California BanCorp - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2020

OR

 

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

For the transition period from                      to                     

Commission File Number 001-39242

 

 

CALIFORNIA BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

California		82-1751097
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1300 Clay Street, Suite 500,

Oakland, California 94612

(Address of principal executive offices) (Zip Code)

(510) 457-3737

(Registrant’s telephone number, including area code)

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

 

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, no par value		CALB		NASDAQ Global Select Market

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

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

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ☐    NO  ☒

Number of shares outstanding of the registrant’s common stock as of March 31, 2020: 8,121,848

 

 

 

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

 

				Page
Part I—Financial Information					3
Item 1.		Financial Statements			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			31
Item 4.		Controls and Procedures			31
Part II—Other Information					32
Item 1.		Legal Proceedings			32
Item 1A.		Risk Factors			32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3.		Defaults Upon Senior Securities			32
Item 4.		Mine Safety Disclosures			33
Item 5.		Other Information			33
Item 6.		Exhibits			33
Signatures					33

 

2

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(Dollar amounts in thousands)

 

		March 31, 2020				December 31, 2019
ASSETS:
Cash and due from banks		$	22,792			$	19,579
Federal funds sold			117,818				94,763
Total cash and cash equivalents			140,610				114,342
Investment securities, available for sale			34,344				28,555
Loans, net of allowance for losses of $11,565 and $11,075 at March 31, 2020 and December 31, 2019, respectively			960,282				941,132
Premises and equipment, net			3,427				3,668
Bank owned life insurance (BOLI)			23,284				22,316
Goodwill and other intangible assets			7,585				7,595
Accrued interest receivable and other assets			37,950				34,426
Total assets		$	1,207,482			$	1,152,034
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits
Non-interest bearing		$	403,248			$	387,267
Interest bearing			625,613				600,969
Total deposits			1,028,861				988,236
Other borrowings			22,000				10,000
Junior Subordinated debt securities			4,981				4,977
Accrued interest payable and other liabilities			20,447				18,565
Total liabilities			1,076,289				1,021,778
Commitments and Contingencies (Note 5)
Shareholders’ equity
Common stock, no par value; 40,000,000 shares authorized; 8,121,848 and 8,092,966 issued and outstanding at March 31, 2020 and December 31, 2019, respectively			106,790				106,427
Retained earnings			23,991				23,518
Accumulated other comprehensive income, net of taxes			412				311
Total shareholders’ equity			131,193				130,256
Total liabilities and shareholders’ equity		$	1,207,482			$	1,152,034

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollar amounts in thousands, except per share data)

 

		Three Months Ended March 31,
		2020				2019
Interest income
Loans		$	11,783			$	10,954
Federal funds sold			329				209
Investment securities			191				331
Total interest income			12,303				11,494
Interest expense
Deposits			1,994				1,543
Borrowings and subordinated debt			127				114
Total interest expense			2,121				1,657
Net interest income			10,182				9,837
Provision for credit losses			400				581
Net interest income after provision for credit losses			9,782				9,256
Non-interest income
Service charges and other fees			970				625
Gain on the sale of SBA loans			—				23
Other			320				215
Total non-interest income			1,290				863
Non-interest expense
Salaries and benefits			6,477				4,515
Premises and equipment			1,139				745
Other			2,791				2,355
Total non-interest expense			10,407				7,615
Income before provision for income taxes			665				2,504
Provision for income taxes			192				636
Net income		$	473			$	1,868
Earnings per common share
Basic		$	0.06			$	0.23
Diluted		$	0.06			$	0.23
Average common shares outstanding			8,103,248				8,020,456
Average common and equivalent shares outstanding			8,169,898				8,102,543

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollar amounts in thousands)

 

		Three Months Ended March 31,
		2020				2019
Net Income		$	473			$	1,868
Other comprehensive income
Unrealized gains on securities available for sale			75				235
Reclassification adjustment for realized loss on securities available for sale			70				—
Tax effect			(44	)			(69	)
Total other comprehensive income			101				166
Total comprehensive income		$	574			$	2,034

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

 

														Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
		Common Stock								Retained Earnings
		Shares				Amount
Balance at December 31, 2018			7,993,908			$	104,561			$	16,517			$	1			$	121,079
Stock awards issued and related compensation expense			12,638				172				—				—				172
Stock options exercised			40,008				372				—				—				372
Net income			—				—				1,868				—				1,868
Other comprehensive income			—				—				—				166				166
Balance at March 31, 2019			8,046,554			$	105,105			$	18,385			$	167			$	123,657
Balance at December 31, 2019			8,092,966			$	106,427			$	23,518			$	311			$	130,256
Stock awards issued and related compensation expense			25,215				413				—				—				413
Shares withheld to pay taxes on stock based compensation			(7,550	)			(133	)			—				—				(133	)
Stock options exercised			11,217				83				—				—				83
Net income			—				—				473				—				473
Other comprehensive income			—				—				—				101				101
Balance at March 31, 2020			8,121,848			$	106,790			$	23,991			$	412			$	131,193

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands)

 

		Three Months Ended March 31,
		2020				2019
Cash flows from operating activities:
Net income		$	473			$	1,868
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			400				581
Depreciation			315				183
Deferred loan costs, net			312				115
Accretion on discount of purchased loans, net			(35	)			(67	)
Stock based compensation, net			280				172
Increase in cash surrender value of life insurance			(153	)			(105	)
Discount on retained portion of sold loans, net			(156	)			(6	)
Loss on sale of investment securities, net			70				—
Gain on sale of loans, net			—				(23	)
Increase in accrued interest receivable and other assets			167				1,020
Decrease in accrued interest payable and other liabilities			(1,730	)			(2,313	)
Net cash from operating activities			(57	)			1,425
Cash flows from investing activities:
Purchase of investment securities, net			(7,438	)			—
Proceeds from principal payments on investment securities			1,641				1,652
Net increase in loans			(19,671	)			(42,529	)
Purchase of low income tax credit investments			(26	)			(197	)
Purchase of premises and equipment			(74	)			(29	)
Purchase of bank-owned life insurance policies			(815	)			—
Net cash used in investing activities			(26,383	)			(41,103	)
Cash flows from financing activities:
Net increase (decrease) in customer deposits			40,625				(3,079	)
Proceeds from short term and overnight borrowings			12,000				25,000
Proceeds from exercised stock options			83				372
Net cash provided by financing activities			52,708				22,293
Increase (decrease) in cash and cash equivalents			26,268				(17,385	)
Cash and cash equivalents, beginning of period			114,342				78,705
Cash and cash equivalents, end of period		$	140,610			$	61,320
Supplemental disclosure of cash flow information:
Transfer of SBA loans to held-for-sale from loan portfolio		$	0			$	146
Recording of right to use assets and operating lease liabilities		$	4,079			$	5,052
Cash paid during the year for:
Interest		$	2,147			$	1,509
Income taxes		$	164			$	710

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

7

CALIFORNIA BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

Organization

California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”). The Bank conducts its business from its headquarters in Lafayette, California. The Company has 2 full service branches in California located in Contra Costa County and Santa Clara County and 3 loan production offices in California located in Alameda County, Contra Costa County, and Sacramento County.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2019, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2020.

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.

Subsequent Events

Management has reviewed all events through the date the unaudited consolidated financial statements were filed with the SEC. See Note 7 to the unaudited consolidated financial statements for additional information regarding the COVID-19 pandemic.

Use of Estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The estimates utilized to determine the appropriate allowance for loan losses at March 31, 2020 may be materially different from actual results due to the COVID-19 pandemic. See Note 7 to the unaudited consolidated financial statements for additional information regarding the COVID-19 pandemic.

 

8

Reclassifications

Certain prior balances in the unaudited consolidated financial statements have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or stockholders’ equity.

Earnings Per Share (“EPS”)

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the period. In determining the weighted average number of shares outstanding, vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method.

 

		Three months ended
(Dollars in thousands, except per share data)		2020				2019
Net income available to common shareholders		$	473			$	1,868
Weighted average basic common shares outstanding			8,103,248				8,020,456
Add: dilutive potential common shares			66,650				82,087
Weighted average diluted common shares outstanding			8,169,898				8,102,543
Basic earnings per share		$	0.06			$	0.23
Diluted earnings per share		$	0.06			$	0.23

New Financial Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued “Simplifying the Accounting for Income Taxes (Topic 740)” (“ASU 2019-12”) removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and clarifying and amending existing guidance to provide for more consistent application. ASU 2019-12 will become effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset which is an asset that represents the lessees’ right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessors accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new guidance also requires enhanced disclosure about an entity’s leasing arrangements. The Company adopted Topic 842 on January 1 2019, as required for public business entities. See Note 5 Commitments and Contingent Liabilities regarding the impact of this new accounting standard on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The guidance is to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. In October of 2019, the FASB approved a proposal to defer implementation of the CECL model by smaller reporting companies to January 1, 2023. The Company currently qualifies for this deferral and has elected to defer adoption but has also taken steps to effect implementation of the guidance including: (1) forming a CECL Committee; (2) engaging a third party vendor to develop models and model assumptions; (3) established initial framework for portfolio segmentation for application of the models; and (4) received preliminary results for consideration and evaluation. The Company will continue to calibrate and validate its approach during the period of deferral.

 

9

2. INVESTMENT SECURITIES

The following table summarizes the amortized cost and estimated fair value of securities available for sale at March 31, 2020 and December 31, 2019.

 

(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
At March 31, 2020:
Residential mortgage backed and government securities		$	23,763			$	760			$	—			$	24,523
Government agencies			2,987				4				—				2,991
Corporate bonds			7,009				—				(179	)			6,830
Total available for sale securities		$	33,759			$	764			$	(179	)		$	34,344
At December 31, 2019:
Residential mortgage backed and government securities		$	20,291			$	436			$	(5	)		$	20,722
Government agencies			7,824				9				—				7,833
Corporate bonds			—				—				—				—
Total available for sale securities		$	28,115			$	445			$	(5	)		$	28,555

Net unrealized gains on available for sale investment securities totaling $585,000 and $440,000 were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at March 31, 2020 and December 31, 2019, respectively.

The Company purchased 3 securities for $15.1 million and sold 6 securities for total proceeds of $7.7 million during the three months ended March 31, 2020. The Company did not purchase or sell available for sale investment securities during the three months ended March 31, 2019.

The following table summarizes securities with unrealized losses at March 31, 2020 and December 31, 2019 aggregated by major security type and length of time in a continuous unrealized loss position.

 

		Less Than 12 Months								More Than 12 Months								Total
(Dollars in thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
At March 31, 2020:
Residential mortgage backed and government securities		$	—			$	—			$	—			$	—			$	—			$	—
Government agencies			—				—				—				—				—				—
Corporate bonds			—				—				6,830				(179	)			6,830				(179	)
Total available for sale securities		$	—			$	—			$	6,830			$	(179	)		$	6,830			$	(179	)
At December 31, 2019:
Residential mortgage backed and government securities		$	481			$	5			$	—			$	—			$	481			$	5
Government agencies			1,598				—				—				—				1,598				—
Corporate bonds			—				—				—				—				—				—
Total available for sale securities		$	2,079			$	5			$	—			$	—			$	2,079			$	5

At March 31 2020, the Company’s investment security portfolio consisted of 18 securities, two of which were in an unrealized loss position at quarter end. Both securities were corporate securities and investment grade ratings.

 

10

Management believes that changes in the market value since purchase are primarily attributable to changes in interest rates and relative illiquidity. Because the Company does not intend to sell and unlikely to be required to sell until a recovery of fair value, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at March 31, 2020.

At December 31, 2019, the Company’s investment security portfolio consisted of 21 securities, two of which were in an unrealized loss position at year end. One security was a government agency by the Small Business Administration. One security was Mortgage-Backed-Securities. Management believes that changes in the market value of its Mortgage-Backed-Securities since purchase are primarily attributable to changes in interest rates and relative illiquidity and not credit quality. Because the Company does not intend to sell and is unlikely to be required to sell until a recovery of fair value, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at December 31, 2019.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Outstanding loans as of March 31, 2020 and December 31, 2019 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).

 

(Dollars in thousands)		March 31, 2020				December 31, 2019
Commercial and industrial			416,308				389,746
Real estate—construction and land			41,697				42,519
Real estate—other			496,765				502,929
Real estate—HELOC			995				982
Installment and other			13,180				13,476
Total loans, gross			968,945				949,652
Deferred loan origination costs, net			2,902				2,555
Allowance for loan losses			(11,565	)			(11,075	)
Total loans, net			960,282				941,132

The following table reflects gross loans by portfolio segment and the related impairment methodology as of March 31, 2020 and December 31, 2019.

 

(Dollars in thousands)		Commercial and Industrial				Real Estate Construction and Land				Real Estate Other				Real Estate HELOC				Installment and Other				Total
As of March 31, 2020
Loans individually evaluated for impairment		$	5,440			$	—			$	—			$	—			$	344			$	5,784
Loans collectively evaluated for impairment			410,868				41,697				496,765				995				12,836				963,161
Total loans		$	416,308			$	41,697			$	496,765			$	995			$	13,180			$	968,945
As of December 31, 2019
Loans individually evaluated for impairment		$	4,572			$	—			$	687			$	—			$	344			$	5,603
Loans collectively evaluated for impairment			385,174				42,519				502,242				982				13,132				944,049
Total loans		$	389,746			$	42,519			$	502,929			$	982			$	13,476			$	949,652

 

11

The following table reflects the changes in, and allocation of, the allowance for loan losses by portfolio segment as of March 31, 2020 and March 31, 2019.

 

(Dollars in thousands)		Commercial and Industrial				Real Estate Construction and Land				Real Estate Other				Real Estate HELOC				Installment and Other				Total
Three months ended March 31, 2020
Beginning balance		$	6,708			$	1,022			$	3,281			$	6			$	58			$	11,075
Provision for loan losses			1,045				(292	)			(620	)			(1	)			268				400
Charge-offs			—				—				—				—				—				—
Recoveries			90				—				—				—				—				90
Ending balance		$	7,843			$	730			$	2,661			$	5			$	326			$	11,565
Individually evaluated for impairment		$	1,187			$	—			$	—			$	—			$	110			$	1,297
Collectively evaluated for impairment			6,656				730				2,661				5				216				10,268
		$	7,843			$	730			$	2,661			$	5			$	326			$	11,565
Three months ended March 31, 2019
Beginning balance		$	5,578			$	1,493			$	3,703			$	16			$	10			$	10,800
Provision for loan losses			378				(373	)			448				(6	)			134				581
Charge-offs			—				—				—				—				(137	)			(137	)
Recoveries			6				—				—				—				—				6
Ending balance		$	5,962			$	1,120			$	4,151			$	10			$	7			$	11,250
Individually evaluated for impairment		$	14			$	—			$	—			$	—			$	—			$	14
Collectively evaluated for impairment			5,948				1,120				4,151				10				7				11,236
		$	5,962			$	1,120			$	4,151			$	10			$	7			$	11,250

The following table reflects the loan portfolio allocated by management’s internal risk ratings at March 31, 2020 and December 31, 2019.

 

(Dollars in thousands)		Commercial and Industrial				Real Estate Construction and Land				Real Estate Other				Real Estate HELOC				Installment and Other				Total
As of March 31, 2020
Grade:
Pass		$	399,304			$	39,919			$	486,959			$	995			$	10,584			$	937,761
Special Mention			7,254				—				5,188				—				1,495				13,937
Substandard			9,750				1,778				4,618				—				1,101				17,247
Total		$	416,308			$	41,697			$	496,765			$	995			$	13,180			$	968,945
As of December 31, 2019
Grade:
Pass		$	378,327			$	40,731			$	494,314			$	982			$	11,382			$	925,736
Special Mention			6,894				1,788				7,928				—				1,655				18,265
Substandard			4,525				—				687				—				439				5,651
Total		$	389,746			$	42,519			$	502,929			$	982			$	13,476			$	949,652

 

12

The following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2020 and December 31, 2019.

 

(Dollars in thousands)		30 Days				60 Days				90+ Days				Non-Accrual				Current				Total
As of March 31, 2020
Commercial and industrial		$	—			$	—			$	—			$	2,306			$	414,002			$	416,308
Real estate:
Construction and land			—				—				—				—				41,697				41,697
Other			—				—				—				—				496,765				496,765
HELOC			—				—				—				—				995				995
Installment and other			—				—				—				344				12,836				13,180
Total loans, gross		$	—			$	—			$	—			$	2,650			$	966,295			$	968,945
As of December 31, 2019
Commercial and industrial		$	—			$	1,440			$	—			$	2,409			$	385,897			$	389,746
Real estate:
Construction and land			—				—				—				—				42,519				42,519
Other			—				—				—				—				502,929				502,929
HELOC			—				—				—				—				982				982
Installment and other			—				—				—				344				13,132				13,476
Total loans, gross		$	—			$	1,440			$	—			$	2,753			$	945,459			$	949,652

 

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The following table reflects information related to impaired loans as of March 31, 2020 and December 31, 2019.

 

(Dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
As of March 31, 2020
With no related allowance recorded:
Commercial and industrial		$	1,677			$	1,685			$	—			$	1,728			$	35
With an allowance recorded:
Commercial and industrial		$	3,782			$	5,682			$	1,187			$	5,715			$	25
Installment and other		$	356			$	631			$	110			$	1,925			$	—
Total:
Commercial and industrial		$	5,459			$	7,367			$	650			$	7,443			$	60
Installment and other		$	356			$	631			$	110			$	1,925			$	—
As of December 31, 2019
With no related allowance recorded:
Commercial and industrial		$	1,847			$	1,860			$	—			$	1,282			$	68
Real estate- other		$	689			$	687			$	—			$	700			$	52
Installment and other		$	291			$	294			$	—			$	1,723			$	—
With an allowance recorded:
Commercial and industrial		$	2,725			$	4,623			$	600			$	4,620			$	56
Installment and other		$	41			$	200			$	50			$	203			$	15
Total:
Commercial and industrial		$	4,572			$	6,483			$	600			$	5,902			$	124
Real estate- other		$	689			$	687			$	—			$	700			$	52
Installment and other		$	332			$	494			$	50			$	1,926			$	15

Interest forgone on nonaccrual loans totaled $82,000 and $89,000 for the three months ended March 31, 2020 and 2019, respectively. There was no interest recognized on a cash-basis on impaired loans for the three months ended March 31, 2020 and 2019, respectively.

The recorded investment in impaired loans in the tables above excludes accrued interest receivable and net deferred loan origination costs due to their immateriality.

Trouble Debt Restructurings

At March 31, 2020, the Company had a recorded investment of $624,000 and had allocated specific reserves totaling $20,000 related to loans with terms that had been modified in troubled debt restructurings. At December 31, 2019, the Company had a recorded investment of $722,000 and had allocated specific reserves totaling $12,000 related to loans with terms that had been modified in troubled debt restructurings.

The Company had no commitments as of March 31, 2020 and December 31, 2019 to customers with outstanding loans that were classified as troubled debt restructurings. There were no new troubled debt restructurings during the three months ended March 31, 2020 and 2019.

The Company had no troubled debt restructurings with a subsequent payment default within twelve months following the modification during the three months ended March 31, 2020 and 2019.

For additional information regarding the impact of COVID-19, see footnote 7

 

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4. BORROWING ARRANGEMENTS

The Company has a borrowing arrangement with the Federal Reserve Bank of San Francisco (FRB) under which advances are secured by portions of the Bank’s loan and investment securities portfolios. The Company’s credit limit varies according to the amount and composition of the assets pledged as collateral. At March 31, 2020, amounts pledged and available borrowing capacity under such limits were approximately $205.1 million and $132.6 million, respectively. At December 31, 2019, amounts pledged and available borrowing capacity under such limits were approximately $193.7 million and $127.3 million, respectively. There were no borrowings outstanding under this arrangement as of March 31, 2020 and December 31, 2019.

The Company has a borrowing arrangement with the Federal Home Loan Bank (FHLB) under which advances are secured by portions of the Bank’s loan portfolio. The Bank’s credit limit varies according to its total assets and the amount and composition of the loan portfolio pledged as collateral. At March 31, 2020, amounts pledged and available borrowing capacity under such limits were approximately $160.0 million and $105.0 million, respectively. At December 31, 2019, amounts pledged and available borrowing capacity under such limits were approximately $188.8 million and $133.8 million, respectively. In June 2019, the Company secured a $10.0 million FHLB term borrowing for two years maturing in June 2021 at a fixed rate of 1.89%.

Under agreements with several correspondent banks, the Company can borrow up to $61.0 million. In a separate agreement, the Company can borrow up to $10.0 million or the total market value of securities pledged to a correspondent bank under a repurchase agreement. At March 31, 2020 and December 31, 2019 there were no investment securities pledged to the correspondent bank under this agreement. There were no borrowings outstanding under these arrangements at March 31, 2020 and December 31, 2019.

The Company maintains a revolving line of credit with a commitment of $3.0 million for a six month term at a rate of Prime plus 0.40%. At March 31, 2020 and December 31, 2019, no borrowings were outstanding under this line of credit.

The Company entered into a three year borrowing arrangement with a correspondent back on March 20, 2020 for $12.0 million. The note is secured by the Company’s investment in the Bank and has a fixed rate of 3.95%.

The Company issued $5.0 million in subordinated debt on April 15, 2016. The subordinated debt has a fixed interest rate of 5.875% for the first 5 years. After the fifth year, the interest rate changes to a variable rate of Prime plus 2.00%. The subordinated debt was recorded net of related issuance costs of $87,000. On March 31, 2020 and December 31, 2019 and 2018, the balances were $5.0 million and $5.0 million, net of issuance cost, respectively.

5. COMMITMENTS AND CONTINGENT LIABILITIES

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans included on the balance sheet.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, and deeds of trust on residential real estate and income-producing commercial properties.

At March 31, 2020 and December 31, 2019, the Company had outstanding commitments for loans of approximately $343.0 million and $390.0 million, respectively. Unfunded loan commitment reserves totaled $185,000 and $185,000 at March 31, 2020 and December 31, 2019, respectively.

 

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Operating Leases

The Company leases various office premises under long-term operating lease agreements. These leases expire between 2020 and 2027, with certain leases containing either three, five, or seven year renewal options.

The following table reflects the quantitative information for the Company’s leases.

 

(Dollars in thousands)		March 31, 2020
Operating lease cost (cost resulting form lease payments)		$	621
Operating lease – operating cash flows (fixed payments)		$	491
Operating lease – ROU assets		$	9,867
Operating lease – liabilities		$	12,119
Weighted average lease term – operating leases			4.8 years
Weighted average discount rate – operating leases			2.58	%

The following table reflects the minimum commitments under these non-cancellable leases, before considering renewal options, as of March 31, 2020.

 

(Dollars in thousands)		March 31, 2020
2020		$	1,914
2021			2,431
2022			2,441
2023			1,497
2024			1,456
Thereafter			3,291
Total undiscounted cash flows			13,030
Discount on cash flows			(911	)
Total lease liability		$	12,119

Rent expense included in premises and equipment expense totaled $622,000 and $389,000 for the three months ended March 31, 2020 and 2019, respectively.

Contingencies

The Company may be subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the financial position or results of operations of the Company.

For additional information regarding the impact of COVID-19, see footnote 7

Correspondent Banking Agreements

The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Insured financial institution deposits up to $250,000 are fully insured by the FDIC under the FDIC’s general deposit insurance rules.

At March 31, 2020, uninsured deposits at financial institutions were approximately $4.6 million. At December 31, 2019, uninsured deposits at financial institutions were approximately $4.0 million.

6. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:

Level 1—Quoted market prices for identical instruments traded in active exchange markets.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3—Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

 

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The carrying amounts and estimated fair values of financial instruments at March 31, 2020 and December 31, 2019 are as follows:

 

		Carrying Amount				Fair Value Measurements
(Dollars in thousands)						Level 1				Level 2				Level 3				Total
As of March 31, 2020
Financial assets:
Cash and due from banks		$	140,610			$	140,610			$	—			$	—			$	140,610
Securities available for sale			34,344				—				34,344				—				34,344
Loans, net			960,282				—				—				951,928				951,928
Accrued interest receivable			3,247				—				109				3,138				3,247
Financial liabilities:
Deposits		$	1,028,861			$	884,043			$	145,310			$	—			$	1,029,353
Other borrowings			22,000				—				—				22,539				22,539
Subordinated debt			4,981				—				—				5,103				5,103
Accrued interest payable			376				—				300				76				376
As of December 31, 2019
Financial assets:
Cash and due from banks		$	114,342			$	114,342			$	—			$	—			$	114,342
Securities available for sale			28,555				—				28,555				—				28,555
Loans, net			941,132				—				—				940,944				940,944
Accrued interest receivable			3,398				—				168				3,230				3,398
Financial liabilities:
Deposits		$	988,236			$	870,495			$	121,136			$	—			$	991,631
Other borrowings			10,000				—				—				10,032				10,032
Subordinated debt			4,977				—				—				5,112				5,112
Accrued interest payable			400				—				326				74				400

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The methods and assumptions used to estimate fair values are described as follows:

Cash and Due from banks—The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Investment Securities—Since quoted prices are generally not available for identical securities, fair values are calculated based on market prices of similar securities on similar dates, resulting in Level 2 classification.

FHLB, IBFC, PCBB Stock—It is not practical to determine the fair value of these correspondent bank stocks due to restrictions placed on their transferability.

Loans—Fair values of loans for March 31, 2020 and December 31, 2019 are estimated on an exit price basis with contractual cash flow, prepayments, discount spreads, credit loss and liquidity premium assumptions. Loans with similar characteristics such as prepayment rates, terms and rate indexed are aggregated for purposes of the calculations.

Impaired loans—Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans with specific allocations of the allowance for loan losses that are secured by real property is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The methods utilized to estimate the fair value of impaired loans do not necessarily represent an exit price.

 

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Deposits—The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. The carrying amounts of variable rate and fixed-term money market accounts approximate their fair values at the reporting date resulting in Level 1 classification. Fair values of fixed rate certificates of deposit are calculation of the estimated remaining cash flows was discounted to the date of the valuation to calculate the fair value (premium)/discount on the portfolio that applies interest rates currently being offered on certificates for the San Francisco Bay Area to a schedule of aggregated expected monthly maturities on time deposits resulting in Level 2 classification.

FHLB Advances—FHLB Advances are included in Other Borrowings. Fair values for FHLB Advances are estimated using discounted cash flow analyses using interest rates offered at each reporting date by correspondent banks for advances with similar maturities resulting in Level 3 classification.

Senior Notes—Fair values for senior notes are estimated using a discounted cash flow calculation based on current rates for similar types of debt which may be unobservable, and considering recent trading activity of similar instruments in market which can be inactive and accordingly are classified within the Level 3 classification.

Subordinated Debt—Fair values for subordinated debt are calculated based on its terms and were discounted to the date of the valuation to calculate the fair value on the debt. A market rate based on recent debt offering by peer bank was used to discount cash flow until reprice date and subsequently cash flow were discounted at Prime plus 2% for its security. These assumptions which may be unobservable, and considering recent trading activity of similar instruments in market which can be inactive and accordingly are classified within the Level 3 classification.

Accrued Interest Receivable—The carrying amounts of accrued interest receivable approximate fair value resulting in a Level 2 classification for accrued interest receivable on investment securities and a Level 3 classification for accrued interest receivable on loans since investment securities are generally classified using Level 2 inputs and loans are generally classified using Level 3 inputs.

Accrued Interest Payable—The carrying amounts of accrued interest payable approximate fair value resulting in a Level 2 classification, since accrued interest payable is from deposits that are generally classified using Level 2 inputs.

Off Balance Sheet Instruments—Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

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Assets Recorded at Fair Value on a Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis.

 

(Dollars in thousands)		Fair Value				Level 1				Level 2				Level 3
As of March 31, 2020
Investments available for sale:
Residential mortgage backed and government securities		$	24,523			$	—			$	24,523			$	—
Government agencies			2,991				—				2,991				—
Corporate bonds			6,830				—				6,830				—
Total assets measured at fair value on a recurring basis		$	34,344			$	—			$	34,344			$	—
As of December 31, 2019
Investments available for sale:
Residential mortgage backed and government securities		$	20,722			$	—			$	20,722			$	—
Government agencies			7,833				—				7,833				—
Corporate bonds			—				—				—				—
Total assets measured at fair value on a recurring basis		$	28,555			$	—			$	28,555			$	—

Fair values for available-for-sale investment securities are based on quoted market prices for exact or similar securities. During the periods presented, there were no significant transfers in or out of Levels 1 and 2 and there were no changes in the valuation techniques used.

Assets Recorded at Fair Value on a Non-Recurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date. The following table summarizes impaired loans measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019.

 

		Carrying Amount				Fair Value Measurements
(Dollars in thousands)						Level 1				Level 2				Level 3
As of March 31, 2020
Impaired loans—Commercial		$	2,112			$	—			$	—			$	2,112
Total assets measured at fair value on a non-recurring basis		$	2,112			$	—			$	—			$	2,112
As of December 31, 2019
Impaired loans—Commercial		$	3,475			$	—			$	—			$	3,475
Total assets measured at fair value on a non-recurring basis		$	3,475			$	—			$	—			$	3,475

The fair value of impaired loans is based upon independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less selling costs, generally. Level 3 fair value measurement includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a charged-off has been recorded. The unobservable inputs and qualitative information about the unobservable inputs are based on managements’ best estimates of appropriate discounts in arriving at fair market value. Increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of impaired loans.

 

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