# BayCom Corp: Form 10-Q for the period ended Jun 30, 2020

- Company: [BayCom Corp](/companies/bcml.md) (CIK 1730984)
- Form: 10-Q
- Filed: 2020-08-10
- Accepted by EDGAR: Aug 10, 2020, 17:18 ET
- Period: 2020-06-30
- Accession: 0001558370-20-010235
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1730984/000155837020010235/bcml-20200630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1730984/000155837020010235/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $1.9m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $4.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $3.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $5.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.49 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.26 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.49 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 12,025,098 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 12,186,254 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $893.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $10.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $203.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-06-30 | $2.19bn | us-gaap:Assets |
| Total liabilities | at 2020-06-30 | $1.94bn | us-gaap:Liabilities |
| Shareholders' equity | at 2020-06-30 | $252.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 114,593 characters.

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

- the effect of the COVID-19 pandemic, including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;
- expected revenues, cost savings, synergies and other benefits from our recent acquisitions of Grand Mountain Bancshares, Inc. (“GMB”) and TIG Bancorp (“TIG”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected;
- the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses;
- changes in economic conditions in general and in California, Colorado, Washington, and New Mexico;
- changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates;
- uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks;
- our net interest margin and funding sources;
- fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
- secondary market conditions for loans and our ability to originate loans held for sale and to sell loans in the secondary market;
- results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;
- risks related to our acquisition strategy, including our ability to identify future suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;
- challenges arising from attempts to expand into new geographic markets, products, or services;
- future goodwill impairment due to changes in our business, market conditions, or other factors;
- legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, and regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III;
- the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the implementing regulations;
- our ability to control operating costs and expenses;
- the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;
- staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
- the effectiveness of our risk management framework;
- disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, which could expose us to litigation or reputational harm;
- an inability to keep pace with the rate of technological advances;
- our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;
- costs and effects of litigation, including settlements and judgments;
- our ability to implement our business strategies and manage our growth;
- liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
- the loss of our large loan and deposit relationships;
- increased competitive pressures among financial services companies;
- changes in consumer spending, borrowing and savings habits;
- the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
- adverse changes in the securities markets;
- inability of key third-party providers to perform their obligations to us;
- statements with respect to our intentions regarding disclosure and other changes resulting from the Jumpstart Our Business Startups Act of 2012 ("JOBS Act");
- changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;
- other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ; and
- the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”).

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

### Executive Overview

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

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

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

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

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

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

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

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

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

### Critical Accounting Policies and Estimates

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

The following represent our critical accounting policies:

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

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

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

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

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

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

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

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

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

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

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

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

### BayCom’s Response to COVID-19

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

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

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

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

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

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

### Allowance for Loan Losses and Loan Modifications

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

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

- Interest only payments on term debt for up to 180 days;
- Full payment deferrals for up to 90 days upon request with an extension for another 90 days upon submission of specified documentation and recovery plans;
- Loan re-amortization, especially in cases where significant prepayments of principal have occurred and to provide for continuing payment reduction at the end of the 180-day deferment period;
- Covenant waivers and resets;
- Extension of up to six months on loans maturing prior to December 31, 2020;
- Maturity extensions of up to five years on real estate secured loans subject to certain limitations; and
- Maturity extensions of up to two years on revolving lines of credit and non-real estate secured term loans subject to certain limitations.

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

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

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

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

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

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

### Branch Operations and Addiitonal Client Support

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

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

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

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

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

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

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

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ June 30, 2020 | ​ ​ ​ | ​ ​ December 31, 2019 | ​ ​ ​ ​ | ​ ​ % Change ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: |
| Commercial and industrial (1) |  | $312,161 |  | $168,747 |  | 85.0% |
| Real estate: | ​ |  | ​ |  | ​ | ​ ​ |
| Residential | ​ | 194,130 | ​ | 154,306 |  | 25.8% |
| Multifamily residential | ​ | 248,916 | ​ | 215,073 |  | 15.7% |
| Owner occupied CRE | ​ | 398,511 | ​ | 416,141 |  | (4.2)% |
| Non-owner occupied CRE | ​ | 506,673 | ​ | 447,823 |  | 13.1% |
| Construction and land | ​ | 45,641 | ​ | 36,098 |  | 26.4% |
| Total real estate | ​ | 1,393,871 | ​ | 1,269,441 | ​ | 9.8% |
| Consumer | ​ | 5,561 | ​ | 2,560 | ​ | 117.2% |
| PCI loans | ​ | 17,653 | ​ | 17,332 | ​ | 1.9% |
| Total Loans | ​ | 1,729,246 | ​ | 1,458,080 | ​ | 18.6% |
| Net deferred loan fees | ​ | (4,571) | ​ | (451) | ​ | 913.5% |
| Allowance for loan losses | ​ | (13,500) | ​ | (7,400) | ​ | 82.4% |
| Loans, net | ​ | $1,711,175 | ​ | $1,450,229 | ​ | 18.0% |

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ June 30, 2020 | ​ ​ ​ ​ ​ ​ | ​ ​ San Francisco Bay Area (1) ​ ​ ​ ​ Amount ​ | ​ ​ ​ ​ | ​ % of Total in Category ​ | ​ ​ ​ ​ ​ ​ ​ | ​ ​ ​ ​ Other California ​ ​ ​ ​ Amount ​ | ​ ​ ​ ​ ​ | ​ ​ % of Total in Category ​ | ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ Total in State of California ​ ​ ​ ​ Amount ​ | ​ ​ ​ ​ | ​ ​ ​ ​ % of ​ Total in ​ Category ​ | ​ ​ ​ ​ ​ All Other States (2) ​ ​ ​ ​ Amount ​ | ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ % of ​ Total in ​ Category ​ | ​ ​ ​ ​ Total ​ ​ ​ ​ Amount ​ | ​ ​ ​ ​ ​ | ​ ​ ​ % of Total in Category ​ ​ |
| --- | --- | ---: | --- | --- | ---: | ---: | --- | --- | ---: | ---: | --- | ---: | ---: | --- | ---: | ---: | --- | ---: |
| Commercial and industrial | ​ | $57,983 |  | ​ | 12.0% | $171,795 |  | ​ | 24.1% | $229,778 |  | 19.3% | $83,092 |  | 15.6% | $312,870 |  | 18.1% |
| Real estate: | ​ | ​ |  | ​ | ​ | ​ |  | ​ | ​ |  |  | ​ | ​ |  | ​ |  |  | ​ |
| Residential | ​ | 48,548 |  | ​ | 10.1% | 49,840 |  | ​ | 7.0% | 98,388 |  | 8.2% | 98,882 |  | 18.5% | 197,270 |  | 11.4% |
| Multifamily residential | ​ | 62,144 |  | ​ | 12.9% | 127,822 |  | ​ | 17.9% | 189,966 |  | 15.9% | 62,230 |  | 11.7% | 252,196 |  | 14.6% |
| Owner occupied CRE | ​ | 160,456 |  | ​ | 33.3% | 156,639 |  | ​ | 22.0% | 317,095 |  | 26.5% | 87,182 |  | 16.3% | 404,277 |  | 23.4% |
| Non-owner occupied CRE | ​ | 149,830 |  | ​ | 31.1% | 201,167 |  | ​ | 28.1% | 350,997 |  | 29.4% | 160,242 |  | 30.0% | 511,239 |  | 29.6% |
| Construction and land | ​ | 2,682 |  | ​ | 0.6% | 6,205 |  | ​ | 0.9% | 8,887 |  | 0.7% | 36,946 |  | 6.9% | 45,833 |  | 2.7% |
| Total real estate | ​ | 423,660 |  | ​ | ​ ​ | 541,673 |  | ​ | ​ ​ | 965,333 |  | ​ | 445,482 |  | ​ | 1,410,815 |  | ​ |
| Consumer | ​ | 16 |  | ​ | —% | 3 |  | ​ | —% | 19 |  | 0.0% | 5,542 |  | 1.0% | 5,561 |  | 0.2% |
| Total loans | ​ | $481,659 | ​ | ​ | ​ ​ | $713,471 | ​ | ​ | ​ ​ | $1,195,130 |  | ​ | $534,116 |  | ​ | $1,729,246 |  | ​ |
| ​ | ​ | ​ ​ | ​ | ​ | ​ ​ | ​ ​ | ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ |
| December 31, 2019 | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  |  | ​ |  |  | ​ |  |  | ​ |
| Commercial and industrial | ​ | $52,140 | ​ |  | 9.7% | $56,272 | ​ |  | 11.5% | $108,412 |  | 10.6% | $60,879 |  | 14.1% | $169,291 |  | 11.6% |
| Real estate: | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  |  | ​ |  |  | ​ |  |  | ​ |
| Residential | ​ | 54,467 | ​ |  | 10.2% | 44,428 | ​ |  | 9.1% | 98,895 |  | 9.6% | 57,869 |  | 13.4% | 156,764 |  | 10.7% |
| Multifamily residential | ​ | 72,248 | ​ |  | 13.5% | 82,110 | ​ |  | 16.7% | 154,358 |  | 15.1% | 64,052 |  | 14.8% | 218,410 |  | 15.0% |
| Owner occupied CRE | ​ | 184,255 | ​ |  | 34.4% | 144,524 | ​ |  | 29.5% | 328,779 |  | 32.1% | 93,774 |  | 21.7% | 422,553 |  | 29.0% |
| Non-owner occupied CRE | ​ | 169,776 | ​ |  | 31.7% | 159,363 | ​ |  | 32.5% | 329,139 |  | 32.1% | 123,040 |  | 28.4% | 452,179 |  | 31.0% |
| Construction and land | ​ | 2,290 | ​ |  | 0.4% | 3,323 | ​ |  | 0.7% | 5,613 |  | 0.5% | 30,708 |  | 7.1% | 36,321 |  | 2.5% |
| Total real estate | ​ | $483,036 | ​ | ​ | ​ ​ | $433,748 | ​ | ​ | ​ ​ | $916,784 |  | ​ | $369,443 |  | ​ | $1,286,227 |  | ​ |
| Consumer | ​ | 321 | ​ |  | 0.1% | — | ​ |  | 0.0% | 321 |  | 0.0% | 2,241 |  | 0.5% | 2,562 |  | 0.2% |
| Total loans | ​ | $535,497 | ​ | ​ | ​ ​ | $490,020 | ​ | ​ | ​ ​ | $1,025,517 |  | ​ | $432,563 |  | ​ | $1,458,080 |  | ​ |

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

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

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

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

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

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

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

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

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ Loans accounted for on a non-accrual basis: | ​ ​ ​ ​ | ​ ​ ​ June 30, ​ 2020 ​ ​ ​ | ​ ​ ​ December 31, ​ 2019 ​ ​ ​ ​ ​ |
| --- | --- | --- | --- |
| Commercial and industrial | ​ | $560 ​ | $618 ​ |
| Real estate: | ​ | ​ ​ ​ | ​ ​ ​ |
| Residential | ​ | ​ 1,733 ​ | ​ 1,488 ​ |
| Multifamily residential | ​ | ​ 271 ​ | ​ 297 ​ |
| Owner occupied CRE | ​ | ​ 1,321 ​ | ​ 1,349 ​ |
| Non-owner occupied CRE | ​ | ​ 1,532 ​ | ​ 340 ​ |
| Construction and land | ​ | ​ 2,806 ​ | ​ 2,737 ​ |
| Total real estate | ​ | ​ 7,663 ​ | ​ 6,211 ​ |
| Consumer | ​ | ​ — ​ | ​ 13 ​ |
| Total nonaccrual loans | ​ | ​ 8,223 ​ | ​ 6,842 ​ |
| More than 90 days past due and still accruing | ​ | ​ — ​ | ​ 250 ​ |
| Real estate owned | ​ | ​ 296 ​ | ​ 574 ​ |
| Total nonperforming assets (1) | ​ | $8,519 ​ | $7,666 ​ |
| Troubled debt restructurings – performing | ​ | ​ 780 ​ | ​ 789 ​ |
| PCI loans | ​ | $17,653 ​ | $17,332 ​ |
| Nonperforming assets to total assets (1) | ​ | ​ 0.39% | ​ 0.38% |
| Nonperforming loans to total loans (1) | ​ | ​ 0.48% | ​ 0.47% |

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

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

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

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

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

In accordance with acquisition accounting, loans acquired in our acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to our recent acquisitions. As of June 30, 2020, acquired loans, net of their discounts, totaled $355.1 million compared to $590.9 million at December 31, 2019. The remaining net discount on these acquired loans was $4.9 million and $8.0 million at June 30, 2020 and December 31, 2019, respectively. The $129.9 million balance of PPP loans was omitted from the allowance for loan losses at June 30, 2020 as these loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven.

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ ​ June 30, ​ 2020 | ​ ​ ​ December 31, ​ 2019 ​ ​ | ​ ​ |
| --- | --- | ---: | ---: | --- |
| Balance at beginning of period | ​ | $7,400 ​ | $5,140 ​ | ​ |
| Provisions for loan losses | ​ | 6,111 ​ | 2,224 ​ | ​ |
| Recoveries | ​ | ​ | ​ | ​ |
| Commercial and industrial | ​ | 7 ​ | 57 ​ | ​ |
| Residential | ​ | — ​ | 1 ​ | ​ |
| Owner occupied CRE | ​ | — ​ | — ​ | ​ |
| Non-owner occupied CRE | ​ | — ​ | — ​ | ​ |
| Consumer | ​ | — ​ | — ​ | ​ |
| Total recoveries | ​ | 7 ​ | 58 ​ | ​ |
| Charge-offs | ​ | ​ | ​ | ​ |
| Commercial and industrial | ​ | — ​ | — ​ | ​ |
| Residential | ​ | (1) ​ | (1) ​ | ​ |
| Owner occupied CRE | ​ | — ​ | — ​ | ​ |
| Non-owner occupied CRE | ​ | — ​ | (17) ​ | ​ |
| Consumer | ​ | — ​ | (4) ​ | ​ |
| Total charge-offs | ​ | (1) ​ | (22) ​ | ​ |
| Net (charge-offs)/recoveries | ​ | (11) ​ | 36 ​ | ​ |
| Balance at end of period | ​ | $13,500 ​ | $7,400 ​ | ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ |
| Allowance for loan losses as a percentage of total loans | ​ | ​ 0.78% | ​ 0.51% | ​ |
| Allowance for loan losses to total loans excluding PCI loans | ​ | ​ 0.79% | ​ 0.51% | ​ |
| Allowance for loan losses excluding acquired loans (loans not covered by the allowance) | ​ | ​ 0.98% | ​ 0.86% | ​ |
| Allowance for loan losses excluding acquired loans and PPP loans (loans not covered by the allowance) | ​ | ​ 1.09% | ​ 0.86% | ​ |
| Allowance for loan losses as a percentage of total nonperforming loans | ​ | ​ 164.17% | ​ 108.16% | ​ |
| Net (charge-offs)/recoveries as a percentage of average loans outstanding for the period | ​ | ​ 0.00% | ​ 0.00% | ​ |

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

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

***Right-of-use assets and lease liabilities.*** On January 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the Condensed Consolidated Balance Sheets as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 8 – Premises and Equipment in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report. The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The recognition of leases existing on January 1, 2019 did not require an adjustment to beginning retained earnings. Upon adoption of the accounting standards, the Company recognized right-of-use assets and lease liabilities of $7.8 million and $8.2 million respectively. Adoption of these accounting standards did not have a significant effect on the Company’s regulatory capital measures.

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

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

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

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ June 30, 2020 | ​ ​ ​ | ​ ​ December 31, 2019 | ​ ​ ​ ​ ​ ​ % Change ​ ​ |
| --- | --- | ---: | --- | ---: | ---: |
| Noninterest bearing demand deposits |  | $703,430 |  | $572,341 | 22.9% |
| NOW accounts and savings | ​ | 385,335 | ​ | 314,125 | 22.7% |
| Money market | ​ | 528,164 | ​ | 489,206 | 8.0% |
| Time deposits - under $250,000 | ​ | 153,884 | ​ | 189,063 | (18.6)% |
| Time deposits - $250,000 and over | ​ | 116,106 | ​ | 136,448 | (14.9)% |
| Total | ​ | $1,886,919 | ​ | $1,701,183 | 10.9% |

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

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

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

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

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

The Company does not pay a regular cash dividend.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*(Dollars in thousands)*

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ ​ Interest earning assets | ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ Three months ended June 30, 2020 ​ ​ Average Balance(1) ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Annualized ​ Average ​ Yield ​ ​ | ​ ​ 2019 ​ ​ Average Balance(1) ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Annualized ​ Average ​ Yield ​ ​ ​ ​ |
| --- | --- | --- | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Interest bearing deposits in banks | ​ | $186,966 | ​ | $145 |  | 0.31% | $319,577 | ​ | $1,990 |  | 2.50% |
| Investments available-for-sale | ​ | ​ 121,635 | ​ | 743 |  | 2.45% | 100,087 | ​ | 930 |  | 3.73% |
| FHLB Stock | ​ | ​ 7,620 | ​ | 54 |  | 2.84% | 6,090 | ​ | 92 |  | 6.06% |
| FRB Stock | ​ | ​ 7,491 | ​ | 114 |  | 6.10% | 4,163 | ​ | 62 |  | 5.97% |
| Total loans | ​ | ​ 1,699,607 | ​ | 21,756 |  | 5.13% | 1,066,486 | ​ | 14,874 |  | 5.59% |
| Total interest earning assets | ​ | ​ 2,023,319 | ​ | 22,812 |  | 4.52% | 1,496,403 | ​ | 17,948 |  | 4.81% |
| Noninterest earning assets | ​ | ​ 168,126 | ​ | ​ |  | ​ ​ | 101,353 | ​ | ​ |  | ​ ​ |
| Total average assets | ​ | $2,191,445 | ​ | ​ |  | ​ ​ | $1,597,756 | ​ | ​ |  | ​ ​ |
| Interest bearing liabilities | ​ | ​ ​ | ​ | ​ |  | ​ ​ | ​ | ​ | ​ |  | ​ ​ |
| Savings | ​ | $107,487 | ​ | $40 | ​ | 0.15% | $56,690 | ​ | $20 |  | 0.14% |
| NOW accounts | ​ | ​ 269,812 | ​ | 63 |  | 0.09% | 193,195 | ​ | 33 |  | 0.07% |
| Money market | ​ | ​ 519,595 | ​ | 547 |  | 0.42% | 430,102 | ​ | 643 |  | 0.60% |
| Time deposits | ​ | ​ 282,930 | ​ | 1,025 |  | 1.45% | 258,943 | ​ | 1,086 |  | 1.68% |
| Total deposit accounts | ​ | ​ 1,179,824 | ​ | 1,675 |  | 0.57% | 938,930 | ​ | 1,782 |  | 0.76% |
| Junior subordinated debentures, net | ​ | ​ 8,270 | ​ | ​ 100 | ​ | 4.85% | ​ 8,192 | ​ | ​ 148 | ​ | 7.25% |
| Other borrowings | ​ | ​ 51,286 | ​ | 87 |  | 0.68% | — | ​ | ​ — |  | — ​ |
| Total interest bearing liabilities | ​ | ​ 1,239,380 | ​ | 1,862 |  | 0.60% | 947,122 | ​ | 1,930 |  | 0.82% |
| Noninterest bearing liabilties | ​ | ​ 696,775 | ​ | ​ |  | ​ ​ | 432,199 | ​ | ​ |  | ​ ​ |
| Total average liabilities | ​ | ​ 1,936,155 | ​ | ​ |  | ​ ​ | 1,379,321 | ​ | ​ |  | ​ ​ |
| Average equity | ​ | ​ 255,290 | ​ | ​ |  | ​ ​ | 218,435 | ​ | ​ |  | ​ ​ |
| Total average liabilities and equity | ​ | $2,191,445 | ​ | ​ |  | ​ ​ | $1,597,756 | ​ | ​ |  | ​ ​ |
| Net interest income | ​ | ​ | ​ | $20,950 |  | ​ ​ | ​ | ​ | $16,018 |  | ​ ​ |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Interest rate spread (2) | ​ | ​ | ​ | ​ |  | 3.92% | ​ | ​ | ​ |  | 3.99% |
| Net interest margin (3) | ​ | ​ | ​ | ​ |  | 4.15% | ​ | ​ | ​ |  | 4.29% |
| Ratio of average interest earning assets to average interest bearing liabilities | ​ | ​ | ​ | ​ |  | 163.25% | ​ | ​ | ​ |  | 157.99% |

(1) Average balances are average daily balances.

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ Interest earning assets | ​ ​ ​ ​ ​ ​ ​ | ​ ​ Six months ended June 30, 2020 ​ ​ Average Balance(1) ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Annualized ​ Average ​ Yield ​ ​ | ​ ​ 2019 ​ ​ Average Balance(1) ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Annualized ​ Average ​ Yield ​ ​ ​ ​ |
| --- | --- | --- | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Interest bearing deposits in banks | ​ | $203,959 | ​ | $1,006 |  | 0.99% | $319,495 | ​ | $3,979 |  | 2.51% |
| Investments available-for-sale | ​ | ​ 121,775 | ​ | 1,520 |  | 2.50% | 98,901 | ​ | 1,595 |  | 3.25% |
| FHLB Stock | ​ | ​ 7,420 | ​ | 179 |  | 4.84% | 5,627 | ​ | 184 |  | 6.59% |
| FRB Stock | ​ | ​ 7,345 | ​ | 222 |  | 6.06% | 4,130 | ​ | 123 |  | 6.01% |
| Total loans | ​ | ​ 1,623,602 | ​ | 42,375 |  | 5.23% | 1,017,792 | ​ | 28,424 |  | 5.63% |
| Total interest earning assets | ​ | ​ 1,964,101 | ​ | 45,302 |  | 4.63% | 1,445,945 | ​ | 34,305 |  | 4.78% |
| Noninterest earning assets | ​ | ​ 160,639 | ​ | ​ |  | ​ ​ | 95,436 | ​ | ​ |  | ​ ​ |
| Total average assets | ​ | $2,124,740 | ​ | ​ |  | ​ ​ | $1,541,381 | ​ | ​ |  | ​ ​ |
| Interest bearing liabilities | ​ | ​ ​ | ​ | ​ |  | ​ ​ | ​ | ​ | ​ |  | ​ ​ |
| Savings | ​ | $102,851 | ​ | $85 | ​ | 0.17% | $54,531 | ​ | $30 |  | 0.14% |
| NOW accounts | ​ | ​ 258,691 | ​ | 120 |  | 0.09% | 195,448 | ​ | 67 |  | 0.07% |
| Money market | ​ | ​ 509,908 | ​ | 1,464 |  | 0.58% | 384,537 | ​ | 1,200 |  | 0.60% |
| Time deposits | ​ | ​ 297,471 | ​ | 2,333 |  | 1.57% | 235,345 | ​ | 1,831 |  | 1.68% |
| Total deposit accounts | ​ | ​ 1,168,921 | ​ | 4,002 |  | 0.69% | 869,861 | ​ | 3,128 |  | 0.76% |
| Junior subordinated debentures, net | ​ | ​ 8,259 | ​ | ​ 219 | ​ | 5.32% | ​ 8,183 | ​ | ​ 294 | ​ | 7.25% |
| Other borrowings | ​ | ​ 30,327 | ​ | 94 |  | 0.29% | — | ​ | ​ — |  | — ​ |
| Total interest bearing liabilities | ​ | ​ 1,207,507 | ​ | 4,315 |  | 0.72% | 878,044 | ​ | 3,422 |  | 0.82% |
| Noninterest bearing liabilties | ​ | ​ 662,063 | ​ | ​ |  | ​ ​ | 452,106 | ​ | ​ |  | ​ ​ |
| Total average liabilities | ​ | ​ 1,869,570 | ​ | ​ |  | ​ ​ | 1,330,150 | ​ | ​ |  | ​ ​ |
| Average equity | ​ | ​ 255,170 | ​ | ​ |  | ​ ​ | 211,231 | ​ | ​ |  | ​ ​ |
| Total average liabilities and equity | ​ | $2,124,740 | ​ | ​ |  | ​ ​ | $1,541,381 | ​ | ​ |  | ​ ​ |
| Net interest income | ​ | ​ | ​ | $40,987 |  | ​ ​ | ​ | ​ | $30,883 |  | ​ ​ |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Interest rate spread (2) | ​ | ​ | ​ | ​ |  | 3.91% | ​ | ​ | ​ |  | 4.00% |
| Net interest margin (3) | ​ | ​ | ​ | ​ |  | 4.19% | ​ | ​ | ​ |  | 4.31% |
| Ratio of average interest earning assets to average interest bearing liabilities | ​ | ​ | ​ | ​ |  | 162.66% | ​ | ​ | ​ |  | 164.68% |

(1) Average balances are average daily balances.

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

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

***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:

*(Dollars in thousands)*

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ Interest earning assets | ​ ​ ​ ​ ​ ​ ​ | ​ ​ Three months ended June 30, 2020 compared to 2019 Increase/(Decrease) Attributable to Rate ​ ​ | ​ ​ | ​ ​ Volume ​ ​ | ​ ​ | ​ ​ Total ​ ​ | ​ ​ | ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ Six months ended June 30, 2020 compared to 2019 Increase/(Decrease) Attributable to Rate ​ ​ | ​ ​ | ​ ​ Volume ​ ​ | ​ ​ | ​ ​ Total ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | --- | ---: | --- | ---: | --- | ---: |
| Interest bearing deposits in banks | ​ | $(1,019) | ​ | $(826) | ​ | $(1,845) | ​ | ​ | $(1,534) | ​ | $(1,439) | ​ | $(2,973) |
| Investments available-for-sale | ​ | (387) | ​ | 200 | ​ | (187) | ​ | ​ | (444) | ​ | 369 | ​ | (75) |
| FHLB stock and FRB stock | ​ | (59) | ​ | 73 | ​ | 14 | ​ | ​ | (64) | ​ | 158 | ​ | 94 |
| Total loans | ​ | (1,931) | ​ | 8,813 | ​ | 6,882 | ​ | ​ | (3,204) | ​ | 17,155 | ​ | 13,951 |
| Total interest income | ​ | (3,396) | ​ | 8,260 | ​ | 4,864 | ​ | ​ | (5,246) | ​ | 16,243 | ​ | 10,997 |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Interest bearing liabilities | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Savings | ​ | 2 | ​ | 18 | ​ | 20 | ​ | ​ | 28 | ​ | 27 | ​ | 55 |
| NOW accounts | ​ | 17 | ​ | 13 | ​ | 30 | ​ | ​ | 31 | ​ | 22 | ​ | 53 |
| Money market accounts | ​ | (230) | ​ | 134 | ​ | (96) | ​ | ​ | (127) | ​ | 391 | ​ | 264 |
| Time deposits | ​ | (162) | ​ | 101 | ​ | (61) | ​ | ​ | 19 | ​ | 483 | ​ | 502 |
| Total deposit accounts | ​ | (373) | ​ | 266 | ​ | (107) | ​ | ​ | (49) | ​ | 923 | ​ | 874 |
| Junior subordinated debentures, net | ​ | (49) | ​ | 1 | ​ | (48) | ​ | ​ | (78) | ​ | 3 | ​ | (75) |
| Other borrowings | ​ | 87 | ​ | — | ​ | 87 | ​ | ​ | 94 | ​ | — | ​ | 94 |
| Total interest expense | ​ | (335) | ​ | 267 | ​ | (68) | ​ | ​ | (33) | ​ | 926 | ​ | 893 |
| Net interest income | ​ | $(3,061) | ​ | $7,993 | ​ | $4,932 | ​ | ​ | $(5,213) | ​ | $15,317 | ​ | $10,104 |

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

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

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

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Three months ended June 30, 2020 | ​ | ​ ​ 2019 | ​ ​ | ​ ​ ​ $ Change | ​ ​ ​ | ​ ​ ​ % Change ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Gain on sale of loans | ​ | $212 | ​ | $903 | ​ | $(691) | ​ | (76.5)% |
| Service charges and other fees | ​ | 610 | ​ | 663 | ​ | (53) |  | (8.0)% |
| Loan servicing and other loan fees | ​ | 595 | ​ | 514 | ​ | 81 |  | 15.8% |
| (Loss) income on investment in SBIC fund | ​ | (309) | ​ | 10 | ​ | (319) |  | (3,190.0)% |
| Other income and fees | ​ | 194 | ​ | 450 | ​ | (256) |  | (56.9)% |
| Total noninterest income | ​ | $1,302 | ​ | $2,540 | ​ | $(1,238) |  | (48.7)% |

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Six months ended June 30, 2020 | ​ | ​ ​ 2019 | ​ ​ | ​ ​ ​ $ Change | ​ ​ ​ | ​ ​ ​ % Change ​ | ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- |
| Gain on sale of loans | ​ | $854 | ​ | $1,169 | ​ | $(315) | ​ | (26.9)% | ​ |
| Service charges and other fees | ​ | 1,315 | ​ | 1,396 | ​ | (81) |  | (5.8)% | ​ |
| Loan servicing and other loan fees | ​ | 1,241 | ​ | 924 | ​ | 317 |  | 34.3% | ​ |
| Income on investment in SBIC fund | ​ | 35 | ​ | 468 | ​ | (433) |  | (92.5)% | ​ |
| Other income and fees | ​ | 435 | ​ | 703 | ​ | (268) |  | (38.1)% | ​ |
| Total noninterest income | ​ | $3,880 | ​ | $4,660 | ​ | $(780) |  | (16.7)% | ​ |

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

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Three months ended June 30, 2020 | ​ | ​ ​ 2019 | ​ ​ | ​ ​ ​ $ Change | ​ ​ ​ | ​ ​ ​ % Change ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Salaries and related benefits | ​ | $8,252 | ​ | $7,198 | ​ | $1,054 | ​ | 14.6% |
| Occupancy and equipment | ​ | 1,774 | ​ | 1,064 | ​ | 710 |  | 66.7% |
| Data processing | ​ | 1,450 | ​ | 3,683 | ​ | (2,233) |  | (60.6)% |
| Other | ​ | 2,060 | ​ | 2,850 | ​ | (790) |  | (27.7)% |
| Total noninterest expense | ​ | $13,536 | ​ | $14,795 | ​ | $(1,259) |  | (8.5)% |

*(Dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Six months ended June 30, 2020 | ​ | ​ ​ 2019 | ​ ​ | ​ ​ ​ $ Change | ​ ​ ​ | ​ ​ ​ % Change ​ | ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- |
| Salaries and related benefits | ​ | $16,960 | ​ | $13,161 | ​ | $3,799 | ​ | 28.9% | ​ |
| Occupancy and equipment | ​ | 3,585 | ​ | 2,174 | ​ | 1,411 |  | 64.9% | ​ |
| Data processing | ​ | 5,074 | ​ | 4,607 | ​ | 467 |  | 10.1% | ​ |
| Other | ​ | 4,835 | ​ | 4,601 | ​ | 234 |  | 5.1% | ​ |
| Total noninterest expense | ​ | $30,454 | ​ | $24,543 | ​ | $5,911 |  | 24.1% | ​ |

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

### Liquidity and Capital Resources

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

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

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

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

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

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

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

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

*(Dollars in thousands)*

| ​ ​ ​ ​ Leverage Ratio | ​ ​ ​ ​ | ​ ​ At June 30, 2020 Amount ​ | ​ ​ ​ ​ ​ Ratio ​ | ​ ​ At December 31, 2019 Amount ​ | ​ ​ ​ ​ Ratio ​ |
| --- | --- | ---: | ---: | ---: | ---: |
| BayCom Corp | ​ | $200,460 | 9.81% | $207,575 | 11.15% |
| Minimum requirement for "Well-Capitalized" | ​ | 102,161 | 5.00% | 93,659 | 5.00% |
| Minimum regulatory requirement | ​ | 81,729 | 4.00% | 74,927 | 4.00% |
| ​ | ​ |  | ​ |  | ​ |
| United Business Bank | ​ | 212,218 | 9.92% | 213,749 | 10.98% |
| Minimum requirement for "Well-Capitalized" | ​ | 106,929 | 5.00% | 97,313 | 5.00% |
| Minimum regulatory requirement | ​ | 85,543 | 4.00% | 77,850 | 4.00% |
| ​ | ​ |  | ​ |  | ​ |
| Common Equity Tier 1 Ratio | ​ |  | ​ |  | ​ |
| BayCom Corp | ​ | 200,460 | 12.04% | 207,575 | 13.81% |
| Minimum requirement for "Well-Capitalized" | ​ | 108,197 | 6.50% | 97,714 | 6.50% |
| Minimum regulatory requirement | ​ | 74,906 | 4.50% | 67,648 | 4.50% |
| ​ | ​ |  | ​ |  | ​ |
| United Business Bank | ​ | 212,218 | 12.76% | 213,749 | 14.23% |
| Minimum requirement for "Well-Capitalized" | ​ | 108,104 | 6.50% | 97,624 | 6.50% |
| Minimum regulatory requirement | ​ | 74,841 | 4.50% | 67,586 | 4.50% |
| ​ | ​ |  | ​ |  | ​ |
| Tier 1 Risk-Based Capital Ratio | ​ |  | ​ |  | ​ |
| BayCom Corp | ​ | 209,945 | 12.61% | 217,060 | 14.44% |
| Minimum requirement for "Well-Capitalized" | ​ | 133,165 | 8.00% | 120,264 | 8.00% |
| Minimum regulatory requirement | ​ | 99,874 | 6.00% | 90,198 | 6.00% |
| ​ | ​ |  | ​ |  | ​ |
| United Business Bank | ​ | 212,218 | 12.76% | 213,749 | 14.23% |
| Minimum requirement for "Well-Capitalized" | ​ | 133,051 | 8.00% | 120,153 | 8.00% |
| Minimum regulatory requirement | ​ | 99,788 | 6.00% | 90,114 | 6.00% |
| ​ | ​ |  | ​ |  | ​ |
| Total Risk-Based Capital Ratio | ​ |  | ​ |  | ​ |
| BayCom Corp | ​ | 223,860 | 13.45% | 224,875 | 14.96% |
| Minimum requirement for "Well-Capitalized" | ​ | 166,457 | 10.00% | 150,330 | 10.00% |
| Minimum regulatory requirement | ​ | 133,165 | 8.00% | 120,264 | 8.00% |
| ​ | ​ |  | ​ |  | ​ |
| United Business Bank | ​ | 226,133 | 13.60% | 221,564 | 14.75% |
| Minimum requirement for "Well-Capitalized" | ​ | 166,313 | 10.00% | 150,191 | 10.00% |
| Minimum regulatory requirement | ​ | 133,051 | 8.00% | 120,153 | 8.00% |

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

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

### Off-Balance Sheet Arrangements

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

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

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

## Market risk

As filed, 808 characters.

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

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

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

(b) Changes in Internal Controls

There were no significant changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2020, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions 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, 7,177 characters.

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

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

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

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

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

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

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

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

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

Filed Aug 10, 2020.
Source: SEC EDGAR, the filing index for accession 0001558370-20-010235. Last ingested by Listed: Nov 10, 2026, 00:50 ET. No prices; not investment advice.