# BayCom Corp: Form 10-Q for the period ended Mar 31, 2018

- Company: [BayCom Corp](/companies/bcml.md) (CIK 1730984)
- Form: 10-Q
- Filed: 2018-06-18
- Accepted by EDGAR: Jun 18, 2018, 14:38 ET
- Period: 2018-03-31
- Accession: 0000927089-18-000262
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1730984/000092708918000262/bcml-10q033118.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1730984/000092708918000262/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $1.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $4.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.54 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.54 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 7,512,227 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $5.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2018-03-31 | $255.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-03-31 | $1.24bn | us-gaap:Assets |
| Total liabilities | at 2018-03-31 | $1.12bn | us-gaap:Liabilities |
| Shareholders' equity | at 2018-03-31 | $122.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 62,776 characters.

### Executive Overview

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 primarily to businesses and business owners as well as individuals through our network of 17 full service branches located in Northern and Central California, Seattle, Washington and Albuquerque, New Mexico.

Since 2010, we have completed a series of five acquisitions with aggregate total assets of approximately

$892.2 million and total deposits of approximately $768.6 million. We have sought to integrate the banks we acquire into our existing operational platform and enhance shareholder value through the creation of efficiencies within the combined operations. In April 2017, we completed our largest acquisition to date when we acquired United Business Bank, FSB headquartered in Oakland, California, which increased our deposits by approximately $428.0 million, consisting primarily of lower cost stable core deposits from a strong network of relationships with labor unions. At the time of acquisition, United Business Bank, FSB had total assets of approximately $473.1 million, which significantly increased our total asset size and provided us with nine full-service banking offices in Albuquerque, New Mexico; Long Beach, Oakland, Sacramento, San Francisco, San Jose and Glendale, California; and Seattle, Washington. We integrated the United Business Bank, FSB's branches and recognized the opportunity to consolidate two branches, one of which was completed in January 2017 and the other was completed in April 2018. In addition, in November 2017 we acquired Plaza Bank, with one branch located in Seattle, Washington. At the time of the acquisition, Plaza Bank had total assets of approximately $75.8 million and deposits of $54.2 million.

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. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to continue to pursue strategic acquisitions 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 includes the San Francisco Bay area and the metropolitan markets of Los Angeles and Seattle and other community markets including Albuquerque, New Mexico, 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. We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth.

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 non-interest income and non-interest expenses. Non-interest income and non-interest 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.

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

***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 non-accrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.

***Estimated expected cash flows related to purchased credit impaired loans.*** Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under FASB 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 retains 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 assesses the rights for impairment. The servicing rights are initially measured at fair value and amortized in proportion to and over the period of the estimated net servicing income assuming prepayments.

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

The testing for impairment may begin with an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting unit's fair value as well as positive and mitigating events. When required, the goodwill impairment test involves a two-step process. The first test for goodwill impairment is done by comparing the reporting unit's aggregate fair value to its carrying value. 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 is less than the recorded goodwill an impairment charge would be recorded for the difference. For the year ended December 31, 2017, we completed step one of the two-step process of the goodwill impairment test. Based on the results of the test, we concluded that the reporting unit's fair value was greater than its carrying value and there was no impairment of goodwill.

### Comparison of Financial Condition at March 31, 2018 and December 31, 2017

***Total assets.*** Total assets decreased $4.0 million, or 0.3%, to $1.24 billion at March 31, 2018 from $1.25 billion at December 31, 2017. The decrease was primarily due to a $3.9 million, or 0.4%, decrease in total loans receivable, net.

***Cash and cash equivalents.*** Cash and cash equivalents increased $5.6 million, or 2.2%, to $255.5 million at March 31, 2018 from $249.9 million at December 31, 2017. The increase was primarily due to cash received from an increase in client deposits. We intend to invest our excess cash in marketable securities until such funds are needed to support loan growth or other operating or strategic initiatives.

***Securities available-for-sale.*** Investment securities available-for-sale decreased $3.7 million, or 9.2%, to $36.8 million at March 31, 2018 from $40.5 million at December 31, 2017. The decrease was primarily due to maturities of investment securities of $2.0 million during the three months ended March 31, 2018, in addition to routine amortization and accretion of investment premiums and discounts. At March 31, 2018, all of our investment securities were classified as available-for-sale.

***Loans receivable, net.*** 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, decreased $3.9 million, or 0.4%, to $886.2 million at March 31, 2018 from $890.1 million at December 31, 2017. The decrease in loans receivable was primarily due to loans sold and prepayments on loans in excess of new loan originations. Loan originations for quarter ended March 31, 2018 totaled $29.2 million compared to $31.6 million during the three months ended December 31, 2017. We also sold $8.8 million of the guaranteed portion of U.S. Small Business Administration ("SBA") loans during the three months ended March 31, 2018.

The following table provides information about our loan portfolio by type of loan at the dates presented.

*(Dollars in thousands)*

|  | March 31, 2018 | December, 31 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $115,143 | $114,373 | $73,731 |
| Real estate: |  |  |  |
| Residential | 83,218 | 83,486 | 27,976 |
| Multifamily residential | 112,032 | 113,759 | 37,533 |
| Owner occupied CRE | 241,279 | 251,712 | 166,965 |
| Non-owner occupied CRE | 297,372 | 293,332 | 199,238 |
| Construction and land | 28,353 | 22,720 | 20,877 |
| Total real estate | 762,254 | 765,009 | 452,589 |
| Consumer | 97 | 1,096 | 1,125 |
| PCI loans | 13,767 | 14,315 | 8,083 |
| Total loans | 891,261 | 894,793 | 535,528 |
| Deferred loan fees and costs, net | (432) | (469) | (161) |
| Allowance for loan losses | (4,600) | (4,215) | (3,925) |
| Loans receivable, net | $886,229 | $890,109 | $531,442 |

The following table shows at March 31, 2018, the geographic distribution of our loan portfolio in dollar amounts and percentages.

*(Dollars in thousands)*

|  | San Francisco Bay Region(1) Amount Total in Category | % of Total in Category | Other California Amount Total in Category | % of Total in Category | Total in State of California Amount Total in Category | % of | All Other States(2) Amount | % of | Total Amount | % of |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $88,704 | 15.6% | $8,177 | 4.6% | $96,881 | 13.0% | $18,263 | 12.3% | $115,144 | 12.9% |
| Real estate: |  |  |  |  |  |  |  |  |  |  |
| Residential | $62,262 | 11.0% | $8,436 | 4.8% | $70,698 | 9.5% | $13,810 | 9.3% | $84,508 | 9.5% |
| Multifamily residential | 79,822 | 14.1% | 15,421 | 8.8% | 95,243 | 12.8% | 21,119 | 14.2% | 116,362 | 13.1% |
| Owner occupied CRE | 159,963 | 28.2% | 49,549 | 28.1% | 209,512 | 28.2% | 36,375 | 24.5% | 245,887 | 27.6% |
| Non-owner occupied | 160,994 | 28.4% | 85,331 | 48.4% | 246,325 | 33.2% | 54,585 | 36.8% | 300,910 | 33.8% |
| Construction and land | 15,033 | 2.7% | 9,282 | 5.3% | 24,315 | 3.3% | 4,039 | 2.7% | 28,353 | 3.2% |
| Total real estate | $478,074 |  | $168,019 |  | $646,093 |  | $129,928 |  | $776,020 |  |
| Consumer and other | $72 | 0.0% | $- | 0.0% | $72 | 0.0% | $25 | 0.0% | $97 | 0.0% |

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

(2) Includes loans located in the states of New Mexico, Washington and other states. At March 31, 2018, loans in New Mexico and Washington totaled $68.0 million and $38.0 million, respectively.

***Nonperforming assets and nonaccrual loans.*** Nonperforming assets consists of nonaccrual loans. Nonperforming assets increased $50,000, or 27.9%, to $229,000 at March 31, 2018 from $179,000 at December 31, 2017. At March 31, 2018, accruing loans past due 30 to 89 days totaled $1.1 million, compared to $1.9 million at December 31, 2017.

In general, loans are placed on non-accrual 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 non-accrual status, all interest accrued but not received is charged against interest income. When the ability to fully collect non-accrual 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 non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are categorized as performing non-accrual loans and are reflected in non-performing assets. Interest received on such loans is recognized as interest income when received. A non-accrual loan is restored to an accrual basis when principal and interest payments are paid current and full payment of principal and interest is probable. Loans that are well secured and in the process of collection remain on accrual status.

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

- Pass rated loans (typically performing loans) are accounted for in accordance with ASC Topic 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
- Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if they display at least some level of credit deterioration since origination.
- Impaired loans (typically substandard loans on non-accrual 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 non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows.

***Troubled debt restructured loans.*** Troubled debt 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 December 31, 2017, we had four TDR loans totaling $1.0 million, three of which totaling $967,000 were performing according to their restructured terms. The performing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. TDR loans as of March 31, 2018 totaled $791,000, of which $11,000was non-performing. PCI loans included in TDR loans totaled $780,000 and $794,000 as of March 31, 2018 and December 31, 2017, respectively. There was no related allowance for loan losses on the TDR loans at either March 31, 2018 or December 31, 2017.

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

*(Dollars in thousands)*

| Loans accounted for on a non-accrual basis | March 31, 2018 | Dec. 31, 2017 | Mar. 31, 2017 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $11 | $13 | $268 |
| Real estate: |  |  |  |
| Residential | 132 | - | - |
| Multifamily residential | - | - | - |
| Owner occupied CRE | - | 78 | 724 |
| Non-owner occupied CRE | 86 | 88 | - |
| Construction and land | - | - | - |
| Total real estate | 218 | 166 | 724 |
| Consumer and other | - | - | - |
| Total nonaccrual loans | 229 | 179 | 992 |
| More than 90 days past due and still accruing | - | - | - |
| Total of nonaccrual and 90 days past due loans | 229 | 179 | 992 |
| Real estate owned | - | - | 1,050 |
| Total nonperforming assets(1) | $229 | $179 | $2,042 |
| Troubled debt restructurings – performing | $791 | $1,045 | $774 |
| PCI loans | $13,768 | $14,315 | $8,083 |
| Nonperforming assets to total assets(1) | 0.02% | 0.01% | 0.03% |
| Nonperforming loans to total loans(1) | 0.03% | 0.02% | 0.04% |

(1) Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate this ratio.

Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above. At December 31, 2017, and 2016, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

For the three months ended March 31, 2018, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to zero.

***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. No loans which are past due 90 days or more are still accruing interest at March 31, 2018. Potential problem loans, not included in the non-performing loans, totaled $10.2 million at March 31, 2018.

***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 loss" for a description of the manner in which the provision for loan losses is established.

In accordance with acquisition accounting, loans acquired from the United Business Bank, FSB, and Plaza Bank mergers were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions of United Business Bank, FSB, and Plaza Bank. The remaining net discount on these acquired loans was $7.7 million and $8.7 million at March 31, 2018 and December 31, 2017, respectively.

Based on the Company's established comprehensive methodology discussed above, the allowance for loan losses was $4.6 million at March 31, 2018 .52% of loans receivable, net and 2,008.73 % of nonperforming loans). This compares to an allowance for loan losses at December 31, 2017 of $4.2 million 0.47% of loans receivable, net and 2,354.75% of nonperforming loans).

The following table presents an analysis of changes in the allowance for loan losses for the periods presented.

*(Dollars in thousands)*

|  | March 31, 2018 | December 31, 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: |
| Allowance at beginning of period | $4,215 | $3,775 | $3,775 |
| Provisions for loan losses | 254 | 462 | 143 |
| Recoveries: |  |  |  |
| Commercial and industrial | 131 | 45 | 10 |
| Residential | - | - | - |
| Owner occupied CRE | - | - | - |
| Consumer and other | 131 | 45 | 10 |
| Total recoveries |  |  |  |
| Charge-offs: |  |  |  |
| Commercial and industrial | - | (63) | - |
| Owner occupied CRE | - | - | (3) |
| Non-owner occupied CRE | - | (3) | - |
| Consumer and other | - | (1) | - |
| Total charge-offs | - | (67) | (3) |
| Net charge-offs | 131 | (22) | 7 |
| Balance at end of period | $4,600 | $4,215 | $3,925 |
| Ratios |  |  |  |
| Allowance for loan losses as a percentage of total |  |  |  |
| loans | 0.52% | 0.47% | 0.73% |
| Allowance for loan losses to total loans excluding |  |  |  |
| PCI loans | 0.52% | 0.48% | 0.74% |
| Allowance for loan losses excluding acquired |  |  |  |
| loans (loans not covered by the allowance) | 0.90% | 0.85% | 0.84% |
| Allowance for loan losses as a percentage of total |  |  |  |
| nonperforming loans | 2008.73% | 2352.28% | 192.21% |
| Net charge-offs as a percentage of average loans |  |  |  |
| outstanding during the period | (0.01)% | 0.00% | 0.00% |

As of March 31, 2018, we identified $1.0 million in impaired loans, inclusive of $229,000 of nonperforming loans and $780,000 of performing TDR loans. Of these impaired loans, only $11,000 had allowances for loan losses as their estimated collateral value or discounted expected cash flow is equal to or exceeds their carrying costs. As of December 31, 2017, we identified $1.1 million in impaired loans, inclusive of $179,000 of nonperforming loans and $954,000 of performing TDR loans. Of these impaired loans, only $13,000 had allowances for loan losses as their estimated collateral value or discounted expected cash flow is equal to or exceeds their carrying costs.

Management considers the allowance for loan losses at March 31, 2018 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

***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 non-interest-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 decreased $5.5 million, or 0.5%, to $1.10 billion at March 31, 2018 from $1.10 billion at December 31, 2017, primarily due to normal fluctuations within our deposit portfolio. Demand deposits as a percentage of total deposits increased to 80.0% at March 31, 2018 from 79.2% at December 31, 2017.

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

*(Dollars in thousands)*

|  | March 31, 2018 | December 31, 2017 | March 31, 2017 | Percentage Change Prior Year End | Prior Year |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non-interest-bearing | $320,104 | $327,309 | $142,437 | (2.2%) | 124.7% |
| Interest-bearing checking | 160,792 | 155,011 | 42,130 | 3.7% | 281.7% |
| Regular savings accounts | 36,544 | 36,539 | 14,321 | 0.0% | 155.2% |
| Money Market accounts | 361,759 | 356,640 | 246,806 | 1.4% | 46.6% |
| Interest-bearing transactions and savings accounts | 559,095 | 548,190 | 303,257 | 2.0% | 84.4% |
| Interest-bearing certificates | 219,574 | 228,806 | 164,259 | (4.0%) | 33.7% |
| Total deposits | $1,098,773 | $1,104,305 | $609,953 | (0.5%) | 80.1% |

***Borrowings.*** Borrowed funds were $11.4 million at both March 31, 2018 and December 31, 2017. The totals in both periods included $6.0 million in long-term secured borrowings and $5.4 million (net of mark-to-market adjustments), of junior subordinated debentures issued in connection with the sale of trust preferred securities from our acquisition of United Business Bank, FSB in 2017. At March 31, 2018, we had no FHLB advances outstanding and the ability to borrow up to $310.3 million.

In addition to FHLB advances, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At March 31, 2018, we had a total of $55.0 million federal funds line available from four third-party financial institutions, in addition to a $9.0 million line of credit which will expire in April 2018 that we do not intend to renew.

We are required to provide collateral for certain local agency deposits. As of March 31, 2018, the FHLB had issued a letter of credit on behalf of the Bank totaling $7.45 million as collateral for local agency deposits.

***Shareholders' equity.*** Shareholders' equity increased $3.9 million, or 3.3%, to $122.6 million at March 31, 2018 from $118.6 million at December 31, 2017. This increase was primarily due to net income of $4.1 million for the three months ended March 31, 2018.

### Comparison of Results of Operations for the Three Months Ended March 31, 2018 and 2017

***Earnings summary.*** We reported net income of $4.1 million for the three months ended March 31, 2018, compared to $1.4 million for the three months ended March 31, 2017, an increase of $2.7 million, or 187.3%. The increase in net income primarily was the result of increases in net interest income before provision for loan losses and non-interest income partially offset by an increase in non-interest expense reflecting both our two whole-bank acquisitions in 2017 and organic growth.

Diluted earnings per share were $0.54 for the three months ended March 31, 2018, an increase of $0.28 from diluted earnings per share of $0.26 for the three months ended March 31, 2017.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, improved to 57.45% for the three months ended March 31, 2018, compared to 64.24% for the three months ended March 31, 2017. The change in the efficiency ratio for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is attributable primarily to the increase in net interest income and noninterest income, partially offset by an increase in noninterest expense.

***Interest income.*** Interest income for the three months ended March 31, 2018 was $13.6 million, compared to $7.4 million for the three months ended March 31, 2017, an increase of $6.2 million, or 83.1%. The increase in interest income primarily was due to an increase in average interest earning assets, principally loans, which was driven by the two whole-bank acquisitions completed during 2017. Interest income on loans increased $4.6 million as a result of a $372.2 million increase in the average loan balance, further supplemented by a two basis point increase in the average loan yield. The average yield earned on loans for the three months ended March 31, 2018 was 4.91%, compared to 4.89% for the three months ended March 31, 2017. Interest income on loans for the three months ended March 31, 2018 included $1.0 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $595,000 for the three months ended March 31, 2017. The remaining net discount on these purchased loans was $7.7 million and $4.7 million at March 31, 2018 and 2017, respectively.

Interest income on interest-bearing deposits increased $563,000 as a result of a $125.9 million increase in the average balance of interest-earning deposits and a 67 basis point increase in the yield on interest-earning deposits to 1.56% for the three months ended March 31, 2018 from 0.89% for the three months ended March 31, 2017. Interest income on investment securities increased $312 thousand as a result of a $25.7 million increase in the average balance of investment securities and a 61 basis point increase in the yield on investment securities to 2.00% for the three months ended March 31, 2018 from 1.38% for the three months ended March 31, 2017.

***Interest expense.*** Interest expense increased by $220,000, or 23.9%, to $1.1 million for the three months ended March 31, 2018 from $918,000 for the three months ended March 31, 2017. The average cost of interest bearing liabilities decreased 20 basis points to 0.42% for the three months ended March 31, 2018 from 0.62% for the three months ended March 31, 2017. Total average interest-bearing liabilities increased by $516.9 million, or 86.9%, to $1.1 billion for the three months ended March 31, 2018 from $516.9 million for the three months ended March 31, 2017.

Interest expense on deposits increased $60,000, or 6.6%, to $979,000 during the three months ended March 31, 2018 from $918,000 the same period in 2017, primarily due to the deposits acquired in the United Business Bank, FSB and Plaza Bank acquisitions. The effects of the increase in the average deposit balance was largely offset by lower rates paid on interest bearing deposits, reflecting the still relatively low interest rate environment. The average rate paid on interest bearing deposits decreased to 0.36% for the three months ended March 31, 2018 from 0.63% for the three months ended March 31, 2017. Interest expense on borrowings was $159,000 for the three months ended March 31, 2018 compared to none for the same period in 2017, as a result of the Subordinated Debentures assumed and another borrowing obtained in connection with our United Business Bank, FSB acquisition. The Company replaced a term loan of United Business Bank, FSB that matured upon its acquisition with a similar $6.0 million term loan which was repaid subsequent to March 31, 2018.

***Net interest income.*** Net interest income increased $5.9 million, or 91.5%, to $12.4 million for the three months ended March 31, 2018 compared to $6.5 million for the three months ended March 31, 2017. Net interest margin for the three months ended March 31, 2018 increased 25 basis points to 4.27% from 4.02% for the same period in 2017. Net interest margin is enhanced by the amortization of acquisition accounting discounts on loans acquired in the acquisitions. Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 41 basis points and 36 basis points during three months ended March 31, 2018 and 2017, respectively. The average yield on interest-earning assets for the three months ended March 31, 2018 was 4.66%, an eight basis point increase from the three months ended March 31, 2017, while the average cost of interest-bearing liabilities for the three months ended March 31, 2018 was 0.42%, down 20 basis points from the 0.62% cost of funds during the three months ended March 31, 2017.

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

*(Dollars in thousands)*

| Interest-earning assets | As of March 31, Average Balance (1) | 2018 Interest | Annualized Average Yield | Average Balance | 2017 Interest | Annualized Average Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits | $235,718 | $916 | 1.58% | $114,727 | $249 | 0.88% |
| Investments available-for-sale | 39,481 | 194 | 1.99% | 13,537 | 39 | 1.17% |
| FHLB Stock | 4,772 | 93 | 7.90% | 2,511 | 86 | 13.89% |
| FRB Stock | 3,007 | 69 | 9.31% | 1,413 | 22 | 6.31% |
| Total loans (1) | 894,591 | 12,280 | 5.57% | 521,026 | 7,006 | 5.45% |
| Total interest-earning assets | 1,177,569 | 13,552 | 4.67% | 653,214 | 7,402 | 4.60% |
| Non-interest-earning assets | 65,441 |  |  | 44,215 |  |  |
| Total average assets | $1,243,010 |  |  | $697,429 |  |  |
| Interest-bearing liabiliities |  |  |  |  |  |  |
| Savings accounts | $37,620 | $8 | 0.09% | $12,924 | $5 | 0.16% |
| Interest-bearing checking | 160,572 | 33 | 0.08% | 41,293 | 21 | 0.21% |
| Money market accounts | 353,902 | 413 | 0.47% | 244,052 | 425 | 0.71% |
| Certificates of deposit | 223,829 | 525 | 0.95% | 161,790 | 467 | 1.17% |
| Total deposit accounts | 775,923 | 979 | 0.51% | 460,059 | 918 | 0.81% |
| Borrowed funds | 11,394 | 159 | 5.66% | - | - | 0.00% |
| Total interest bearing liabilities | 787,317 | 1,138 | 0.59% | 460,059 | 918 | 0.81% |
| Noninterest bearing liabilities | 333,051 |  |  | 140,996 |  |  |
| Total average liabiliities | 1,120,368 |  |  | 601,055 |  |  |
| Average equity | 122,642 |  |  | 96,374 |  |  |
| Total average liabilities and equity | $1,243,010 |  |  | $697,429 |  |  |
| Net interest income |  | $12,414 |  |  | $6,484 |  |
| Interest rate spread (2) |  |  | 4.08% |  |  | 3.79% |
| Net interest margin (3) |  |  | 4.28% |  |  | 4.03% |
| Ratio of average interest-earning assets |  |  |  |  |  |  |
| to average interest-bearing liabilities |  |  | 149.57% |  |  | 141.98% |

(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 earning assets.

48

***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. The following table compares the three months ended March 31, 2018 and 2017.

*(Dollars in thousands)*

| Interest -earning assets | Three months ended March 31, 2018 compared to 2017 Increase/(Decrease) Attributable to Rate | Volume | Total |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | $404 | $263 | $667 |
| Investments available-for-sale | 80 | 75 | 155 |
| Other equity securities | (48) | 102 | 54 |
| Total loans | 251 | 5,023 | 5,274 |
| Total interest income | 687 | 5,462 | 6,150 |
| Interest-bearing liabilities |  |  |  |
| Savings accounts | (7) | 10 | 3 |
| Interest-bearing checking | (49) | 61 | 12 |
| Money market accounts | (203) | 191 | (12) |
| Certificates of deposit | 23 | 35 | 58 |
| Total deposits | (235) | 296 | 61 |
| Borrowed funds | - | 159 | 159 |
| Total interest expense | (235) | 455 | 220 |
| Net interest income | $923 | $5,007 | $5,930 |

***Provision for loan losses.*** We recorded a provision for loan losses of $254,000 for the three months ended March 31, 2018, compared to a provision for loan losses of $143,000 for the three months ended March 31, 2017, an increase of $111,000 or 77.3%. We recorded no provision for loan losses for acquired loans related to the acquired non-purchased credit-impaired loans as accounted for in accordance with ASC Topic 310-20 for both the three months ended March 31, 2018 and 2017. In addition, no additional provisions were recorded on the purchase credit-impaired loans accounted for in accordance with ASC Topic 310-30 during the three months ended March 31, 2018 and 2017. The provision for loan losses increased primarily as a result of an increase in specific reserves on certain loans. We had net recoveries on previously charged-off loans of $131,000 for the three months ended March 31, 2018 compared to net recoveries of $7,000 during the three months ended March 31, 2017. The ratio of net recoveries to average total loans outstanding was (0.01)% for the three months ended March 31, 2018 and 0.00% for the three months ended March 31, 2017. The allowance for loan losses to loans receivable was 0.52% at

March 31, 2018 compared to 0.73% at March 31, 2017. See Comparison of Financial Condition - Allowance for loan losses for additional details.

***Noninterest income.*** Noninterest income increased $990,000, or 134.6%, to $1.7 million for the three months ended March 31, 2018 compared to $736,000 for the three months ended March 31, 2017. The increase primarily relates to higher gain on sale of loans, service charges and other fees and loan fee income. During the three months ended March 31, 2018, the Company sold $6.4 million of SBA loans, which generated a net gain on sale of $651,000 compared to a gain of $400,000 during the three months ended March 31, 2017. Additionally, our acquisitions and organic growth significantly increased our deposit accounts, which resulted in a $304,000, or 213.0%, increase in service charges and other fees. Loan fee income increased $188,000, or 329.6%, to $245,000 for the three months ended March 31, 2018, compared to $57,000 for the three months ended March 31, 2017. All other components of noninterest income increased $248,000, net between these two periods.

The following table details the components of non-interest income:

*(Dollars in thousands)*

|  | Three months ended March 31, 2018 | 2017 | Variance Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Gain on sale of loans | $651 | $400 | $251 | 62.8% |
| Service charges and other fees | 446 | 143 | 303 | 211.9% |
| Loan servicing and other loan fees | 245 | 57 | 188 | 329.8% |
| Other income and fees | 384 | 136 | 248 | 182.4% |
| Total non-interest income | $1,726 | $736 | $990 | 134.6% |

***Noninterest expense.*** Noninterest expense increased $3.5 million, or 75.2%, to $8.1 million for the three months ended March 31, 2018 compared to $4.6 million for the three months ended March 31, 2017. Each line category of noninterest expense was higher than the previous year, as we nearly doubled in size due to the acquisitions and organic growth. Salaries and related benefits increased $1.8 million, or 59.4%, to $4.9 million, as the number of full-time equivalent employees increased to 158 at March 31, 2018, compared to 105 a year earlier. Occupancy and equipment expenses increased $406,000, or 71.3%, to $975,000, primarily due to the increase in the number of branch office resulting from our acquisitions. As of March 31, 2018, we operated 17 full service branches, compared to 10 a year earlier. Data processing expenses increased $348,000, or 96.8%, to $704,000, related to the acquisitions and the systems conversion we undertook during 2017, as well as a result of higher transaction volume. Other noninterest expense increased $899,000, or 143.7%, to $1.5 million during the three months ended March 31, 2018, compared to $626,000 during the same period in 2017, primarily due to increases in office expenses of $216,000, professional fees of $211,000, amortization of our core deposit intangible asset of $206,000, and in marketing expenses of $156,000.

The following table details the components of non-interest expense:

*(Dollars in thousands)*

|  | Three months ended March 31, 2018 | 2017 | Variance Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Salaries and related benefits | $4,914 | $3,082 | $1,832 | 59.4% |
| Occupancy and Equipment | 975 | 569 | 406 | 71.4% |
| Data processing expense | 708 | 360 | 348 | 96.7% |
| Other expense | 1,526 | 628 | 898 | 143.0% |
| Total non-interest expense | $8,123 | $4,639 | $3,484 | 75.2% |

***Income taxes.*** Income tax expense increased $672,000, or 65.7%, to $1.7 million for the three months ended March 31, 2018 compared to $1.0 million for the three months ended March 31, 2017, reflecting the increase in pre-tax income. The Company's effective tax rate was 29.39% for the three months ended March 31, 2018 compared to 41.91% for the same period in 2017. The decrease in the Company's effective tax rate during the three months ended March 31, 2018 compared to the same period in 2017 is primarily the result of recent changes in the U. S. tax laws, wherein the statutory corporate income tax rate was lowered from 35.0% to 21.0%.

### 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 March 31, 2018, the Bank had an available borrowing capacity of $310.3 million with the FHLB of San Francisco, and four Federal Funds lines with available commitments totaling $55.0 million with four correspondent banks. There are no amounts outstanding under these facilities at March 31, 2018 and December 31, 2017. Additionally, the Company 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.

We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $82.4 million and $98.7 million at March 31, 2018 and December 31, 2017, certificates of deposit scheduled to mature in one year or less at March 31, 2018, totaled $167.0 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 was $5.0 million and net cash used in operating activities was $10.3 million for the three months ended March 31, 2018 and 2017, respectively. During the three months ended March 31, 2018, net cash provided by investing activities, which consists primarily of net repayment of loans receivable and maturities of investment securities, was $6.2 million. During the three months ended March 31, 2017, net cash used in investing activities totaled $12.0 million due primarily to an increase in net loans receivable. Net cash used in financing activities totaling $5.5 million comprised primarily of a net decrease in deposits compared to net cash provided by financing activities totaling $19.2 million which was primarily due to a net increase in deposits for the three months ended March 31, 2018 and 2017, respectively.

As a separate legal entity from the Bank, BayCom Corp must provide for its own liquidity. Sources of capital and liquidity for BayCom Corp include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At March 31, 2018, BayCom Corp had liquid assets of $495,000 on an unconsolidated basis. Subsequent to March 31, 2018, the Company completed an initial public offering of its common stock resulting in net proceeds to the Company of approximately $66.8 million. For further information, see "Note 11 – Subsequent Events" of this report.

### Capital Requirements

BayCom Corp is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as a state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require BayCom Corp and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires BayCom Corp to maintain capital adequacy that generally parallels the FDIC requirements. 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. In addition to the minimum capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. As of March 31, 2018, the conservation buffer was 1.875%. At March 31, 2018, BayCom Corp and the Bank each exceeded all regulatory capital requirements.

The actual regulatory capital ratios calculated for BayCom Corp and the Bank as of March 31, 2018, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):

*(Dollars in thousands)*

| Leverage Ratio | At March 31, 2018 Dollars | Ratio | At December 31, 2017 Dollars | Ratio |
| --- | ---: | ---: | ---: | ---: |
| BayCom Corp | $105,483 | 8.61% | $107,153 | 8.73% |
| Minimum requirement for "Well-Capitalized" | 61,249 | 5.00% | 61,396 | 5.00% |
| Minimum regulatory requirement | 48,999 | 4.00% | 49,117 | 4.00% |
| United Business Bank | $115,943 | 9.49% | $111,143 | 8.92% |
| Minimum requirement for "Well-Capitalized" | 61,107 | 5.00% | 62,279 | 5.00% |
| Minimum regulatory requirement | 48,886 | 4.00% | 49,823 | 4.00% |
| Common Equity Tier 1 Ratio |  |  |  |  |
| BayCom Corp | $105,483 | 12.10% | $100,761 | 11.43% |
| Minimum requirement for "Well-Capitalized" | 56,647 | 6.50% | 57,285 | 6.50% |
| Minimum regulatory requirement | 39,217 | 4.50% | 39,659 | 4.50% |
| United Business Bank | $115,943 | 13.31% | $111,143 | 12.43% |
| Minimum requirement for "Well-Capitalized" | 56,612 | 6.50% | 58,109 | 6.50% |
| Minimum regulatory requirement | 39,193 | 4.50% | 40,229 | 4.50% |
| Tier 1 Risk-Based Capital Ratio |  |  |  |  |
| BayCom Corp | $111,875 | 12.84% | $107,153 | 12.16% |
| Minimum requirement for "Well-Capitalized" | 69,720 | 8.00% | 70,504 | 8.00% |
| Minimum regulatory requirement | 52,290 | 6.00% | 52,878 | 6.00% |
| United Business Bank | $115,943 | 13.31% | $111,143 | 12.43% |
| Minimum requirement for "Well-Capitalized" | 69,676 | 8.00% | 71,519 | 8.00% |
| Minimum regulatory requirement | 52,257 | 6.00% | 53,639 | 6.00% |
| Total Risk-Based Capital Ratio |  |  |  |  |
| BayCom Corp | $116,785 | 13.40% | $111,678 | 12.67% |
| Minimum requirement for "Well-Capitalized" | 87,150 | 10.00% | 88,131 | 10.00% |
| Minimum regulatory requirement | 69,720 | 8.00% | 70,504 | 8.00% |
| United Business Bank | $120,853 | 13.88% | $115,668 | 12.90% |
| Minimum requirement for "Well-Capitalized" | 88,248 | 10.00% | 89,399 | 10.00% |
| Minimum regulatory requirement | 70,598 | 8.00% | 71,519 | 8.00% |

53

***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.

As of March 31, 2018, and December 31, 2017, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and letters of credit were $82.4 million and $98.7 million at March 31, 2018 and December 31, 2017, respectively. As a percentage of net loans, these off-balance sheet items represent 11% and 11%, respectively. The Company does not expect all commitments to be funded.

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 and Washington. As of March 31, 2018, and December 31, 2017, the FHLB issued a letter of credit on behalf of the Company totaling $7.5 million and $9.9 million, respectively, as collateral for local agency deposits.

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

## Market risk

As filed, 445 characters.

For information regarding the Company's market risk, see "Management Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity and Market Risk" in the Company's prospectus dated May 4, 2018 filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on May 4, 2018. As of March 31, 2018, the market risk of the Company has not changed materially from those disclosed in the prospectus.

## Controls and procedures

As filed, 3,522 characters.

(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 March 31, 2018 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 March 31, 2018, 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 FS Bancorp management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC's rules and forms.

(b) Changes in Internal Controls

There were no significant changes in the Company's internal control over financial reporting that occurred during the three months ended March 31, 2018, 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.

## Risk factors

As filed, 334 characters.

For information regarding the Company's risk factors, see "Risk Factors" in the Company's prospectus dated May 4, 2018, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on May 4, 2018. As of March 31, 2018, the risk factors of the Company have not changed materially from those disclosed in the prospectus.

Filed Jun 18, 2018.
Source: SEC EDGAR, the filing index for accession 0000927089-18-000262. Last ingested by Listed: Nov 10, 2026, 00:50 ET. No prices; not investment advice.