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Table of Contents

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, 2020

OR

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

For the transition period from            to          

COMMISSION FILE NUMBER 001-38483

BAYCOM CORP

(Exact Name of Registrant as Specified in its Charter)

California

 

37-1849111

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

500 Ygnacio Valley Road, Suite 200, Walnut Creek, California

 

94596

(Address of principal executive offices)

 

(Zip Code)

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

None

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

BCML

The NASDAQ Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

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

As of November 1, 2020, 11,833,115 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

62

ITEM 3. DEFAULTS OF SENIOR SECURITIES

63

ITEM 4. MINE SAFETY DISCLOSURES

63

ITEM 5. OTHER INFORMATION

63

ITEM 6. EXHIBITS

63

SIGNATURES

65

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.

1

Table of Contents

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

2

Table of Contents

BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)

(unaudited)

September 30, 

December 31, 

    

2020

    

2019

ASSETS

 

  

 

  

Cash and due from banks

$

319,835

$

23,476

Federal funds sold

 

 

271,906

Cash and cash equivalents

 

319,835

 

295,382

Interest bearing deposits in banks

 

8,714

 

1,739

Investment securities available-for-sale

 

113,708

 

119,889

Federal Home Loan Bank ("FHLB") stock, at par

 

7,737

 

7,174

Federal Reserve Bank ("FRB") stock, at par

 

7,594

 

6,731

Loans held for sale

 

12,044

 

2,226

Loans, net of allowance for loan losses of $15,800 and $7,400 at September 30, 2020 and December 31, 2019, respectively

 

1,678,295

 

1,450,229

Premises and equipment, net

 

15,623

 

10,529

Other real estate owned ("OREO")

 

296

 

574

Core deposit intangible

 

8,755

 

9,185

Cash surrender value of bank owned life insurance ("BOLI") policies, net

 

20,745

 

20,244

Right-of-use assets ("ROU")

13,061

15,291

Goodwill

 

38,838

 

35,466

Interest receivable and other assets

 

26,486

 

19,518

Total assets

$

2,271,731

$

1,994,177

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Noninterest and interest bearing deposits

$

1,908,646

$

1,701,183

Lease liabilities

 

13,097

 

15,599

Salary continuation plan

 

3,923

 

3,658

Interest payable and other liabilities

 

9,074

 

11,275

Subordinated debt, net

63,340

Other borrowings

10,000

Junior subordinated deferrable interest debentures, net

 

8,302

 

8,242

Total liabilities

 

2,016,382

 

1,739,957

Commitments and contingencies (Note 16)

 

  

 

  

Shareholders' equity

 

  

 

  

Preferred stock - no par value; 10,000,000 shares authorized; no shares issued and outstanding at both September 30, 2020 and December 31, 2019

 

 

Common stock - no par value; 100,000,000 shares authorized; 11,833,115 and 12,444,632 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

174,357

 

184,043

Additional paid in capital

 

287

 

287

Accumulated other comprehensive income, net of tax

 

2,880

 

1,251

Retained earnings

 

77,825

 

68,639

Total shareholders’ equity

 

255,349

 

254,220

Total liabilities and shareholders’ equity

$

2,271,731

$

1,994,177

3

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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, 

    

2020

    

2019

    

2020

    

2019

Interest income:

 

  

 

  

 

  

 

  

 

Loans, including fees

$

20,136

$

17,524

$

62,511

$

46,194

Investment securities and interest bearing deposits in banks

 

875

 

2,662

 

3,400

 

7,990

FHLB dividends

 

95

 

141

 

274

 

325

FRB dividends

 

117

 

63

 

339

 

186

Total interest and dividend income

 

21,223

 

20,390

 

66,524

 

54,695

Interest expense:

 

  

 

  

 

  

 

  

Deposits

 

1,562

 

2,493

 

5,564

 

5,623

Subordinated debt

600

140

818

433

Other borrowings

 

56

 

 

150

 

Total interest expense

 

2,218

 

2,633

 

6,532

 

6,056

Net interest income

 

19,005

 

17,757

 

59,992

 

48,639

Provision for loan losses

 

2,293

 

479

 

8,404

 

1,201

Net interest income after provision for loan losses

 

16,712

 

17,278

 

51,588

 

47,438

Noninterest income:

 

  

 

  

 

  

 

  

Gain on sale of loans

 

176

 

689

 

1,030

 

1,782

Service charges and other fees

 

648

 

605

 

1,963

 

2,000

Loan servicing and other loan fees

 

608

 

443

 

1,849

 

1,367

(Loss) gain on sale of premises

(25)

(25)

187

Income on investment in SBIC fund

 

188

 

131

 

223

 

599

Other income and fees

 

233

 

246

 

668

 

839

Total noninterest income

 

1,828

 

2,114

 

5,708

 

6,774

Noninterest expense:

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

8,482

 

7,440

 

25,442

 

20,600

Occupancy and equipment

 

1,749

 

1,396

 

5,334

 

3,570

Data processing

 

1,642

 

1,036

 

6,716

 

5,643

Other expense

 

2,283

 

1,792

 

7,118

 

6,394

Total noninterest expense

 

14,156

 

11,664

 

44,610

 

36,207

Income before provision for income taxes

 

4,384

 

7,728

 

12,686

 

18,005

Provision for income taxes

 

1,135

 

2,165

 

3,500

 

5,274

Net income

$

3,249

$

5,563

$

9,186

$

12,731

Earnings per common share:

 

  

 

  

 

  

 

  

Basic earnings per common share

$

0.27

$

0.46

$

0.76

$

1.11

Weighted average shares outstanding

 

11,865,058

 

12,061,616

 

12,078,407

 

11,450,108

Diluted earnings per common share

$

0.27

$

0.46

$

0.76

$

1.11

Weighted average shares outstanding

 

11,865,058

 

12,061,616

 

12,078,407

 

11,450,108

4

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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, 

    

2020

    

2019

    

2020

    

2019

Net income

$

3,249

$

5,563

$

9,186

12,731

Other comprehensive income:

 

  

 

  

 

  

 

  

Change in unrealized (loss) gain on available-for-sale securities

 

(13)

 

446

 

2,288

 

2,391

Deferred tax benefit (expense)

 

4

 

(128)

 

(659)

 

(684)

Other comprehensive (loss) income, net of tax

 

(9)

 

318

 

1,629

 

1,707

Total comprehensive income

$

3,240

$

5,881

$

10,815

$

14,438

5

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except for share data)

(unaudited)

    

    

    

    

Accumulated

    

    

Common

Additional

Other

Total

Number of

Stock

Paid in

Comprehensive

Retained

Shareholders’

Shares

Amount

Capital

Income/(Loss)

Earnings

Equity

Balance, December 31, 2018

 

10,869,275

$

149,248

$

287

$

(103)

$

51,321

$

200,753

Net income

 

 

 

 

 

4,941

 

4,941

Other comprehensive income, net

 

 

 

 

597

 

  

 

597

Restricted stock granted

22,289

 

  

 

 

 

  

 

Stock based compensation

 

 

120

 

 

 

  

 

120

Balance, March 31, 2019

 

10,891,564

$

149,368

$

287

$

494

$

56,262

$

206,411

Net income

 

 

 

 

 

2,227

 

2,227

Other comprehensive income, net

 

 

 

 

792

 

  

 

792

Restricted stock granted

45,696

 

  

 

 

 

  

 

Stock based compensation

 

 

320

 

 

 

  

 

320

Stock issued in acquisition

 

1,115,006

 

24,887

 

 

 

  

 

24,887

Balance, June 30, 2019

 

12,052,266

174,575

287

1,286

58,489

234,637

Net income

 

 

 

 

 

5,563

 

5,563

Other comprehensive income, net

 

 

 

 

318

 

  

 

318

Restricted stock granted

9,350

 

  

 

 

 

  

 

Stock based compensation

 

 

367

 

 

 

  

 

367

Balance, September 30, 2019

12,061,616

174,942

287

1,604

64,052

240,885

Net income

 

 

 

 

 

4,587

 

4,587

Other comprehensive loss, net

 

 

 

 

(353)

 

  

 

(353)

Stock based compensation

 

 

347

 

 

 

  

 

347

Issuance of shares

876,803

19,711

19,711

Repurchase of shares

(493,787)

(10,957)

(10,957)

Balance, December 31, 2019

12,444,632

184,043

287

1,251

68,639

254,220

Net income

 

2,818

2,818

Other comprehensive income, net

 

810

810

Restricted stock granted

 

15,173

Restricted stock forfeited

(1,432)

Stock based compensation

309

309

Repurchase of shares

(228,525)

(4,596)

(4,596)

Balance, March 31, 2020

12,229,848

179,756

287

2,061

71,457

253,561

Net income

 

3,119

3,119

Other comprehensive income, net

 

828

828

Restricted stock granted

 

92,294

Stock based compensation

363

363

Repurchase of shares

(451,978)

(5,463)

(5,463)

Balance, June 30, 2020

 

11,870,164

$

174,656

$

287

$

2,889

$

74,576

$

252,408

Net income

 

3,249

3,249

Other comprehensive loss, net

 

(9)

(9)

Restricted stock granted

 

21,599

Stock based compensation

385

385

Repurchase of shares

(58,648)

(684)

(684)

Balance, September 30, 2020

 

11,833,115

$

174,357

$

287

$

2,880

$

77,825

$

255,349

6

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Nine months ended

September 30, 

    

2020

    

2019

Cash flows from operating activities:

 

  

 

  

 

Net income

$

9,186

$

12,731

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Increase in deferred tax asset

 

(1,888)

 

(1,148)

Accretion on acquired loans

 

(4,339)

 

(2,683)

Gain on sale of loans

 

(1,030)

 

(1,782)

Proceeds from sale of loans

 

14,993

 

24,317

Loans originated for sale

 

(20,036)

 

(33,551)

Loss (gain) on sale of premises

25

(187)

Gain on sale of OREO

 

(28)

 

(112)

Accretion on junior subordinated debentures

 

60

 

60

Increase in cash surrender value of life insurance policies securities

 

(501)

 

(484)

Provision for loan losses

 

8,404

 

1,201

Amortization/accretion of premium/discount on investment securities, net

 

543

 

340

Depreciation and amortization

 

1,198

 

859

Core deposit intangible amortization

 

1,379

 

1,177

Stock based compensation expense

 

1,057

 

807

Increase in deferred loan origination fees, net

 

4,124

 

212

Increase in interest receivable and other assets

 

(1,854)

 

(6,889)

Increase in salary continuation plan, net

 

265

 

213

(Decrease) increase in interest payable and other liabilities

 

(5,401)

 

10,300

Net cash provided by operating activities

 

6,157

 

5,381

Cash flows from investing activities:

 

  

 

  

Proceeds from maturities of interest bearing deposits in banks

 

9,065

 

1,497

Purchase of investment securities

 

(9,920)

 

(13,260)

Proceeds from the maturity and repayment of investment securities

 

22,228

 

21,173

Purchase of Federal Home Loan Bank stock

 

(398)

 

(477)

Purchase of Federal Reserve Bank stock

 

(863)

 

(88)

(Increase) decrease in loans, net

 

(141,802)

 

29,362

Proceeds from sale of premises

431

4,961

Proceeds from sale of OREO

 

518

 

354

Purchase of equipment and leasehold improvements

 

(2,869)

 

(704)

Net cash paid out for acquisition

 

(8,432)

 

(9,342)

Net cash (used in) provided by investing activities

 

(132,042)

 

33,476

7

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BAYCOM CORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(In thousands)

(unaudited)

Nine months ended

September 30, 

    

2020

    

2019

Cash flows from financing activities:

 

  

 

  

Increase (decrease) in noninterest and interest bearing deposits, net

 

175,055

 

(10,410)

Decrease in time deposits, net

 

(85,739)

 

(14,950)

Repurchase of common stock

 

(10,743)

 

Repayment of junior subordinated debentures

(1,575)

Proceeds from Issuance of subordinated debt, net

 

63,340

 

Increase in other borrowings

 

116,000

 

Repayment of other borrowings

 

(106,000)

 

Net cash provided by (used in) financing activities

 

150,338

 

(25,360)

Increase in cash and cash equivalents

 

24,453

 

13,497

Cash and cash equivalents at beginning of period

 

295,382

 

323,581

Cash and cash equivalents at end of period

$

319,835

$

337,078

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the year for:

 

  

 

  

Interest expense

$

7,137

$

4,745

Income tax, net of refunds

5,940

 

4,866

Non-cash investing and financing activities:

 

  

 

  

Change in unrealized gain on available-for-sale securities, net of tax

$

1,629

$

1,707

Transfer of loans to other real estate owned

 

212

 

Recognition of ROU assets

760

11,411

Recognition of lease liability

707

11,727

Acquisition:

 

  

 

  

Assets acquired, net of cash received

$

109,429

$

289,546

Liabilities assumed

 

120,409

 

267,172

Cash consideration

 

13,886

 

37,814

Common stock issued

 

 

24,887

Goodwill

 

3,372

 

11,855

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

NOTE 1 – BASIS OF PRESENTATION

BayCom Corp (the “Company”) is a bank holding company headquartered in Walnut Creek, California. United Business Bank (the “Bank”), the 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 16 years of operation, the Bank has grown to 34 full-service banking branches. The main headquarters and a branch office are located in Walnut Creek, California and additional branch offices are located in Oakland, Castro Valley, Mountain View, Napa, Stockton (2), Pleasanton, Livermore, San Jose, Long Beach, Sacramento, San Francisco, Buena Park, Los Angeles, and Garden Grove, California, and Seattle, Washington (2), New Mexico (5) and Colorado (11). The condensed consolidated financial statements include the accounts of the Company and the Bank.

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto for the year ended December 31, 2019. Results of operations for interim periods are not necessarily indicative of results for the full year. Certain prior year information has been reclassified to conform to the current year presentation. None of the reclassifications impacted consolidated net income, earnings per share or shareholders’ equity.

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

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

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

On February 4, 2020, the Company completed its acquisition of Grand Mountain Bancshares, Inc. (“GMB”) and its wholly owned subsidiary Grand Mountain Bank, headquartered in Granby, Colorado (“GMB Merger”). See “Note 3 – Acquisitions” for additional information on the Uniti Merger, TIG Merger and GMB Merger.

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

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

9

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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)

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

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

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

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)

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

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

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

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

In October 2020, the FASB issued ASU 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

11

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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 3 – ACQUISITIONS

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

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

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

12

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

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

    

GMB

    

TIG

    

UFC

    

Acquisition

Acquisition

Acquisition

Date

Date

Date

February 4, 2020

October 21, 2019

May 24, 2019

Fair value of assets:

 

  

 

  

 

  

 

Cash and due from banks

$

5,494

$

6,146

$

6,392

Federal funds sold

 

 

55,955

 

22,080

Total cash and cash equivalents

 

5,494

 

62,101

 

28,472

Interest bearing deposits in banks

 

16,040

 

 

Investment securities available-for-sale

4,369

26,382

5,096

FHLB stock, at par

 

165

 

241

 

1,535

FRB stock, at par

 

 

792

 

Loans, net

 

98,410

 

137,183

 

276,719

Premises and equipment, net

3,879

3,480

463

OREO

 

 

42

 

76

Core deposit intangible

 

949

 

3,038

 

566

Deferred tax assets, net

 

728

 

308

 

234

Servicing asset

 

 

 

1,824

Interest receivable and other assets

929

2,079

3,033

Total assets acquired

 

130,923

 

235,646

 

318,018

Liabilities:

 

  

 

  

 

  

Deposits

 

  

 

  

 

  

Noninterest bearing

 

30,937

 

77,157

 

143,082

Interest bearing

 

87,210

 

125,597

 

122,704

Total Deposits

 

118,147

 

202,754

 

265,786

Interest payable and other liabilities

687

2,014

1,386

Junior subordinated debentures, net

1,575

Total liabilities assumed

120,409

204,768

267,172

Stock issued

 

 

19,711

 

24,887

Cash consideration

 

13,886

 

20,184

 

37,814

Goodwill

$

3,372

$

9,017

$

11,855

13

Table of Contents

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 goodwill at the acquisition date:

    

GMB

    

TIG

    

UFC

Acquisition

Acquisition

Acquisition

Date

Date

Date

February 4, 2020

October 21, 2019

May 24, 2019

Book value of net assets acquired

$

10,348

$

29,164

$

47,445

Fair value adjustments:

 

  

 

  

 

  

Investments available-for-sale

 

(10)

 

(627)

 

Loans, net

 

484

 

382

 

4,617

Premises and equipment, net

 

(1,000)

 

180

 

Write-down on OREO

 

 

(18)

 

(32)

Core deposit intangible

 

949

 

3,038

 

566

Tax assets

 

(139)

 

(774)

 

(695)

Time deposits

 

(25)

 

(308)

 

(250)

Write-down on servicing assets

 

 

 

(805)

Junior subordinated debentures, net

(98)

Write-down other (assets) liabilities

5

(159)

Total purchase accounting adjustments

 

166

 

1,714

 

3,401

Fair value of net assets acquired

 

10,514

 

30,878

 

50,846

Price paid:

 

  

 

  

 

  

Common stock issued

 

 

19,711

 

24,887

Cash paid

 

13,886

 

20,184

 

37,814

Total price paid

 

13,886

 

39,895

 

62,701

Goodwill

$

3,372

$

9,017

$

11,855

Pro Forma Results of Operations

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

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

Three months ended September 30, 

Nine months ended September 30, 

2020

    

2019

    

2020

    

2019

Net interest income

$

19,005

$

21,328

$

60,394

$

65,778

Net income

 

3,249

 

6,238

 

8,389

 

14,394

Basic earnings per share

$

0.27

$

0.48

$

0.69

$

1.11

Diluted earnings per share

0.27

0.48

0.69

1.11

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.

14

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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)

Acquisition expenses

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

    

Nine months ended September 30, 

2020

2019

    

GMB Merger

UFC Merger

Professional fees

    

$

369

    

$

535

Data processing

 

2,000

 

2,657

Severance expense

 

266

 

578

Other expenses

 

383

 

365

Total

$

3,018

$

4,135

During the three months ended September 30, 2020 and 2019, no acquisition-related expenses were incurred.

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, 2020

  

 

  

 

  

 

  

U.S. Treasuries

$

$

$

$

U.S. Government Agencies

 

6,029

 

53

 

(5)

 

6,077

Municipal securities

 

16,954

 

685

 

 

17,639

Mortgage-backed securities

 

60,364

 

2,247

 

(15)

 

62,596

Collateralized mortgage obligations

 

3,935

 

1,150

 

(11)

 

5,074

SBA securities

 

7,959

 

60

 

(50)

 

7,969

Corporate bonds

 

14,422

 

65

 

(134)

 

14,353

Total

$

109,663

$

4,260

$

(215)

$

113,708

    

    

Gross

    

Gross

    

Amortized

unrealized

unrealized

Estimated

cost

gains

losses

fair value

December 31, 2019

  

 

  

 

  

 

  

U.S. Treasuries

$

999

$

$

$

999

U.S. Government Agencies

 

10,033

 

64

 

(7)

 

10,090

Municipal securities

 

17,888

 

408

 

(5)

 

18,291

Mortgage-backed securities

 

42,931

 

860

 

(48)

 

43,743

Collateralized mortgage obligations

 

28,197

 

476

 

(68)

 

28,605

SBA securities

 

9,550

 

2

 

(66)

 

9,486

Corporate bonds

 

8,534

 

141

 

 

8,675

Total

$

118,132

$

1,951

$

(194)

$

119,889

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

15

Table of Contents

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, 2020

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasuries

$

$

$

$

$

$

U.S. Government Agencies

 

 

 

1,511

 

(5)

 

1,511

 

(5)

Municipal securities

 

 

 

 

 

 

Mortgage-backed securities

 

208

 

(3)

 

506

 

(12)

 

714

 

(15)

Collateralized mortgage obligations

 

2,308

 

(5)

 

832

 

(6)

 

3,140

 

(11)

SBA securities

 

1,036

 

(2)

 

3,737

 

(48)

 

4,773

 

(50)

Corporate bonds

 

6,372

 

(134)

 

 

 

6,372

 

(134)

Total

$

9,924

$

(144)

$

6,586

$

(71)

$

16,510

$

(215)

Less than 12 months

12 months or more

Total

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

fair value

loss

fair value

loss

fair value

loss

December 31, 2019

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasuries

$

$

$

$

$

$

U.S. Government Agencies

 

1,497

 

(1)

 

1,514

 

(6)

 

3,011

 

(7)

Municipal securities

 

3,147

 

(5)

 

 

 

3,147

 

(5)

Mortgage-backed securities

 

7,772

 

(47)

 

81

 

(1)

 

7,853

 

(48)

Collateralized mortgage obligations

 

4,155

 

(56)

 

883

 

(12)

 

5,038

 

(68)

SBA securities

 

6,937

 

(24)

 

1,530

 

(42)

 

8,467

 

(66)

Corporate bonds

 

 

 

 

 

 

Total

$

23,508

$

(133)

$

4,008

$

(61)

$

27,516

$

(194)

At September 30, 2020, the Company held 288 investment securities, of which 21 were in an unrealized loss position for more than twelve months and 22 were in an unrealized loss position for less than twelve months. These temporary unrealized losses relate principally to current interest rates for similar types of securities. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment. Additional deterioration in market and economic conditions related to the COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in other-than-temporary impairment charges.

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

September 30, 2020

December 31, 2019

    

Amortized

    

Estimated

    

Amortized

    

Estimated

cost

fair value

cost

fair value

Available-for-sale

 

  

 

  

 

  

 

  

Due in one year or less

$

10,244

$

10,351

$

10,737

$

10,781

Due after one through five years

 

19,866

 

20,839

 

24,078

 

24,560

Due after five years through ten years

 

27,207

 

27,847

 

22,914

 

23,366

Due after ten years

 

52,346

 

54,671

 

60,403

 

61,182

Total

$

109,663

$

113,708

$

118,132

$

119,889

16

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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, 

2020

2019

Commercial and industrial

$

326,329

$

169,291

Construction and land

 

41,082

 

36,321

Commercial real estate

 

1,142,735

 

1,093,142

Residential

 

182,434

 

156,764

Consumer

 

6,090

 

2,562

Total loans

 

1,698,670

 

1,458,080

Net deferred loan fees

 

(4,575)

 

(451)

Allowance for loan losses

 

(15,800)

 

(7,400)

Net loans

$

1,678,295

$

1,450,229

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

    

Commercial

    

Construction

    

Commercial

    

    

    

and industrial

and land

real estate

Residential

Consumer

Total

September 30, 2020

  

 

  

 

  

 

  

 

  

 

  

Recorded investment in impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

With no specific allowance recorded

$

870

$

2,383

$

2,511

$

1,545

$

$

7,309

With a specific allowance recorded

 

526

 

80

 

266

 

156

 

 

1,028

Total recorded investment in impaired loans

$

1,396

$

2,463

$

2,777

$

1,701

$

$

8,337

Specific allowance on impaired loans

 

475

 

25

 

71

 

20

 

 

591

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment in impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

With no specific allowance recorded

$

436

$

2,737

$

2,505

$

1,488

$

1

$

7,167

With a specific allowance recorded

 

182

 

 

270

 

 

12

 

464

Total recorded investment in impaired loans

$

618

$

2,737

$

2,775

$

1,488

$

13

$

7,631

Specific allowance on impaired loans

 

95

 

 

64

 

 

12

 

171

Three months ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Average recorded investment in impaired loans

$

1,136

$

2,692

$

2,814

$

1,710

$

$

8,352

Interest recognized

 

 

 

7

 

 

 

7

Nine months ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Average recorded investment in impaired loans

 

769

 

2,763

 

3,304

 

1,689

 

3

 

8,528

Interest recognized

 

4

 

151

 

37

 

 

 

192

Three months ended September 30, 2019

 

  

 

  

 

  

 

  

 

  

 

  

Average recorded investment in impaired loans

 

2,283

 

1,369

 

1,634

 

124

 

 

5,410

Interest recognized

 

 

 

 

 

 

Nine months ended September 30, 2019

 

  

 

  

 

  

 

  

 

  

 

  

Average recorded investment in impaired loans

 

3,330

 

782

 

1,779

 

494

 

 

6,385

Interest recognized

 

34

 

 

20

 

1

 

 

55

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans on accrual are comprised solely of 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.

17

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR loan. TDR loans are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt. At September 30, 2020, TDR loans totaled $3.7 million, compared to $4.4 million at December 31, 2019. At September 30, 2020 and at December 31, 2019, $775,000 and $789,000, respectively, of TDR loans were accruing and performing in accordance with their modified terms. There are no commitments to lend additional amounts to borrowers with outstanding loans that are classified as TDR loans at September 30, 2020. All TDR loans are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses.

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

    

Number of

    

Rate

    

Term

    

Interest only

    

Rate & term

    

loans

modification

modification

modification

modification

Total

Three months ended September 30, 2020

Commercial and industrial

 

$

$

$

$

$

Construction and land

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

Residential

 

1

 

 

156

 

 

 

156

Consumer

 

 

 

 

 

 

Total

 

1

$

$

156

$

$

$

156

    

Number of

    

Rate

    

Term

    

Interest only

    

Rate & term

    

loans

modification

modification

modification

modification

Total

Nine months ended September 30, 2020

Commercial and industrial

 

1

$

$

24

$

$

$

24

Construction and land

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

Residential

 

1

 

 

156

 

 

 

156

Consumer

 

 

 

 

 

 

Total

 

2

$

$

180

$

$

$

180

    

Number of

    

Rate

    

Term

    

Interest only

    

Rate & term

    

loans

modification

modification

modification

modification

Total

Three months ended September 30, 2019

Commercial and industrial

 

$

$

$

$

$

Construction and land

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Total

 

$

$

$

$

$

    

Number of

    

Rate

    

Term

    

Interest only

    

Rate & term

    

loans

modification

modification

modification

modification

Total

Nine months ended September 30, 2019

Commercial and industrial

 

2

$

$

176

$

$

321

$

497

Construction and land

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Total

 

2

$

$

176

$

$

321

$

497

18

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

For the three and nine months ended September 30, 2020 and 2019, the Company recorded no charge-offs related to TDR loans. During the three and nine months ended September 30, 2020, there were no TDR loans for which there was a payment default within the first 12 months of the modification.

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

Risk Rating System

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

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

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

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

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

Credit that is currently protected but is potentially a weak asset;
Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and
Adverse financial trends.

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

19

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

Some characteristics of Substandard loans are:

Inability to service debt from ordinary and recurring cash flow;
Chronic delinquency;
Reliance upon alternative sources of repayment;
Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt;
Repayment dependent upon the liquidation of collateral;
Inability to perform as agreed, but adequately protected by collateral;
Necessity to renegotiate payments to a non-standard level to ensure performance; and
The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

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

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

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

    

    

Special

    

    

    

Pass

mention

Substandard

Doubtful

Total

September 30, 2020

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

318,497

$

5,564

$

2,268

$

$

326,329

Construction and land

 

38,303

 

315

 

2,464

 

 

41,082

Commercial real estate

 

1,124,741

 

12,653

 

5,341

 

 

1,142,735

Residential

 

179,418

 

852

 

2,164

 

 

182,434

Consumer

 

6,086

 

 

4

 

 

6,090

Total

$

1,667,045

$

19,384

$

12,241

$

$

1,698,670

    

    

Special

    

    

    

Pass

mention

Substandard

Doubtful

Total

December 31, 2019

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

166,613

$

1,166

$

1,512

$

$

169,291

Construction and land

 

32,879

 

93

 

3,349

 

 

36,321

Commercial real estate

 

1,071,771

 

16,021

 

5,350

 

 

1,093,142

Residential

 

153,484

 

1,215

 

2,065

 

 

156,764

Consumer

 

2,541

 

 

21

 

 

2,562

Total

$

1,427,288

$

18,495

$

12,297

$

$

1,458,080

20

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

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

    

    

    

    

    

    

    

    

Recorded

    

    

    

90 Days

    

    

    

    

    

investment >

30–59 Days

60–89 Days

or more

Total

Total loans

90 days and

past due

past due

past due

past due

Current

PCI loans

receivable

accruing

September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

80

$

601

$

231

$

912

$

324,743

$

674

$

326,329

$

Construction and land

 

21

 

 

2,463

 

2,484

 

38,408

 

190

 

41,082

 

Commercial real estate

 

91

 

346

 

1,524

 

1,961

 

1,128,134

 

12,640

 

1,142,735

 

Residential

 

3

 

 

 

3

 

179,419

 

3,012

 

182,434

 

Consumer

 

148

 

473

 

990

 

1,611

 

4,479

 

 

6,090

 

Total

$

343

$

1,420

$

5,208

$

6,971

$

1,675,183

$

16,516

$

1,698,670

$

    

    

    

    

    

    

    

    

Recorded

    

    

    

90 Days

    

    

    

    

    

investment >

30–59 Days

60–89 Days

or more

Total

Total loans

90 days and

past due

past due

past due

past due

Current

PCI loans

receivable

accruing

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

923

$

1,480

$

207

$

2,610

$

166,137

$

544

$

169,291

$

26

Construction and land

 

325

 

88

 

2,961

 

3,374

 

32,724

 

223

 

36,321

 

224

Commercial real estate

 

4,668

 

4,698

 

1,460

 

10,826

 

1,068,211

 

14,105

 

1,093,142

 

Residential

 

531

 

122

 

1,392

 

2,045

 

152,261

 

2,458

 

156,764

 

Consumer

 

14

 

 

13

 

27

 

2,533

 

2

 

2,562

 

Total

$

6,461

$

6,388

$

6,033

$

18,882

$

1,421,866

$

17,332

$

1,458,080

$

250

At September 30, 2020, there were no loans greater than 90 days past due and still accruing interest, compared to $250,000 at December 31, 2019. The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $872,000 at both September 30, 2020 and December 31, 2019. Interest foregone on nonaccrual loans was approximately $117,500 and $338,500 for the three and nine months ended September 30, 2020 compared to $66,500 and $155,000 for the three and nine months ended September 30, 2019, respectively. At September 30, 2020, there were three loans totaling $546,000 in the process of foreclosure compared to none at December 31, 2019.

Purchase Credit Impaired Loans

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

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

September 30, 2020

December 31, 2019

    

Unpaid

    

    

Unpaid

    

principal

Carrying

principal

Carrying

balance

value

balance

value

Commercial and industrial

$

1,061

$

674

$

1,225

$

544

Construction and land

 

271

 

190

 

338

 

223

Commercial real estate

 

14,481

 

12,640

 

15,930

 

14,105

Residential

 

3,754

 

3,012

 

3,238

 

2,458

Consumer

 

 

 

8

 

2

Total

$

19,567

$

16,516

$

20,739

$

17,332

21

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

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

Three months ended

Nine months ended

    

September 30, 

    

September 30, 

2020

2019

2020

2019

Balance at beginning of period

$

571

$

557

$

554

$

256

Additions

 

25

 

190

 

247

 

540

Removals

 

 

(346)

 

(51)

 

(349)

Accretion

 

(62)

 

(15)

 

(216)

 

(61)

Balance at end of period

$

534

$

386

$

534

$

386

NOTE 6 – ALLOWANCE FOR LOAN LOSSES

The following table provides additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the three and nine months ended September 30, 2020:

Commercial

Construction

Commercial

    

and industrial

    

and land

    

real estate

    

Residential

    

Consumer

    

Unallocated

    

Total

Three months ended September 30, 2020

  

  

  

  

  

  

  

Allowance for loan losses

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

3,330

$

336

$

7,892

$

1,367

$

2

$

573

$

13,500

Charge-offs

 

 

 

 

 

 

 

Recoveries

 

3

 

 

4

 

 

 

 

7

Provision for loan losses

  

495

  

249

  

1,236

  

192

  

2

  

119

 

2,293

Ending balance

$

3,828

$

585

$

9,132

$

1,559

$

4

$

692

$

15,800

Nine months ended September 30, 2020

  

Allowance for loan losses

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

1,762

$

164

$

4,926

$

421

$

14

$

113

$

7,400

Charge-offs

 

 

 

 

(1)

 

(17)

 

 

(18)

Recoveries

 

10

 

 

4

 

 

 

 

14

Provision for loan losses

 

2,056

421

4,202

1,139

7

579

 

8,404

Ending balance

$

3,828

$

585

$

9,132

$

1,559

$

4

$

692

$

15,800

September 30, 2020

Allowance for loan losses related to:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans individually evaluated for impairment

$

475

$

25

$

71

$

20

$

$

$

591

Loans collectively evaluated for impairment

 

3,353

 

560

 

9,061

 

1,539

 

4

 

692

 

15,209

PCI loans

 

 

 

 

 

 

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans receivable:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

1,396

$

2,463

$

2,777

$

1,701

$

$

$

8,337

Collectively evaluated for impairment

 

324,259

 

38,429

 

1,127,318

 

177,721

 

6,090

 

 

1,673,817

PCI loans

 

674

 

190

 

12,640

 

3,012

 

 

 

16,516

Total loans

$

326,329

$

41,082

$

1,142,735

$

182,434

$

6,090

$

$

1,698,670

22

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

The following table provides additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the three and nine months ended September 30, 2019:

Commercial

Construction

Commercial

    

and industrial

    

and land

    

real estate

    

Residential

    

Consumer

    

Unallocated

    

Total

Three months ended September 30, 2019

  

  

  

  

  

  

  

Allowance for loan losses

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

1,250

$

266

$

3,853

$

225

$

2

$

284

$

5,880

Charge-offs

 

 

 

 

(1)

 

 

 

(1)

Recoveries

 

2

 

 

 

 

 

 

2

Provision (reclassification) for loan losses

 

46

 

(59)

 

147

 

137

 

115

 

93

 

479

Ending balance

$

1,298

$

207

$

4,000

$

361

$

117

$

377

$

6,360

Nine months ended September 30, 2019

  

  

  

  

  

  

  

Allowance for loan losses

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

1,017

$

327

$

3,214

$

215

$

3

$

364

$

5,140

Charge-offs

 

 

 

(17)

 

(1)

 

(4)

 

 

(22)

Recoveries

 

41

 

 

 

 

 

 

41

Provision (reclassification) for loan losses

 

240

 

(120)

 

803

 

147

 

118

 

13

 

1,201

Ending balance

$

1,298

$

207

$

4,000

$

361

$

117

$

377

$

6,360

September 30, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for loan losses related to:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans individually evaluated for impairment

$

28

$

$

$

$

$

$

28

Loans collectively evaluated for impairment

 

1,270

 

207

 

4,000

 

361

 

117

 

377

 

6,332

PCI loans

 

 

 

 

 

 

 

Loans receivable:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

2,317

$

2,737

$

2,192

$

119

$

$

$

7,365

Collectively evaluated for impairment

 

157,335

 

21,694

 

898,100

 

131,706

 

1,375

 

 

1,210,210

PCI loans

 

521

 

192

 

12,330

 

1,641

 

 

 

14,684

Total loans

$

160,173

$

24,623

$

912,622

$

133,466

$

1,375

$

$

1,232,259

NOTE 7 – PREMISES AND EQUIPMENT

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

    

September 30, 

    

December 31, 

2020

2019

Premises owned

$

11,024

$

7,906

Leasehold improvements

 

3,089

 

2,362

Furniture, fixtures and equipment

 

7,500

 

5,053

Less accumulated depreciation and amortization

 

(5,990)

 

(4,792)

Total premises and equipment, net

$

15,623

$

10,529

Depreciation and amortization included in occupancy and equipment expense totaled $445,000 and $1.3 million for the three and nine months ended September 30, 2020 compared to $297,000 and $859,000, for the three and nine months ended September 30, 2019, respectively.

23

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

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

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

For the remainder of 2020

$

3,224

2021

 

2,636

2022

 

2,239

2023

 

1,489

2024

1,106

Thereafter

 

3,560

Total lease payments

14,254

Less: interest

(1,157)

Present value of lease liabilities

$

13,097

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

    

September 30, 2020

 

Weighted-average remaining lease term

 

6.15

years

Weighted-average discount rate

 

2.72

%

Rental expense included in occupancy and equipment on the consolidated statements of income totaled $829,000 and $2.5 million for the three and nine months ended September 30, 2020 compared to $824,000 and $2.1 million for the three and nine months ended September 30, 2019, respectively.

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

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

24

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

As of September 30, 2020 and December 31, 2019, goodwill totaled $38.8 million and $35.5 million, respectively. At September 30, 2020 and December 31, 2019, core deposit intangible from business combinations totaled $8.8 million and $9.2 million, respectively. A significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant decline in the price of our common stock could necessitate taking charges in the future related to the impairment of goodwill or core deposit intangibles. The core deposit intangible assets represent the value ascribed to the long-term deposit relationships acquired and is being amortized over an estimated average useful life of seven to ten years. At September 30, 2020, the weighted average remaining useful life was 3.7 years.

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

    

September 30, 

    

December 31, 

2020

2019

Balance at beginning of period

$

35,466

$

14,594

Acquired goodwill

 

3,372

 

20,872

Impairment

 

 

Balance at end of period

$

38,838

$

35,466

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

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

    

September 30, 

    

December 31, 

2020

2019

Balance at beginning of period

$

9,185

$

7,205

Additions

 

949

 

3,604

Less amortization

 

(1,379)

 

(1,624)

Balance at end of period

$

8,755

$

9,185

Amortization expense in other noninterest expense on the condensed consolidated statements of income totaled $453,000 and $1.4 million for the three and nine months ended September 30, 2020 compared to $396,000 and $1.2 million for the three and nine months ended September 30, 2019, respectively.

25

Table of Contents

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 estimated amortization expense with respect to core deposit intangibles as of September 30, 2020 for the periods indicated:

For the remainder of 2020

$

453

2021

 

1,813

2022

 

1,813

2023

 

1,034

2024

970

Thereafter

 

2,672

Total

$

8,755

NOTE 9 – 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, 

2020

2019

Tax assets, net

$

7,423

$

5,922

Accrued interest receivable

 

8,996

 

5,495

Investment in SBIC Funds

 

2,846

 

2,272

Prepaid assets

 

1,638

 

1,160

Servicing assets

 

1,747

 

2,097

Low income housing partnerships, net

 

2,167

 

1,171

Investment in statutory trusts

 

479

 

475

All other

 

1,190

 

926

Total

$

26,486

$

19,518

NOTE 10 – DEPOSITS

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

    

September 30, 

    

December 31, 

2020

2019

Demand deposits

$

713,328

$

572,341

NOW accounts and savings

 

393,203

 

314,125

Money market

 

551,816

 

489,206

Time deposits under $250,000

 

139,778

 

189,063

Time deposits over $250,000

 

110,521

 

136,448

Total

$

1,908,646

$

1,701,183

At September 30, 2020 and December 31, 2019, the weighted average stated rate on the Company’s interest bearing deposits were 0.52% and 0.86%, respectively.

26

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

NOTE 11 - BORROWINGS

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 net proceeds to the Company from the sale of the Notes were approximately $63.3 million, after deducting underwriting discounts and offering expenses. The Company used $6.0 million of the net proceeds of the offering to repay other borrowings with the remainder to be used for general corporate purposes, which may include providing capital to support its growth organically or through strategic acquisitions, repayment or redemption of outstanding indebtedness, the payment of dividends, financing investments and capital expenditures, repurchasing shares of the Company’s common stock and for investments in United Business Bank, as regulatory capital. The Company has not historically paid dividends.

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

The Bank has a Federal Funds line with four corresponding banks. Cumulative available commitments totaled $75.0 million and $55.0 million at September 30, 2020 and December 31, 2019, respectively. There were no amounts outstanding under these facilities at September 30, 2020 and December 31, 2019.

NOTE 12 - 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, 

2020

2019

Accrued expenses

$

6,253

$

6,241

CDARs deferred fees

 

129

 

320

Accounts payable

 

724

 

2,175

Reserve for unfunded commitments

 

415

 

415

Accrued interest payable

 

710

 

1,607

All other

 

843

 

517

Total

$

9,074

$

11,275

27

Table of Contents

BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

NOTE 13 – 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, 

2020

2019

2020

2019

Professional fees

$

531

$

379

$

2,055

$

1,643

Core deposit premium amortization

 

453

 

396

 

1,379

 

1,177

Marketing and promotions

 

200

 

271

 

639

 

877

Stationery and supplies

 

167

 

138

 

440

 

436

Insurance (including FDIC premiums)

 

212

 

30

 

377

 

345

Communication and postage

 

176

 

142

 

494

 

349

Loan default related expense

 

97

 

38

 

309

 

188

Director fees and stock compensation

 

81

 

175

 

239

 

671

Bank service charges

 

49

 

9

 

125

 

40

Courier expense

 

176

 

128

 

490

 

359

Other

 

141

 

86

 

571

 

309

Total

$

2,283

$

1,792

$

7,118

$

6,394

NOTE 14 – 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, 2020, a total of 151,247 shares are available for future issuance under the 2017 Plan.

2014 Omnibus Equity Incentive Plan

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

The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date. For the three and nine months ended September 30, 2020, total compensation expense for these plans was $385,000 and $1.1 million, respectively, compared to $367,000 and $807,000 for the three and nine months ended September 30, 2019, 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)

As of September 30, 2020, there was $2.6 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately two years.

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

2020

2019

    

    

Weighted-average

    

    

Weighted-average

 

grant date

grant date

 

Shares

fair value

Shares

fair value

 

Non-vested at January 1,

 

142,103

$

20.76

131,000

$

19.18

Granted

 

15,173

 

22.60

22,289

 

22.38

Vested

 

(23,435)

 

19.62

(19,253)

 

19.51

Forfeited

(1,432)

18.93

Non-Vested, at March 31, 

 

132,409

$

22.10

134,036

$

20.76

Granted

 

92,294

 

12.18

45,696

 

24.60

Vested

 

(32,264)

 

23.30

(36,582)

 

19.55

Non-Vested, at June 30, 

 

192,439

$

17.14

143,150

$

21.63

Granted

 

21,599

 

10.28

9,350

 

21.40

Vested

 

(9,523)

 

21.34

(9,723)

 

10.96

Non-Vested, at September 30, 

 

204,515

$

16.22

142,777

$

22.60

NOTE 15 – FAIR VALUE MEASUREMENT

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

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

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

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

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

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

    

Total

    

Level 1

    

Level 2

    

Level 3

September 30, 2020

U.S. Treasuries

$

$

$

$

U.S. Government Agencies

 

6,077

 

 

6,077

 

Municipal securities

 

17,639

 

 

17,639

 

Mortgage-backed securities

 

62,596

 

 

62,596

 

Collateralized mortgage obligations

 

5,074

 

 

5,074

 

SBA securities

 

7,969

 

 

7,969

 

Corporate bonds

 

14,353

 

 

14,353

 

Total

$

113,708

$

$

113,708

$

    

Total

    

Level 1

    

Level 2

    

Level 3

December 31, 2019

 

  

 

  

 

  

 

  

U.S. Treasuries

$

999

$

999

$

$

U.S. Government Agencies

 

10,090

 

 

10,090

 

Municipal securities

 

18,291

 

 

18,291

 

Mortgage-backed securities

 

43,743

 

 

43,743

 

Collateralized mortgage obligations

 

28,605

 

 

28,605

 

SBA securities

 

9,486

 

 

9,486

 

Corporate bonds

 

8,675

 

 

8,675

 

Total

$

119,889

$

999

$

118,890

$

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

    

Total

    

Level 1

    

Level 2

    

Level 3

September 30, 2020

 

  

 

  

 

  

 

  

Performing impaired loans

$

775

$

$

$

775

Nonperforming impaired loans

 

7,562

 

 

 

7,562

OREO

 

296

 

 

 

296

Total

$

8,633

$

$

$

8,633

    

Total

    

Level 1

    

Level 2

    

Level 3

December 31, 2019

 

  

 

  

 

  

 

  

Performing impaired loans

$

789

$

$

$

789

Nonperforming impaired loans

 

6,842

 

 

 

6,842

OREO

 

574

 

 

 

574

Total

$

8,205

$

$

$

8,205

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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 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)

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

Carrying

Fair

Fair value measurements

    

amount

    

value

    

Level 1

    

Level 2

    

Level 3

September 30, 2020

 

  

 

  

 

  

 

  

 

  

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

319,835

$

319,835

$

319,835

$

$

Interest bearing deposits in banks

 

8,714

 

8,714

 

8,714

 

 

Investment securities available-for-sale

 

109,663

 

113,708

 

 

113,708

 

Loans held for sale

 

12,044

 

12,044

 

 

12,044

 

Loans, net

 

1,678,295

 

1,707,874

 

 

 

1,707,874

Other equity securities

 

15,331

 

15,331

 

15,331

 

 

Accrued interest receivable

 

8,996

 

8,996

 

 

8,996

 

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

 

1,908,646

 

1,910,260

 

 

1,910,260

 

Subordinated debt, net

63,340

 

63,340

 

63,340

Other borrowings

 

10,000

 

10,000

 

 

10,000

 

Junior subordinated deferrable interest debentures, net

8,302

8,018

8,018

Accrued interest payable

 

710

 

710

 

 

710

 

Off-balance sheet liabilities:

 

 

  

 

  

 

  

 

  

Undisbursed loan commitments, lines of credit, standby letters of credit

 

107,441

 

107,026

 

 

 

107,026

Carrying

Fair

Fair value measurements

    

amount

    

value

    

Level 1

    

Level 2

    

Level 3

December 31, 2019

 

  

 

  

 

  

 

  

 

  

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

295,382

$

295,382

$

295,382

$

$

Interest bearing deposits in banks

 

1,739

 

1,739

 

1,739

 

 

Investment securities available-for-sale

 

118,132

 

119,889

 

999

 

118,890

 

Loans held for sale

 

2,226

 

2,226

 

 

2,226

 

Loans, net

 

1,450,229

 

1,453,067

 

 

 

1,453,067

Other equity securities

 

13,905

 

13,905

 

13,905

 

 

Accrued interest receivable

 

5,495

 

5,495

 

 

5,495

 

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

 

1,701,183

 

1,704,428

 

 

1,704,428

 

Junior subordinated deferrable interest debentures, net

 

8,242

 

8,086

 

 

 

8,086

Accrued interest payable

 

1,607

 

1,607

 

 

1,607

 

Off-balance sheet liabilities:

 

 

 

 

Undisbursed loan commitments, lines of credit, standby letters of credit

 

128,934

 

128,519

 

 

 

128,519

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BAYCOM CORP AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL STATEMENTS - (continued)

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

(unaudited)

NOTE 16 – COMMITMENTS AND CONTINGENCIES

Lending and Letter of Credit Commitments

In the normal course of business, the Company enters into various commitments to extend credit, which are not reflected in the financial statements. These commitments consist of the undisbursed balance on personal, commercial lines, including commercial real estate secured lines of credit, and of undisbursed funds on construction and development loans. At September 30, 2020 and December 31, 2019, undisbursed commitments totaled $105.2 million and $126.6 million, respectively. In addition, at both September 30, 2020 and December 31, 2019, the Company has issued standby letter of credit commitments, primarily issued for the third-party performance obligations of clients totaling $2.3 million. There were no outstanding balances at both September 30, 2020 and December 31, 2019.

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

Commercial Real Estate Concentrations

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

Other Assets

The Company has commitments to fund Low Income Housing Tax Credit Partnerships (“LIHTC”) and a Small Business Investment Company (“SBIC”). At both September 30, 2020 and December 31, 2019, the remaining commitments to the LIHTC and SBIC were approximately $1.8 million and $122,000, respectively.

Deposits

At September 30, 2020, approximately $238.2 million, or 12.1%, of the Company's deposits were derived from its top ten depositors. At December 31, 2019, approximately $157.0 million, or 9.2%, of the Company's deposits were derived from its top ten depositors.

Local Agency Deposits and Other Advances

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

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

The novel coronavirus disease, or COVID-19, pandemic is adversely affecting us, our clients, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to:

expected revenues, cost savings, synergies and other benefits from our recent acquisitions of Grand Mountain Bancshares, Inc. (“GMB”) and TIG Bancorp (“TIG”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected;
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses;
changes in economic conditions in general and in California, Colorado, Washington, and New Mexico;
changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates;
uncertainty regarding the future of the London Interbank Offered Rate (“LIBOR”), and the potential transition away from LIBOR toward new interest rate benchmarks;
our net interest margin and funding sources;
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
secondary market conditions for loans and our ability to originate loans held for sale and to sell loans in the secondary market;
results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;
risks related to our acquisition strategy, including our ability to identify future suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;
challenges arising from attempts to expand into new geographic markets, products, or services;
future goodwill impairment due to changes in our business, market conditions, or other factors;

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legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, and regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III;
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the implementing regulations;
our ability to control operating costs and expenses;
the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
the effectiveness of our risk management framework;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;
an inability to keep pace with the rate of technological advances;
our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;
costs and effects of litigation, including settlements and judgments;
our ability to implement our business strategies and manage our growth;
liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
the loss of our large loan and deposit relationships;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
statements with respect to our intentions regarding disclosure and other changes resulting from the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”);
changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”); and
the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”).

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

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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, including four full-service branches recently acquired in our acquisition of GMB. At September 30, 2020, the Company had approximately $2.3 billion in total assets, $1.7 billion in total loans, $1.9 billion in total deposits and $255.3 million in shareholders’ equity. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relate primarily to the Bank.

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

The following represent our critical accounting policies:

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

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

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

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are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.

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

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

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

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

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

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

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

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

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The testing for impairment may begin with an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting unit’s fair value as well as positive and mitigating events. When required, the goodwill impairment test involves a two-step process. The first test for goodwill impairment is done by comparing the reporting unit’s aggregate fair value to its carrying value. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit). Absent other indicators of impairment, if the aggregate fair value exceeds the carrying value, goodwill is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value, a second test would be performed to measure the amount of impairment loss, if any. To measure any impairment loss the implied fair value would be determined in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill were less than the recorded goodwill an impairment charge would be recorded for the difference. As of September 30, 2020, the Company had positive equity, however, as a result of the potential credit losses and adverse economic impacts resulting from the COVID-19 pandemic, the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the Bank, the reporting unit, exceeds its’ carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the Bank’s fair value exceeded its’ carrying value, resulting in no impairment. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition. See Part II. Item 1A. Risk Factors - “The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our clients. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic” for additional information.

BayCom’s Response to COVID-19

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

Paycheck Protection Program ("PPP") Participation. The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to guarantee loans under a loan program called the Paycheck Protection Program, or PPP. The goal of the PPP was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a loan term maturity of up to five years; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as the borrower meets certain criteria. Through the conclusion of the PPP program on August 8, 2020, the Company has accepted 1,310359 applications for PPP loans, including applications from new and existing clients who are small to midsize businesses as well as independent contractors, sole proprietors and partnerships.

As of September 30, 2020, we have funded approximately $140.2 million in PPP loans, with an average loan amount of $103,000. In addition to the 1% interest earned on these loans, the SBA paid us fees for processing PPP loans in the following amounts: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants. The following table summarizes our PPP participation as of September 30, 2020:

Funded

Total

Average

    

Outstanding

    

Number

    

Size

    

(Dollars in thousands)

Existing clients

$

85,491

 

655

$

131

New clients

 

54,718

 

704

 

78

Total PPP loans

$

140,209

 

1,359

$

103

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

Allowance for Loan Losses and Loan Modifications

At September 30, 2020, the Company’s allowance for loan losses was $15.8 million, or 0.93% of total loans, compared to $13.5 million, or 0.78% of total loans, at June 30, 2020, and $6.4 million, or 0.52% of loans outstanding, at September 30, 2019. The provision for loan losses totaled $2.3 million for the third quarter of 2020, compared to $4.4 million the prior quarter and $479,000 for the same quarter last year due to the migration of acquired loans out of the discounted acquired loan portfolio and, for the second and third quarter of 2020, consideration of probable loan losses as a result of the COVID-19 pandemic. We have received numerous requests from borrowers for some type of payment relief. At September 30, 2020, we had provided payment relief related to COVID-19 on 426 loans totaling $413.9 million, of which 371 loans totaling $335.8 million or 81.1% have resumed their normal loan payments. As of September 30, 2020, 55 loans totaling $78.1 million are under payment relief including 30 loans totaling $57.8 million that have entered into a second payment forbearance agreement. The relief for borrowers requesting a second forbearance agreement is to allow interest only payments and principal and interest deferral for up to 180 days. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications were not classified as TDRs at September 30, 2020 in accordance with the guidance of the CARES Act. As a reminder, the CARES Act provided that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and regulatory guidance if they are less than 30 days past due on their contractual payments as of December 31, 2019.

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

Interest only payments on term debt for up to 180 days;
Full payment deferrals for up to 180 days upon request with an extension for another 180 days upon submission of specified documentation and recovery plans;
Loan re-amortization, especially in cases where significant prepayments of principal have occurred and to provide for continuing payment reduction at the end of the 180-day deferment period;
Covenant waivers and resets.

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

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Our modifications as of September 30, 2020, consisting of the deferral of principal and/or interest, are reflected in the following table:

Payment

As a %

Interest Only Payments

Principal and Interest Deferrals

Relief

of each

 

    

90 days

    

180 days

    

90 days

    

180 days

    

Total

    

loan type

 

Loan type with outstanding balances

    

(Dollars in thousands)

 

Hospitality

$

11,713

$

2,584

$

$

8,165

$

22,462

16.3

%

Multifamily

 

16,132

5,070

 

21,202

 

8.8

%

Retail

 

1,925

2,470

925

12,225

 

17,545

 

8.4

%

Commercial

 

2,156

564

2,005

 

4,725

 

1.5

%

Gas station

 

585

1,292

 

1,877

 

1.9

%

Residential

 

182

67

1,392

 

1,641

 

1.2

%

Mixed Use

 

3,712

 

3,712

 

13.7

%

Construction and land

 

541

21

 

562

 

1.4

%

Agriculture

 

536

78

 

614

 

23.0

%

Church

 

2,332

842

 

3,174

 

15.2

%

All other

 

610

 

610

 

2.2

%

Consumer

 

10

5

 

15

 

0.2

%

Total

$

13,638

$

26,982

$

2,944

$

34,575

$

78,139

 

4.6

%

Loan count

 

2

 

18

 

8

 

27

 

55

 

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

Branch Operations and Additional Client Support

We have taken various steps to ensure the safety of our clients and our personnel. Many of our employees are working remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. The Families First Coronavirus Response Act, which requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19, also provides additional flexibility to our employees to help navigate their individual challenges.

The COVID-19 pandemic has caused varying degrees of disruption to our branch operations resulting in the implementation of various social distancing measures at the Company to address client and community needs. To ensure the safety of our clients and employees, services are offered through drive up facilities, ATMs, online banking, our call center operations and/or by appointment. We have installed counter shields and hand sanitizing stations, limited the number of clients in a branch at any one time, required social distancing and the wearing of masks within branches, diligent disinfecting of common area high touchpoints, such as tables, doorknobs, light switches, countertops, and the like, and encouraged the use of our digital and electronic banking channels. We continuously monitor and conform our practices based on updates from the Center for Disease Control, World Health Organization, Financial Regulatory Agencies, and local and state health departments.

Overdraft and fee reversals are waived on a case-by-case basis. We are cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits.

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

Total assets.  Total assets increased $277.6 million, or 13.9%, to $2.3 billion at September 30, 2020, from $2.0 billion at December 31, 2019. The increase primarily was the result of loans increasing $228.1 million, or 15.7%, driven by the completion of our acquisition of GMB during the first quarter of 2020, and new loan originations, primarily PPP loans.

Cash and cash equivalents.  Cash and cash equivalents increased $24.4 million, or 8.3%, to $319.8 million, at September 30, 2020, from $295.4 million at December 31, 2019, primarily as a result of the proceeds received from our issuance and sale of $65.0 million aggregate principal amount of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”) further described under “Borrowings” below. We intend to invest our excess cash in loans and marketable securities until such funds are needed to support acquisitions or other growth oriented operating or strategic initiatives.

Investment securities available-for-sale.  Investment securities available-for-sale decreased $6.2 million, or 5.2%, to $113.7 million at September 30, 2020 from $119.9 million at December 31, 2019. The decrease was primarily due to the routine amortization and repayment of investment principal balances, partially offset by $4.4 million of securities acquired in the GMB acquisition. At September 30, 2020 and December 31, 2019, all of our investment securities were classified as available-for-sale.

Loans receivable, net.  We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans. Loans receivable, net of allowance for loan losses, increased $228.1 million, or 15.7%, to $1.7 billion at September 30, 2020 from $1.5 billion at December 31, 2019. The increase was primarily driven by $140.2 million of PPP loans, $98.4 million of loans acquired in the GMB acquisition and $146.6 million in new loan originations. Loan originations for the first nine months of 2020 totaled $286.9 million compared to $176.6 million for the first nine months of 2019. The increase in loan originations for the current period compared to the comparable period in 2019 primarily was the result of the growth of our operations from recent acquisitions and PPP loans. Loan originations in 2020 were concentrated in California markets, primarily Los Angeles, San Francisco Bay Area and Sacramento/Northern California with commercial and multifamily real estate secured loans accounting for the majority of the originations.

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

September 30, 

December 31, 

% Change

 

2020

2019

 

(Dollars in thousands)

 

Commercial and industrial (1)

    

$

325,655

    

$

168,747

    

93.0

%

Real estate:

 

  

 

  

Residential

 

179,422

 

154,306

 

16.3

%

Multifamily residential

 

238,382

 

215,073

 

10.8

%

Owner occupied CRE

 

395,564

 

416,141

 

(4.9)

%

Non-owner occupied CRE

 

496,149

 

447,823

 

10.8

%

Construction and land

 

40,892

 

36,098

 

13.3

%

Total real estate

 

1,350,409

 

1,269,441

6.4

%

Consumer

 

6,090

 

2,560

137.9

%

PCI loans

 

16,516

 

17,332

(4.7)

%

Total Loans

 

1,698,670

 

1,458,080

16.5

%

Net deferred loan fees

 

(4,575)

 

(451)

914.5

%

Allowance for loan losses

 

(15,800)

 

(7,400)

113.5

%

Loans, net

$

1,678,295

$

1,450,229

15.7

%

(1)Includes $140.2 million of PPP loans as of September 30, 2020.

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

San Francisco Bay

Total in State of

 

Area (1)

Other California

California

All Other States (2)

Total

 

% of

% of

% of

% of

% of

 

Total in

Total in

Total in

Total in

Total in

 

Amount

Category

Amount

Category

Amount

Category

Amount

Category

Amount

Category

 

 

(Dollars in thousands)

September 30, 2020

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

Commercial and industrial

$

71,240

 

14.2

%  

$

163,813

 

24.3

%  

$

235,053

 

20.0

%  

$

91,276

 

17.4

%  

$

326,329

 

19.2

%

Real estate:

 

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

Residential

 

41,883

 

8.4

%  

 

48,780

 

7.2

%  

 

90,663

 

7.7

%  

 

91,771

 

17.5

%  

 

182,434

 

10.7

%

Multifamily residential

 

60,660

 

12.1

%  

 

118,117

 

17.5

%  

 

178,777

 

15.2

%  

 

62,831

 

12.0

%  

 

241,608

 

14.2

%

Owner occupied CRE

 

152,775

 

30.5

%  

 

167,455

 

24.9

%  

 

320,230

 

27.3

%  

 

80,362

 

15.3

%  

 

400,592

 

23.6

%

Non-owner occupied CRE

 

174,739

 

34.8

%  

 

169,308

 

25.1

%  

 

344,047

 

29.3

%  

 

156,488

 

29.9

%  

 

500,535

 

29.5

%

Construction and land

 

93

 

0.0

%  

 

5,952

 

0.9

%  

 

6,045

 

0.5

%  

 

35,037

 

6.7

%  

 

41,082

 

2.4

%

Total real estate

 

430,150

 

 

509,612

 

 

939,762

 

 

426,489

 

 

1,366,251

 

Consumer

 

15

 

0.0

%  

 

2

 

0.0

%  

 

17

 

0.0

%  

 

6,073

 

1.2

%  

 

6,090

 

0.4

%

Total loans

$

501,405

$

673,427

$

1,174,832

 

  

$

523,838

 

  

$

1,698,670

 

  

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

52,140

 

9.7

%  

$

56,272

 

11.5

%  

$

108,412

 

10.6

%  

$

60,879

 

14.1

%  

$

169,291

 

11.6

%

Real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

 

54,467

 

10.2

%  

 

44,428

 

9.1

%  

 

98,895

 

9.6

%  

 

57,869

 

13.4

%  

 

156,764

 

10.7

%

Multifamily residential

 

72,248

 

13.5

%  

 

82,110

 

16.7

%  

 

154,358

 

15.1

%  

 

64,052

 

14.8

%  

 

218,410

 

15.0

%

Owner occupied CRE

 

184,255

 

34.4

%  

 

144,524

 

29.5

%  

 

328,779

 

32.1

%  

 

93,774

 

21.7

%  

 

422,553

 

29.0

%

Non-owner occupied CRE

 

169,776

 

31.7

%  

 

159,363

 

32.5

%  

 

329,139

 

32.1

%  

 

123,040

 

28.4

%  

 

452,179

 

31.0

%

Construction and land

 

2,290

 

0.4

%  

 

3,323

 

0.7

%  

 

5,613

 

0.5

%  

 

30,708

 

7.1

%  

 

36,321

 

2.5

%

Total real estate

$

483,036

$

433,748

$

916,784

 

  

$

369,443

 

  

$

1,286,227

 

  

Consumer

 

321

 

0.1

%  

 

 

0.0

%  

 

321

 

0.0

%  

 

2,241

 

0.5

%  

 

2,562

 

0.2

%

Total loans

$

535,497

$

490,020

$

1,025,517

 

  

$

432,563

 

  

$

1,458,080

 

  

(1)Includes Alameda, Contra Costa, Solano, Napa, Sonoma, Marin, San Francisco, San Mateo and Santa Clara counties.
(2)Includes loans located primarily in the states of Colorado, New Mexico and Washington. At September 30, 2020, loans in Colorado, New Mexico and Washington totaled $211.6 million, $79.7 million and $91.1 million, respectively. At December 31, 2019, loans in Colorado, New Mexico and Washington totaled $142.0 million, $89.6 million and $103.7 million, respectively.

Nonperforming assets and nonaccrual loans.  Nonperforming assets consists of nonaccrual loans, accruing loans that are 90 days past due and other real estate owned (“OREO”). Nonperforming assets increased $192,000, or 2.5%, to $7.9 million at September 30, 2020 from $7.7 million at December 31, 2019, primarily due to an increase in nonaccrual loans, partially offset by a decrease in OREO and accruing loans 90 days and more past due. Included in nonaccrual loans at September 30, 2020 and December 31, 2019, are $775,000 and $789,000, respectively, of TDRs, which are performing in accordance with their restructured terms. The Company had nonaccrual loans totaling $7.6 million or 0.45% of total loans, of which $872,000 million are guaranteed by governmental agencies at September 30, 2020, compared to $7.1 million or 0.49% of total loans at December 31, 2019. This increase in nonaccrual loans during the first nine months of 2020 was primarily driven by the addition of six loans within the commercial and industrial loan portfolio, partially offset by the payoff of two other loans in that category. At September 30, 2020, accruing loans past due 30 to 89 days totaled $1.2 million, compared to $12.8 million at December 31, 2019. This decrease reflects our efforts to process loan extensions, loan renewals and collect past due payments. OREO totaled $296,000 and $574,000 at September 30, 2020 and December 31, 2019, respectively.

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

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is restored to an accrual basis when principal and interest payments are paid current and full payment of principal and interest is probable. Loans that are well secured and in the process of collection remain on accrual status.

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

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

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

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

Troubled debt restructured loans.  Troubled debt restructurings, also referred to as “TDRs” herein, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. At September 30, 2020, TDRs totaled $3.7 million, compared to $4.4 million at December 31, 2019. At September 30, 2020 and December 31, 2019, the Company had TDRs that were accruing and performing in accordance with their modified terms of $775,000 and $789,000, respectively. Performing TDRs are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. The CARES Act amended the generally accepted accounting principles in the United States (“GAAP”) with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. As of September 30, 2020 the Company had approved 426 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic totaling $413.9 million, of which 371 loans totaling $335.8 million or 81.1% have resumed their normal loan payments. As of September 30, 2020, 55 loans totaling $78.1 million are under payment relief including 30 loans totaling $57.8 million that have entered into a second payment forbearance agreement.

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

September 30, 

December 31, 

    

2020

    

2019

(Dollars in thousands)

Loans accounted for on a non-accrual basis:

Commercial and industrial

$

1,396

$

618

Real estate:

Residential

1,701

1,488

Multifamily residential

254

297

Owner occupied CRE

1,482

1,349

Non-owner occupied CRE

266

340

Construction and land

2,463

2,737

Total real estate

6,166

6,211

Consumer

13

Total nonaccrual loans

7,562

6,842

More than 90 days past due and still accruing

250

Total nonperforming loans

7,562

7,092

Real estate owned

296

574

Total nonperforming assets (1)

$

7,858

$

7,666

Troubled debt restructurings – performing

775

789

PCI loans

$

16,516

$

17,332

Nonperforming assets to total assets (1)

0.35

%

0.38

%

Nonperforming loans to total loans (1)

0.45

%

0.49

%

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

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

For the three and nine months ended September 30, 2020, interest foregone on nonaccrual loans was $117,500 and $338,500, none of which was included in interest income, compared to $66,500 and $155,000 for the three and nine months ended September 30, 2019.

Potential problem loans.  Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which we are monitoring because the financial information of the borrower causes us concerns as to their ability to comply with their loan repayment terms. Potential problem loans, not included in our nonperforming loans, totaled $62.5 million at September 30, 2020, including $57.8 million of loans granted a second COVID-19 payment relief which are considered higher risk. Potential problem loans totaled $5.5 million at December 31, 2019

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

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In accordance with acquisition accounting, loans acquired in our acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to our recent acquisitions. As of September 30, 2020, acquired loans, net of their discounts, totaled $240.0 million compared to $590.9 million at December 31, 2019, due to the migration of acquired loans out of the discounted acquired loan portfolio and consideration of probable loan losses as a result of the COVID-19 pandemic. The remaining net discount on these acquired loans was $4.1 million and $8.0 million at September 30, 2020 and December 31, 2019, respectively. The $140.2 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at September 30, 2020 as these loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven.

Based on the Company’s established comprehensive methodology discussed above, the allowance for loan losses was $15.8 million at September 30, 2020, or 0.93% of total loans and 208.94% of nonperforming loans. This compares to an allowance for loan losses of $7.4 million, or 0.51% of total loans and 104.34% of nonperforming loans, at December 31, 2019.

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

September 30, 

December 31, 

 

    

2020

    

2019

 

(Dollars in thousands)

Balance at beginning of period

$

7,400

$

5,140

Provisions for loan losses

 

8,404

 

2,224

Recoveries

 

  

 

  

Commercial and industrial

 

10

 

57

Residential

 

 

1

Owner occupied CRE

 

 

Non-owner occupied CRE

 

4

 

Consumer

 

 

Total recoveries

 

14

 

58

Charge-offs

 

  

 

  

Commercial and industrial

 

 

Residential

 

(1)

 

(1)

Owner occupied CRE

 

 

Non-owner occupied CRE

 

 

(17)

Consumer

 

(17)

 

(4)

Total charge-offs

 

(18)

 

(22)

Net (charge-offs)/recoveries

 

(4)

 

36

Balance at end of period

$

15,800

$

7,400

Allowance for loan losses as a percentage of total loans

0.93

%

0.51

%

Allowance for loan losses to total loans excluding PCI loans (1)

0.94

%

0.51

%

Allowance for loan losses excluding acquired loans (loans not covered by the allowance) (1)

1.08

%

0.86

%

Allowance for loan losses excluding acquired loans and PPP loans (loans not covered by the allowance) (1)

1.20

%

0.86

%

Allowance for loan losses as a percentage of total nonperforming loans

208.94

%

104.34

%

Net (charge-offs)/recoveries as a percentage of average loans outstanding for the period

0.00

%

0.00

%

(1)  See non-GAAP financial measures herein.

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As of September 30, 2020, the Company had $8.3 million in impaired loans, inclusive of $7.6 million of nonperforming loans and $775,000 of performing TDRs. Of these impaired loans, only $1.0 million had allowances for loan losses recorded of $591,000, as the estimated collateral value or discounted expected cash flow for the remaining impaired loans is equal to or exceeds their carrying costs. As of December 31, 2019, the Company had $7.6 million in impaired loans, inclusive of $7.1 million of nonperforming loans and $789,000 of performing TDRs. Of these impaired loans, only $464,000 had allowances for loan losses recorded of $171,000, as the estimated collateral value or discounted expected cash flow for the remaining impaired loans is equal to or exceeds their carrying costs.

Management considers the allowance for loan losses at September 30, 2020 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Right-of-use assets and lease liabilities.  On January 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the Condensed Consolidated Balance Sheets as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 7 – Premises and Equipment in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report. The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The recognition of leases existing on January 1, 2019 did not require an adjustment to beginning retained earnings. Upon adoption of the accounting standards, the Company recognized right-of-use assets and lease liabilities of $7.8 million and $8.2 million respectively. Adoption of these accounting standards did not have a significant effect on the Company’s regulatory capital measures.

Right-of-use assets decreased $2.2 million, or 14.6%, to $13.1 million at September 30, 2020 from $15.3 million at December 31, 2019. Lease liabilities decreased $2.5 million, or 16.0%, to $13.1 million at September 30, 2020 from $15.6 million at December 31, 2019. Both decreases were due to reductions caused by monthly rent payments.

Premises and Equipment.  Premises and equipment increased $5.1 million, or 48.4%, to $15.6 million at September 30, 2020 from $10.5 million at December 31, 2019. This increase in premises and equipment was driven by a $3.9 million increase related to the GMB acquisition, $1.2 million for the installation of new ATMs and video conferencing equipment in branches and $750,000 in leasehold improvements. These increases were partially offset by an increase in amortization and depreciation expenses associated with these investments.

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

Total deposits increased $207.5 million, or 12.2%, to $1.9 billion at September 30, 2020 from $1.7 billion at December 31, 2019. The increase in deposits was primarily driven by $118.1 million of deposits acquired in the GMB acquisition, proceeds from PPP loans deposited directly into customer accounts and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19. Noninterest bearing demand deposits totaled $713.3 million, or 37.4% of total deposits, at September 30, 2020 compared to $572.3 million, or 33.6% of total deposits at December 31, 2019.

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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, 

 

2020

2019

% Change

 

(Dollars in thousands)

 

Noninterest bearing demand deposits

    

$

713,328

    

$

572,341

    

24.6

%

NOW accounts and savings

 

393,203

 

314,125

 

25.2

%

Money market

 

551,816

 

489,206

 

12.8

%

Time deposits - under $250,000

 

139,778

 

189,063

 

(26.1)

%

Time deposits - $250,000 and over

 

110,521

 

136,448

 

(19.0)

%

Total

$

1,908,646

$

1,701,183

 

12.2

%

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

At September 30, 2020, the Company had outstanding FHLB borrowings totaling $10.0 million compared to no FHLB borrowings at December 31, 2019. In May 2020, the Company secured a $10.0 million advance from the FHLB of San Francisco comprised of two $5.0 million tranches, at no cost, maturing on November 9, 2020 and May 7, 2021, respectively. At both September 30, 2020 and December 31, 2019, the Company had outstanding junior subordinated deferrable interest debentures, net of fair value adjustments, totaling $8.3 million which were assumed in connection with our previous acquisitions.

On August 6, 2020, the Company issued and sold in an underwritten offering the Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, $63.3 million.

If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At September 30, 2020 and December 31, 2019, we had a total of $75.0 million and $55.0 million, respectively, in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.

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

Shareholders’ equity.  Shareholders’ equity increased $1.1 million, or 0.4%, to $255.3 million at September 30, 2020 from $254.2 million at December 31, 2019. The increase in shareholders’ equity at September 30, 2020 compared to December 31, 2019 was primarily due to net income of $9.2 million and a $1.6 million increase in other comprehensive income representing an increase in the unrealized gains on investments securities, net of tax, partially offset by the repurchase of $10.7 million of our common stock. During the nine months ended September 30, 2020, the Company repurchased a total of 739,151 shares of its common stock at a total cost of $10.7 million, or $14.53 per share, leaving 31,984 shares available for future purchases under our stock repurchase plan. Subsequent to September 30, 2020, the Company adopted another stock repurchase plan for up to 590,000 shares of its common stock. For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”).

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Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

Earnings summary.  Net income was $3.2 million for the three months ended September 30, 2020, compared to $5.6 million for the three months ended September 30, 2019, a decrease of 2.3 million or 41.6%. Net income for the nine months ended September 30, 2020 was $9.2 million, compared to $12.7 million for the nine months ended September 30, 2019, a decrease of $3.5 million or 27.8%. Net income for the three and nine months ended September 30, 2020 was significantly impacted by the higher provision for loan losses primarily related to the migration of acquired loans out of the discounted acquired loan portfolio and consideration of probable loan losses as a result of the COVID-19 pandemic. The results for the quarter and nine months ended September 30, 2020 reflect the impact of the COVID-19 pandemic resulting in a reduction in business activity or the closing of businesses in all the states the Company operates.

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

Diluted earnings per share were $0.27 for the three months ended September 30, 2020, a decrease of $0.19 from diluted earnings per share of $0.46 for the three months ended September 30, 2019. Diluted earnings were $0.76 for the nine months ended September 30, 2020, a decrease of $0.35 from diluted earnings per share of $1.11 for the nine months ended September 30, 2019. The impact of acquisition-related expenses was none and $0.18 per diluted share for the three and nine months ended September 30, 2020, respectively, and $0.27 per diluted share for both the three and nine months ended September 30, 2019.

The Company’s efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, was 67.95% and 67.90% for the three and nine months ended September 30, 2020, compared to 58.70% and 65.34% for the three and nine months ended September 30, 2019. Increased interest expense, reflecting acquisitions, outpaced the growth of net interest income and noninterest income which were impacted by the effects of the COVID-19 pandemic.

Interest income.  Interest income for the three months ended September 30, 2020 was $21.2 million, compared to $20.4 million for the three months ended September 30, 2019, an increase of $833,000 or 4.1%. The increase in interest income was due to an increase in average interest earning assets, principally loans, which was driven primarily by our recent acquisitions and PPP lending. Average interest earning assets increased $433.2 million or 26.0% for the three months ended September 30, 2020, compared to the same period in 2019. Interest on loans, including fees, increased $2.6 million, or 14.9%, primarily as a result of a $513.7 million increase in the average loan balance, partially offset by a 112 basis point decrease in the average loan yield during the three months ended September 30, 2020 as compared to this same period in 2019. The average yield on loans for the three months ended September 30, 2020 was 4.64%, compared to 5.76% for the same period in 2019. Interest income included $594,000 in fees earned related to PPP loans in the quarter ended September 30, 2020 compared to none in same period a year ago. For the three months ended September 30, 2020, the average balance of PPP loans was $136.7 million and the average yield was 2.75%. Although the average balance of loans increased, the average yield on net loans decreased compared to the same period in the prior year due primarily to decreases in interest rates on adjustable rate instruments following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic, and secondarily due to the impact of PPP loans. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two-year maturity of the loans. The accretion of the net discount on acquired loans increased the average yield on loans by 19 basis points and 51 basis points during the third quarter of 2020 and 2019, respectively. Interest income on loans for the quarters ended September 30, 2020 and 2019 included $824,000 and $1.6 million, respectively, in accretion of purchase accounting fair value adjustments on acquired loans including the recognition of revenue from purchase credit impaired loans in excess of discounts. The incremental accretion and the impact on loan yield will change during any period based upon the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines.

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Interest income on interest bearing deposits decreased $1.8 million to $154,000 as a result of a $96.1 million decrease in the average balance of interest bearing deposits and a 201 basis point decrease in the average yield on interest bearing deposits to 0.25% for the three months ended September 30, 2020, from 2.26% for the three months ended September 30, 2019.

Interest income on investment securities available-for-sale increased slightly by $22,000 as a result of a $11.6 million increase in the average balance of investment securities available-for-sale, partially offset by a 20 basis point decrease in the average yield on investment securities to 2.52% for the three months ended September 30, 2020 from 2.72% for the three months ended September 30, 2019, during the same periods.

Interest income for the nine months ended September 30, 2020 was $66.5 million, compared to $54.7 million for the nine months ended September 30, 2019 an increase $11.8 million or 21.6%. The increase in interest income was due to an increase in average interest earning assets, principally loans, which was driven primarily by our recent acquisitions and organic growth, including PPP lending. Average interest earning assets increased $496.4 million or 32.7% for the nine months ended September 30, 2020, compared to the same period in 2019. Interest on loans, including fees, increased $16.3 million, or 35.3%, primarily as a result of a $574.7 million increase in the average loan balance, partially offset by a 68 basis point decrease in the average loan yield during the nine months ended September 30, 2020 as compared to this same period in 2019. The average yield on loans for the nine months ended September 30, 2020 was 5.03%, compared to 5.71% for the same period in 2019. During the nine months ended September 30, 2020 compared to this same period in 2019, the accretion of the net discount on acquired loans increased the yield on loans by 36 basis points and 39 basis points, respectively. Interest income on loans for the nine months ended September 30, 2020 included $4.4 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $3.2 million for the nine months ended September 30, 2019. The remaining net discount on these purchased loans was $4.1 million and $8.0 million at September 30, 2020 and 2019, respectively.

Interest income on interest earning deposits decreased $4.8 million to $1.2 million as a result of a $100.0 million decrease in the average balance of interest earning deposits and a 175 basis point decrease in the average yield on interest earning deposits to 0.68% for the nine months ended September 30, 2020, from 2.43% for the nine months ended September 30, 2019.

Interest income on investment securities increased $200,000 as a result of a 17.1 million increase in the average balance of investment securities available-for-sale, partially offset by an 18 basis point decrease in the average yield on investment securities to 2.55% for the nine months ended September 30, 2020, from 2.73% for the nine months ended September 30, 2019.

Interest expense.  Interest expense decreased $415,000, or 15.8%, to $2.2 million for the three months ended September 30, 2020 compared $2.6 million for to the three months ended September 30, 2019. The average cost of interest bearing liabilities decreased 35 basis points to 0.70% for the three months ended September 30, 2020 from 1.05% for the three months ended September 30, 2019. Total average interest bearing liabilities increased $259.3 million, or 26.0%, to $1.3 billion for the three months ended September 30, 2020 from $994.5 million for the three months ended September 30, 2019. Interest expense on deposits decreased $931,000, or 37.4%, to $1.6 million during the three months ended September 30, 2020 from $2.5 million during this same period in 2019, primarily due to a decrease in the rate paid on interest bearing deposits and despite an increase in the average balance. The average rate paid on interest bearing deposits decreased by 48 basis points to 0.52% for the three months ended September 30, 2020, from 1.00% for the three months ended September 30, 2019, due to lower deposit pricing after the targeted federal funds rate decreases. The overall average cost of deposits for the third quarter of 2020 declined to 0.33%, compared to 0.65% for the third quarter of 2019 due to a 36.9% increase in noninterest bearing deposits and a reduction in market interest rates over the last year. The average balance of noninterest bearing deposits increased $192.1 million, or 36.9%, to $712.4 million for the three months ended September 30, 2020 compared to $520.3 million for the same period in 2019. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decreases over the past year typically lags declines in the yield on interest earning assets.

Interest expense on borrowings increased $516,000, or 368.6%, to $656,000 for the three months ended September 30, 2020, from $140,000 for the three months ended September 30, 2019, as a result of the issuance of the Notes on August 10, 2020, which currently have a 5.25% interest rate. The average balance of borrowing outstanding

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increased $45.3 million to $53.5 million during the three months ended September 30, 2020, compared to $8.2 million during the comparable period in 2019. As discussed previously, the Company paid off $6.0 million of short-term borrowings using net proceeds of the issuance of the Notes. The decline in the average cost of borrowing to 4.86% for the three months ended September 30, 2020, from 6.76% for the three months ended September 30, 2019, partially offset the increase in the average balance of borrowings outstanding.

Interest expense increased by $476,000, or 7.9%, to $6.5 million for the nine months ended September 30, 2020 from $6.1 million for the nine months ended September 30, 2019. The average cost of interest bearing liabilities decreased 16 basis points to 0.72% for the nine months ended September 30, 2020 from 0.88% for the same period last year. Total average interest bearing liabilities increased $286.2 million, or 31.2%, to $1.2 billion for the nine months ended September 30, 2019 from $917.3 million for the nine months ended September 30, 2019. Interest expense on deposits decreased $59,000, or 1.1%, to $5.6 million during the nine months ended September 30, 2020 compared to the same period in 2019. The average rate paid on interest bearing deposits decreased by 20 basis points to 0.63% for the nine months ended September 30, 2020 from 0.83% for the nine months ended September 30, 2019. The overall average cost of deposits for the nine months ended September 30, 2020 declined to 0.40%, compared to 0.55% for the same nine months of 2019 due to a 42.1% increase in noninterest bearing deposits and a reduction in market interest rates over the last year. The average balance of noninterest bearing deposits, primarily due to the recent acquisitions increased $195.8 million, or 42.1%, to $661.1 million for the nine months ended September 30, 2020 compared to $465.3 million for the same period in 2019.

Interest expense on borrowings increased $553,000, or 123.5%, to $968,000 for the nine months ended September 30, 2020, from $433,000 for the nine months ended September 30, 2019, as a result of the issuance of the Notes. The average balance of borrowing outstanding increased $16.8 million to $25.0 million during the nine months ended September 30, 2020, compared to $8.2 million during the comparable period in 2019. The decline in the average cost of borrowing to 5.17% for the nine months ended September 30, 2020, from 7.07% for the nine months ended September 30, 2019, partially offset the increase in the average balance of borrowings outstanding.

Net interest income.  Net interest income increased $1.2 million, or 7.0%, to $19.0 million for the three months ended September 30, 2020, compared to $17.8 million for the three months ended September 30, 2019. Annualized net interest margin for the three months ended September 30, 2020 decreased 64 basis points to 3.59% from 4.23% for the same period in 2019. During the quarter, the low interest rate environment putting downward pressure on adjustable rate instruments combined with the impact of the low loan yields of the PPP loan portfolio, and a significant increase in low yielding interest-bearing deposits, adversely affected net interest margin. 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 19 and 51 basis points during the three months ended September 30, 2020 and the three months ended September 30, 2019, respectively. The average yield on interest earning assets for the three months ended September 30, 2020 was 4.01%, a 85 basis point decrease from 4.86% for the three months ended September 30, 2019, while the average cost of interest bearing liabilities for the three months ended September 30, 2020 decreased to 0.70%, a decrease of 35 basis points from 1.05% during the three months ended September 30, 2019, due primarily to lower market interest rates generally.

Net interest income increased $11.4 million, or 23.3%, to $60.0 million for the nine months ended September 30, 2020 compared to $48.6 million for the nine months ended September 30, 2019. Annualized net interest margin for the nine months ended September 30, 2020 decreased 32 basis points to 3.96% from 4.28% for the same period in 2019. Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased our net interest margin by 36 and 40 basis points during the nine months ended September 30, 2020 and the nine months ended September 30, 2019, respectively. The average yield on interest earning assets for the nine months ended September 30, 2020 was 4.40%, a 41 basis point decrease from 4.81% for the nine months ended September 30, 2019, while the average cost of interest bearing liabilities for the nine months ended September 30, 2020 decreased to 0.72%, a decrease of 16 basis points from 0.88% for the nine months ended September 30, 2019, due primarily to lower market interest rates.

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

Three months ended September 30, 

2020

2019

(Dollars in thousands)

Annualized

Annualized

Average

Average

Average

Average

    

Balance(1)

    

Interest

    

Yield

    

Balance(1)

    

Interest

    

Yield

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

$

247,861

$

154

 

0.25

%  

$

343,963

$

1,963

 

2.26

%

Investments available-for-sale

113,657

 

721

 

2.52

%  

 

102,040

 

699

 

2.72

%

FHLB Stock

7,612

 

95

 

4.94

%  

 

7,174

 

141

 

7.80

%

FRB Stock

7,741

 

117

 

6.00

%  

 

4,169

 

63

 

6.00

%

Total loans

1,720,631

 

20,136

 

4.64

%  

 

1,206,942

 

17,524

 

5.76

%

Total interest earning assets

2,097,502

 

21,223

 

4.01

%  

 

1,664,288

 

20,390

 

4.86

%

Noninterest earning assets

150,820

 

 

 

113,767

 

 

Total average assets

$

2,248,322

 

 

$

1,778,055

 

 

Interest bearing liabilities

 

 

 

 

 

Savings

$

114,461

$

41

0.14

%  

$

56,147

$

26

 

0.18

%

NOW accounts

278,587

 

66

 

0.09

%  

 

197,127

 

35

 

0.07

%

Money market

546,475

 

637

 

0.46

%  

 

402,501

 

805

 

0.79

%

Time deposits

260,785

 

818

 

1.24

%  

 

330,526

 

1,627

 

1.95

%

Total deposit accounts

1,200,308

 

1,562

 

0.52

%  

 

986,301

 

2,493

 

1.00

%

Subordinated debt, net

35,865

416

4.60

%  

%

Junior subordinated debentures, net

8,290

184

8.82

%  

8,211

140

6.76

%

Other borrowings

9,348

 

56

 

2.37

%  

 

 

Total interest bearing liabilities

1,253,811

 

2,218

 

0.70

%  

 

994,512

 

2,633

 

1.05

%

Noninterest bearing liabilities

738,143

 

 

 

544,718

 

 

Total average liabilities

1,991,954

 

 

 

1,539,230

 

 

Average equity

256,368

 

 

 

238,825

 

 

Total average liabilities and equity

$

2,248,322

 

 

$

1,778,055

 

 

Net interest income

 

$

19,005

 

 

$

17,757

 

Interest rate spread (2)

 

 

 

3.31

%  

 

 

 

3.81

%

Net interest margin (3)

 

 

 

3.59

%  

 

 

 

4.23

%

Ratio of average interest earning assets to average interest bearing liabilities

 

 

 

167.29

%  

 

 

 

167.35

%

(1)Average balances are average daily balances.
(2)Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.
(3)Net interest margin is calculated as net interest income divided by total average interest earning assets.

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Nine months ended September 30, 

2020

2019

Annualized

Annualized

Average

Average

Average

Average

    

Balance(1)

    

Interest

    

Yield

    

Balance(1)

    

Interest

    

Yield

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

$

227,706

$

1,158

 

0.68

%  

$

327,740

$

5,948

 

2.43

%

Investments available-for-sale

117,090

 

2,242

 

2.55

%  

 

99,959

 

2,042

 

2.73

%

FHLB Stock

7,395

 

274

 

4.94

%  

 

6,148

 

325

 

7.07

%

FRB Stock

7,526

 

339

 

6.00

%  

 

4,143

 

186

 

6.00

%

Total loans

1,656,232

 

62,511

 

5.03

%  

 

1,081,535

 

46,194

 

5.71

%

Total interest earning assets

2,015,949

 

66,524

 

4.40

%  

 

1,519,525

 

54,695

 

4.81

%

Noninterest earning assets

150,380

 

 

 

101,615

 

 

Total average assets

$

2,166,329

 

 

$

1,621,140

 

 

Interest bearing liabilities

 

 

 

 

 

Savings

$

105,575

$

126

0.16

%  

$

55,076

$

56

 

0.14

%

NOW accounts

265,372

 

186

 

0.09

%  

 

196,014

 

102

 

0.07

%

Money market

522,390

 

2,101

 

0.54

%  

 

390,591

 

2,006

 

0.69

%

Time deposits

285,153

 

3,151

 

1.47

%  

 

267,420

 

3,459

 

1.73

%

Total deposit accounts

1,178,490

 

5,564

 

0.63

%  

 

909,101

 

5,623

 

0.83

%

Subordinated debt, net

12,042

510

5.64

%  

%

Junior subordinated debentures, net

8,270

308

4.97

%  

8,192

433

7.07

%

Other borrowings

4,652

 

150

 

4.29

%  

 

 

Total interest bearing liabilities

1,203,454

 

6,532

 

0.72

%  

 

917,293

 

6,056

 

0.88

%

Noninterest bearing liabilities

707,293

 

 

 

483,315

 

 

Total average liabilities

1,910,747

 

 

 

1,400,608

 

 

Average equity

255,582

 

 

 

220,532

 

 

Total average liabilities and equity

$

2,166,329

 

 

$

1,621,140

 

 

Net interest income

 

$

59,992

 

 

$

48,639

 

Interest rate spread (2)

 

 

 

3.68

%  

 

 

 

3.93

%

Net interest margin (3)

 

 

 

3.96

%  

 

 

 

4.28

%

Ratio of average interest earning assets to average interest bearing liabilities

 

 

 

167.51

%  

 

 

 

165.65

%

(1)Average balances are average daily balances.
(2)Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.
(3)Net interest margin is calculated as net interest income divided by total average interest earning assets.

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

Three months ended September 30, 

 

Nine months ended September 30, 

2020 compared to 2019

 

2020 compared to 2019

Increase/(Decrease)

 

Increase/(Decrease)

Attributable to

 

Attributable to

    

Rate

    

Volume

    

Total

 

Rate

    

Volume

    

Total

(Dollars in thousands)

 

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

$

(1,261)

$

(548)

$

(1,809)

$

(2,975)

$

(1,815)

$

(4,790)

Investments available-for-sale

 

(58)

 

80

 

22

 

(150)

 

350

 

200

FHLB stock and FRB stock

 

(64)

 

72

 

8

 

(128)

 

230

 

102

Total loans

 

(4,845)

 

7,457

 

2,612

 

(8,482)

 

24,799

 

16,317

Total interest income

 

(6,228)

 

7,061

 

833

 

(11,735)

 

23,564

 

11,829

Interest bearing liabilities

Savings

 

(12)

 

27

 

15

 

19

 

51

 

70

NOW accounts

 

17

 

14

 

31

 

48

 

36

 

84

Money market accounts

 

(456)

 

288

 

(168)

 

(581)

 

676

 

95

Time deposits

 

(466)

 

(343)

 

(809)

 

(538)

 

230

 

(308)

Total deposit accounts

 

(917)

 

(14)

 

(931)

 

(1,052)

 

993

 

(59)

Subordinated debt, net

 

416

 

 

416

 

510

 

 

510

Junior subordinated debentures, net

 

43

 

1

 

44

 

(129)

 

4

 

(125)

Other borrowings

 

56

 

 

56

 

150

 

 

150

Total interest expense

 

(402)

 

(13)

 

(415)

 

(521)

 

997

 

476

Net interest income

$

(5,826)

$

7,074

$

1,248

$

(11,214)

$

22,567

$

11,353

Provision for loan losses.  We recorded a provision for loan losses of $2.3 million and $8.4 million for the three and nine months ended September 30, 2020, compared to a provision for loan losses of $479,000 and $1.2 million for the three and nine months ended September 30, 2019, respectively. This increase in the provision for loan losses was primarily a result of the migration of acquired loans out of the discounted acquired loan portfolio and is based upon current economic conditions and gives consideration to probable loan losses due to potential effects from higher forecasted unemployment rates and lower gross domestic product, as well as the impact of other economic conditions on the U.S. and global economies from COVID-19. In addition, the current quarter provision for credit losses also reflected risk rating downgrades on loans that were considered at higher risk due to the COVID-19 pandemic. The historical look back period was extended to capture a full business cycle reflecting volatility and losses of the last market downturn, consistent with the current environment impacted by the COVID-19 pandemic. We had net recoveries of $7,000 and charge-offs on loans of $4,000 for the three and nine months ended September 30, 2020, respectively, compared to net recoveries of $1,000 and $19,000 during the three and nine months ended September 30, 2019, respectively. The allowance for loan losses to total loans was 0.93% at September 30, 2020 compared to 0.52% at September 30, 2019. See Comparison of Financial Condition - Allowance for loan losses for additional details. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

Noninterest income.  Noninterest income decreased $286,000, or 13.5%, to $1.8 million for the three months ended September 30, 2020 compared to $2.1 million for the three months ended September 30, 2019. The decrease in noninterest income compared to the same period in 2019 was primarily due to a $513,000 decrease in gain on sale of loans as SBA loans originated for sale and sold have declined because of the pandemic. During the three months ended September 30, 2020, the Company sold $3.3 million of SBA loans (the guaranteed portion), which generated a gain on sale of $176,000, compared to the sale of $10.7 million of SBA loans and a gain of $689,000 during the three months ended September 30, 2019. This decrease in gains on sale of loans during the three months ended September 30, 2020 was

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partially offset by increases of $165,000 in loan servicing fees and other loan fees and $43,000 in services charges and other fees primarily resulting from the increase in accounts acquired in our recent acquisitions.

Noninterest income decreased $1.1 million, or 15.7%, to $5.7 million for the nine months ended September 30, 2020 compared to $6.8 million for the nine months ended September 30, 2020. The decrease in noninterest income compared to the same period in 2019 was primarily due to a $752,000 decrease in gain on sale of loans, a $376,000 decrease in income in our investment in the SBIC fund and a $212,000 decrease in gains on sale of premises. During the nine months ended September 30, 2020, the Company sold $15.0 million of SBA loans (the guaranteed portion), which generated a gain on sale of $1.0 million, compared to the sale of $24.3 million of SBA loans and a gain of $1.8 million during the nine months ended September 30, 2019. These decreases were partially offset by an increase in loan servicing and other loan fees of $482,000, or 35.3%, to $1.8 million for the nine months ended September 30, 2020, compared to $1.3 million for the nine months ended September 30, 2019, for the same reasons discussed above. Other noninterest income decreased $171,000, or 20.4%, to $668,000 during the nine months ended September 30, 2020, compared to $839,000 during the same period in 2019, due primarily to lower fees collected on Certificate of Deposit Account Registry Services, or CDARS, transactions.

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

Three months ended September 30, 

 

    

2020

    

2019

    

$ Change

    

% Change

(Dollars in thousands)

 

Gain on sale of loans

$

176

$

689

$

(513)

(74.5)

%

Service charges and other fees

 

648

 

605

 

43

 

7.1

%

Loan servicing and other loan fees

 

608

 

443

 

165

 

37.2

%

(Loss) income on investment in SBIC fund

 

188

 

131

 

57

 

43.5

%

Gain on sale of premises

(25)

(25)

100.0

%

Other income and fees

 

233

 

246

 

(13)

 

(5.3)

%

Total noninterest income

$

1,828

$

2,114

$

(286)

 

(13.5)

%

Nine months ended September 30, 

 

    

2020

    

2019

    

$ Change

    

% Change

(Dollars in thousands)

 

Gain on sale of loans

$

1,030

$

1,782

$

(752)

(42.2)

%

Service charges and other fees

 

1,963

 

2,000

 

(37)

 

(1.8)

%

Loan servicing and other loan fees

 

1,849

 

1,367

 

482

 

35.3

%

Income on investment in SBIC fund

 

223

 

599

 

(376)

 

(62.8)

%

Gain on sale of premises

(25)

187

(212)

(113.4)

%

Other income and fees

 

668

 

839

 

(171)

 

(20.4)

%

Total noninterest income

$

5,708

$

6,774

$

(1,066)

 

(15.7)

%

Noninterest expense.  Noninterest expense increased $2.5 million, or 21.4%, to $14.2 million for the three months ended September 30, 2020 compared to $11.7 million for the three months ended September 30, 2019. Salaries and related benefits increased $1.0 million, or 14.0%, to $8.5 million, during the three months ended September 30, 2020, compared to $7.4 million for the comparable period in 2019, primarily as a result of an increase of 56 full-time equivalent employees to 312 at September 30, 2020, compared to 256 a year earlier. Occupancy and equipment expenses increased $353,000, or 25.3%, to $1.7 million, primarily due to occupancy costs related to the operation of additional acquired branches. As of September 30, 2020, we operated 34 full-service branches, compared to 25 a year earlier. Data processing expenses increased $606,000, or 58.5%, to $1.6 million, primarily due to primarily to higher transaction volumes from the increase in the number of our deposit accounts. Other noninterest expense increased $491,000, or 27.4%, to $2.3 million during the three months ended September 30, 2020, compared to $1.8 million during the same period in 2019, primarily due to an increase in insurance (FDIC premiums) which increased $182,000 to $212,000 as a portion of the Bank’s small bank assessment credit offset the assessment in the quarter ended September 30, 2019, with no such credit available in the quarter ended September 30, 2020. In addition, professional fees increased $152,000 due to higher fees paid for employee recruiting placement and legal expenses. Noninterest expense for the third quarter of 2020 and 2019 did not include any acquisition-related expense.

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Table of Contents

Noninterest expense for the nine months ended September 30, 2020 increased $8.4 million, or 23.2%, to $44.6 million from $36.2 million in the same period in 2019, due to our three acquisitions over the last year and organic growth. Salaries and employee benefits increased $4.8 million or 23.5%, to $25.4 million for the nine months ended September 30, 2020, compared to $20.6 million during the same period in 2019. The increase in salaries and employee benefits was due primarily to an increase in the number of full-time equivalent employees and severance benefits paid in connection with the GMB merger and to a lesser extent normal salary increase. Occupancy and equipment expense increased $1.7 million, or 49.4%, to $5.3 million for the nine months ended September 30, 2020, compared to $3.6 million for the same period in 2019 due to the three acquisitions completed over the last year. Data processing expense increased $1.1 million, or 19.0%, to $6.7 million for the nine months ended September 30, 2020, compared to $5.6 million for the same period in 2019 due primarily to higher transaction volumes from the increase in the number of deposit accounts, partially offset by lower acquisition-related expenses compared to the prior period in 2019. Other noninterest expense increased $724,000, or 11.3%, to $7.2 million during the nine months ended September 30, 2020, compared to $6.4 million during the same period in 2019, primarily due to a $412,000 increase in professional fees resulting from higher fees paid for employee recruiting and internal auditing and compliance related expenses. Noninterest expense for the nine months ended September 30, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses, compared to $4.1 million UFC acquisition-related expenses during the same period in 2019. Excluding all acquisition-related expenses, noninterest expenses increased $9.5 million, or 29.7%, from the same period of 2019, comprised of increases of $5.2 million in salary and benefits, $1.8 million in occupancy and equipment, $1.7 million in data processing, $578,000 in professional fees and $294,000 in other noninterest expenses.

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

Three months ended September 30, 

 

    

2020

    

2019

    

$ Change

    

% Change

(Dollars in thousands)

 

Salaries and related benefits

$

8,482

$

7,440

$

1,042

14.0

%

Occupancy and equipment

 

1,749

 

1,396

 

353

 

25.3

%

Data processing

 

1,642

 

1,036

 

606

 

58.5

%

Other

 

2,283

 

1,792

 

491

 

27.4

%

Total noninterest expense

$

14,156

$

11,664

$

2,492

 

21.4

%

Nine months ended September 30, 

 

    

2020

    

2019

    

$ Change

    

% Change

(Dollars in thousands)

 

Salaries and related benefits

$

25,442

$

20,600

$

4,842

23.5

%

Occupancy and equipment

 

5,334

 

3,570

 

1,764

 

49.4

%

Data processing

 

6,716

 

5,643

 

1,073

 

19.0

%

Other

 

7,118

 

6,394

 

724

 

11.3

%

Total noninterest expense

$

44,610

$

36,207

$

8,403

 

23.2

%

Income taxes.  Income tax expense decreased $1.1 million, or 47.6%, to $1.1 million for the three months ended September 30, 2020 compared to $2.2 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, income tax expense decreased $1.8 million or 33.6%, to $3.5 million, compared to $5.3 million for the nine months ended September 30, 2019. These variations are reflecting fluctuations in the pre-tax income and to a lesser extent, a decrease in our effective tax rate. The Company’s effective tax rate was 25.9% and 27.6% for three and nine months ended September 30, 2020 compared to 28.0% and 29.3% for the same periods in 2019. The decreases in the Company’s effective tax rate during three and nine months ended September 30, 2020 compared to the same periods in 2019 were primarily due to higher proportion of favorable permanent adjustments relative to taxable income.

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Liquidity and Capital Resources

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

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

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of September 30, 2020 and December 31, 2019, the Bank had an available borrowing capacity with the FHLB of $466.7 million and $542.4 million, respectively, and Federal Funds lines with available commitments totaling $75.0 million and $55.0 million with four correspondent banks, respectively. In May 2020, the Bank secured a $10.0 million advance from the FHLB of San Francisco, at no cost, comprised of two $5.0 million tranches, maturing on November 9, 2020 and May 7, 2021, respectively. Additionally, the Bank classifies its securities portfolio as available-for-sale, providing an additional source of liquidity. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. Additionally, as of September 30, 2020, the Bank was approved to utilize the PPPLF. The Bank may utilize the PPPLF pursuant to which the Bank will pledge PPP loans at face value as collateral to obtain FRB non-recourse loans. During the quarter ended and as of September 30, 2020, the Bank did not utilize the PPPLF as it held a substantial cash and cash equivalent position as a result of PPP disbursed funds remaining unused in borrower deposit accounts and due to deposit clients increasing their balances due to COVID-19.

We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit in the aggregate totaled $107.4 million and $128.9 million at September 30, 2020 and December 31, 2019, respectively. Time deposits scheduled to mature in one year or less at September 30, 2020, totaled $202.7 million. It is management's policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities for the nine months ended September 30, 2020 was $6.2 million, compared to $5.4 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, net cash used in investing activities was $132.0 million, which consisted primarily of net change in loans receivable and interest bearing deposits in banks, compared to $33.5 million of cash provided by investing activities for the nine months ended September 30, 2019. Net cash provided by financing activities for the nine months ended September 30, 2020 was $150.3 million, which was comprised primarily of net change in deposits and an increase in long-term borrowings resulting from the issuance of the Notes, compared to $25.4 million of net cash used in financing activities during the nine months ended September 30, 2019.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. At September 30, 2020, the Company, on an unconsolidated basis, had liquid assets of $55.9 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.

The Bank, as a state-chartered, federally insured savings bank, and member of the Federal Reserve is subject to the capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements. The capital adequacy requirements are quantitative measures established by

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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, 2020, the Bank was considered to be well-capitalized.

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

At September 30, 2020

At December 31, 2019

 

Amount

Ratio

Amount

Ratio

 

(Dollars in thousands)

 

Leverage Ratio

    

  

    

  

    

  

    

  

BayCom Corp

$

203,855

9.71

%  

$

207,575

 

11.15

%

Minimum requirement for "Well-Capitalized"

 

104,952

5.00

%  

 

93,659

 

5.00

%

Minimum regulatory requirement

 

83,961

4.00

%  

 

74,927

 

4.00

%

 

  

 

  

 

  

 

  

United Business Bank

 

218,216

 

9.94

%  

 

213,749

 

10.98

%

Minimum requirement for "Well-Capitalized"

 

109,762

 

5.00

%  

 

97,313

 

5.00

%

Minimum regulatory requirement

 

87,809

 

4.00

%  

 

77,850

 

4.00

%

 

  

 

  

 

  

 

  

Common Equity Tier 1 Ratio

 

  

 

  

 

  

 

  

BayCom Corp

 

203,855

12.52

%  

 

207,575

 

13.81

%

Minimum requirement for "Well-Capitalized"

 

105,874

6.50

%  

 

97,714

 

6.50

%

Minimum regulatory requirement

 

73,298

4.50

%  

 

67,648

 

4.50

%

 

  

 

  

 

  

 

  

United Business Bank

 

218,216

 

13.41

%  

 

213,749

 

14.23

%

Minimum requirement for "Well-Capitalized"

 

105,771

 

6.50

%  

 

97,624

 

6.50

%

Minimum regulatory requirement

 

73,226

 

4.50

%  

 

67,586

 

4.50

%

 

  

 

  

 

  

 

  

Tier 1 Risk-Based Capital Ratio

 

  

 

  

 

  

 

  

BayCom Corp

 

213,340

13.10

%  

 

217,060

 

14.44

%

Minimum requirement for "Well-Capitalized"

 

130,307

8.00

%  

 

120,264

 

8.00

%

Minimum regulatory requirement

 

97,730

6.00

%  

 

90,198

 

6.00

%

 

  

 

  

 

  

 

  

United Business Bank

 

218,216

 

13.41

%  

 

213,749

 

14.23

%

Minimum requirement for "Well-Capitalized"

 

130,180

 

8.00

%  

 

120,153

 

8.00

%

Minimum regulatory requirement

 

97,635

 

6.00

%  

 

90,114

 

6.00

%

 

  

 

  

 

  

 

  

Total Risk-Based Capital Ratio

 

  

 

  

 

  

 

  

BayCom Corp

 

229,555

14.09

%  

 

224,875

 

14.96

%

Minimum requirement for "Well-Capitalized"

 

162,883

10.00

%  

 

150,330

 

10.00

%

Minimum regulatory requirement

 

130,307

8.00

%  

 

120,264

 

8.00

%

 

  

 

  

 

  

 

  

United Business Bank

 

234,431

 

14.41

%  

 

221,564

 

14.75

%

Minimum requirement for "Well-Capitalized"

 

162,724

 

10.00

%  

 

150,191

 

10.00

%

Minimum regulatory requirement

 

130,180

 

8.00

%  

 

120,153

 

8.00

%

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

As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines

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

Off-Balance Sheet Arrangements

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

For information about our loan commitments, unused lines of credit and standby letters of credit, see Note 16 - Commitment and Contingencies in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report.

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

Non-GAAP financial measures

This report contains certain financial information by methods other than GAAP. These measures include allowance for loan losses as a percentage of total loans, excluding PCI loans, acquired loans and PPP loans. Management uses these non-GAAP financial measures, together with the related GAAP measures, in its analysis of the Company’s performance and in making business decisions. Management believes that presenting allowance for loan losses as a percentage of total loans excluding PCI, acquired loans and PPP loans is useful in assessing the credit quality of the Company’s core portfolio. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other peer financial institutions.

Reconciliation of the GAAP and non-GAAP financial measures are presented as of the dates indicated:

September 30, 

December 31, 

    

2020

    

2019

    

(Dollars in thousands)

Allowance for loan losses excluding acquired loans and PPP loans

Allowance for loan losses (GAAP)

$

(15,800)

$

(7,400)

Total loans (GAAP)

1,698,670

1,458,080

Exclude PCI loans

 

16,516

 

17,332

Adjusted total loans excluding PCI loans (non-GAAP)

$

1,682,154

$

1,440,748

Total loans (GAAP)

$

1,698,670

$

1,458,080

Exclude Acquired loans

 

240,008

 

590,971

Adjusted total loans excluding acquired loans (non-GAAP)

$

1,458,662

$

867,109

Exclude PPP loans

 

140,209

 

Adjusted total loans excluding acquired loans and PPP loans (non-GAAP)

$

1,318,453

$

867,109

Allowance for loan losses as a percentage of total loans (GAAP)

0.93

%

0.51

%

Allowance for loan losses to total loans excluding PCI loans (non-GAAP)

 

0.94

%  

 

0.51

%  

Allowance for loan losses excluding acquired loans (loans not covered by the allowance) (non-GAAP)

 

1.08

%  

 

0.86

%  

Allowance for loan losses excluding acquired loans and PPP loans (loans not covered by the allowance) (non-GAAP)

1.20

%  

0.86

%  

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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 2019 Annual Report. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2019 Annual Report.

Item 4. Controls and Procedures

(a)       Evaluation of Disclosure Controls and Procedures

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

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

(b)       Changes in Internal Controls

There were no significant changes in the Company’s internal control over financial reporting that occurred during the nine months ended September 30, 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

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

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

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

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

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

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

As of September 30, 2020, we hold and service a portfolio of 1,359 PPP loans originated under PPP with a total balance of $140.2 million. The PPP loans are subject to the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”) Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the vast majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. We could face additional risks in our administrative capabilities to service our PPP loans and risk with respect to the determination of loan forgiveness depending on the final procedures for determining loan forgiveness.

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

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

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

(a)

Not applicable.

(b)

Not applicable.

(c)

Stock Repurchases. On March 11, 2020, the Company announced that the Board of Directors authorized the repurchase of up to 618,000 shares, or approximately 5% of the Company's outstanding common shares. The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended September 30, 2020:

Total number of

 

Total

Average

shares purchased

Maximum number of

number of

price

as part of

shares that may yet be

shares

paid

publicly announced

purchased under the

purchased

per share

plans or programs

plans or programs

July 1, 2020 - July 31, 2020

    

 

$

    

90,632

August 1, 2020 - August 31, 2020

 

35,814

11.63

35,814

 

54,818

September 1, 2020 - September 30, 2020

 

22,834

11.72

22,834

 

31,984

 

58,648

$

11.66

58,648

 

31,984

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During the quarter ended September 30, 2020, the Company purchased 58,648 shares of the Company’s common stock at an average cost of $11.66 per share. For the nine months ended September 30, 2020, the Company purchased 739,151 shares of the Company’s common stock at an average cost of $14.53 per share. As of September 30, 2020, a total of 586,016 shares or 95 percent of the shares authorized in the March 2020 stock repurchase plan have been purchased at an average cost of $12.57 per share, leaving 31,984 shares available for future purchases.

On October 29, 2020, the Company announced that the Company’s Board of Directors authorized the repurchase of up to five percent of the Company’s common stock, or approximately 590,000 shares. The Company will purchase the shares from time to time in the open market or through privately negotiated transactions over a one-year period depending on market conditions, the capital requirements of the Corporation, and available cash that can be allocated to the stock repurchase program, among other considerations commencing October 30, 2020. The October 2020 stock repurchase plan will become effective once the Company has completed the March 2020 stock repurchase plan by purchasing the remaining 31,894 shares available under the March 2020 plan. The actual timing, number and value of shares repurchased under our stock repurchase programs will depend on a number of factors, including constraints specified in any Rule 10b5-1 trading plans, price, general business and market conditions, and alternative investment opportunities. The stock repurchase plans do 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.

Item 3. Defaults of Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

2.1

Agreement and Plan of Merger by and between BayCom Corp and Uniti Financial Corporation dated December 7, 2018(1)

2.2

Agreement and Plan of Merger by and between BayCom Corp and TIG Bancorp dated June 28, 2019(2)

3.1

Articles of Incorporation of BayCom Corp(3)

3.2

Amended and Restated Bylaws of BayCom Corp(4)

4.1

Indenture, date August 6, 2020, between BayCom Corp and Wilmington Trust, National Association, as Trustee(5)

4.2

First Supplemental Indenture, dated August 6, 2020, between BayCom Corp and Wilmington Trust, National Association, as Trustee(5)

4.3

Form of 5.25% Fixed-to-Floating Rate Subordinated Note due 2030 (included in Exhibit 4.2)(5)

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, 2020 formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Balance Sheets; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Changes in Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Notes to Condensed Consolidated Financial Statements.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document).

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(1)Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the SEC on December 10, 2018 (File No. 001-38483).
(2)Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the SEC on July 1, 2019 (File No. 001-38483).
(3)Incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on April 11, 2018 (File No. 333-224236).
(4)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)
(5)Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on August 10, 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 6, 2020

By:

/s/ George Guarini

 

George Guarini

Chief Executive Officer

(Principal Executive Officer)

 

 

Date: November 6, 2020

By:

/s/ Keary Colwell

 

Keary Colwell

Senior Executive Vice President,

Chief Financial Officer and Chief Administrative Officer

(Principal Financial and Accounting Officer)

65