What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-15 · 257 added, 368 removed, 390 unchanged (62% of the section changed)

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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 novel coronavirus disease 2019 (“COVID-19”) pandemic, including on our 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 economic activity, employment levels and market liquidity global economies, and consumer and corporate clients;

● expected revenues, cost savings, synergies and other benefits from our recent acquisition of Pacific Enterprise Bancorp (the “PEB Merger”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to client and employee retention, might be greater than expected;

● potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the novel coronavirus disease 2019 (“COVID-19”) pandemic and any governmental or societal responses thereto;

● 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;

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

● uncertainly regarding transition away from London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks;

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

● our net interest margin and funding sources;

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● 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 those required by BASEL III;

● the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the implementing regulations;

● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and including changes as a result of COVID-19;

● our ability to attract and retain deposits;

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● 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, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods, including as a result of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 (“CAA 2021”);

● other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of the CARES Act, CAA 2021, recent COVID-19 vaccination efforts and economic stimulus efforts, and other risks described elsewhere in this Form 10-Q and other filings with the Securities and Exchange Commission (“SEC”).

Further, statements about the potential effects of the proposed acquisition of Pacific Enterprise Bancorp (“PEB”) on our business, financial results, and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in the forward-looking statements due to factors and future developments which are uncertain, unpredictable and in many cases beyond our control, including, but not limited to:

● the possibility that expected revenues, cost savings, synergies and other benefits from the proposed merger might not be realized within the expected time frames or at all including but not limited to customer and employee retention, and costs or difficulties relating to integration matters, might be greater than expected including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which we and PEB operate;

● the possibility that the proposed merger does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all;

● the risk that the benefits from the proposed merger may not be fully realized or may take longer to realize than expected or be more costly to achieve;

● the failure to attract new customers and retain existing customers in the manner anticipated;

● reputational risks and the potential adverse reactions or changes to business, customer or employee relationships, including those resulting from the announcement or completion of the proposed merger;

● Our or PEB’s businesses may experience disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, customers, other business partners or governmental entities;

● deposit attrition, operating costs, customer loss and business disruption following the transaction, including difficulties in maintaining relationships with employees, may be greater than expected;

● the diversion of managements' attention from ongoing business operations and opportunities as a result of the proposed merger or otherwise;

● changes in our or PEB’s stock price before closing, including as a result of its financial performance prior to closing or transaction-related uncertainty, or more generally due to broader stock market movements, and the performance of financial companies and peer group companies;

● the occurrence of any event, change or other circumstance that could give risk to the right of one or both of the parties to terminate the merger agreement;

● the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the merger;

● changes in interest rates which may affect our and PEB’s expected revenues, credit quality deterioration, reductions in real estate values, or reductions in our and PEB’s net income, cash flows or the market value of assets, including its investment securities;

● each of our and PEB’s potential exposure to unknown or contingent liabilities of the other party;

● dilution caused by our issuance of additional shares of BayCom Corp common stock in connection with the proposed merger;

● the possibility that the proposed merger is more expensive to complete than anticipated, including as a result of unexpected factors or events;

● future acquisitions by us of other depository institutions or lines of business;

● that the COVID-19 pandemic, including uncertainty and volatility in financial, commodities and other markets, and disruptions to banking and other financial activity, could harm our or PEB’s business, financial position and results of operations, and could adversely affect the timing and anticipated benefits of the proposed merger.

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

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

In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth.

Since 2010, we have expanded our geographic footprint through nine strategic acquisitions.

Since 2010, we have expanded our geographic footprint through 10 strategic acquisitions.

We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency.

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We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank.

At September 30, 2021, the Company had approximately $2.4 billion in total assets, $1.6 billion in total loans, $2.0 billion in total deposits and $257.3 million in shareholders’ equity.

At March 31, 2022, the Company had approximately $2.8 billion in total assets, $2.0 billion in total loans, $2.3 billion in total deposits and $324.7 million in shareholders’ equity.

We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth.

At September 30, 2021, our $1.6 billion total loan portfolio included $449.3 million , or 27.3%, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.2 billion, or 72.7%, consisted of loans we originated.

At March 31, 2022, our $2.0 billion total loan portfolio included $349.8 million or 17.5 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.7 billion, or 82.5%, consisted of loans we originated.

The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for loan losses.

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

On September 7, 2021, the Company entered into a definitive agreement with Pacific Enterprise Bancorp (“PEB”), which is headquartered in Irvine, California.

Pursuant to the merger agreement PEB will merge with and into the Company, with the Company as the surviving corporation in the merger.

The transaction is expected to be completed in the first calendar quarter of 2022, subject to customary closing conditions, regulatory approval, and approval of the Company’s and PEB’s shareholders.

For a more detailed description of the proposed merger, see “Note 3 – Acquisitions”.

On February 1, 2022, the Company completed its acquisition of Pacific Enterprise Bancorp (“PEB”), which was headquartered in Irvine, California.

Pursuant to an Agreement and Plan of Merger, dated September 7, 2021 (the “Merger Agreement”), by and between BayCom and PEB.

Under the terms of the Merger Agreement, PEB merged with and into BayCom (the “Merger”), with BayCom as the surviving corporation in the Merger.

Immediately following the Merger, Pacific Enterprise Bank, a wholly-owned subsidiary of PEB, merged with and into United Business Bank, a wholly-owned subsidiary of BayCom (the “Bank Merger”), with United Business Bank as the surviving bank in the Bank Merger.

For additional information regarding the Merger, see “Note 3 – Acquisitions” contained in the Notes to Condensed Consolidated Financial Statements included in “Item 1.

Financial Information” of Part I this report.

Set forth below is a discussion of the primary factors affecting our results of operations:

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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.

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.

The significant 150 basis point reduction in the targeted federal funds rate during the quarter ended March 31, 2020, resulted in a larger impact to our interest-earning assets than to our interest bearing liabilities, reducing our net interest margin.

In addition, our net interest margin is adversely impacted by the low loan yields from loans originated pursuant to the U.S.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).

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 150 basis point reductions in the targeted federal funds rate in 2020, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2021 and possibly longer.

In March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) commenced increasing the target range for the federal funds rate by implementing a 25 basis point increase to a range of 0.25% to 0.50%.

In May 2022, the FOMC implemented a 50 basis point increase to a range of 0.75% to 1.00%.

The FOMC has indicated further increases are to be expected this year.

This recent March increase, however, had limited impact on the current quarter’s net interest margin as the change in rate occurred towards the end of the quarter.

Noninterest income.

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Additional consideration is given to our historical loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography.

Additional analysis was also completed on the allowance for loan losses based on the significance of loan modifications in accordance

with the CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19.

analysis was also completed on the allowance for loan losses based on the significance of loan modifications in accordance with the Coronavirus Aid, Relief, and Economic Security Act of 2020 or CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19.

Our evaluation of the allowance for loan losses is inherently subjective and requires estimates that are susceptible to significant change as additional or new information becomes available.

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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.

Due to the adverse and unknown economic impacts resulting from the COVID-19 pandemic, the Company performed a goodwill impairment qualitative assessment during the third quarter of 2021 to determine if it is not more likely than not that the fair value of the Company’s reporting unit exceeded its carrying value, including goodwill.

As of September 30, 2021, the Company’s qualitative assessment, which considered the Company’s continued profitability, positive equity, average community bank merger deal values realized as of September 30, 2021, net interest margin, allowance for loan loss, and the continued growth in its core deposit portfolio, concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.

As of December 31, 2021, the Company concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.

BayCom’s Response to COVID-19

Paycheck Protection Program ("PPP") Participation .

During the third quarter of 2021, the Bank continued its participation in the SBA PPP which ended August 8, 2020, by processing applications for PPP loan forgiveness.

As of September 30, 2021, the Bank had 764 PPP loans outstanding totaling $113.2 million, with unrecognized fees of $4.0 million.

As of September 30, 2021, the Bank has received SBA forgiveness for 1,291 PPP loans totaling $121.5 million out of the $140.2 million in PPP loans funded during the first PPP.

As of September 30, 2021, the Bank has received SBA forgiveness for 75 PPP loans totaling $22.2 million out of the 771 PPP loans totaling $116.7 million funded during the second PPP, which concluded on May 31, 2021.

Allowance for Loan Losses and Loan Modifications .

At September 30, 2021, the Company’s allowance for loan losses was $17.3 million, or 1.05% of total loans, compared to $17.5 million, or 1.06% of total loans, at December 31, 2020.

Based on our review of the appropriateness of the allowance for loan losses at September 30, 2021, the Company recorded a provision (recovery) for loan losses of $477,000 and ($30,000) for the three and nine months ended September 30, 2021, compared to a $2.3 million and $8.4 million provision for loan losses for the three and nine months ended September 30, 2020, respectively.

The provision for loan losses recorded in the third quarter of 2021 related primarily to new loan production and net change in qualitative factor adjustments.

The reversal of the provision for loan for the nine months ended September 20, 2021 reflects improvements since December 31, 2020 in the economic forecast and corresponding decline in qualitative factor adjustments utilized to calculate the allowance for loan losses at September 30, 2021.

The prior periods provision for loan losses was due primarily to probable loan losses reflecting the uncertain adverse impact of the COVID-19 pandemic on the economy last year.

The Company provided payment and financial relief programs for borrowers impacted by COVID-19.

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

As of September 30, 2021, no loan was subject to a COVID-19 related payment adjustment agreement compared to 43 loans totaling $66.7 million at December 31, 2020.

We believe the steps we have taken over the course of the last year are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

Branch Operations and Additional Client Support .

The Company remains focused on keeping its employees safe and the Bank running effectively to serve its clients.

The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and public health authority guidelines, and encouraging remote work and supporting employees with paid time off.

As of September 30, 2021, all of the Bank’s branch lobbies were open.

The Company is aware of COVID-19 infections arising out of the Delta variant and is prepared to restore other protocols, as may prove to be necessary.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients.

As of March 31, 2022, all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets.

Total assets increased $168.2 million, or 7.7%, to $2.4 billion at September 30, 2021, from $2.2 billion at December 31, 2020.

The increase was primarily the result of cash and cash equivalents increasing $145.1 million or 48.5%, and securities available for sale increasing $26.7 million or 23.1%.

These increases in total assets were primarily funded by deposit growth.

Total assets increased $405.3 million, or 17.2%, to $2.8 billion at March 31, 2022, from $2.4 billion at December 31, 2021.

The increase primarily was due to loans receivable, net, increasing $339.0 million, primarily due to loans acquired in the PEB Merger.

In addition, cash and cash equivalents increased $47.5 million or 12.5%, investment securities available for sale increased $10.2 million or 5.9% and other assets increased $9.3 million or 31.1%.

Cash and cash equivalents.

Cash and cash equivalents increased $145.1 million, or 48.5%, to $444.5 million, at September 30, 2021, from $299.3 million at December 31, 2020.

Cash and cash equivalents increased $47.5 million, or 12.5%, to $427.2 million, at March 31, 2022, from $379.7 million at December 31, 2021.

The increase was primarily a result of loan repayments and an increase in total deposits, which exceeded the funds required for loan originations and used for purchases of investment securities.

Investment securities, all of which are classified as available-for-sale, increased $26.7 million, or 23.1%, to $142.3 million at September 30, 2021 from $115.6 million at December 31, 2020.

The increase was primarily

due to the purchase of $48.4 million of investment securities during the nine months ended September 30, 2021, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured.

Investment securities, all of which are classified as available-for-sale, increased $10.2 million, or 5.9%, to $184.7 million at March 31, 2022 from $174.4 million at December 31, 2021.

The increase was primarily due to the purchase of $22.7 million of investment securities during the three months ended March 31, 2022 partially offset by the routine amortization and repayment of investment principal balances and securities called and matured.

Loans receivable, net.

We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans.

Loans receivable, net of allowance for loan losses, decreased $2.3 million, or 0.1%, to $1.6 billion at September 30, 2021 from December 31, 2020.

The decrease was primarily due to loan repayments totaling $453.2 million, including $120.7 million in PPP loan forgiveness, partially offset by loan originations totaling $399.7 million, including $116.7 million of new PPP loans, with the remaining change due to normal loan amortization and payoffs.

The decrease in loan originations for the current period compared to the comparable period in 2020 reflected overall lower loan production due to the COVID-19 pandemic, despite the PPP loan activity.

Loans receivable, net of allowance for loan losses, increased $339.0 million, or 20.6%, to $2.0 billion at March 31, 2022 from $1.7 billion at December 31, 2021.

The increase was primarily due to $412.9 million of net loans acquired from PEB and $81.6 million of new loan originations, partially offset by $143.3 million of loan repayments, including $51.6 million in PPP loan repayments, and $10.9 million in loan sales.

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

September 30,

(Dollars in thousands)

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Allowance for loan losses

(1) Includes $113.2 million and $135.6 million of PPP loans as of September 30, 2021 and December 31, 2020, respectively.

The following table shows as of September 30, 2021, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:

(1) Includes $114.6 million and $69.6 million of PPP loans as of March 31, 2022 and December 31, 2021, respectively.

The increase from December 31, 2021 primarily reflects PPP loans acquired in the PEB Merger.

The following table shows as of March 31, 2022, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:

San Francisco Bay

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(Dollars in thousands)

September 30, 2021

March 31, 2022

Commercial and industrial

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(2) Includes loans located primarily in the states of Colorado, New Mexico and Washington.

At September 30, 2021, loans in Colorado, New Mexico and Washington totaled $135.7 million, $77.1 million and $97.2 million, respectively.

At March 31, 2022, loans in Colorado, New Mexico and Washington totaled $103.6 million, $61.7 million and $85.0 million, respectively.

At December 31, 2021, loans in Colorado, New Mexico and Washington totaled $123.2 million, $69.5 million and $86.6 million, respectively.

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Nonperforming assets consists of nonaccrual loans, accruing loans that are 90 days or more past due and other real estate owned (“OREO”).

Nonperforming assets decreased $770,000, or 8.5%, to $8.3 million at September 30, 2021 from $9.1 million at December 31, 2020, primarily due to a $408,000 decrease in OREO and a $1.1 million decrease in nonaccrual loans, partially offset by a $767,000 increase in accruing loans 90 days and more past due.

The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling $8.3 million or 0.50% of total loans, of which $841,000 were guaranteed by governmental agencies at September 30, 2021, compared to $8.7 million or 0.53% of total loans, of which $850,000 were SBA guaranteed at December 31, 2020.

Included in nonperforming loans at September 30, 2021 and December 31, 2020, were $1.6 million and $567,000, respectively, of TDR loans.

At September 30, 2021 and December 31, 2020, nonaccrual loans included $2.5 million and $620,000 of loans 30-89 days past due and $2.5 million and $4.1 million of loans less than 30 days past due, respectively.

At September 30, 2021, the $2.5 million in nonaccrual loans 30-89 days past due primarily was comprised of two loans and the $2.5 million of loans less than 30 days past due was comprised of 13 small balance loans.

At December 31, 2021, nonaccrual loans 30-89 days past due of $620,000 primarily was comprised of four loans and the $4.1 million of loans less than 30 days past due was comprised of 12 small balance loans.

All of these loans were placed on nonaccrual due to concerns over the client’s financial condition.

Nonperforming assets increased $5.7 million, or 82.0%, to $12.6 million at March 31, 2022 from $6.9 million at December 31, 2021, primarily due to a $5.5 million increase in nonaccrual loans and $117,000 increase in accruing loans 90 days and more past due.

The increase in nonaccrual loans was primarily due to one $4.9 million commercial and industrial loan which was restructured and placed on non-accrual during the current quarter.

The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling 62% of total loans, of which $800,000 were guaranteed by governmental agencies at March 31, 2022, compared to $6.9 million or 0.41% of total loans, of which $822,000 were SBA guaranteed at December 31, 2021.

Included in nonperforming loans at March 31, 2022 and December 31, 2021, were $6.4 million and $1.6 million, respectively, of TDR loans.

At March 31, 2022 and December 31, 2021, nonaccrual loans included $5.6 million and $6.9 million of loans 30-89 days past due and $2.2 million and $2.5 million of loans less than 30 days past due, respectively.

At March 31, 2022, nonaccrual loans 30-89 days past due of $5.6 million primarily was comprised of one $4.9 million commercial and industrial loan restructured as a TDR during the three months ended March 31, 2022 and seven smaller loans, and the $2.2 million of loans less than 30 days past due are comprised of two loans.

All of these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers.

There was one loan totaling $117,000 that was 90 days or more past due and still accruing at March 31, 2022, compared to no loans at December 31, 2021.

In general, loans are placed on nonaccrual status after being contractually delinquent for more than 90 days, or earlier, if management believes full collection of future principal and interest on a timely basis is unlikely.

When a loan is placed on nonaccrual status, all interest accrued but not received is charged against interest income.

When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected.

Generally, loans with temporarily impaired values and loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the

borrowers continue to repay the loans as scheduled.

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.

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Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity .

TDR loans as of September 30, 2021 totaled $1.6 million, of which $765,000 were accruing and performing according to their restructuring terms.

TDR loans as of March 31, 2022 totaled $7.2 million, of which $794,000 were accruing and performing according to their restructuring terms.

TDR loans as of December 31, 2021 totaled $2.4 million, of which $805,000 were accruing and performing according to their restructuring terms.

The accruing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status.

There were related allowance for loan losses on the TDR loans of $130,000 and $35,000 at September 30, 2021 and December 31, 2020, respectively.

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

September 30,

The related allowance for loan losses on TDR loans totaled of $878,000 and $31,000 at March 31, 2022 and December 31, 2021, respectively.

The Company provided payment and financial relief programs for borrowers impacted by COVID-19.

At both March 31, 2022 and December 31, 2021, the Company had two commercial real estate loans totaling $2.7 million operating under forbearance agreements due to COVID-19.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be TDRs at March 31, 2022, pursuant to applicable accounting and regulatory guidance.

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

(Dollars in thousands)

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Nonperforming loans to total loans (2)

Includes $6.4 million and $1.6 million of nonaccrual TDR loans at March 31, 2022 and December 31, 2021, respectively.

Excludes the performing (accruing) TDR loans which are set forth separately in the table.

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

Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above.

At September 30, 2021 and December 31, 2020, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

Interest foregone on nonaccrual loans was approximately $61,000 and $157,500 for the three and nine months ended September 30, 2021 compared to $117,500 and $338,500 for the three and nine months ended September 30, 2020, respectively, none of which was included in interest income.

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 concern as to their ability to comply with their loan repayment terms.

We define potential problem loans as loans classified as “Substandard”, “Doubtful” or “Loss” that are not included in the amounts of nonaccrual or restructured loans.

During the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements.

Such loans are placed under closer supervision with consideration given to placing the loan on nonaccrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.

At September 30, 2021, there are $13.7 million of potential problem loans, compared to $12.7 million at December 31, 2020.

Also, see Note 5 — Loans in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report .

At March 31, 2022 we had $117,000 and no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing compared to none at December 31, 2021.

Interest foregone on nonaccrual loans was approximately $84,600 and $88,300 for the three months ended March 31, 2022 and March 31, 2021, respectively, none of which was included in interest income.

Allowance for loan losses.

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We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations.

Qualitative loss factors are based on management’s judgment of company, market, industry or business

specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios.

Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios.

Management and the Board of Directors sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios.

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Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

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.

At March 31, 2022, the Company’s allowance for loan losses was $17.7 million, or 0.88% of total loans, compared to $17.7 million, or 1.06% of total loans, at December 31, 2021.

Based on our review of the appropriateness of the allowance for loan losses at March 31, 2022, the Company recorded a provision for loan losses of $7,000 for the three months ended March 31, 2022, compared to none for the three months ended March 31, 2022.

The decline in the allowance for loan losses as a percentage of total loans outstanding was due to our acquisition of loans in the PEB Merger and related acquisition accounting on those loans.

As discussed in more detail below, acquired loans are recorded at their estimated fair value at acquisition and no allowance for loan losses is recorded on the acquired loans.

We recorded net charge-offs of $7,000 for the first quarter of 2022 compared to no charge-offs in the same quarter in 2021.

The calculation of the allowance for loan losses at March 31, 2022 and December 31, 2021 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven .

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts.

Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date.

Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisition.

As of September 30, 2021, acquired loans, net of their discounts, totaled $55.2 million compared to $164.0 million at December 31, 2020, with the decrease due to the migration of acquired loans out of the discounted acquired loan portfolio.

The remaining net discount on these acquired loans was $2.2 million and $3.3 million at September 30, 2021 and December 31, 2020, respectively.

The $113.2 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at September 30, 2021 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 .

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

September 30,

However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred.

The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios.

As of March 31, 2022 , acquired loans net of their discount, totaled $349.8 million and the remaining net discount on these acquired loans was $603,000, compared to $51.3 million of acquired loans and $2.1 million of net discounts at December 31 , 2021 .

The net discount includes a credit discount based on estimated losses in the acquired loans partially offset a premium, if any, based market interest rates on the date of acquisition.

The decrease in the net discount on acquired loans from December 31, 2021 was due to a net premium on the PEB loans given the higher yielding portfolio compared to current market interest rates.

As part of the acquisition of PEB, the Company acquired loans under various state guarantee programs which PEB was a participant.

PEB was approved by, and the Company has been approved by the California Pollution Control Financing Authority ("CalCAP") to originate loans to qualified small businesses.

Under the program, the borrower, CalCAP and the Company contribute funds to a loss reserve account that is held in a demand deposit account at the Company.

Losses on qualified loans will be charged to this account after approval by CalCAP.

The funds are the property of CalCAP, however, in the event that the Company leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the Company and there are no pending claims for reimbursement, will be distributed to CalCAP and the Company based on their contributions to the program.

The borrower contributions are included in the Company share.

The Company opted out of this CalCAP Small Business loan program in 2017.

Funds contributed by the Company to the reserve account are treated as a receivable from CalCAP, and evaluated for impairment.

The Company had a receivable from CalCAP of $4,023,000 as of March 31, 2022.

The Company had a loss reserve account of $14,723,000 as of March 31, 2022.

In addition, the Company has been approved by the CalCAP in partnership with the California Air

Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program.

Under the program, the CalCAP solely contributes funds to a loss reserve account that is held in a demand

deposit account at the Company.

Losses are handled in the same manner as noted above.

The funds are the property of CalCAP and are payable upon termination of the program.

When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to the CalCAP.

The Company had a loss reserve account of $5,925,000 as of March 31, 2022.

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

Three months ended March 31,

(Dollars in thousands)

Balance at beginning of period

Provisions for (reversal of) loan losses

Commercial and industrial

Owner occupied CRE

Non-owner occupied CRE

Total recoveries

Allowance for loan losses as a percentage of total loans outstanding at period end

Allowance for loan losses

Total loans outstanding

Non-accrual loans as a percentage of total loans outstanding at period end

Total non-accrual loans

Total loans outstanding

Allowance for loan losses as a percentage of non-accrual loans at period end

Allowance for loan losses

Total non-accrual loans

Net charge-offs/(recoveries) during period to average loans outstanding:

Commercial and industrial:

Owner occupied CRE

Non-owner occupied CRE

Total charge-offs

Net (recoveries)/charge-offs

Average loans outstanding

Construction and land:

Net charge-offs

Balance at end of period

Allowance for loan losses as a percentage of total loans

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

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

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

Allowance for loan losses as a percentage of total nonperforming loans

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

(1) See non-GAAP financial measures herein.

The allowance for loan losses decreased to $17.3 million at September 30, 2021 from $17.5 million at December 31, 2020.

The decrease in the allowance for loan losses at September 30, 2021 was primarily due to the continued improvement since December 31, 2020 in the national and local economy associated with the recovery from the COVID-19 pandemic, which reduced the loss rates utilized to calculate the allowance for loan losses at September 30, 2021 as compared to the uncertain economic outlook and loss rates utilized at December 31, 2020, partially offset by net charge offs of $170,000.

Our PPP loans were omitted from the calculation of the required allowance for loan losses at September 30, 2021 and December 31, 2020 as these loans are fully guaranteed by the SBA and management expects that a majority of SBA PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA, which in turn, the SBA will reimburse the Bank for the amount forgiven.

Included in the carrying value of loans are net discounts on acquired loans which may reduce the need for an allowance for loan losses on these loans because they are carried at their estimated fair value on the date on which they were acquired.

As of September 30, 2021, the Company identified $8.1 million in impaired loans, inclusive of $7.3 million of nonperforming loans and $805,000 of accruing TDR loans.

Of these impaired loans, only $1.0 million had a specific allowance of $701,000 as of September 30, 2021.

As of December 31, 2020, the Company identified $9.2 million in impaired loans, inclusive of $8.4 million of nonperforming loans and $798,000 of accruing TDR loans.

Average loans outstanding

Commercial estate:

Net charge-offs

Average loans outstanding

Net charge-offs

Average loans outstanding

Net charge-offs

Average loans outstanding

Total net charge-offs

Total average loans outstanding

As of March 31, 2022, the Company identified $13.4 million in impaired loans, inclusive of $12.6 million of nonperforming loans and $753,000 of accruing TDR loans.

Of these impaired loans, only $5.9 million had a specific allowance of $1.5 million as of March 31, 2022.

As of December 31, 2021, the Company identified $7.7 million in impaired loans, inclusive of $6.9 million of nonperforming loans and $765,000 of performing (accruing) TDR loans.

Of these impaired loans, only $1.1 million had a specific allowance of $931,000 as of December 31, 2021.

Management considers the allowance for loan losses at September 30, 2021 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

Uncertainties relating to our allowance for loan losses are heightened as a result of the risks surrounding the COVID-19 pandemic, including whether government programs will provide adequate relief to borrowers.

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.

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.

Recently we have seen most of our market areas reporting a fairly significant increase in COVID transmissions, which we understand from our public health authorities is largely attributed to lagging vaccination rates and an increase in cases related to the Delta variant.

To date, we are not seeing renewed business activity restrictions in our primary markets.

To the extent business activity restrictions are renewed, due to COVID-19 or otherwise, this will likely affect our business operations which may, in turn, require us to increase our allowance through our provision for loan losses which would adversely affect our financial performance.

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.

Management considers the allowance for loan losses at March 31, 2022 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio.

Uncertainties relating to our allowance for loan losses remain heightened as a result of the risks surrounding the lingering effects of COVID-19.

A further decline in national and local economic conditions, as a result of the COVID-19 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.

Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations.

3 unchanged sentences

Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.

Total deposits increased $169.4 million, or 9.2%, to $2.0 billion at September 30, 2021 from $1.8 billion at December 31, 2020.

The increase in deposits was primarily driven by organic growth in client relationships, proceeds from PPP loans and government stimulus checks deposited directly into customer accounts, and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.

At September 30, 2021, noninterest bearing demand deposits totaled $733.1 million or 36.5% of total deposits, compared to $678.4 million or 36.9% of total deposits at December 31, 2020.

Total deposits increased $345.2 million, or 17.4%, to $2.3 billion at March 31, 2022 from $2.0 billion at December 31, 2021.

The increase in deposits from the prior quarter is primarily attributable to the $376.7 million of deposits acquired from PEB.

At March 31, 2022, noninterest bearing demand deposits totaled $783.1 million or 33.6% of total deposits, compared to $710.1 million or 35.8% of total deposits at December 31, 2021.

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

September 30,

(Dollars in thousands)

7 unchanged sentences

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.

In May 2020, the Bank secured a $10.0 million advance from the FHLB of San Francisco, comprised of two $5.0 million tranches, at no cost, maturing in November 2020 and May 2021.

As of September 30, 2021, the two tranches were repaid and the Bank had no borrowings outstanding from the FHLB of San Francisco.

At September 30, 2021 and December 31, 2020, we had the ability to borrow up to $434.9 million and $421.2 million, respectively, from the FHLB of San Francisco.

At September 30, 2021, the Company had outstanding junior subordinated deferrable interest debentures, net mark-to-market adjustments, totaling $8.4 million which were assumed in connection with our previous acquisitions.

The Company issued $65.0 million of subordinated debt during the third quarter of 2020.

At September 30, 2021, the Company had outstanding subordinated debt, net of cost to issue, totaling $63.5 million.

At March 31, 2022 and December 31, 2021, we had the ability to borrow up to $454.4 million and $483.1 million, respectively, from the FHLB of San Francisco.

In addition to the availability of liquidity from the FHLB of San Francisco, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco, with available credit capacity of $114.6 million and $135.6 million as of March 31, 2022 and December 31, 2021, respectively, based on loans that qualify as collateral for the FRB line of credit.

At both March 31, 2022 and December 31, 2021, there were no FRB borrowings outstanding.

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

If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding.

At September 30, 2021 and December 31, 2020, we had a total of $75.0 million in federal funds line available from third-party financial institutions and no balances outstanding at these dates.

At both March 31, 2022 and December 31, 2021, we had a total of $65.0 million in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.

At March 31, 2022 and December 31, 2021, the Company had outstanding junior subordinated debt, net of market-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.4 million compared to $8.3 million at March 31, 2021.

At March 31, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.5 million at December 31, 2021.

We are required to provide collateral for certain local agency deposits.

As of September 30, 2021 and December 31, 2020, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $41.5 million and $30.1 million, respectively as collateral for local agency deposits.

At both March 31, 2022 and December 31, 2021, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $42.0 million as collateral for local agency deposits.

Shareholders’ equity.

Shareholders’ equity increased $4.7 million, to $257.3 million at September 30, 2021 from $252.6 million at December 31, 2020.

The increase in shareholders’ equity was primarily due to net income of $15.3 million partially offset by the repurchase of $11.5 million of our common stock.

During the nine months ended September 30, 2021, the Company repurchased a total of 643,609 shares of its common stock at a total cost of $11.5 million, or $17.80 per share, leaving 657 shares available for future purchases under the current stock repurchase plan.

Shareholders’ equity increased $62.5 million, to $324.7 million at March 31, 2022 from $262.6 million at December 31, 2021.

The increase in shareholders’ equity was primarily due to issuance of stock related to our acquisition of PEB and net income, partially offset by the repurchase of $1.3 million of common stock and $685,000 of accrued cash dividends payable.

In addition, shareholder’s equity was adversely impacted by a $7.0 million decrease in accumulated other comprehensive income resulting in a total comprehensive loss of $464,000 due to an increase in the unrealized loss on available for sale securities reflecting the increase in market interest rates during the current quarter.

During the three months ended March 31, 2022, the Company repurchased a total of 57,177 shares of its common stock at a total cost of $1.3 million, or $22.18 per share, leaving 685,355 shares available for future purchases under the current stock repurchase plan.

For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021

Earnings summary.

Net income was $5.4 million for the three months ended September 30, 2021, compared to $3.2 million for the three months ended September 30, 2020, an increase of $2.2 million or 66.6%.

The increase was the result of a $1.8 million decrease in provision for loan losses, a $2.2 million increase in noninterest income and a $276,000 decrease in noninterest expenses, partially offset by a $1.3 million decrease in net interest income, and an $845,000 increase in the provision for income taxes.

Diluted earnings per share were $0.51 for the three months ended September 30, 2021, an increase of $0.24 from diluted earnings per share of $0.27 for the three months ended September 30, 2020.

Net income was $15.3 million for the nine months ended September 30, 2021, compared to $9.2 million for the nine months ended September 30, 2020, an increase of $6.1 million or 66.0%.

The increase was the result of $8.4 million decrease in the provision for loan losses, a $3.0 million increase in noninterest income and a $3.2 million decrease in noninterest expense, partially offset by a $6.4 million decrease in net interest income and a $2.2 million increase in provision for income taxes.

There were no acquisition-related expenses during the nine months ended September 30, 2021, compared to $3.0 million during the nine months ended September 30, 2020.

Diluted earnings per share were $1.39 for the nine months ended September 30, 2021, an increase of $0.63 from diluted earnings per share of $0.76 for the nine months ended September 30, 2020.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, was 63.82% and 66.40% for the three and nine months ended September 30, 2021, compared to 67.95% and 67.90% for the three and nine months ended September 30, 2020.

The improvement in the efficiency ratio during the three months ended September 30, 2021 compared to the same period in 2020 was due to higher revenues coupled with lower noninterest expense during the current quarter compared to the comparable quarter in 2020.

The improvement in the efficiency ratio during the nine months ended September 30, 2021 was primarily due higher revenues and reduced noninterest expense due to the absence of acquisition-related expenses.

Net income was $6.5 million for the three months ended March 31, 2022, compared to $4.5 million for the three months ended March 31, 2021, an increase of $2.0 million or 43.2%.

The increase was the result of a $4.3 million increase in net interest income and a $2.2 million increase in noninterest income, partially offset by a $4.2 million increase in noninterest expense.

Diluted earnings per share were $0.51 for the three months ended March 31, 2022, an increase of $0.11 from diluted earnings per share of $0.40 for the three months ended March 31, 2021.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, was 68.48% and 69.31% for the three months ended March 31, 2022 and 2021, respectively.

The improvement in the efficiency ratio during the three months ended March 31, 2022 compared to the same period in 2021 was due to higher revenues.

Interest income.

Interest income for the three months ended September 30, 2021 was $20.0 million, compared to $21.2 million for the three months ended September 30, 2020, a decrease of $1.2 million or 5.94%.

The decrease in interest income was due to the low interest rate environment and a decrease in average loans outstanding, which more than offset the $122.6 million, or 5.85%, increase in average interest earning assets resulting from higher average balance of lower yielding cash and cash equivalents.

Interest income on loans, including fees, decreased $1.7 million, or 8.37%, to $18.5 million during the three months ended September 30, 2021, compared to $20.1 million for the three months ended September 30, 2020 primarily due to a $93.7 million decrease in average loan balance and a 14 basis point decline in the average loan yield.

The average yield on loans for the three months ended September 30, 2021 was 4.50%, compared to 4.64% for the same period in 2020.

Interest income on loans for the quarters ended September 30, 2021 and 2020 included $338,000 and $824,000, respectively, in accretion of purchase accounting fair value adjustments on acquired loans.

The remaining net discount on these acquired loans was $2.2 million and $4.1 million at September 30, 2021 and 2020, respectively.

Interest income for the three months ended September 30, 2021 included $1.1 million in fees earned related to PPP loans compared to $594,000 during the same period in 2020.

As of September 30, 2021, total unrecognized fees on PPP loans were $4.0 million.

For the three months ended September 30, 2021, average PPP loans were $127.5 million and the average yield, including fees, was 4.52%.

Interest income for the three months ended March 31, 2022 was $24.8 million, compared to $20.3 million for the three months ended March 31, 2021, an increase of $4.5 million or 22.4%.

The increase in interest income between the periods reflects increases in interest income on loans and, to a lesser extent, investment securities due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

Interest income on loans, including fees, increased $3.7 million, or 19.5%, to $22.9 million during the three months ended March 31, 2022, compared to $19.2 million for the three months ended March 31, 2021 primarily due to $275.8 million increase in average loan balance, as well as the higher average yield earned on loans.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended March 31, 2022 was 4.89%, compared to 4.79% for the same period in 2021.

Interest income on loans for the quarters ended March 31, 2022 and 2021 included $1.3 million and $675,000, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts.

The remaining net discount on these acquired loans was $603,000 and $2.7 million at March 31, 2022 and March 31, 2021, respectively.

Interest income for the three months ended March 31, 2022 included $1.3 million in fees earned related to PPP loans compared to $1.2 million during the same period in 2021.

As of March 31, 2022, total unrecognized fees on PPP loans were $735,000.

Interest income on loans for the quarters ended March 31, 2022 and 2021, included $235,000 and $562,000, respectively, in fees related to prepayment penalties.

For the three months ended March 31, 2022, average PPP loans were $108.8 million and the average yield, including fees, was 5.89%.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but will cease completely after the maturity of the loans.

Approximately two-thirds of the PPP loans are set to mature by the end of 2022, while the remaining loans have a five-year maturity date.

Interest income on interest bearing deposits in banks increased $44,000 as a result of a $193.6 million increase in the average balance of interest bearing deposits in banks, partially offset by a seven basis point decrease in the average yield on interest bearing deposits to 0.18% for the three months ended September 30, 2021 compared to 0.25% for the three months ended September 30, 2020.

Interest income on investment securities available-for-sale increased by $356,000 as a result of a 63 basis point increase in the average yield to 3.15% for the three months ended September 30, 2021 compared to 2.52% for the three

months ended September 30, 2020, and a $22.1 million increase in the average balance of investment securities available-for-sale.

Interest income for the nine months ended September 30, 2021 was $60.2 million, compared to $66.5 million for the nine months ended September 30, 2020, a decrease $6.3 million or 9.5%.

The decrease in interest income primarily was due to a 68 basis point decline in the average yield on interest earning assets and a $41.6 million or 2.5% decline in the average loan balance.

Interest income on loans, including fees, decreased $6.2 million, or 9.86%, primarily as a result of a 36 basis point decrease in the average loan yield to 4.67% for the nine months ended September 30,2021 compared to 5.03% for the nine months ended September 30, 2020 and, to a lesser extent, the $41.6 million decrease in the average loan balance.

The average yield on loans for the accretion of the net discount on acquired loans decreased the average yield on loans by 19 basis points during the nine months ended September 30, 2021 and 2020.

During the nine months ended September 30, 2021 compared to this same period in 2020, the accretion of the net discount on acquired loans increased the yield on loans by eight basis points and 36 basis points, respectively.

Interest income on loans for the nine months ended September 30, 2021 included $1.4 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $4.4 million for the nine months ended September 30, 2020.

The remaining net discount on these purchased loans was $2.2 million and $4.1 million at September 30, 2021 and 2020, respectively.

Interest income for the nine months ended September 30, 2021 also included $3.4 million in fees earned related to PPP loans compared to $1.1 million during the same period in 2020.

For the nine months ended September 30, 2021, average PPP loans were $117.8 million and the average yield, including fees, was 4.90%.

Interest income on interest bearing deposits in banks decreased $679,000 as a result a 52 basis point decrease in the average yield to 0.16% for the nine months ended September 30, 2021 compared to 0.68% for the nine months ended September 30, 2020, partially offset by a $184.1 million increase in the average balance of interest bearing deposits in banks.

Interest income on investment securities available for sale increased $472,000 as a result of a 46 basis point increase in the average yield on investment securities to 3.01% for the nine months ended September 30, 2021 compared to 2.55% for the nine months ended September 30, 2020, and a $3.6 million increase in the average balance of investment securities available-for-sale.

Interest income on investment securities and interest-bearing deposits in banks increased $740,000, or 85.3% to $1.6 million during the three months ended March 31, 2022, compared to $868,000 for the three months ended March 31, 2021, primarily due a $68.1 million increase in the average balance of investment securities, as well as a higher average yield earned on investment securities.

The average yield on investment securities increased 43 basis point to 3.15% for the three months ended March 31, 2022 compared to 2.72% for the same period prior year.

Interest expense.

Interest expense remained relatively unchanged at $2.2 million for both the three months ended September 30, 2021 and 2020, as a decrease in interest expense on deposits was offset by an increase in interest expense on subordinated debt.

Total average interest bearing liabilities increased $89.4 million, or 7.1%, to $1.3 billion for the three months ended September 30, 2021, compared to $1.3 billion for the three months ended September 30, 2020.

The average rate paid on interest bearing liabilities decreased by four basis points to 0.66% for the three months ended September 30, 2021, from 0.70% for the three months ended September 30, 2020.

Interest expense on deposits decreased $322,000, or 20.61%, to $1.2 million for the three months ended September 30, 2021 compared to $1.6 million for the three months ended September 30, 2020, primarily due to decreases in the targeted federal funds rate, earlier in 2020, partially offset by a $71.1 million increase in the average balance of deposits.

The average rate paid on interest bearing deposits decreased by 13 basis points to 0.39% for the three months ended September 30, 2021, from 0.52% for the three months ended September 30, 2020.

The overall average cost of deposits for the three months ended September 30, 2021 declined to 0.25%, compared to 0.32% for the three months ended September 30, 2020, due to an increase in noninterest bearing deposits and a reduction in market interest rates over the last year.

The average balance of noninterest bearing deposits increased $25.0 million, or 3.39%, to $763.1 million for the three months ended September 30, 2021 compared to $738.1 million for the same period in 2020.

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 $325,000 or 49.7%, to $981,000 for the three months ended September 30, 2021, from $656,000 for the three months ended September 30, 2020, as a result of the issuance of subordinated debt in August 2020, which currently has a 5.25% interest rate.

The average balance of borrowings outstanding increased $18.3 million to $71.8 million during the three months ended September 30, 2021, compared to

$53.5 million during the three months ended September 30, 2020.

The average cost of borrowing increased to 5.42% for the three months ended September 30, 2021, compared to 4.86% for the three months ended September 30, 2020.

Interest expense increased by $89,000, or 1.4%, to $6.6 million for the nine months ended September 30, 2021 compared to $6.5 million for the nine months ended September 30, 2020 as a result of the costs from the issuance of subordinated debt in August 2020 exceeding decreased deposit costs from the decline in the average rate paid on interest bearing deposits.

The average cost of interest bearing liabilities decreased four basis points to 0.68% for the nine months ended September 30, 2021 compared to 0.72% for the nine months ended September 30, 2020.

Total average interest bearing liabilities increased $98.2 million, or 8.16%, to $1.3 million for the nine months ended September 30, 2021 from $1.2 million for the nine months ended September 30, 2020.

Interest expense on deposits decreased $1.9 million, or 34.0%, to $3.7 million during the nine months ended September 30, 2021 from $5.6 million the same period in 2020, primarily as a result of a decline in the average rate paid on interest bearing deposits and a $51.9 decrease in the average balance of higher interest bearing time deposits.

The average rate paid on interest bearing deposits decreased by 23 basis points to 0.40% for the nine months ended September 30, 2021 compared to 0.63% for the nine months ended September 30, 2020.

The overall average cost of deposits for the nine months ended September 30, 2021 declined to 0.25%, compared to 0.32% for the nine months ended September 30, 2020 due to an increase in noninterest bearing deposits and a reduction in market interest rates over the last year.

The average balance of noninterest bearing deposits increased $59.9 million, or 9.1%, to $721.0 million for the nine months ended September 30, 2021 compared to $661.1 million for the nine months ended September 30, 2020.

Interest expense on borrowings increased $2.0 million, or 198.8%, to $2.9 million for the nine months ended September 30, 2021, from $968,000 for the nine months ended September 30, 2020, as a result of a higher average balance of borrowings outstanding due to the issuance of the subordinated debt in August 2020.

The average balance of borrowing outstanding increased $49.1 million to $74.1 million during the nine months ended September 30, 2021, compared to $25.0 million during the nine months ended September 30, 2020.

The average cost of borrowing increased to 5.32% for the nine months ended September 30, 2021, compared to 5.17% for the nine months ended September 30, 2020.

Interest expense increased $264,000, or 12.1%, to $2.5 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021.

The increase was due to the $293.7 million increase in the average balance of deposits.

Total average interest bearing liabilities increased $289.0 million, or 23.0%, to $1.5 billion for the three months ended March 31, 2022, compared to $1.3 billion for the three months ended March 31, 2021.

The average rate paid on interest bearing liabilities decreased by seven basis points to 0.64% for the three months ended March 31, 2022, compared to 0.71% for the same period prior year.

Interest expense on deposits increased $264,000, or 24.9%, to $1.5 million for the three months ended March 31, 2022 compared to $1.2 million for the three months ended March 31, 2021, primarily due to increases in the average balance in all interest bearing deposit categories.

The average balance of deposits totaled $2.2 billion for the three months ended March 31, 2022, compared to $1.9 billion for the same quarter a year ago, respectively.

The average rate paid on interest bearing deposits decreased by one basis point to 0.41% for the three months ended March 31, 2022, from 0.42% for the three months ended March 31, 2021.

The overall average cost of deposits for the three months ended March 31, 2022, increased to 0.27%, compared to 0.26% for the three months ended March 31, 2021.

The average balance of noninterest bearing deposits increased $61.9 million, or 8.51%, to $789.1 million for the three months ended March 31, 2022 compared to $727.4 million for the same period in 2021.

Interest expense on borrowings was $982,000 for both the three months ended March 31, 2022 and 2021, due to decreases in borrowings outstanding offset by increases in the average cost of borrowings.

The average balance of borrowings outstanding decreased $4.8 million to $72.0 million during the three months ended March 31, 2022, compared to $76.7 million during the three months ended March 31, 2021.

The average cost of borrowing increased to 5.53% for the three months ended March 31, 2022, compared to 5.19% for the three months ended March 31, 2021.

Net interest income and net interest margin.

Net interest income decreased $1.3 million, or 6.7%, to $17.7 million for the three months ended September 30, 2021, compared to $19.0 million for the three months ended September 30, 2020, and decreased $6.4 million to $53.6 million for the nine months ended September 30, 2021, compared to $60.0 million for the nine months ended September 30, 2020.

The decrease in net interest income during the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the decline in the average loan balance between periods, while the decrease during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to the decline in the average yield on interest earning assets.

The average yield on interest earning assets for the three months ended September 30, 2021 was 3.57%, a 44 basis point decrease from 4.01% for the three months ended September 30, 2020, due primarily to lower market interest rates, while the average cost of interest bearing liabilities for the three months ended September 30, 2021 decreased to 0.66%, or four basis points from 0.70% for the three months ended September 30, 2020.

The average yield on interest earning assets for the nine months ended September 30, 2021 was 3.72%, a 68 basis point decrease from 4.40% for the nine months ended September 30, 2020, while the average cost of interest bearing liabilities for the nine months ended September 30, 2021 decreased to 0.68%, or four basis points from 0.72% for the nine months ended September 30, 2020, due primarily to lower market interest rates, partially offset by the cost of the subordinated debt.

The net interest margin for the three and nine months ended September 30, 2021 was 3.17% and 3.51%, respectively, compared to 3.59% and 3.96% for the three and nine months ended September 30, 2020.

During the three and nine months ended September 30, 2021, the interest margin was impacted by lower yielding loans, including PPP loans and resetting adjustable rate instruments as well as reduced interest rates on new fixed-rate real estate loan and adjustable-rate commercial loan originations and the increase in low yielding overnight cash balances causing a decrease in the average yield on interest-earning assets that outweighed the contribution to net interest margin from the decrease in the average cost of interest-bearing liabilities.

The decrease in net interest margin was offset partially by an increase in deferred SBA PPP loan fees recognized due to the volume of forgiven SBA PPP loans during the three and nine months

ended September 30, 2021, which benefited net interest margin compared to a reduction in net interest margin from the Company’s origination of low yielding PPP loans during the same periods in 2020.

Net interest income increased $4.3 million, or 23.6%, to $22.4 million for the three months ended March 31, 2022, compared to $18.1 million for the three months ended March 31, 2021.

The increase in net interest income primarily was due to increases in interest income on loans and, to a lesser extent, investment securities due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

The average yield on interest earning assets for the three months ended March 31, 2022 was 4.03%, a 12 basis point increase from 3.91% for the three months ended March 31, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the three months ended March 31, 2022 decreased to 0.64%, or seven basis points from 0.71% for the three months ended March 31, 2021.

The annualized net interest margin for the three months ended March 31, 2022 was 3.63%, compared to 3.49% for first quarter of 2021.

The comparable quarter over quarter increase in net interest margin primarily reflects an improved mix of interest-bearing assets, including increased balances of higher yielding loans and investment securities available for sale.

During the quarter, the recognition of deferred loan fees related to PPP loans and accretion on acquired loans, also had a positive impact on the net interest margin.

PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 4.52% and 4.90%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of 20 basis points and 21 basis points during the three and nine months ended September 30, 2021, compared to a positive impact of 11 basis points and eight basis points during the comparable periods in 2020, respectively.

The average yield on PPP loans was 5.89%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of eight basis points during the three months ended March 31, 2022, compared to 4.51% with a positive impact of three basis points during the comparable periods in 2021.

The impact of PPP loans on net interest margin will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are net, but will cease completely after the maturity of the loans.

Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts decreased our net interest margin by 12 and 19 basis points during the three and nine months ended September 30, 2021 and 19 and 51 basis points during the three and nine months ended September 30 2020, respectively.

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 21 basis points during the three months ended March 31, 2022 and 17 basis points during the three months ended March 31, 2021.

Average Balances, Interest and Average Yields/Cost.

6 unchanged sentences

The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.

Three months ended September 30,

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

Investments securities available-for-sale

Total interest earning assets

Noninterest earning assets

Total average assets

Interest bearing liabilities

Time deposits

Total deposit accounts

Subordinated debt, net

Junior subordinated debentures, net

Other borrowings

Total interest bearing liabilities

Noninterest bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Interest rate spread (2)

Net interest margin (3)

Ratio of average interest earning assets to average interest bearing liabilities

(1) Average balances are computed using average daily balances.

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

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

Nine months ended September 30,

Three months ended March 31,

(Dollars in thousands)

7 unchanged sentences

Time deposits

Total deposit accounts

Total interest bearing deposit accounts

Subordinated debt, net

2 unchanged sentences

Total interest bearing liabilities

Noninterest bearing deposits

Other noninterest bearing liabilities

Noninterest bearing liabilities

15 unchanged sentences

Yields have been calculated on a pre-tax basis.

Three months ended September 30,

Nine months ended September 30,

2021 compared to 2020

Three months ended March 31,

2022 compared to 2021

Increase/(Decrease)

Attributable to

(Dollars in thousands)

Interest earning assets

9 unchanged sentences

Junior subordinated debentures, net

Other borrowings

Total interest expense

1 unchanged sentence

Provision for loan losses.

We recorded $477,000 provision for loan losses and $30,000 reversal of the provision for loan losses for the three and nine months ended September 30, 2021, compared to a provision for loan losses of $2.3 million and $8.4 million for the three and nine months ended September 30, 2020 respectively.

The provision for loan losses recorded in the third quarter of 2021 related primarily to new loan production.

The reversal of the provision for loan losses for the nine months ended September 30, 2021 was primarily due to an adjustment to the qualitative factors utilized to calculate the allowance for loan losses resulting from improvements in the economic forecast since December 31, 2020.

We had net charge-offs on loans of $177,000 and $170,000 for the three and nine months ended September 30, 2021 , compared to $7,000 of net charge-offs and recoveries on loans of $4,000 for the three and nine months ended September 30, 2020 , respectively .

The allowance for loan losses to total loans was 1.05% at September 30, 2021, compared to 0.93% at September 30, 2020.

We recorded $7,000 provision for loan losses for the three months ended March 31, 2022, compared to no provision for the three months ended March 31, 2021.

The provision for loan losses recorded in the first quarter March 31, 2022 related primarily to new loan production.

We had net charge-offs on loans of $7,000 for the three months ended March 31, 2022 , compared to zero net charge-offs on loans for the three months ended March 31, 2021.

Noninterest income.

Noninterest income for the three months ended September 30, 2021 increased $2.2 million, or 119.2%, to $4.0 million compared to $1.8 million for the three months ended September 30, 2020.

The increase in noninterest income for the current quarter compared to the same period in 2020 was primarily due to a $2.0 million increase in gain on sale of loans and a $338,000 increase in income from our investment in the SBIC fund, partially offset by a $150,000 decrease in loan servicing fees and other fees.

During the three months ended September 30, 2021, the Company sold $20.3 million of SBA loans (guaranteed portion), resulting in a gain on sale of $2.2 million, compared to the sale of $3.3 million of SBA loans (guaranteed portion) resulting in a gain on sale of $176,000 during the three months ended September 30, 2020.

Noninterest income increased $3.0 million, or 52.4%, to $8.7 million for the nine months ended September 30, 2021 compared to $5.7 million for the nine months ended September 30, 2020 primarily due to a $2.7 million increase in gain on sale of loans and a $798,000 increase in income in our investment in the SBIC fund.

During the nine months ended September 30, 2021 , the Company sold $36.0 million of SBA loans (guaranteed portion), resulting

in a gain on sale of $3.8 million, compared to the sale of $15.0 million of SBA loans (guaranteed portion) resulting in a gain of $1.0 million during the nine months ended September 30, 2020 .

These increase were partially offset by a decrease in loan servicing and other loan fees of $426,000, or 23.0%, to $1.4 million for the nine months ended September 30, 2021 , compared to $1.8 million for the nine months ended September 30, 2020 , as a result of lower transaction volume.

Noninterest income increased $2.2 million, or 96.6%, to $4.4 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021.

The increase in noninterest income primarily was due to the $1.6 million bargain purchase gain related to the PEB Merger and a $561,000 increase in gain on sale of loans due to an increase in the volume of loans sold, partially offset by $66,000 decrease in income from our investment in a SBIC fund.

During the three months ended March 31, 2022, the Company sold $10.9 million of SBA loans (guaranteed portion), resulting in a gain on sale of $1.1 million, compared to the sale of $6.8 million of SBA loans (guaranteed portion) resulting in a gain on sale of $643,000 during the three months ended March 31, 2021.

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

Three months ended September 30,

(Dollars in thousands)

Gain on sale of loans

Service charges and other fees

Loan servicing and other loan fees

Income on investment in SBIC fund

Gain (loss) on sale of premises

Gain (loss) on sale of OREO

Other income and fees

Total noninterest income

Nine months ended September 30,

Three months ended March 31,

(Dollars in thousands)

2 unchanged sentences

Loan servicing and other loan fees

Gain (loss) on sale of premises

Income on investment in SBIC fund

Gain on sale of OREO

Bargain purchase gain

Other income and fees

1 unchanged sentence

Noninterest expense.

Noninterest expense decreased $276,000, or 1.9%, to $13.9 million for the three months ended September 30, 2021 compared to $14.2 million for the three months ended September 30, 2020.

The decrease was primarily due to a $319,000, or 3.8% decrease in salaries and employee benefits expense as a result of overall lower staff combined with a $160,000 or 9.7% decrease in data processing expense due to decreased customer transactions , partially offset by a $196,000, or 11.2% increase in occupancy and equipment expense primarily as a result of normal increases in rent.

Noninterest expense for the nine months ended September 30, 2021 decreased $3.2 million, or 7.3%, to $41.4 million from $44.6 million in the same period in 2020.

This decrease primarily was due to decreases in data processing expenses of $2.5 million and other expenses of $747,000 for the nine months ended September 30, 2021 , compared to the same period in 2020.

The higher data processing and other expenses during the nine months ended September 30, 2020, were primarily related to our acquisition of Grand Mountain Bancshares in February 2020, compared to no acquisition-related expenses incurred during the nine months ended September 30, 2021.

Salaries and benefits decreased $284,000, or 11.0% during the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a decrease in staffing levels.

Partially offsetting these decreases was a $276,000 or 11.2% increase in occupancy and equipment expense primarily as a result of normal increases in rent.

Noninterest expense increased $4.2 million, or 30.1%, to $18.3 million for the three months ended March 31, 2022 compared to $14.1 million for the three months ended March 31, 2021.

Noninterest expense for the first quarter of 2022 included $3.1 million of nonrecurring acquisition-related expenses related to the PEB Merger, which were comprised of $555,000 in salary and employee benefits, $1.1 million in data processing expenses, $725,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 in other expenses.

Excluding acquisition-related expenses for each of the periods, noninterest expense for the first quarter of 2022 increased $1.2 million, or 8.2%, compared to the same quarter a year ago primarily due to an $870,000 increase in salary and employee benefits as a result of normal year end salary increases and an increase in the number of full time equivalent employees, a $236,000 increase in occupancy and equipment expense and a $340,000 increase in other noninterest expense, partially offset by a $284,000 decrease in data processing expense.

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

Three months ended September 30,

(Dollars in thousands)

Salaries and related benefits

Occupancy and equipment

Data processing

Total noninterest expense

Nine months ended September 30,

Three months ended March 31,

(Dollars in thousands)

Salaries and related benefits

Salaries and employee benefits

Occupancy and equipment

2 unchanged sentences

Income taxes.

The provision for income taxes increased $845,000, or 74.4%, to $2.0 million for the three months ended September 30, 2021 compared to $1.1 million for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the provision for income taxes increased $2.2 million, or 63.1%, to $5.7 million, compared to $3.5 million for the nine months ended September 30, 2020.

The Company’s effective tax rate was 26.8% and 27.2% for three and nine months ended September 30, 2021 compared to 25.9% and 27.6% for the three and nine months ended September 30, 2020.

The increases in the provision for income taxes for the periods primarily was due to increased taxable income.

The provision for income taxes increased $232,000, or 13.6%, to $1.9 million for the three months ended March 31, 2022 compared to $1.7 million for the three months ended March 31, 2021.

The Company’s effective tax rate was 23.0% for three months ended March 31, 2022 compared to 27.3% for the three months ended March 31, 2021.

The effective tax rate was lower for the first quarter of 2022 compared same quarter a year ago primarily due to the non-taxable bargain purchase gain in the current quarter.

Liquidity and Capital Resources

4 unchanged sentences

Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans.

During the three months ended March 31, 2022, the Bank sold $10.9 million in loans and loan participation interests and received $129.4 million in principal loan repayments.

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 investment securities available-for-sale.

The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

At September 30, 2021, the Company had $448.5 million in cash and cash equivalents, and interest bearing deposits in banks, and $142.3 million in investment securities.

The Company classifies its investment securities portfolio as available for sale, providing an additional source of liquidity.

Recently, the Bank’s liquidity has been positively impacted by an increase in deposit levels.

During the three months ended March 31, 2022, deposits increased by $345.2 million due to the closing of the PEB Merger.

As a result, our liquid assets in the form of cash and cash equivalents, interest bearing deposits in banks, and investment securities available for sale increased to $615.2 million at March 31, 2022 from $557.7 million at December 31, 2021.

Management believes that our security portfolio is of high quality and the securities would therefore be marketable.

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements.

At September 30, 2021, the Bank had an available borrowing capacity of $434.9 million with the FHLB of San Francisco, and Federal Funds lines with available commitments totaling $75.0 million with four correspondent banks.

There were no amounts outstanding under these facilities at September 30, 2021 and December 31, 2020.

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 totaled $96.3 million at September 30, 2021, and certificates of deposits scheduled to mature in one year or less at September 30, 2021, totaled $181.0 million.

Securities purchased during the three months ended March 31, 2022, totaled $22.7 million and securities repayments, maturities and sales in the period were $2.5 million.

Certificates of deposit scheduled to mature in one year or less at March 31, 2022, totaled $241.1 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.

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements.

As of March 31, 2022, the Bank had an available borrowing capacity of $454.4 million with the FHLB of San Francisco and $114.6 million with the FRB of San Francisco, with no borrowings outstanding at that date.

Federal Funds lines with available commitments totaling $65.0 million with four correspondent banks.

There were no amounts outstanding under these facilities at March 31, 2022 and December 31, 2021.

Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Liquidity management is both a daily and long-term function of the Company’s management.

Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds.

On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S.

Government obligations and U.S.

agency securities.

We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments.

Loan commitments and letters of credit were $89.1 million, including $3.4 million of undisbursed construction and development loan commitments, at March 31, 2022.

For information regarding our commitments, see “Note 18 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1.

Financial Information” of Part I of this report.

Our cash flows are comprised of three primary classifications:

cash flows from operating activities, investing activities, and financing activities.

Net cash provided by operating activities for the nine months ended September 30, 2021 was $5.4, compared to $6.2 million for the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, net cash used in investing activities was $13.2 million, which consisted primarily of net change in loans receivable, compared to $132.0 million of cash used in investing activities for the nine months ended September 30, 2020.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $152.9 million, which was comprised primarily of net change in deposits, compared to $150.3 million during the nine months ended September 30, 2020.

Net cash provided by operating activities for the three months ended March 31, 2022 was $2.8 million, compared to $651,000 provided by operating activities for the three months ended March 31, 2021.

During the three months ended March 31, 2022, net cash provided by investing activities was $77.5 million, which consisted primarily of net change in loans receivable, compared to $70.4 million of cash provided by investing activities for the three months ended March 31, 2021.

Net cash used in financing activities for the three months ended March 31, 2022 was $32.8 million, which was comprised primarily of net change in deposits, compared to $87.4 million provided by financing activities during the three months ended March 31, 2021.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our liquidity and capital resources since the information disclosed in our 2021 Annual Form 10-K other than set forth above.

We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

The Company is a separate legal entity from the Bank and must provide for its own liquidity.

At September 30, 2021, the Company, on an unconsolidated basis, had liquid assets of $35.2 million.

At March 31, 2022, the Company, on an unconsolidated basis, had liquid assets of $30.4 million.

In addition to its operating expenses, the Company is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on trust-preferred securities and subordinated notes held at the Company level.

The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

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 additional information about our loan commitments, unused lines of credit and standby letters of credit, see Note 18 - Commitment and Contingencies in the Notes to the Condensed Consolidated Financial Statements included in “Item 1 - Financial Statements” within this report.

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

In February 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s outstanding common stock, payable on April 15, 2022 to shareholders of record as of the close of business on March 11, 2022.

The Company expects to continue to pay quarterly cash dividends on its common stock subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason

without prior notice.

Assuming continued payment of the cash dividend at this rate of $0.05 per share, our average total dividend paid each quarter would be approximately $686,000 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

The dividends, if any, we may pay may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I.

Business” of the 2021 Annual Report.

From time to time, our Board of Directors has authorized stock repurchase plans.

In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company may repurchase up to seven percent of the Company’s common stock, or approximately 747,000 shares, of which 685,355 shares remained available for repurchase at March 31, 2022.

The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

The repurchase program does not obligate the Company to purchase any particular number of shares.

For additional information on the Company’s stock repurchases, see "Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.

Regulatory Capital

The Company is a bank holding company subject to capital adequacy requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3 billion is generally not subject to the Federal Reserve’s capital regulations.

Under the capital regulations, the minimum capital ratios are:

(1) a common equity Tier 1 capital ratio (“CET1 capital”) of 4.5% of risk-weighted assets;

(2) a Tier 1 capital ratio of 6.0% of risk-weighted assets (“Tier 1 capital”);

(3) a total risk-based capital ratio of 8.0% of risk-weighted assets;

and (4) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0%.

CET1 capital generally consists of common stock, retained earnings, accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital, and certain minority interests (all of which are subject to applicable regulatory adjustments and deductions).

Tier 1 capital generally consists of CET1 capital and noncumulative perpetual preferred stock.

Tier 2 capital generally consists of other preferred stock and subordinated debt which meet certain conditions, plus an amount of the allowance for loan and lease losses up to 1.25% of assets.

Total capital is the sum of Tier 1 and Tier 2 capital.

The Bank is subject to various regulatory capital requirements administered by the Federal Reserve.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The Bank’s capital amounts and classifications are also

subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital to total average assets (as defined), and minimum ratios of Tier 1 capital (as defined) and CET1 capital to risk-weighted assets (as defined).

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

As of September 30, 2021, the most recent regulatory notifications from the Federal Reserve categorized the Bank as “Well Capitalized” under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes would have changed the category.

The following is a summary of actual capital amounts and ratios as of the dates indicated, for the Company (assuming it was subject to regulatory capital requirements) and the Bank compared to the requirements for minimum capital adequacy and classification as Well Capitalized:

At September 30, 2021

The Bank, as a state-chartered, federally insured commercial bank, and member of the Board of Governors of the Federal Reserve System is subject to capital requirements established by the Federal Reserve.

The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements.

The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital.

The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets.

Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “Well Capitalized” status under the Federal Reserve regulations.

Based on capital levels at March 31, 2022 and 2021, the Bank was considered to be Well Capitalized.

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

At March 31, 2022

At December 31, 2021

24 unchanged sentences

Minimum regulatory requirement

In addition to the minimum CET1 capital, Tier 1 capital, leverage ratio and total capital ratios, the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.

At September 30, 2021, the Bank’s CET1 capital exceeded the required capital conservation buffer.

Non-GAAP financial measures

This report contains certain financial information by methods other than GAAP.

These measures include allowance for loan losses as a percentage of total loans, excluding PCI loans, acquired loans and PPP loans.

Management uses these non-GAAP financial measures, together with the related GAAP measures, in its analysis of the Company’s

performance and in making business decisions.

Management believes that presenting allowance for loan losses as a percentage of total loans excluding PCI, acquired loans and PPP loans is useful in assessing the credit quality of the Company’s core portfolio.

These non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

Further, these non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable financial measures determined in accordance with GAAP and may not be comparable to a similarly titled measure reported by other companies.

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

September 30,

Allowance for loan losses excluding acquired loans and PPP loans

(Dollars in thousands)

Allowance for loan losses (GAAP)

Total loans (GAAP)

Exclude PCI loans

Adjusted total loans excluding PCI loans (non-GAAP)

Total loans (GAAP)

Exclude acquired loans

Adjusted total loans excluding acquired loans (non-GAAP)

Exclude PPP loans

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

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

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

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

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

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

At March 31, 2022, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be Well Capitalized under the prompt corrective action regulations.

If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2022, the Company would have exceeded all regulatory capital requirements.

For additional information, see “Item 1.

Business — Supervision and Regulation — United Business Bank — Capital Requirements” and Note 19, “Regulatory Matters” in the Notes to the Consolidated Financial Statements, included in “Item 8.

Financial Statements and Supplementary Data” in the 2021 Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis