BayCom Corp: Form 10-Q for the period ended Mar 31, 2019

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

• expected revenues, cost savings, synergies and other benefits from our recent merger with Bethlehem Financial Corporation (“BFC”) or our pending merger with Uniti Financial Corporation (the “Uniti Merger”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to 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, Washington, and New Mexico;
• changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates;
• our net interest margin and funding sources;
• fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
• secondary market conditions for loans and our ability to originate loans held for sale and to sell loans in the secondary market;
• results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;
• risks related to our acquisition strategy, including our ability to identify future suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;
• challenges arising from attempts to expand into new geographic markets, products, or services;
• future goodwill impairment due to changes in our business, market conditions, or other factors;
• legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, and regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III;
• the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the implementing regulations;
• our ability to attract and retain deposits;
• our ability to control operating costs and expenses;
• the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;
• difficulties in reducing risk associated with the loans and securities on our balance sheet;
• staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
• the effectiveness of our risk management framework;
• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;
• an inability to keep pace with the rate of technological advances;
• our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;
• costs and effects of litigation, including settlements and judgments;
• our ability to implement our business strategies and manage our growth;
• liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
• the loss of our large loan and deposit relationships;
• increased competitive pressures among financial services companies;
• changes in consumer spending, borrowing and savings habits;
• the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
• 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; 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, 2018 (“2018 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 2019 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our consolidated financial condition and consolidated results of operations as well as our stock price performance.

Executive Overview

General. BayCom is a bank holding company headquartered in Walnut Creek, California. BayCom’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services to businesses and business owners as well as individuals through its network of 22 full service branches and one loan production office located in California, with a majority of our branches located in the San Francisco Bay Area, Seattle, Washington and Central New Mexico. At March 31, 2019, the Company had approximately $1.5 billion in total assets, $965.0 million in total loans, $1.3 billion in total deposits and $206.4 million in shareholders’ equity. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relate primarily to the Bank.

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 six strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. Looking forward, we expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the 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.

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.

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 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 resulted from our acquisitions of FULB, Plaza Bank and BFC. 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. 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 is less than the recorded goodwill an impairment charge would be recorded for the difference. As of March 31, 2019, the Company completed its qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of the Bank, the reporting unit, exceeds the carrying value. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results.

Even though the Company determined that there was no goodwill impairment, a decline in the value of its stock price as well as values of other financial institutions, declines in revenue for the Company beyond our current forecasts, significant adverse changes in the operating environment for the financial industry or an increase in the value of our assets without an increase in the value of the reporting unit may result in a future impairment charge.

It is possible that changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management's judgments, assumptions and estimates made in assessing the fair value of our goodwill, could result in an impairment charge of a portion or all of our goodwill. If the Company recorded an impairment charge, its financial position and results of operations would be adversely affected; however, such an impairment charge would have no impact on our liquidity, operations or regulatory capital.

Comparison of Financial Condition at March 31, 2019 and December 31, 2018

Total assets. Total assets remained relatively unchanged at $1.5 billion at both March 31, 2019 and December 31, 2018. The $4.1 million increase was primarily due to the recording of a $7.5 million right-of-use asset and increases in loans held for sale of $3.4 million and in interest receivable and other assets of $2.9 million partially offset by a decline in net loans receivable of $10.6 million during the first quarter of 2019.

Cash and cash equivalents. Cash and cash equivalents increased $8.9 million, or 2.7%, to $332.5 million, at March 31, 2019, from $323.6 million at December 31, 2018. These funds fluctuate based on our funding needs. The increase was primarily due to the decline in net loans receivable as loan repayments exceeded loan originations. 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 $2.5 million, or 2.5%, to $97.3 million at March 31, 2019 from $99.8 million at December 31, 2018. The decrease was primarily due to $2.0 million of maturities and repayment of investment securities, in addition to routine amortization of investment premiums and discounts. At March 31, 2019 and December 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 $10.6 million, or 1.1%, to $959.6 million at March 31, 2019 from $970.2 million at December 31, 2018. The decrease was primarily due to repayments on loans in excess of loan originations. Loan originations for quarter ended March 31, 2019 totaled $20.7 million compared to $29.2 million during the first quarter 2018. Loan originations in the first quarter of 2019 were spread throughout our markets with the majority focused in San Mateo, Alameda Counties in California and Bernalillo County in New Mexico, with commercial and residential real estate secured loans accounting for the majority of the originations during the quarter.

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

(Dollars in thousands)

35

The following table shows at March 31, 2019, the geographic distribution of our loan portfolio in dollar amounts and percentages:

(Dollars in thousands)

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

(2) Includes loans located primarily in the states of New Mexico and Washington. At March 31, 2019, loans in New Mexico and Washington totaled $101.4 million and $60.1 million, respectively.

Nonperforming assets and nonaccrual loans. Nonperforming assets consists of nonaccrual loans and other real estate owned. Nonperforming assets increased $481,000, or 12.2%, to $4.4 million at March 31, 2019 from $3.9 million at December 31, 2018. The Company had nonaccrual loans totaling $3.6 million, or 0.37% of total loans, of which $2.3 million are guaranteed by governmental agencies at March 31, 2019 as compared to $3.1 million or 0.32% of total loans at December 31, 2018. This increase in nonaccrual loans during the first quarter of 2019 was related to the addition of one owner-occupied commercial real estate loan. At March 31, 2019, accruing loans past due 30 to 89 days totaled $8.7 million, compared to $3.4 million at December 31, 2018. This increase was primarily due to increases in nonowner-occupied commercial real estate loans of $3.2 million and in owner-occupied commercial real estate loans of $1.8 million. OREO totaled $801,000 at both March 31, 2019 and December 31, 2018.

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

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

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

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. During the first quarter of 2019, there were two loans modified as a TDR totaling $497,000. At March 31, 2019 and December 31, 2018, the Company had TDRs that were performing in accordance with their modified terms of $767,000 and $750,000, respectively. The performing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status.

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

(Dollars in thousands)

(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 March 31, 2019 and 2018, and December 31, 2018, 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, 2019, gross interest income which would have been recorded had the nonaccruing loans been current in accordance with their original terms amounted to approximately $42,000.

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 $6.3 million at March 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 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 FULB 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 FULB and Plaza Bank. As of March 31, 2019, acquired loans, net of their discounts, totaled $379.6 million compared to $392.8 million at December 31, 2018. The remaining net discount on these acquired loans was $7.0 million and $7.5 million at March 31, 2019 and December 31, 2018, respectively.

Based on the Company’s established comprehensive methodology discussed above, the allowance for loan losses was $5.4 million at March 31, 2019 or 0.55% of total loans and 149.81% of nonperforming loans. This compares to an allowance for loan losses at December 31, 2018 of $5.1 million 0.53% of total loans and 164.32% of nonperforming loans.

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

(Dollars in thousands)

As of March 31, 2019, the Company had $4.4 million in impaired loans, inclusive of $3.6 million of nonperforming loans and $766,000 of performing TDR loans. These impaired loans had a specific allowance for loan losses totaling $10,000 based on their estimated collateral value or discounted expected cash flows. As of December 31, 2018, the Company had $3.9 million in impaired loans, inclusive of $3.1 million of nonperforming loans and $750,000 of performing TDR loans. These impaired loans had a specific allowance for loan losses totaling $10,000 based on their estimated collateral value or discounted expected cash flows.

Management considers the allowance for loan losses at March 31, 2019 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.

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 Consolidated Balance Sheet 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.

Premises and Equipment. Premises and equipment decreased $4.7 million, or 42.0%, to $6.5 million at March 31, 2019 from $11.2 million at December 31, 2018. The decrease in premises and equipment was primarily due to the sale of the Oakland, California building with a carrying value of $4.6 million. The Bank leased back 4,021 square feet representing 11.1% of the building’s total square footage for its Oakland branch. In the first quarter 2019, the Bank recorded a $78,000 recovery on the write-down of $600,000 expensed in the second quarter of 2018.

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 remained relatively unchanged at $1.3 billion at both March 31, 2019 and December 31, 2018. The $7.2 million decrease was primarily due to normal fluctuations within our deposit portfolio. Noninterest bearing demand deposits as a percentage of total deposits increased to 33.3% at March 31, 2019 from 31.6% at December 31, 2018.

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)

Borrowings. Although deposits are our primary source of funds, we may from time to time utilize borrowings as a cost effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. We are a member of and may obtain advances from the FHLB of San Francisco, which is part of the Federal Home Loan Bank System. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At March 31, 2019 and December 31, 2018, we had no FHLB advances outstanding and the ability to borrow up to $371.6 million and $369.6 million, respectively.

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, 2019 and December 31, 2018, we had a total of $65.0 and $55.0 million, respectively, in federal funds lines available from third-party financial institutions and no balances outstanding at March 31, 2019 and December 31, 2018.

We are required to provide collateral for certain local agency deposits. As of March 31, 2019 and December 31, 2018, the FHLB had issued a letter of credit on behalf of the Bank totaling $11.5 million as collateral for local agency deposits.

Shareholders’ equity. Shareholders’ equity increased $5.7 million, or 2.8%, to $206.4 million at March 31, 2019 from $200.7 million at December 31, 2018. This increase was primarily due to net income of $4.9 million for the three months ended March 31, 2019. In addition, other comprehensive income increased by $597,000, primarily due to improvements in the fair market value of our available-for-sale investments. The Company does not pay a regular cash dividend.

Comparison of Results of Operations for the Three Months Ended March 31, 2019 and 2018

Earnings summary. We reported net income of $4.9 million for the three months ended March 31, 2019, compared to $4.1 million for the three months ended March 31, 2018, an increase of $872,000, or 21.4%. The increase in net income primarily was the result of increases in net interest income before provision for loan losses and noninterest income partially offset by an increase in noninterest expense reflecting both the BFC acquisition and organic growth.

Diluted earnings per share were $0.45 for the three months ended March 31, 2019, a decrease of $0.09 from diluted earnings per share of $0.54 for the three months ended March 31, 2018.

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, improved slightly to 57.39% for the three months ended March 31, 2019, compared to 57.45% for the three months ended March 31, 2018. The change in the efficiency ratio for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 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, 2019 was $16.4 million, compared to $13.6 million for the three months ended March 31, 2018, an increase of $2.8 million, or 20.7%. The increase in interest income primarily was due to an increase in average interest earning assets, principally loans, which was driven primarily by the BFC acquisition and organic growth. To a lesser extent, the increase was also due to the reinvestment of the net proceeds received from our initial public offering in 2018, as well as a higher yield on interest earning deposits primarily due to increases in market interest rates during the year. Interest, including fees, on loans increased $1.3 million as a result of a $74.0 million increase in the average loan balance, partially offset by a 10 basis point decrease in the average loan yield. The average yield on loans for the first quarter of 2019 was 5.67% compared to 5.57% for the same quarter last year. The accretion of the net discount on acquired loans increased the yield on loans by 33 basis points and 56 basis points during the first quarter of 2019 and 2018, respectively. Interest income on loans for the three months ended March 31, 2019 included $577,000 in accretion of purchase accounting fair value adjustments on acquired loans, compared to $1.2 million for the three months ended March 31, 2018. 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. The remaining net discount on these purchased loans was $7.0 million and $7.7 million at March 31, 2019 and 2018, respectively.

Interest income on interest-bearing deposits increased $1.1 million as a result of a $87.6 million increase in the average balance of interest-bearing deposits and a 92 basis point increase in the average yield on interest-bearing deposits to 2.50% for the three months ended March 31, 2019 from 1.58% for the three months ended March 31, 2018.

Interest income on investment securities available-for-sale increased $471,000 as a result of a $60.3 million increase in the average balance of investment securities available-for-sale and a 71 basis point increase in the average yield on investment securities to 2.70% for the three months ended March 31, 2019 from 1.99% for the three months ended March 31, 2018.

Interest expense. Interest expense increased by $354,000, or 31.1%, to $1.5 million for the three months ended March 31, 2019 from $1.1 million for the three months ended March 31, 2018. The average cost of interest bearing liabilities increased 11 basis points to 0.70% for the three months ended March 31, 2019 from 0.59% for the three months ended March 31, 2018. Total average interest-bearing liabilities increased by $78.2 million, or 9.9%, to $865.5 million for the three months ended March 31, 2019 from $787.3 million for the three months ended March 31, 2018.

Interest expense on deposits increased $367,000, or 37.5%, to $1.35 million during the three months ended March 31, 2019 from $979,000 during this same period in 2018, primarily due to the deposits acquired in the BFC acquisition and increases in prevailing market interest rates year over year. The average rate paid on interest bearing deposits increased to 0.64% for the three months ended March 31, 2019 from 0.51% for the three months ended March 31, 2018. Increases in the cost of interest bearing deposits were partially offset by the increase in the average balance of noninterest bearing deposits. Interest expense on borrowings was $146,000 for the three months ended March 31, 2019 compared to $159,000 for the same period in 2018, as a result of a $3.1 million reduction in the average balance of borrowings outstanding quarter over quarter. The Company replaced a term loan of United Business Bank, FSB, the wholly-owned bank subsidiary of FULB, 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 $2.5 million, or 19.7%, to $14.9 million for the three months ended March 31, 2019 compared to $12.4 million for the three months ended March 31, 2018. Net interest margin for the three months ended March 31, 2019 increased two basis points to 4.30% from 4.28% for the same period in 2018. Net interest margin is enhanced by the amortization of acquisition accounting discounts on loans acquired in acquisitions. 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 33 and 56 basis points during the three months ended March 31, 2019 and 2018, respectively. The average yield on interest-earning assets for the three months ended March 31, 2019 was 4.74%, a seven basis point increase compared to the three months ended March 31, 2018, while the average cost of interest-bearing liabilities for the three months ended March 31, 2019 was 0.70%, an increase of 11 basis points from 0.59% during the three months ended March 31, 2018.

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)

(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.

43

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, 2019 and 2018:

(Dollars in thousands)

Provision for loan losses. We recorded a provision for loan losses of $277,000 for the three months ended March 31, 2019, compared to a provision for loan losses of $254,000 for the three months ended March 31, 2018. 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, 2019 and 2018. 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, 2019 and 2018. The provision for loan losses increased primarily as a result of an increase in specific reserves related to the migration of certain loans to nonaccrual status. We had net charge-offs on loans of $12,000 for the three months ended March 31, 2019 compared to net recoveries of $131,000 during the three months ended March 31, 2018. The ratio of net charge-offs to average total loans outstanding was 0% for the three months ended March 31, 2019 and the ratio of net recoveries to average total loans outstanding was 0.02% for the three months ended March 31, 2018. The allowance for loan losses to total loans was 0.56% at March 31, 2019 compared to 0.52% at March 31, 2018. See Comparison of Financial Condition - Allowance for loan losses for additional details.

Noninterest income. Noninterest income increased $394,000, or 22.8%, to $2.1 million for the three months ended March 31, 2019 compared to $1.7 million for the three months ended March 31, 2018. The increase primarily relates to higher service charges and other loan fee income as well as an increase in other noninterest income resulting from our investment in a SBIC fund partially offset by a decline in the gain on sale of loans. During the three months ended March 31, 2019, the Company sold $2.8 million of SBA loans, which generated a net pretax gain on sale of $268,000 compared to a gain of $651,000 during the three months ended March 31, 2018. Additionally, our BFC acquisition and organic deposit growth increased our service charges and other fees by $287,000, or 64.3%, due to an increase in the number of deposit accounts. Loan servicing fees and other income increased $165,000, or 67.3%, to $410,000 for the three months ended March 31, 2019, compared to $245,000 for the three months ended March 31, 2018. Other noninterest income increased $403,000, or 104.9%, to $787,000 during the three months ended March 31, 2019, compared to $384,000 during the same period in 2018, primarily due to a one-time increase resulting from an investment in an SBIC fund.

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

(Dollars in thousands)

Noninterest expense. Noninterest expense increased $1.6 million, or 20.0%, to $9.7 million for the three months ended March 31, 2019 compared to $8.1 million for the three months ended March 31, 2018. Each line category of noninterest expense in the table below was higher than the previous year, as we increased our size due to the BFC acquisition and organic growth. Salaries and related benefits increased $1.0 million, or 21.1%, to $5.9 million, as the number of full-time equivalent employees increased to 205 at March 31, 2019, compared to 164 a year earlier. Occupancy and equipment expenses increased $135,000, or 13.8%, to $1.1 million, primarily due to the increase in the number of branch offices resulting from the BFC acquisition. As of March 31, 2019, we operated 22 full service branches, compared to 17 a year earlier. Data processing expenses increased $216,000, or 30.5%, to $924,000, related to higher transaction costs derived from increased processing volume. Other noninterest expense increased $225,000, or 14.7%, to $1.8 million during the three months ended March 31, 2019, compared to $1.5 million during the same period in 2018, primarily due to increases in the amortization of our core deposit intangible asset of $100,000 and professional fees of $56,000 to ensure compliance with various public company requirements.

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

(Dollars in thousands)

Income taxes. Income tax expense increased $325,000, or 19.2%, to $2.0 million for the three months ended March 31, 2019 compared to $1.7 million for the three months ended March 31, 2018, reflecting the increase in pre-tax income. The Company’s effective tax rate was 29.01% for the three months ended March 31, 2019 compared to 29.39% for the same period in 2018. The slight decrease in the Company’s effective tax rate during the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to an increase in the amount of income that was either exempt from tax or that exhibited favorable tax attributes.

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, 2019, the Bank had an available borrowing capacity of $371.6 million with the FHLB of San Francisco, and Federal Funds lines with available commitments totaling $65.0 million with five correspondent banks. There are no amounts outstanding under these facilities at March 31, 2019 and December 31, 2018. 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 $92.4 million and $101.1 million at March 31, 2019 and December 31, 2018, certificates of deposit scheduled to mature in one year or less at March 31, 2019, totaled $159.5 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 used in operating activities was $458,000 for the three months ended March 31, 2019. Net cash provided by operating activities was $5.0 million for the three months ended March 31, 2018. During the three months ended March 31, 2019 and 2018, net cash provided by investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $16.6 million and $6.2 million, respectively. Net cash used in financing activities, which is comprised primarily of net change in deposits was $7.2 million and $5.5 million for the three months ended March 31, 2019 and 2018, respectively.

Baycom Corp is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, funds paid out for Company stock repurchases, and payments on trust-preferred securities and subordinated debt held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At March 31, 2019, the Company on an unconsolidated basis had liquid assets of $38.0 million.

The Bank, as a state-chartered, federally insured savings bank, and member of the Federal Reserve is subject to the capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “well-capitalized” status under the Federal Reserve regulations. Based on capital levels at March 31, 2019, the Bank was considered to be well-capitalized.

As a bank holding company registered with the Federal Reserve, BayCom Corp is subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If BayCom Corp were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at March 31, 2019, BayCom Corp would have exceeded all regulatory capital requirements.

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

(Dollars in thousands)

In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. As of March 31, 2019, the Bank’s conservation buffer was 7.87%.

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 18 - 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.

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 2018 Annual Report, filed with the Securities and Exchange Commission on March 19, 2019. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2018 Annual Report.

(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, 2019 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, 2019, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to BayCom Corp’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.

(b) Changes in Internal Controls

There were no significant changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2019, 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.

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s 2018 Annual Report, filed with the Securities and Exchange Commission on March 19, 2019. As of March 31, 2019, the risk factors of the Company have not changed materially from those disclosed in the 2018 Annual Report.