The decline in the allowance for loan losses as a percentage of total loans outstanding at September 30, 2022, as compared to December 31, 2021, was mostly due to the Company’s acquisition of PEB and related acquisition accounting on those loans, as the acquired loans were recorded at their estimate fair value at acquisition and no allowance for loan losses is recorded for acquired loans. Based on our review of the appropriateness of the allowance for loan losses at September 30, 2022, the Company recorded a provision for loan losses of $3.8 million for the nine months ended September 30, 2022, compared to $30,000 reversal of provision for the nine months ended September 30, 2021. The provision for loan losses for the nine months ended September 30, 2022 primarily was due to $3.5 million in net charge-offs during the nine months ended September 30, 2022, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan losses. We recorded net charge-offs of $944,000 and $3.5 million for the three and nine months ended September 30, 2022, respectively, compared to $177,000 and $170,000 net charge-off for the three months and nine months ended September 30, 2021, respectively.

The Company, based on information received from the lead lender during the current quarter with respect to the expected sale price of collateral securing a $4.5 million participation interest in the national shared credit discussed above, charged off $3.2 million which accounted for the bulk of the charge-offs during the nine months ended September 30, 2022. Subsequent to quarter-end the collateral was sold and the Company received final settlement from the lead lender, with no additional charge-offs required by the Company.

The calculation of the allowance for loan losses at September 30, 2022 and December 31, 2021 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA and management

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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.

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts. 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. However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. As of September 30, 2022, acquired loans net of their discount, totaled $229.4 million and the remaining net discount on these acquired loans was $480,000, compared to $51.3 million of acquired loans and $2.1 million of net discounts at December 31, 2021. The net discount includes a credit discount based on estimated losses in the acquired loans partially offset a premium, if any, based market interest rates on the date of acquisition. The decrease in the net discount on acquired loans from December 31, 2021 was due to a net premium on the PEB loans given the higher yielding portfolio compared to current market interest rates.

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The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations:


	Nine months ended September 30,
	2022			2021

	(Dollars in thousands)
Allowance for loan losses as a percentage of total loans outstanding at period end		0.90	%		1.05	%
Allowance for loan losses	$	18,050		$	17,300
Total loans outstanding		1,994,966			1,640,836

Non-accrual loans as a percentage of total loans outstanding at period end		0.82	%		0.44	%
Total non-accrual loans	$	16,369		$	7,292
Total loans outstanding		1,994,966			1,640,836

Allowance for loan losses as a percentage of non-accrual loans at period end		110.27	%		237.25	%
Allowance for loan losses	$	18,050		$	17,300
Total non-accrual loans		16,369			7,292

Net charge-offs/(recoveries) during period to average loans outstanding:
Commercial and industrial:		1.21	%		0.05	%
Net charge-offs	$	3,461		$	173
Average loans outstanding		285,935			318,409
Construction and land:		—	%		(0.02)	%
Net recoveries	$	—		$	(4)
Average loans outstanding		18,206			18,283
Commercial estate:		—	%		—	%
Net charge-offs	$	1		$	1
Average loans outstanding		1,577,751			1,138,864
Residential:		0.01	%		—	%
Net charge-offs	$	6		$	—
Average loans outstanding		89,228			141,540
Consumer:		0.29	%		—	%
Net charge-offs	$	6		$	—
Average loans outstanding		2,085			3,531
Total loans:		0.18	%		0.01	%
Total net charge-offs	$	3,474		$	170
Total average loans outstanding		1,973,205			1,620,627

As of September 30, 2022, the Company identified $20.5 million in impaired loans, inclusive of $19.7 million of nonperforming loans and $759,000 of performing (accruing) TDR loans. Of these impaired loans, only $1.2 million had a specific allowance of $998,000 as of September 30, 2022. As of December 31, 2021, the Company identified $7.7 million in impaired loans, inclusive of $6.9 million of nonperforming loans and $765,000 of performing (accruing) TDR loans. Of these impaired loans, only $1.1 million had a specific allowance of $931,000 as of December 31, 2021.

Management considers the allowance for loan losses at September 30, 2022 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 the effects of inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the COVID- 19 pandemic, among 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.

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

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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 $130.2 million, or 6.6%, to $2.1 billion at September 30, 2022 from $2.0 billion at December 31, 2021. The increase in deposits was primarily attributable to the $376.7 million of deposits acquired in the PEB Merger. At September 30, 2022, noninterest bearing demand deposits totaled $813.5 million or 38.5% of total deposits, compared to $710.1 million or 35.8% of total deposits at December 31, 2021.

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


	September 30,		December 31,
	2022		2021		% Change

	(Dollars in thousands)
Noninterest bearing demand deposits	$	813,510	$	710,137	14.6	%
NOW accounts and savings		463,039		484,847	(4.5)
Money market		614,414		568,094	8.2
Time deposits		224,488		222,161	1.0
Total	$	2,115,451	$	1,985,239	6.6	%

Borrowings. Although deposits are our primary source of funds, 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. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. 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.

At September 30, 2022 and December 31, 2021, we had the ability to borrow up to $484.6 million and $483.1 million, respectively, from the FHLB of San Francisco. In addition to the availability of liquidity from the FHLB of San Francisco, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco, with available credit capacity of $35.4 million and $135.6 million as of September 30, 2022 and December 31, 2021, respectively, based on loans that qualify as collateral for the FRB line of credit. At both September 30, 2022 and December 31, 2021, there were no FHLB advances or FRB borrowings outstanding.

We may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At both September 30, 2022 and December 31, 2021, we had a total of $65.0 million in federal funds line available from third-party financial institutions and no balances outstanding at these dates.

At both September 30, 2022 and December 31, 2021, the Company had outstanding junior subordinated debt, net of market-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.5 million and $8.4 million, respectively.

At September 30, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.7 million compared to $63.5 million at December 31, 2021.

We are required to provide collateral for certain local agency deposits. At both September 30, 2022 and December 31, 2021, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $42.0 million as collateral for local agency deposits.

Shareholders’ equity. Shareholders’ equity increased $51.8 million, to $314.4 million at September 30, 2022 from $262.6 million at December 31, 2021. The increase in shareholders’ equity primarily was due to issuance of stock

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related to our acquisition of PEB and net income, partially offset by the repurchase of $13.5 million of common stock and $2.0 million of cash dividends. In addition, shareholder’s equity was adversely impacted by increasing unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $16.5 million increase in accumulated other comprehensive loss, net of tax from December 31, 2021. During the nine months ended September 30, 2022, the Company repurchased a total of 668,755 shares of its common stock at a total cost of $13.5 million, or $19.15 per share, leaving 73,777 shares available for future purchases under the current stock repurchase plan. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

Earnings summary. Net income was $7.2 million for the three months ended September 30, 2022, compared to $5.4 million for the three months ended September 30, 2021, an increase of $1.8 million or 33.6%. The increase was the result of a $7.0 million increase in net interest income, partially offset by a $717,000 increase in provision for loan losses, a $1.3 million decrease in noninterest income, a $2.2 million increase in noninterest expense and a $970,000 increase in provision for income taxes. Diluted earnings per share were $0.54 for the three months ended September 30, 2022, compared to diluted earnings per share of $0.51 for the three months ended September 30, 2021.

Net income was $18.9 million for the nine months ended September 30, 2022, compared to $15.3 million for the nine months ended September 30, 2021, an increase of $3.7 million, or 24.1%, primarily as a result of a $16.6 million increase in net interest income and $466,000 increase in noninterest income, partially offset by a $3.9 million increase in provision for loan losses, a $8.3 million increase in noninterest expense and a $1.3 million increase in provision for income taxes. Diluted earnings per share were $1.44 for the nine months ended September 30, 2022, compared to diluted earnings per share of $1.39 for the nine months ended September 30, 2021.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, was 58.60% and 62.49% for the three and nine months ended September 30, 2022, compared to 63.82% and 66.40% for the three and nine months ended September 30, 2021. The improvement in the efficiency ratio during the three and nine months ended September 30, 2022 compared to the same period in 2021 was due to higher revenues.

Interest income. Interest income for the three months ended September 30, 2022 was $27.1 million, compared to $20.0 million for the three months ended September 30, 2021, an increase of $7.2 million or 35.9%. The increase in interest income between the periods reflects increases in interest income on loans and, to a lesser extent, investment securities available-for-sale due to increases in the average balances of and yields earned on these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

Interest income on loans, including fees, increased $5.6 million, or 30.1%, to $24.0 million for the three months ended September 30, 2022, compared to $18.5 million for the three months ended September 30, 2021, primarily due to a $388.8 million increase in average loan balance and a 23 basis point increase in the average yield. The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended September 30, 2022 was 4.73%, compared to 4.50% for the same period in 2021. Interest income on loans for three months ended September 30, 2022 and 2021 included $63,000 and $338,000, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts. The remaining net discount on these acquired loans was $480,000 and $2.3 million at September 30, 2022 and September 30, 2021, respectively. Interest income on loans for three months ended September 30, 2022 and 2021 included $161,000 and $1.1 million, respectively, in fees earned related to PPP loans. As of September 30, 2022, total unrecognized fees on PPP loans were $227,000. Interest income on loans for the three months ended September 30, 2022 and 2021, included $195,000 and $57,000, respectively, in fees related to prepayment penalties.

For the three months ended September 30, 2022, average PPP loans were $50.1 million and the average yield, including fees, was 2.28%. 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 will cease completely after the maturity of the loans. Approximately two-thirds of the PPP loans are set to mature by the end of 2022, while the remaining loans have a five-year maturity date.

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Interest income on investment securities available-for-sale increased $478,000, or 44.3%, to $1.6 million during the three months ended September 30, 2022, compared to $1.1 million for the three months ended September 30, 2021, primarily due to higher average yields earned on investment securities available-for-sale and by a $53.0 million increase in the average balance of investment securities available-for-sale. The average yield on investment securities available-for-sale increased 12 basis point to 3.27% for the three months ended September 30, 2022 compared to 3.15% for the three months ended September 30, 2021.

Interest income on federal funds sold and interest-bearing balances in banks increased $1.1 million, or 550.2%, to $1.3 million during the three months ended September 30, 2022, compared to $198,000 for the three months ended September 30, 2021, primarily due to higher average yields earned on federal funds sold and interest-bearing balances in banks, partially offset by a $206.8 million decrease in the average balance of federal funds sold and interest-bearing balances in banks. The average yield on federal funds sold and interest-bearing balances in banks increased 200 basis point to 2.18% for the three months ended September 30, 2022 compared to 0.18% for the three months ended September 30, 2021.

Interest income for the nine months ended September 30, 2022 was $77.6 million, compared to $60.2 million for the nine months ended September 30, 2021, an increase of $17.3 million or 28.8%. The increase in interest income between the periods reflects increases in interest income on loans and, to a lesser extent, investment securities available-for-sale and federal funds sold and interest bearing balances in banks due to increases in the average balance of and yields earned on loans and investment securities available-for-sale, as well as an increase in the yield earned on federal funds sold and interest bearing balances in banks, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

Interest income on loans, including fees, increased $13.6 million, or 24.1%, as a result of a $356.2 million increase in the average loan balance and a seven basis point increase in the average loan yield. The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the nine months ended September 30, 2022 was 4.74%, compared to 4.67% for the nine months ended September 30, 2021. Interest income on loans for the nine ended September 30, 2022 and 2021 included $1.5 million and $1.4 million, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts. Interest income for the nine months ended September 30, 2022 included $1.7 million in fees earned related to PPP loans compared to $2.1 million during the same period in 2021. Interest income on loans for the nine months ended September 30, 2022 and 2021, included $916,000 and $771,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities available-for-sale increased $1.8 million, or 65.2%, to $4.5 million during the nine months ended September 30, 2022, compared to $2.7 million for the nine months ended September 30, 2021, primarily due a $66.1 million increase in the average balance of investment securities available-for-sale, as well as a higher average yields earned on investment securities available-for-sale. The average yield on investment securities available-for-sale increased 20 basis point to 3.21% for the nine months ended September 30, 2022 compared to 3.01% for the nine months ended September 30, 2021.

Interest income on federal funds sold and interest-bearing balances in banks increased $1.8 million, or 380.7%, to $2.3 million during the nine months ended September 30, 2022, compared to $479,000 for the nine months ended September 30, 2021, primarily due to higher average yields earned on federal funds sold and interest-bearing balances in banks, partially offset by a $74.2 million decrease in the average balance of federal funds sold and interest-bearing balances in banks. The average yield on interest-bearing deposits in banks increased 75 basis point to 0.91% for the nine months ended September 30, 2022 compared to 0.16% for the nine months ended September 30, 2021.

Interest expense. Interest expense increased $191,000, or 8.6%, to $2.4 million for the three months ended September 30, 2022 compared to $2.2 million for the three months ended September 30, 2021. The increase was due to the $98.1 million increase in the average balance of deposits primarily related to the PEB Merger. Total average interest bearing liabilities increased $98.4 million, or 7.32%, to $1.4 billion for the three months ended September 30, 2022, compared to $1.3 billion for the three months ended September 30, 2021. The average rate paid on interest bearing liabilities for both three months ended September 30, 2022, and 2021 was 0.66%.

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Interest expense on deposits increased $147,000, or 11.9%, to $1.4 million for the three months ended September 30, 2022 compared to $1.2 million for the three months ended September 30, 2021. The increase primarily was due to a $98.1 million increase in the average balance of deposits, with average balances increasing in all interest bearing deposit categories. The average balance of deposits totaled $1.4 billion for the three months ended September 30, 2022, compared to $1.3 billion for the same quarter a year ago, respectively. The average rate paid on interest bearing deposits decreased by one basis point to 0.40% for the three months ended September 30, 2022, compared to 0.39% for the three months ended September 30, 2021. The overall average cost of deposits for both the three months ended September 30, 2022 and 2021 was 0.25%. The average balance of noninterest bearing deposits increased $67.2 million, or 9.2%, to $801.9 million for the three months ended September 30, 2022 compared to $734.6 million for the same period in 2021.

Interest expense on borrowings increased $43,000 or 2.0%, to $1.0 million for the three months ended September 30, 2022, compared to $981,000 for the three months ended September 30, 2021. The average balance of borrowings outstanding increased $252,000 to $72.1 million during the three months ended September 30, 2022, compared to $71.8 million during the three months ended September 30, 2021. The average cost of borrowings increased to 5.64% for the three months ended September 30, 2022, compared to 5.42% for the three months ended September 30, 2021.

Interest expense increased $695,000, or 10.5%, to $7.3 million for the nine months ended September 30, 2022 compared to $6.6 million for the nine months ended September 30, 2021. The increase primarily was due to a $225.6 million increase in the average balance of interest bearing deposits. Total average interest bearing liabilities increased $223.5 million, or 17.2%, to $1.5 billion for the nine months ended September 30, 2022, compared to $1.3 billion for the nine months ended September 30, 2021. The average rate paid on interest bearing liabilities decreased by four basis points to 0.64% for the nine months ended September 30, 2022, compared to 0.68% for the nine months ended September 30, 2021.

Interest expense on deposits increased $636,000, or 17.3%, to $4.3 million for the nine months ended September 30, 2022 compared to $3.7 million for the nine months ended September 30, 2021. The increase primarily was due to a $132.3 million increase in the average balance of and a six basis point increase in the cost of money market accounts. The average balance of interest bearing deposits increased $225.6 million, with the average balance increasing in all interest bearing deposit categories. The average rate paid on interest bearing deposits remained unchanged at 0.40% for both the nine months ended September 30, 2022 and September 30, 2021, primarily reflecting a 21 basis point decline in the average rate paid on time deposits to 0.75% during the nine months ended September 30, 2022 compared to 0.96% during the nine months ended September 30, 2021 offset by the increase in the rate paid on money market accounts. The average balance of noninterest bearing deposits increased $62.3 million, or 8.6%, to $783.3 million for the nine months ended September 30, 2022 compared to $721.0 million for the same period in 2021.

Interest expense on borrowings was $3.0 million for both the nine months ended September 30, 2022 and 2021. The average balance of borrowings outstanding decreased $2.1 million to $72.0 million for the nine months ended September 30, 2022, compared to $74.1 million for the nine months ended September 30, 2021. The average cost of borrowings increased to 5.58% for the nine months ended September 30, 2022, compared to 5.32% for the nine months ended September 30, 2021.

Net interest income and net interest margin. Net interest income increased $7.0 million, or 39.4%, to $24.7 million for the three months ended September 30, 2022, compared to $17.7 million for the three months ended September 30, 2021 and increased $16.6 million, or 31.0%, to $70.2 million for the nine months ended September 30, 2022, compared to $53.6 million for the nine months ended September 30, 2021. The increase in net interest income primarily was due to increases in interest income on loans and, to a lesser extent, investment securities available-for-sale due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

The average yield on interest earning assets for the three months ended September 30, 2022 was 4.38%, an 81 basis point increase from 3.57% for the three months ended September 30, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities was 0.66% for both the three months ended September 30, 2022 and 2021. The average yield on interest earning assets for the nine months ended September 30, 2022 was 4.12%, a 40 basis point increase from 3.72% for the nine months ended September 30, 2021, primarily due to higher market

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interest rates, while the average cost of interest bearing liabilities for the nine months ended September 30, 2022 decreased to 0.64%, or three four points, from 0.68% for the nine months ended September 30, 2021.

The annualized net interest margin for the three and nine months ended September 30, 2022 was 3.99% and 3.73%, compared to 3.17% and 3.31% for three and nine months ended September 30, 2021, respectively. The comparable period over period increases in net interest margin primarily reflect an improved mix of interest-earning assets, including increased balances of higher yielding loans and investment securities available for sale. During these periods, the recognition of deferred loan fees related to PPP loans and accretion on acquired loans, also had a positive impact on the net interest margin. PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans for the three and nine months ended September 30, 2022 was 2.28% and 3.93%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of three basis points and 10 basis points during the three and nine months ended September 30, 2022, respectively, compared to 4.52% with a positive impact of 20 basis points and 4.90% with 21 basis points during the comparable periods in 2021, respectively. The impact of PPP loans on net interest margin will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are net, but will cease completely after the maturity of the loans. 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 one and eight basis points during the three and nine months ended September 30, 2022 and 12 and 19 basis points during the three and nine months ended September 30, 2021, respectively.

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Average Balances, Interest and Average Yields/Cost. The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average yields; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Nonaccruing loans have been included in the table as loans carrying a zero yield. Yields have been calculated on a pre-tax basis. Loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.


	Three months ended September 30,
	2022						2021
					Annualized						Annualized
	Average				Average		Average				Average
	Balance(1)		Interest		Yield/Cost		Balance(1)		Interest		Yield/Cost

	(Dollars in thousands)
Interest earning assets
Federal funds sold and interest bearing balances in banks	$	234,627	$	1,287	2.18	%	$	441,440	$	198	0.18	%
Investments securities available-for-sale		188,739		1,555	3.27	%		135,721		1,077	3.15	%
FHLB Stock		10,679		160	5.93	%		8,385		125	5.93	%
FRB Stock		9,592		125	5.19	%		7,634		112	5.84	%
Total loans		2,015,790		24,010	4.73	%		1,626,946		18,451	4.50	%
Total interest earning assets		2,459,427		27,137	4.38	%		2,220,126		19,963	3.57	%
Noninterest earning assets		135,399						142,666
Total average assets	$	2,594,826					$	2,362,792
Interest bearing liabilities
Savings	$	126,923		44	0.14	%	$	121,928		41	0.13	%
NOW accounts		335,037		80	0.10	%		329,518		75	0.09	%
Money market		645,340		750	0.46	%		592,229		601	0.40	%
Time deposits		262,234		513	0.78	%		227,731		523	0.91	%
Total interest bearing deposit accounts		1,369,534		1,387	0.40	%		1,271,406		1,240	0.39	%
Subordinated debt, net		63,644		896	5.58	%		63,473		895	5.59	%
Junior subordinated debentures, net		8,452		129	6.08	%		8,371		86	4.06	%
Total interest bearing liabilities		1,441,630		2,412	0.66	%		1,343,250		2,221	0.66	%
Noninterest bearing deposits		801,871						734,641
Other noninterest bearing liabilities		28,941						28,499
Noninterest bearing liabilities		830,812						763,140
Total average liabilities		2,272,442						2,106,390
Average equity		322,384						256,402
Total average liabilities and equity	$	2,594,826					$	2,362,792
Net interest income			$	24,725					$	17,742

Interest rate spread (2)					3.72	%					2.91	%
Net interest margin (3)					3.99	%					3.17	%
Ratio of average interest earning assets to average interest bearing liabilities					170.60	%					165.28	%

(1)	Average balances are computed using 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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	Nine months ended September 30,
	2022						2021
					Annualized						Annualized
	Average				Average		Average				Average
	Balance (1)		Interest		Yield/Cost		Balance(1)		Interest		Yield/Cost

	(Dollars in thousands)
Interest earning assets
Federal funds sold and interest bearing balances in banks	$	337,565	$	2,303	0.91	%	$	411,811	$	479	0.16	%
Investments securities available-for-sale		186,799		4,483	3.21	%		120,734		2,714	3.01	%
FHLB Stock		10,418		467	5.99	%		8,136		346	5.69	%
FRB Stock		8,998		387	5.75	%		7,624		341	5.98	%
Total loans		1,970,850		69,921	4.74	%		1,614,608		56,348	4.67	%
Total interest earning assets		2,514,630		77,561	4.12	%		2,162,913		60,228	3.72	%
Noninterest earning assets		140,575						141,084
Total average assets	$	2,655,205					$	2,303,997
Interest bearing liabilities
Savings	$	125,829		130	0.14	%	$	118,326		123	0.14	%
NOW accounts		346,230		246	0.09	%		313,775		211	0.09	%
Money market		694,599		2,321	0.45	%		562,263		1,660	0.39	%
Time deposits		286,500		1,613	0.75	%		233,208		1,680	0.96	%
Total deposit accounts		1,453,158		4,310	0.40	%		1,227,572		3,674	0.40	%
Subordinated debt, net		63,601		2,687	5.65	%		63,431		2,686	5.66	%
Junior subordinated debentures, net		8,431		319	5.06	%		8,351		261	4.17	%
Other borrowings		—		—	—	%		2,308		—	—	%
Total interest bearing liabilities		1,525,190		7,316	0.64	%		1,301,662		6,621	0.68	%
Noninterest bearing deposits		783,293						720,999
Other noninterest bearing liabilities		29,158						26,290
Noninterest bearing liabilities		812,451						747,289
Total average liabilities		2,337,641						2,048,951
Average equity		317,564						255,046
Total average liabilities and equity	$	2,655,205					$	2,303,997
Net interest income			$	70,245					$	53,607

Interest rate spread (2)					3.48	%					3.04	%
Net interest margin (3)					3.73	%					3.31	%
Ratio of average interest earning assets to average interest bearing liabilities					164.87	%					166.17	%

(1)	Average balances are computed using 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.


	Three months ended September 30,						Nine months ended September 30,
	2022 compared to 2021						2022 compared to 2021
	Increase/(Decrease)						Increase/(Decrease)
	Attributable to						Attributable to
	Rate		Volume		Total		Rate		Volume		Total

	(Dollars in thousands)						(Dollars in thousands)
Interest earning assets
Federal funds sold and interest bearing balances in banks	$	1,181	$	(92)	$	1,089	$	1,937	$	(113)	$	1,824
Investments available-for-sale		62		416		478		744		1,025		1,769
FHLB stock and FRB stock		(14)		62		48		21		146		167
Total loans		1,198		4,361		5,559		1,618		11,955		13,573
Total interest income		2,427		4,747		7,174		4,320		13,013		17,333

Interest bearing liabilities
Savings		1		2		3		3		4		7
NOW accounts		4		1		5		24		11		35
Money market accounts		96		53		149		373		288		661
Time deposits		(88)		78		(10)		(502)		435		(67)
Total deposit accounts		13		134		147		(102)		738		636
Subordinated debt, net		1		—		1		1		—		1
Junior subordinated debentures, net		42		1		43		58		—		58
Total interest expense		56		135		191		(43)		738		695
Net interest income	$	2,371	$	4,612	$	6,983	$	4,363	$	12,275	$	16,638

Provision for loan losses. We recorded a $1.2 million and $3.8 million provision for loan losses for the three and nine months ended September 30, 2022, respectively, compared to a $477,000 provision for loan losses and $30,000 reversal of the provision for loan losses for the three and nine months ended September 30, 2021, respectively. We had net charge-offs on loans of $944,000 and $3.5 million for the three and nine months ended September 30, 2022, compared to $177,000 and $170,000 net charge-offs on loans for the three and nine months ended September 30, 2021, respectively. The provision for loan losses in the third quarter of 2022 was primarily due to $944,000 in net charge-offs during the current quarter, coupled with new loan production and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan losses. The Company, based on information received from the lead lender during the current quarter with respect to the expected sale price of collateral securing a $4.5 million participation interest in a national shared credit, charged off $750,000, which was in addition to the $2.4 million charged off on this same national shared credit in the prior quarter. Subsequent to quarter-end the collateral was sold and the Company received final settlement from the lead lender, with no additional charge-offs required.

Noninterest income. Noninterest income decreased $1.3 million, or 31.5%, to $2.7 million for the three months ended September 30, 2022 compared to $4.0 million for the three months ended September 30, 2021. The decrease in noninterest income primarily was due to a $898,000 decrease in gain on sale of loans due to a decrease in the volume and premiums on SBA loans (guaranteed portion) sold and a $589,000 decrease in income from our investment in a Small Business Investment Company (“SBIC”) fund. During the three months ended September 30, 2022, the Company sold $18.3 million of SBA loans (guaranteed portion), resulting in a gain on sale of $1.3 million, compared to the sale of $20.3 million of SBA loans (guaranteed portion) resulting in a gain on sale of $2.2 million during the three months ended September 30, 2021. Partially offsetting these decreases in noninterest income was a $206,000 increase in service charges and other loan fees.

Noninterest income increased $466,000, or 5.4%, to $9.2 million for the nine months ended September 30, 2022 compared to $8.7 million for the nine months ended September 30, 2021. The increase in noninterest income primarily

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was due to the $1.6 million bargain purchase gain related to the PEB Merger, as well as increases of $346,000 in service charges and other fees, $247,000 in loan servicing and other loan fees and $65,000 in other income and fees. These increases were partially offset by a $991,000 decrease in gain on sale of loans due to a decrease in the volume of loans sold and decrease in premiums realized and a $866,000 decrease in income from our investment in a SBIC fund. During the nine months ended September 30, 2022, the Company sold $33.4 million of SBA loans (guaranteed portion), resulting in a gain on sale of $2.7 million, compared to the sale of $36.0 million of SBA loans (guaranteed portion) resulting in a gain on sale of $3.8 million during the nine months ended September 30, 2021.

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


	Three months ended September 30,
	2022		2021		$ Change		% Change

	(Dollars in thousands)
Gain on sale of loans	$	1,278	$	2,176	$	(898)	(41.3)	%
Service charges and other fees		817		611		206	33.7	%
Loan servicing and other loan fees		488		458		30	6.6	%
(Loss) income on investment in SBIC fund		(63)		526		(589)	112.0	%
Other income and fees		224		236		(12)	(5.1)	%
Total noninterest income	$	2,744	$	4,007	$	(1,263)	(31.5)	%


	Nine months ended September 30,
	2022		2021		$ Change		% Change

	(Dollars in thousands)
Gain on sale of loans	$	2,714	$	3,705	$	(991)	(26.7)	%
Service charges and other fees		2,165		1,819		346	19.0	%
Loan servicing and other loan fees		1,670		1,423		247	17.4	%
Income on investment in SBIC fund		155		1,021		(866)	(84.8)	%
Bargain purchase gain		1,665		—		1,665	100.0	%
Other income and fees		796		731		65	8.9	%
Total noninterest income	$	9,165	$	8,699	$	466	5.4	%

Noninterest expense. Noninterest expense increased $2.2 million, or 16.0%, to $16.1 million for the three months ended September 30, 2022 compared to $13.9 million for the three months ended September 30, 2021. The increase primarily was due to a $2.0 million increase in salaries and employee benefits as a result of an increase in the number of full-time equivalent employees, primarily reflecting the recent acquisition of PEB in February, 2022, and to a lesser extent, increases in occupancy and equipment expense of $98,000 as a result of revaluing the right-of-use asset for the renewal of two lease agreements and increased utilities and lease related expenses, increases in data processing fees of $80,000 and other noninterest expenses of $37,000.

Noninterest expense for the nine months ended September 30, 2022 increased $8.3 million, or 19.9%, to $49.6 million from $41.4 million in the same period in 2021. Noninterest expense for the nine months ended September 30, 2022 included $3.1 million of nonrecurring acquisition-related expenses associated with the PEB Merger recorded in the first quarter of 2022, which were comprised of $556,000 in salary and employee benefits, $1.1 million in data processing expenses, $724,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 other expenses.

Excluding acquisition-related expense, noninterest expense for the nine months ended September 30, 2022 increased $5.2 million compared to the nine months ended September 30, 2021 primarily as a result of a $4.0 million increase in salary and employee benefits due to increase in the number of full-time equivalent employees due to the PEB Merger and open positions that were filled this quarter, as well as increases in salaries and wages due to upward market pressure on wages. In addition, occupancy costs increased $403,000 primarily due to the PEB Merger, revaluing the right-of-use asset for the renewal of two lease agreements and increased utilities and lease related expenses. Data processing expenses increased $194,000 due to higher transaction activity, and other noninterest expense increased $544,000 reflecting increased operating expenses as businesses reopened from COVID-19 related closures.

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


	Three months ended September 30,
	2022		2021		$ Change		% Change

	(Dollars in thousands)
Salaries and related benefits	$	10,164	$	8,163	$	2,001	24.5	%
Occupancy and equipment		2,043		1,945		98	5.0	%
Data processing		1,562		1,482		80	5.4	%
Other		2,327		2,290		37	1.6	%
Total noninterest expense	$	16,096	$	13,880	$	2,216	16.0	%


		Nine months ended September 30,
		2022		2021		$ Change		% Change

		(Dollars in thousands)
Salaries and employee benefits		$	29,751	$	25,158	$	4,593	18.3	%
Occupancy and equipment	��		6,388		5,610		778	13.9	%
Data processing			5,502		4,235		1,267	29.9	%
Other			7,986		6,371		1,615	25.3	%
Total noninterest expense		$	49,627	$	41,374	$	8,253	19.9	%

Income taxes. The provision for income taxes increased $970,000, or 49.0%, to $3.0 million for the three months ended September 30, 2022 compared to $2.0 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, income tax expense increased $1.3 million, or 23.0%, to $7.0 million, compared to $5.7 million for the nine months ended September 30, 2021. The Company’s effective tax rate was 29.0% and 27.1% for three and nine months ended September 30, 2022 compared to 26.8% and 27.2% for the three and nine months ended September 30, 2021, respectively. The effective tax rate was higher for the third quarter of 2022 compared to the same quarter a year ago due to accrual for non-deductible compensation expenses that were not present in 2021. The effective tax rate was lower for the nine months ended September 30, 2022 compared to the same period a year ago primarily due to the non-taxable bargain purchase gain in the first quarter 2022.

Liquidity and Capital Resources

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

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. During the nine months ended September 30, 2022, the Bank sold $33.4 million in loans and loan participation interests and received $409.2 million in principal loan repayments. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.

Recently, the Bank’s liquidity has been positively impacted by an increase in deposit levels. During the nine months ended September 30, 2022, deposits increased by $130.2 million, primarily due to the closing of the PEB Merger. Liquid assets in the form of cash and cash equivalents, time deposits in banks, and investment securities available for sale totaled $394.4 million at September 30, 2022. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. Securities purchased during the three and nine months ended September 30, 2022, totaled $1.0 million and $25.7 million, respectively, and securities repayments, maturities and sales in the period were $3.7 million and $9.2 million, respectively. Certificates of deposit scheduled to mature in one year or less at September 30, 2022, totaled $158.9 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.

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In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of September 30, 2022, the Bank had an available borrowing capacity of $484.6 million with the FHLB of San Francisco and $35.4 million with the FRB of San Francisco, with no borrowings outstanding at that date. Federal Funds lines with available commitments totaling $65.0 million with four correspondent banks. There were no amounts outstanding under these facilities at September 30, 2022 and December 31, 2021. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $102.7 million, including $7.9 million of undisbursed construction and development loan commitments, at September 30, 2022. For information regarding our commitments, see “Note 18 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1. Financial Information” of Part I of this report.

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 nine months ended September 30, 2022 was $23.8 million, compared to $5.4 million provided by operating activities for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, net cash provided by investing activities was $82.6 million, which consisted primarily of net change in loans receivable, compared to $13.2 million of cash used in investing activities for the nine months ended September 30, 2021. Net cash used in financing activities for the nine months ended September 30, 2022 was $261.4 million, which was comprised primarily of net change in deposits, compared to $152.9 million provided by financing activities during the nine months ended September 30, 2021. Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our liquidity and capital resources since the information disclosed in our 2021 Annual Form 10-K other than set forth above. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. At September 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $25.5 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 notes 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.

On August 18, 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s outstanding common stock, payable on October 14, 2022 to shareholders of record as of the close of business on September 16, 2022. The Company expects to continue to pay quarterly cash dividends on its common stock subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment of the cash dividend at this rate of $0.05 per share, our average total dividend paid each quarter would be approximately $658,000 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). The dividends, if any, we may pay may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I. Item 1. Business” of the 2021 Annual Report.

From time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company was authorized to repurchase up to 747,000 shares, or approximately 7.0%, of its outstanding common stock, of which 73,777 shares remained available for repurchase at September 30, 2022. In October 2022, our Board of

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Directors approved a sixth stock repurchase program to commence following completion of the fifth stock repurchase program for the repurchase of up to 645,000 shares, or approximately 5.0% of the Company’s outstanding common stock, over a one year period through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. This repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The sixth stock repurchase program does not obligate the Company to purchase any particular number of shares. For additional information on the Company’s stock repurchases, see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.

Regulatory Capital

The Bank, as a state-chartered, federally insured commercial bank, and member of the Board of Governors of the Federal Reserve System is subject to 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 September 30, 2022 and December 31, 2021, 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 September 30, 2022				At December 31, 2021
	Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
Leverage Ratio
BayCom Corp	$	283,016	11.44	%	$	213,787	9.60	%
Minimum requirement for “Well Capitalized”		123,748	5.00	%		111,349	5.00	%
Minimum regulatory requirement		98,998	4.00	%		89,079	4.00	%

United Business Bank		327,231	12.90	%		250,624	10.87	%
Minimum requirement for “Well Capitalized”		126,851	5.00	%		115,295	5.00	%
Minimum regulatory requirement		101,481	4.00	%		92,236	4.00	%

Common Equity Tier 1 Ratio
BayCom Corp		283,016	13.84	%		213,787	12.31	%
Minimum requirement for “Well Capitalized”		132,899	6.50	%		112,856	6.50	%
Minimum regulatory requirement		92,007	4.50	%		78,131	4.50	%

United Business Bank		327,231	16.16	%		250,624	14.60	%
Minimum requirement for “Well Capitalized”		131,634	6.50	%		111,543	6.50	%
Minimum regulatory requirement		91,131	4.50	%		77,222	4.50	%

Tier 1 Risk-Based Capital Ratio
BayCom Corp		292,501	14.31	%		223,272	12.86	%
Minimum requirement for “Well Capitalized”		163,568	8.00	%		138,900	8.00	%
Minimum regulatory requirement		122,676	6.00	%		104,175	6.00	%

United Business Bank		327,231	16.16	%		250,624	14.60	%
Minimum requirement for “Well Capitalized”		162,011	8.00	%		137,283	8.00	%
Minimum regulatory requirement		121,509	6.00	%		102,962	6.00	%

Total Risk-Based Capital Ratio
BayCom Corp		375,866	18.38	%		306,287	17.64	%
Minimum requirement for “Well Capitalized”		204,460	10.00	%		173,625	10.00	%
Minimum regulatory requirement		163,568	8.00	%		138,900	8.00	%

United Business Bank		345,596	17.07	%		268,639	15.65	%
Minimum requirement for “Well Capitalized”		202,514	10.00	%		171,604	10.00	%
Minimum regulatory requirement		162,011	8.00	%		137,283	8.00	%

In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At September 30, 2022, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

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 banks to be Well Capitalized under the prompt corrective action regulations. If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2022, the Company would have exceeded all regulatory capital requirements.

For additional information, see “Item 1. Business — Supervision and Regulation — United Business Bank — Capital Requirements” and Note 19, “Regulatory Matters” in the Notes to the Consolidated Financial Statements, included in “Item 8. Financial Statements and Supplementary Data” in the 2021 Annual Report.

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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 2021 Annual Report. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2021 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 September 30, 2022 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 September 30, 2022, 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 September 30, 2022, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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

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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

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the 2021 Annual Report.

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

(a)

Not applicable.

(b)

Not applicable.

(c)Stock Repurchases. Under the Company’s fifth stock repurchase program, which was approved by the Company’s board of directors in December 2021, the Company was authorized to repurchase up to 747,000 shares, or approximately 7.0%, of its then outstanding shares from time to time through open market purchases, privately-negotiated transactions, pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. In October 2022, our Board of Directors approved a sixth stock repurchase program to commence following completion of the fifth stock repurchase program for the repurchase of up to 645,000 shares, or approximately 5.0%, of the Company’s outstanding common stock, over a one year period through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission, price and market conditions, and alternative investment opportunities. The stock repurchase program does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time. The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended September 30, 2022:


				Total number of
	Total		Average	shares purchased	Maximum number of
	number of		price	as part of	shares that September yet be
	shares		paid	publicly announced	purchased under the
	purchased		per share	plans or programs	plans or programs
July 1, 2022 - July 31, 2022	115,501	$	20.08	115,501	364,810
August 1, 2022 - August 31, 2022	132,800		19.32	132,800	232,010
September 1, 2022 - September 30, 2022	158,233		18.60	158,233	73,777
	406,534	$	19.14	406,534

Item 3. Defaults of Senior Securities

Not applicable.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


3.1	Articles of Incorporation of BayCom Corp⁽¹⁾
3.2	Amended and Restated Bylaws of BayCom Corp⁽²⁾
31.1 31.2	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 September 30, 2022 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 the Registration Statement on Form S-1 filed with the SEC on April 11, 2018 (File No. 333-224236).

(2)	Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on June 17, 2020 (File No. 001-38483).

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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: November 10, 2022	By:	/s/ George Guarini
		George Guarini
		Chief Executive Officer
		(Principal Executive Officer)


Date: November 10, 2022	By:	/s/ Keary Colwell
		Keary Colwell
		Senior Executive Vice President and Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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