California BanCorp - Quarter Report: 2021 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

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)

(510) 457-3737

(Registrant’s telephone number, including area code)

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


Common Stock, No Par Value	CALB	NASDAQ Global Select Market
(Title of class)	(Trading Symbol)	(Name of exchange on which registered)

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.

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 May 10, 2021: 8,208,586

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021


		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	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

Part II—Other Information		39

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		40

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(Dollar amounts in thousands)


	March 31, 2021		December 31, 2020
ASSETS:
Cash and due from banks	$	18,475	$	22,485
Federal funds sold		342,305		396,032

Total cash and cash equivalents		360,780		418,517
Investment securities, available for sale		58,105		55,093
Loans, net of allowance for losses of $14,577 and $14,111 at March 31, 2021 and December 31, 2020, respectively		1,454,167		1,355,482
Premises and equipment, net		5,452		5,778
Bank owned life insurance (BOLI)		23,920		23,718
Goodwill and other intangible assets		7,544		7,554
Accrued interest receivable and other assets		37,620		39,637

Total assets	$	1,947,588	$	1,905,779

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits
Non-interest bearing	$	742,574	$	673,100
Interest bearing		887,141		859,106

Total deposits		1,629,715		1,532,206
Other borrowings		134,819		189,043
Junior Subordinated debt securities		24,729		24,994
Accrued interest payable and other liabilities		19,147		23,126

Total liabilities		1,808,410		1,769,369
Commitments and Contingencies (Note 5)
Shareholders’ equity
Common stock, no par value; 40,000,000 shares authorized; 8,189,598 and 8,171,734 issued and outstanding at March 31, 2021 and December 31, 2020, respectively		108,430		107,948
Retained earnings		30,630		27,821
Accumulated other comprehensive income, net of taxes		118		641

Total shareholders’ equity		139,178		136,410

Total liabilities and shareholders’ equity	$	1,947,588	$	1,905,779

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


CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)


	Three Months Ended March 31,
	2021		2020
Interest income
Loans	$	14,584	$	11,783
Federal funds sold		88		329
Investment securities		360		191

Total interest income		15,032		12,303
Interest expense
Deposits		1,191		1,994
Borrowings and subordinated debt		505		127

Total interest expense		1,696		2,121
Net interest income		13,336		10,182
Provision for loan losses		300		400

Net interest income after provision for loan losses		13,036		9,782
Non-interest income
Service charges and other fees		641		970
Other		280		320

Total non-interest income		921		1,290
Non-interest expense
Salaries and benefits		6,367		6,477
Premises and equipment		1,197		1,139
Professional fees		589		955
Data processing		580		526
Other		1,347		1,310

Total non-interest expense		10,080		10,407
Income before provision for income taxes		3,877		665
Provision for income taxes		1,068		192

Net income	$	2,809	$	473

Earnings per common share
Basic	$	0.34	$	0.06

Diluted	$	0.34	$	0.06

Average common shares outstanding		8,179,667		8,103,248

Average common and equivalent shares outstanding		8,242,467		8,169,898

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

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollar amounts in thousands)


	Three Months Ended March 31,
	2021			2020
Net Income	$	2,809		$	473
Other comprehensive income
Unrealized gain (loss) on securities available for sale		(743	)		75
Reclassification adjustment for realized loss on securities available for sale		—			70
Tax effect		220			(44	)

Total other comprehensive income (loss)		(523	)		101

Total comprehensive income	$	2,286		$	574

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


CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)


	Common Stock						Retained		Accumulated Other Comprehensive Income			Total Shareholders’
	Shares			Amount			Earnings		(Loss)			Equity
Balance at December 31, 2020		8,171,734		$	107,948		$	27,821	$	641		$	136,410
Stock awards issued and related compensation expense		3,369			383			—		—			383
Stock options exercised		14,495			99			—		—			99
Net income		—			—			2,809		—			2,809
Other comprehensive income		—			—			—		(523	)		(523	)

Balance at March 31, 2021		8,189,598		$	108,430		$	30,630	$	118		$	139,178

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.


CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)


	Three Months Ended March 31,
	2021			2020
Cash flows from operating activities:
Net income	$	2,809		$	473
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300			400
Provision for deferred taxes		220			120
Depreciation		398			315
Deferred loan fees, net		2,129			312
Accretion on discount of purchased loans, net		(36	)		(35	)
Stock based compensation, net		383			280
Increase in cash surrender value of life insurance		(162	)		(153	)
Discount on retained portion of sold loans, net		(9	)		(156	)
Loss on sale of investment securities, net		—			70
Increase (decrease) in accrued interest receivable and other assets		762			47
Decrease in accrued interest payable and other liabilities		(3,418	)		(1,730	)

Net cash provided by operating activities		3,376			(57	)

Cash flows from investing activities:
Purchase of investment securities		(7,245	)		(15,100	)
Proceeds from sales of investment securities		—			7,662
Proceeds from principal payments on investment securities		4,217			1,641
Net increase in loans		(101,068	)		(19,671	)
Purchase of low income tax credit investments		(290	)		(26	)
Purchase of premises and equipment		(72	)		(74	)
Purchase of bank-owned life insurance policies		(40	)		(815	)

Net cash used for investing activities		(104,498	)		(26,383	)

Cash flows from financing activities:
Net increase in customer deposits		97,509			40,625
Paydown of long term borrowing		(54,223	)		—
Proceeds from short term and overnight borrowings, net		—			12,000
Proceeds from exercised stock options		99			83

Net cash provided by financing activities		43,385			52,708

Increase in cash and cash equivalents		(57,737	)		26,268
Cash and cash equivalents, beginning of period		418,517			114,342

Cash and cash equivalents, end of period	$	360,780		$	140,610

Supplemental disclosure of cash flow information:
Recording of right to use assets and operating lease liabilities	$	—		$	4,079
Cash paid during the year for:
Interest	$	1,725		$	2,147
Income taxes	$	—		$	164

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

CALIFORNIA BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

Organization

California BanCorp (the “Company”, or ‘we”), 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 has 2 full service branches in California located in Contra Costa County and Santa Clara County and 4 loan production offices in California located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara 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 shareholders’ 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 shareholders’ 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, 2020, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 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, 2021 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, 2021.

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 these unaudited consolidated financial statements were filed with the SEC and concluded that no event required any adjustment to the balances presented.

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, 2021 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.

Reclassifications

Certain prior balances in the unaudited consolidated financial statements may have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or shareholders’ 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
	March 31,
(Dollars in thousands, except per share data)	2021		2020
Net income available to common shareholders	$	2,809	$	473
Weighted average basic common shares outstanding		8,179,667		8,103,248
Add: dilutive potential common shares		62,800		66,650

Weighted average diluted common shares outstanding		8,242,467		8,169,898
Basic earnings per share	$	0.34	$	0.06

Diluted earnings per share	$	0.34	$	0.06

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 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.

2. INVESTMENT SECURITIES

The following table summarizes the amortized cost and estimated fair value of securities available for sale at March 31, 2021 and December 31, 2020.


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
(Dollars in thousands)
At March 31, 2021:
Mortgage backed securities	$	29,305	$	538	$	(405	)	$	29,438
Government agencies		2,392		—		(7	)		2,385
Corporate bonds		26,241		500		(459	)		26,282

Total available for sale securities	$	57,938	$	1,038	$	(871	)	$	58,105

At December 31, 2020:
Mortgage backed securities	$	27,541	$	669	$	(17	)	$	28,193
Government agencies		2,418		—		(6	)		2,412
Corporate bonds		24,224		434		(170	)		24,488

Total available for sale securities	$	54,183	$	1,103	$	(193	)	$	55,093

Net unrealized gains/(losses) on available for sale investment securities totaling $167,000 and $910,000 were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at March 31, 2021 and December 31, 2020, respectively.

The Company purchased 2 securities for $7.2 million and did not sell available for sale investment securities during the three months ended March 31, 2021. 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 following table summarizes securities with unrealized losses at March 31, 2021 and December 31, 2020 aggregated by major security type and length of time in a continuous unrealized loss position.


	Less Than 12 Months					More Than 12 Months				Total
			Unrealized					Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
At March 31, 2021:
Mortgage backed securities	$	15,460	$	(405	)	$	—	$	—	$	15,460	$	(405	)
Government agencies		2,376		(7	)		—		—		2,376		(7	)
Corporate bonds		6,291		(459	)		—		—		6,291		(459	)

Total available for sale securities	$	24,127	$	(871	)	$	—	$	—	$	24,127	$	(871	)

At December 31, 2020:
Mortgage backed securities	$	4,481	$	(17	)	$	—	$	—	$	4,481	$	(17	)
Government agencies		2,412		(6	)		—		—		2,412		(6	)
Corporate bonds		7,830		(170	)		—		—		7,830		(170	)

Total available for sale securities	$	14,723	$	(193	)	$	—	$	—	$	14,723	$	(193	)

At March 31, 2021 the Company’s investment security portfolio consisted of 31 securities, six of which (corporate securities with investment grade ratings) were in an unrealized loss position at quarter end. At December 31, 2020 the Company’s investment security portfolio consisted of 29 securities, five of which were in an unrealized loss position at year end. 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 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 March 31, 2021 and December 31, 2020, respectively.

The following table summarizes the scheduled maturities of available for sale investment securities as of March 31, 2021.


	March 31, 2021
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Available for sale securities:
Less than one year	$	—	$	—
One to five years		9,067		9,324
Five to ten years		5,250		5,286
Beyond ten years		11,924		11,672
Securities not due at a single maturity date		31,697		31,823

Total available for sale securities	$	57,938	$	58,105

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. As such, mortgage backed securities and government agencies are not included in the maturity categories above and instead are shown separately as securities not due at a single maturity date.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Outstanding loans as of March 31, 2021 and December 31, 2020 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4). Additionally, SBA loans include loans funded under the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted as a result of the COVID-19 pandemic (see Note 7).


	March 31,			December 31,
(Dollars in thousands)	2021			2020
Commercial and industrial		439,044			414,548
Real estate - other		573,520			550,690
Real estate - construction and land		45,550			37,193
SBA		364,273			317,564
Other		47,926			49,075

Total loans, gross		1,470,313			1,369,070
Deferred loan origination (fees)/costs, net		(1,569	)		523
Allowance for loan losses		(14,577	)		(14,111	)

Total loans, net		1,454,167			1,355,482

The following table reflects the loan portfolio allocated by management’s internal risk ratings at March 31, 2021 and December 31, 2020.


	Commercial				Real Estate
	and		Real Estate		Construction
(Dollars in thousands)	Industrial		Other		and Land		SBA		Other		Total
As of March 31, 2021
Grade:
Pass	$	424,029	$	561,153	$	41,549	$	361,863	$	47,926	$	1,436,520
Special Mention		11,544		7,607		1,306		995		—		21,452
Substandard		3,471		4,760		2,695		1,415		—		12,341

Total	$	439,044	$	573,520	$	45,550	$	364,273	$	47,926	$	1,470,313

As of December 31, 2020
Grade:
Pass	$	401,629	$	540,153	$	34,543	$	315,277	$	49,075	$	1,340,677
Special Mention		9,013		2,911		872		859		—		13,655
Substandard		3,906		7,626		1,778		1,428		—		14,738

Total	$	414,548	$	550,690	$	37,193	$	317,564	$	49,075	$	1,369,070

The following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2021 and December 31, 2020.


(Dollars in thousands)	30 Days		60 Days		90+ Days		Non-Accrual		Current		Total
As of March 31, 2021
Commercial and industrial	$	749	$	—	$	—	$	—	$	438,295	$	439,044
Real estate - other		1,000		—		—		—		572,520		573,520
Real estate - construction and land		—		—		—		—		45,550		45,550
SBA		—		—		—		234		364,039		364,273
Other		—		—		—		—		47,926		47,926

Total loans, gross	$	1,749	$	—	$	—	$	234	$	1,468,330	$	1,470,313

As of December 31, 2020
Commercial and industrial	$	—	$	—	$	—	$	—	$	414,548	$	414,548
Real estate - other		1,505		—		—		—		549,185		550,690
Real estate - construction and land		—		—		—		—		37,193		37,193
SBA		—		—		—		234		317,330		317,564
Other		—		—		—		—		49,075		49,075

Total loans, gross	$	1,505	$	—	$	—	$	234	$	1,367,331	$	1,369,070

The following table reflects the impairment methodology applied to gross loans by portfolio segment and the related allowance for loan losses as of March 31, 2021 and December 31, 2020.


	Commercial				Real Estate
	and		Real Estate		Construction
(Dollars in thousands)	Industrial		Other		and Land		SBA		Other		Total
As of March 31, 2021
Gross loans:
Loans individually evaluated for impairment	$	1,873	$	—	$	—	$	687	$	—	$	2,560
Loans collectively evaluated for impairment		437,171		573,520		45,550		363,586		47,926		1,467,753

Total gross loans	$	439,044	$	573,520	$	45,550	$	364,273	$	47,926	$	1,470,313

Allowance for loan losses:
Loans individually evaluated for impairment	$	41	$	—	$	—	$	258	$	—	$	299
Loans collectively evaluated for impairment		9,190		3,957		798		317		16		14,278

Total allowance for loan losses	$	9,231	$	3,957	$	798	$	575	$	16	$	14,577

As of December 31, 2020
Gross loans:
Loans individually evaluated for impairment	$	2,288	$	—	$	—	$	689	$	—	$	2,977
Loans collectively evaluated for impairment		412,260		550,690		37,193		316,875		49,075		1,366,093

Total loans	$	414,548	$	550,690	$	37,193	$	317,564	$	49,075	$	1,369,070

Allowance for loan losses:
Loans individually evaluated for impairment	$	41	$	—	$	—	$	259	$	—	$	300
Loans collectively evaluated for impairment		8,882		3,877		681		345		26		13,811

Total allowance for loan losses	$	8,923	$	3,877	$	681	$	604	$	26	$	14,111

The following table reflects information related to impaired loans as of March 31, 2021 and December 31, 2020.


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized
As of March 31, 2021
With no related allowance recorded:
SBA	$	234	$	479	$	—	$	1,913	$	—
With an allowance recorded:
Commercial and industrial	$	1,873	$	1,873	$	41	$	2,013	$	30
SBA	$	453	$	453	$	258	$	766	$	18
Total:
Commercial and industrial	$	1,873	$	1,873	$	41	$	2,013	$	30
SBA	$	687	$	932	$	258	$	2,679	$	18
As of December 31, 2020
With no related allowance recorded:
SBA	$	234	$	479	$	—	$	1,917	$	—
With an allowance recorded:
Commercial and industrial	$	2,288	$	2,288	$	41	$	2,137	$	148
SBA	$	455	$	455	$	259	$	3,921	$	57
Total:
Commercial and industrial	$	2,288	$	2,288	$	41	$	2,137	$	148
SBA	$	689	$	934	$	259	$	5,838	$	57

The following table reflects the changes in, and allocation of, the allowance for loan losses by portfolio segment for the three months ended March 31, 2021 and March 31, 2020.


	Commercial					Real Estate
	and		Real Estate			Construction
(Dollars in thousands)	Industrial		Other			and Land			SBA			Other			Total
Three months ended March 31, 2021
Beginning balance	$	8,923	$	3,877		$	681		$	604		$	26		$	14,111
Provision for loan losses		142		80			117			(29	)		(10	)		300
Charge-offs		—		—			—			—			—			—
Recoveries		166		—			—			—			—			166

Ending balance	$	9,231	$	3,957		$	798		$	575		$	16		$	14,577

Three months ended March 31, 2020
Beginning balance	$	6,708	$	3,281		$	1,022		$	50		$	14		$	11,075
Provision for loan losses		1,045		(620	)		(292	)		271			(4	)		400
Charge-offs		—		—			—			—			—			—
Recoveries		90		—			—			—			—			90

Ending balance	$	7,843	$	2,661		$	730		$	321		$	10		$	11,565

Interest forgone on nonaccrual loans totaled $8,000 and $82,000 for the three months ended March 31, 2021 and 2020, respectively. There was no interest recognized on a cash-basis on impaired loans for the three months ended March 31, 2021 and 2020, 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, 2021 and December 31, 2020, the Company had no recorded investments or allocated specific reserves related to loans with terms that had been modified in troubled debt restructurings.

The Company had no commitments as of March 31, 2021 and December 31, 2020 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, 2021 and 2020.

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, 2021 and 2020.

COVID-19

For additional information regarding the impact of COVID-19 on the loan portfolio, see Footnote 7.

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, 2021, amounts pledged and available borrowing capacity under such limits were approximately $412.7 million and $309.3 million, respectively. At December 31, 2020, amounts pledged and available borrowing capacity under such limits were approximately $458.7 million and $358.5 million, respectively. In April 2020, the Company secured an additional arrangement with the FRB for a $332.7 million Paycheck Protection Liquidity Facility (PPPLF) two year term borrowing maturing in April 2022 at a fixed rate of 0.35%. As of March 31, 2021, the PPPLF borrowing had an outstanding balance of $119.8 million.

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 Company’s credit limit varies according to its total assets and the amount and composition of the loan portfolio pledged as collateral. At March 31, 2021, amounts pledged and available borrowing capacity under such limits were approximately $157.1 million and $96.1 million, respectively. At December 31, 2020, amounts pledged and available borrowing capacity under such limits were approximately $129.3 million and $68.3 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%. This FHLB term borrowing of $10.0 million remained outstanding at March 31, 2021 and December 31, 2020. In May 2020, the Company secured a $5.0 million FHLB term borrowing for one year maturing in May 2021 at a fixed rate of 0.00%. This FHLB term borrowing of $5.0 million remained outstanding at March 31, 2021.

Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to $116.0 million. There were no borrowings outstanding under these arrangements at March 31, 2021 and December 31, 2020.

The Company maintains a revolving line of credit with a commitment of $5.0 million for a six month term at a rate of Prime plus 0.40%. At March 31, 2021 and December 31, 2020, no borrowings were outstanding under this line of credit.

The Company entered into a three year borrowing arrangement with a correspondent bank 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%. There were no borrowings outstanding under this arrangement at March 31, 2021.

The Bank 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 both March 31, 2021 and December 31, 2020, the balance remained at $5.0 million, net of the remaining unamortized issuance cost.

The Company issued $20.0 million in subordinated debt on September 30, 2020. The subordinated debt has a fixed interest rate of 5.00% for the first 5 years and a stated maturity of September 30, 2030. After the fifth year, the interest rate changes to a quarterly variable rate equal to then current three-month term SOFR plus 0.488%. The subordinated debt was recorded net of related issuance costs of $300,000. At March 31, 2021 and December 31, 2020, the balance remained at $20.0 million, net of the remaining unamortized issuance cost.

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, 2021 and December 31, 2020, the Company had outstanding unfunded commitments for loans of approximately $534.3 million and $491.1 million, respectively. Unfunded loan commitment reserves, included in the allowance for loan losses, totaled $355,000 and $305,000 at March 31, 2021 and December 31, 2020, respectively.

The outstanding unfunded commitments for loans at March 31, 2021 was comprised of fixed rate commitments of approximately $24.8 million and variable rate commitments of approximately $509.5 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan commitments as of March 31, 2021.


			Over One
	Due in		Year But
	One Year		Less Than		Over
(Dollars in thousands)	Or Less		Five Years		Five Years		Total
Unfunded fixed rate loan commitments:
Interest rate less than or equal to 4.00%	$	8,386	$	607	$	6,000	$	14,993
Interest rate between 4.00% and 5.00%		3,774		3,995		879		8,648
Interest rate greater than or equal to 5.00%		—		250		878		1,128

Total unfunded fixed rate loan commitments	$	12,160	$	4,852	$	7,757	$	24,769

Operating Leases

The Company leases various office premises under long-term operating lease agreements. These leases expire between 2021 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 at March 31, 2021.


	March 31,
(Dollars in thousands)	2021
Operating lease cost (cost resulting from lease payments)	$	531
Operating lease - operating cash flows (fixed payments)	$	602
Operating lease - ROU assets	$	7,854
Operating lease - liabilities	$	9,874
Weighted average lease term - operating leases		3.0 years
Weighted average discount rate - operating leases		0.35	%

The following table reflects the minimum commitments under these non-cancellable leases, before considering renewal options (dollars in thousands).


	March 31,
(Dollars in thousands)	2021
2021	$	1,828
2022		2,441
2023		1,497
2024		1,456
2025		1,500
Thereafter		1,792

Total undiscounted cash flows		10,514
Discount on cash flows		(640	)

Total lease liability	$	9,874

Rent expense included in premises and equipment expense totaled $531,000 and $622,000 for the three months ended March 31, 2021 and 2020, respectively.

Contingencies

The Company is involved in legal proceedings arising from normal business activities. Management, based upon the advice of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the Company’s financial position or results of operations.

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, 2021, uninsured deposits at financial institutions were approximately $26.0 million. At December 31, 2020, uninsured deposits at financial institutions were approximately $8.7 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.

The carrying amounts and estimated fair values of financial instruments at March 31, 2021 and December 31, 2020 are as follows:


	Carrying		Fair Value Measurements
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
As of March 31, 2021
Financial assets:
Cash and due from banks	$	360,780	$	360,780	$	—	$	—	$	360,780
Securities available for sale		58,105		—		58,105		—		58,105
Loans, net		1,454,167		—		—		1,460,129		1,460,129
Accrued interest receivable		6,597		—		301		6,296		6,597
Financial liabilities:
Deposits	$	1,629,715	$	1,521,050	$	108,917	$	—	$	1,629,967
Other borrowings		134,819		—		—		134,860		134,860
Subordinated debt		24,729		—		—		25,588		25,588
Accrued interest payable		516		—		51		465		516
As of December 31, 2020
Financial assets:
Cash and due from banks	$	418,517	$	418,517	$	—	$	—	$	418,517
Securities available for sale		55,093		—		55,093		—		55,093
Loans, net		1,355,482		—		—		1,360,845		1,360,845
Accrued interest receivable		6,578		—		225		6,353		6,578
Financial liabilities:
Deposits	$	1,532,206	$	1,331,572	$	200,888	$	—	$	1,532,460
Other borrowings		189,043		—		—		189,123		189,123
Subordinated debt		24,994		—		—		24,642		24,642
Accrued interest payable		545		—		51		494		545

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, 2021 and December 31, 2020 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.

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.

Paycheck Protection Program Liquidity Facility (PPPLF)—The fair value of PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current rates at which similar advances would be obtained 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 in 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.

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, 2021
Investments available for sale:
Mortgage backed securities	$	29,438	$	—	$	29,438	$	—
Government agencies		2,385		—		2,385		—
Corporate bonds		26,282		—		26,282		—

Total assets measured at fair value on a recurring basis	$	58,105	$	—	$	58,105	$	—

As of December 31, 2020
Investments available for sale:
Mortgage backed securities	$	28,193	$	—	$	28,193	$	—
Government agencies		2,412		—		2,412		—
Corporate bonds		24,488		—		24,488		—

Total assets measured at fair value on a recurring basis	$	55,093	$	—	$	55,093	$	—

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, 2021 and December 31, 2020.


	Carrying		Fair Value Measurements
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3
As of March 31, 2021
Impaired loans - SBA	$	687	$	—	$	—	$	687

Total assets measured at fair value on a non-recurring basis	$	687	$	—	$	—	$	687

As of December 31, 2020
Impaired loans - SBA	$	689	$	—	$	—	$	689

Total assets measured at fair value on a non-recurring basis	$	689	$	—	$	—	$	689

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.

7. BUSINESS IMPACT OF COVID-19

During 2020, the COVID-19 virus aggressively spread globally, including to all 50 states in the United States. The continuing COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted our operations as of March 31, 2021, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could result in a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments for investments, loans, and intangible assets.

Investments

Management has analyzed the investment portfolio and determined that any impairment would be temporary based on the type of investments the company holds.

As part of the Company’s assessment of other-than-temporary-impairment (OTTI), management considered coronavirus COVID-19 and determined that the significant change in the general economic environment and financial markets represents an interim impairment indicator that will require continued evaluation. As a result, there is a reasonable possibility that OTTI could occur in the near term.

Loan Portfolio

The Company has taken measures to both support customers affected by the pandemic and to maintain strong asset quality, including implementing a broad-based risk management strategy to manage credit segments on a real-time basis, and monitoring portfolio risk and related mitigation strategies also by segment.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the revised interagency guidance issued in April 2020, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)”, provide banks the option to temporarily suspend certain requirements under GAAP related to Troubled Debt Restructurings (“TDRs”) for a limited time to account for the effects of COVID-19. As a result, the Company does not recognize eligible COVID-19 loan modifications as TDRs. Additionally, loans qualifying for these modifications will not be required to be reported as delinquent, nonaccrual, impaired or criticized solely as a result of a COVID-19 loan modification. However, management continues to evaluate these loans for performance criteria separate from their respective COVID-19 loan modification status. Through the date of this filing, the Company has not experienced any loan charge-offs caused by the economic impact from COVID-19. Management has evaluated events related to COVID-19 that have occurred subsequent to March 31, 2021 and has concluded there are no matters that would require recognition in the accompanying consolidated financial statements (see “Subsequent Events” below).

Proactive Deferral Program:

As a result of the novel coronavirus COVID-19, during 2020 the Company granted payment deferments on 383 loans with an aggregate outstanding balance of $323.9 million and aggregate monthly principal and interest payments of $3.7 million, none of which are considered to be TDRs, based on the relief provided under the CARES Act described above. The payment deferments were granted initially for up to 90 days, and the Company considered an additional 90 days based on the circumstances on both a macro and micro level at the time. As of March 31, 2021, four loans totaling $9.5 million were on a deferred status or have had a structure modification under the CARES Act guidelines.

Paycheck Protection Program (PPP):

The Company is also participating in the SBA Paycheck Protection Program (PPP). Key Features of the PPP include:

•

24-month term if originated prior to June 5, 2020; 60-month term for originations subsequent to June 5, 2020

•

Interest-rate of 1%

•

Deferred payments until such time the SBA remits the borrower’s loan forgiveness amount to the lender or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness period

•

Loan forgiveness if the funds are used for payroll costs, interest on mortgages, rent, and utilities (at least 60% of the forgiven amount must have been used for payroll); no collateral or personal guarantees are required; neither the government nor lenders will charge any fees

•

Forgiveness dependent on the employer maintaining or quickly rehiring employees and maintaining salary levels; forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease

•

Loans guaranteed by the United States Treasury Department

Following the launch of PPP in April 2020, the Company processed 100% of the approximately 730 applications received and all of the eligible applications that were submitted to the SBA received approval, resulting in loans funded of $362.0 million. As of March 31, 2021, loan balances totaling approximately $120.4 million had been approved for forgiveness and the funds remitted to the Company. Additionally, approximately $5.4 million in loan balances had been repaid to the Company directly from our clients. At March 31, 2021, the outstanding balance of the loans funded under the 2020 PPP was $236.2 million.

In January 2021, the SBA relaunched the PPP for both first draw and second draw participants that are eligible for the program. Eligible borrowers that previously received a PPP loan may apply for a second draw with the same general loan terms as their first draw PPP loan. The key features of the relaunched program are similar to the initial PPP. As of March 31, 2021, the Company processed 100% of the approximately 370 applications received and all of the eligible applications that were submitted to the SBA received approval, resulting in loans funded of $117.2 million.

The following table reflects the concentration of PPP loans funded and outstanding through the Paycheck Protection Program Liquidity Facility (PPPLF) as of March 31, 2021.


	Number of		Principal		Number of Loans as a % of						Principal Balance as a % of
(Dollars in millions)	Loans		Balance		PPP Loans			Gross Loans			PPP Loans			Gross Loans
Dental services		371	$	62.6		46	%		17	%		18	%		4	%
Contractors		110		130.6		14	%		5	%		37	%		9	%
Other		325		160.2		40	%		15	%		45	%		11	%

Total		806	$	353.4		100	%		37	%		100	%		24	%

The PPP loans categorized above as “other” are comprised of multiple sectors, including professional/scientific services, retail, manufacturing, finance, wholesale, and real estate.

The Company’s participation in the PPP had the following impact on the operating results for the first quarter ended March 31, 2021:

•

Funding of loans under the PPP and related borrowing under the Paycheck Protection Program Liquidity Facility (PPPLF) provided net benefit to net interest income of $2.3 million during the first quarter ended March 31, 2021, including the impact of amortization of deferred fees and origination costs.

•

The Company received $9.1 million in fees during 2020 related to the origination of PPP loans and $3.9 million in similar fees during 2021. Recognition of the fees was deferred at origination and is being recognized over the term of the loans. For the first quarter ended March 31, 2021, the Company amortized into interest income approximately $2.2 million. As clients are accepted for loan forgiveness by the SBA, the remaining fees will be recognized at the time of payoff of the loan.

•

The Company deferred loan origination costs of approximately $3.0 million related to PPP loans which are being amortized over the remaining term of the PPP loans. Additionally, the Company deferred loan origination costs of approximately $1.7 million year-to-date related to loan modifications which are being amortized over the remaining term of the modified loans. During the first quarter ended March 31, 2021, the Company amortized into interest income approximately $633,000.

•

The continued uncertainty regarding the severity and duration of the pandemic and related economic effects considered in our qualitative assessment of the allowance for loan losses resulted in a gross increase in the provision for the first quarter ended March 31, 2021 of approximately $200,000. Our overall analysis of the allowance for loan losses considers multiple qualitative factors that may, in part, offset the gross impact on the provision specifically related to COVID-19.

Goodwill

The Company completed an impairment analysis of goodwill as of March 31, 2021 and determined there was no impairment.

Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value (“Step Zero”).

As part of the Company’s qualitative assessment of goodwill impairment, management considered the triggering event of coronavirus COVID-19 and determined that the significant change in the general economic environment and financial markets, including our market capitalization, represents an interim impairment indicator that will require continued evaluation. However, we do not believe that it is more likely than not that a goodwill impairment exists as of March 31, 2021.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial condition at March 31, 2021 and December 31, 2020 and our results of operations for the three months ended March 31, 2021 and 2020, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 that was filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2021 (our “Annual Report”) and with the accompanying unaudited notes to consolidated financial statements set forth in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 (this “Report”). Because we conduct all of our material business operations through our bank subsidiary, California Bank of Commerce, the discussion and analysis relates to activities primarily conducted by the Bank.

Forward Looking Statements

Statements contained in this Report that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, and our future plans constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” The information contained in such forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and the occurrence of events in the future or changes in circumstances that had not been anticipated, could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could, therefore, also affect the price performance of our shares.

In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk of a recession in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; risks associated with seeking new client relationships and maintaining existing client relationships; and the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Readers of this Report are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in Part I, Item 1A of our Annual Report and in Part II, Item 1A of this Report, as such information may be updated from time to time in subsequent Quarterly Reports on Form 10-Q that we file with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three months ended, and our financial condition at, March 31, 2021.

Due to the risks and uncertainties we face, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report as a result of new information, future events or otherwise, except as may otherwise be required by law.

Overview

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 Company has 2 full service branches in California located in Contra Costa County and Santa Clara County and 4 loan production offices in California located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County.

Selected Financial Data

The following tables set forth the Company’s selected historical consolidated financial data for the periods and as of the dates indicated. You should read this information together with the Company’s audited consolidated financial statements included in our Annual Report and the unaudited consolidated financial statements and related notes included elsewhere in this Report. The selected historical consolidated financial data as of and for the three months ended March 31, 2021 are derived from our unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q. The Company’s historical results for any prior period are not necessarily indicative of future performance.


	Three months ended
	March 31,
(Dollars in thousands, except per share data)	2021			2020
Income Statement Data:
Interest income	$	15,032		$	12,303
Interest expense		1,696			2,121

Net interest income		13,336			10,182
Provision for credit losses		300			400

Net interest income after provision for credit losses		13,036			9,782
Other income		921			1,290
Other expenses		10,080			10,407

Income before taxes		3,877			665
Income taxes		1,068			192

Net income	$	2,809		$	473

Per Share Data:
Basic earnings per share	$	0.34		$	0.06
Diluted earnings per share	$	0.34		$	0.06
Performance Measures:
Return on average assets		0.59	%		0.16	%
Return on average tangible equity (1)		8.77	%		1.54	%
Net interest margin		2.94	%		3.80	%
Efficiency ratio		70.70	%		90.72	%

(1)	See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures”


	March 31,			December 31,
(Dollars in thousands)	2021			2020
Balance Sheet Data:
Assets	$	1,947,588		$	1,905,799
Loans, net	$	1,454,167		$	1,355,482
Deposits	$	1,629,715		$	1,532,206
Shareholders’ equity	$	139,178		$	136,410
Asset Quality Data:
Allowance for loan losses / gross loans		0.99	%		1.03	%
Allowance for loan losses / nonperforming loans		6229.49	%		6030.34	%
Nonperforming assets / total assets		0.01	%		0.01	%
Nonperforming loans / gross loans		0.02	%		0.02	%
Capital Adequacy Measures (Bank):
Tier I leverage ratio		7.46	%		7.49	%
Tier I risk-based capital ratio		9.47	%		10.11	%
Total risk-based capital ratio		12.34	%		13.22	%

Critical Accounting Policies

Our unaudited consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make complex and subjective estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

Our most significant accounting policies are described in Note 1 to our audited financial statements for the year ended December 31, 2020, included in our Annual Report on Form 10-K and in Note 1 to our unaudited financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q.

COVID-19

The COVID-19 pandemic has caused a substantial disruption to the economy, as well as a heightened level of uncertainty about the scope and longevity of its impact. In response to the pandemic, we have implemented a multi-pronged approach to address the challenges caused by the effects of this pandemic. Our approach includes ensuring the safety of our employees and the communities that we serve and developing new and temporarily revised programs that are responsive to the needs of our loan and deposit customers. As we continue to closely monitor COVID-19 developments, we remain focused on our ability to navigate these challenging conditions and the underlying strength and stability of our Company. For information regarding the specific business impact to the Company regarding COVID-19, see Note 7 of the unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

Some of the financial measures discussed in this Quarterly Report on Form 10-Q are considered non-GAAP financial measures. In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, from the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles.

The following tables reflect the details of the non-GAAP financial measures the Company included in this Quarterly Report on Form 10-Q. We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our statements of financial condition, results of income and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons.


	Three months ended
	March 31,
(Dollars in thousands)	2021			2020
Return on average tangible common equity:
Net income	$	2,809		$	473
Tangible equity:
Average equity	$	137,415		$	131,343
Average goodwill / core deposit intangible		7,550			7,591

Tangible equity	$	129,865		$	123,752

Return on average tangible common equity		8.77	%		1.54	%


	March 31,			December 31,
(Dollars in thousands)	2021			2020
Allowance for loan loss as a percentage of outstanding loans, excluding PPP loans:
Allowance for loan loss	$	14,577		$	14,111
Gross loans		1,470,313			1,369,070
Less: PPP loans		353,426			306,373

Gross loans, net of PPP loans		1,116,887			1,062,697

Allowance for loan loss as a percentage of outstanding loans, excluding PPP loans		1.31	%		1.33	%

Results of Operations – Three Months Ended March 31, 2021 and 2020:

Overview

For the three months ended March 31, 2021, net income was $2.8 million compared to $473,000 for the same period last year. The increase of $2.3 million, or 494%, was primarily attributable to an increase in net interest income of $3.1 million, or 31%, partially offset by an increase in the provision for income taxes of $876,000 or 456%.

Net Interest Income and Margin

Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and borrowings is the principal component of the Company’s earnings. Net interest income is affected by changes in the nature and volume of earning assets and interest-bearing liabilities held during the quarter, the rates earned on such assets and the rates paid on interest bearing liabilities.

Net interest income for the three months ended March 31, 2021, was $13.3 million, an increase of $3.1 million, or 31% over $10.2 million for the same period in 2020. The increase in net interest income was primarily attributable to an increase in interest income as the result of amortization totaling $2.2 million for fees collected on PPP loans, offset by lower yields on earning assets resulting from a decline in short-term interest rates and higher liquidity. In addition to the impact of PPP, the increase in net interest income was due to growth in average earning assets.

Average total interest-earning assets increased by $762.0 million, or 71% to $1.84 billion in the first quarter of 2021 from $1.08 billion for the same period during 2020. For the three months ended March 31, 2021, growth in average deposits outpaced growth in average loans when compared to the same period of 2020 as the Company worked to strengthen liquidity. Average deposit balances for the three months ended March 31, 2021 grew $569.2 million, or 57%, from the quarter ended March 31, 2020, while average loans grew $463.2 million, or 49%, for the same period. As a result, the average loan to deposit ratio for the first quarter of 2021 was 90.2% down from 95.2% for the first quarter of 2020 and the yield on average earning assets decreased 128 basis points to 3.31% from 4.59%.

In addition, the average yield on total average gross loans in the three months ended March 31, 2021 was 4.18%, a decrease of 80 basis points compared to 4.98% in the same period one year earlier. Excluding PPP loans, the average yield on total average gross loans in the three months ended March 31, 2021 was 4.53%.

Of the $569.2 million increase in average total deposit balances year over year, $314.9 million was attributable to noninterest-bearing deposits and $254.3 million was attributable to interest-bearing deposits. The cost of interest-bearing deposits was 0.55% during the quarter ended March 31, 2021 compared to 1.28% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances decreased by 49 basis points to 0.31% in the first quarter of 2020 compared to 0.80% in the first quarter of 2020.

As a result, the net interest margin decreased by 86 basis points to 2.94% for the three months ended March 31, 2021, compared to 3.80% for the three months ended March 31, 2020.

The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the quarters ended March 31, 2021 and 2020.


	Three months ended March 31,
(Dollars in thousands)	2021							2020
			Yields			Interest				Yields			Interest
	Average		or			Income/		Average		or			Income/
	Balance		Rates			Expense		Balance		Rates			Expense
ASSETS
Interest earning assets:
Loans (1)	$	1,415,506		4.18	%	$	14,584	$	952,303		4.98	%	$	11,783
Federal funds sold		369,223		0.10	%		88		96,834		1.37	%		329
Investment securities		54,708		2.67	%		360		28,294		2.72	%		191

Total interest earning assets		1,839,437		3.31	%		15,032		1,077,431		4.59	%		12,303

Noninterest-earning assets:
Cash and due from banks		23,033							21,729
All other assets (2)		60,269							68,643

TOTAL	$	1,922,739						$	1,167,803

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	34,512		0.13	%	$	11	$	23,747		0.12	%	$	7
Money market and savings		644,740		0.61	%		972		476,493		1.19	%		1,412
Time		199,953		0.42	%		208		124,705		1.85	%		575
Other		192,803		1.06	%		505		15,070		3.39	%		127

Total interest-bearing liabilities		1,072,008		0.64	%		1,696		640,015		1.33	%		2,121

Noninterest-bearing liabilities:
Demand deposits		689,965							375,039
Accrued expenses and other liabilities		23,351							21,406
Shareholders’ equity		137,415							131,343

TOTAL	$	1,922,739						$	1,167,803

Net interest income and margin (3)				2.94	%	$	13,336				3.80	%	$	10,182

(1)	Nonperforming loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred loan fees (costs) of $1.2 million and $(294,000), respectively. respectively.

(2)	Other noninterest-earning assets includes the allowance for loan losses of 14.2 million and $11.1 million, respectively.

(3)	Net interest margin is net interest income divided by total interest-earning assets.

The following table shows the effect of the interest differential of volume and rate changes for the quarters ended March 31, 2021 and 2020. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.


	Three Months Ended March 31,
	2021 vs. 2020
	Increase (Decrease) Due to
	Change in:
	Average		Average			Net
(Dollars in thousands)	Volume		Rate			Change
Interest income:
Loans	$	4,772	$	(1,971	)	$	2,801
Federal funds sold		65		(306	)		(241	)
Investment securities		174		(5	)		169
Interest expense:
Deposits
Demand		3		1			4
Money market and savings		254		(694	)		(440	)
Time		78		(445	)		(367	)
Other borrowings		466		(88	)		378

Net interest income	$	4,210	$	(1,056	)	$	3,154

Interest Income

Interest income increased by $2.7 million in the first quarter of 2021 compared to the same period of 2020, primarily due to amortization of loan fees collected on PPP loans and volume growth in average earning assets, and in particular an increase in loans. The increase in interest earned on our loan portfolio of $2.8 million in the first quarter of 2021 compared to the first quarter of 2020 was comprised of $2.5 million attributable to an approximate $463.2 million increase in average loans outstanding, offset by approximately $266,000 attributable to the decrease in the yield earned on loans to 4.18% from 4.98%.

Interest Expense

Interest expense decreased by $425,000 in the first quarter of 2021 compared to the same period of 2020, primarily due to the effect of decreased rates paid on interest-bearing deposits and the decrease in borrowing rates due to the PPPLF term borrowing. The average rate paid on interest-bearing liabilities in the first quarter of 2021 compared to the same period one year earlier decreased 69 basis points to 0.64% from 1.33%.

Provision for Credit Losses

We made provisions for loan losses of $300,000 and $400,000 for the three months ended March 31, 2021 and 2020, respectively. We recorded net loan recoveries of $166,000 in the first quarter of 2021 compared to net loan recoveries of $90,000 during the same period of 2020. The allowance for loan loss as a percent of outstanding loans was 0.99% at March 31, 2021 and 1.19% at March 31, 2020. The decrease in the reserve percentage reflects the impact of PPP loans which are guaranteed by the SBA. The reserve percentage excluding PPP loans was 1.31% (See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures”). See further discussion of the Provision for Credit Losses and Allowance for Loan losses in “Financial Condition – Allowance for Loan Losses”.

Noninterest Income

The following table reflects the major components of the Company’s noninterest income.


	Three Months Ended
	March 31,				Increase (Decrease)
(Dollars in thousands)	2021		2020		Amount			Percent
Service charges and other fees	$	641	$	970	$	(329	)		-34	%
Earnings on BOLI		162		153		9			6	%
Other		118		167		(49	)		-29	%

Total noninterest income	$	921	$	1,290	$	(369	)		-29	%

Noninterest income decreased by $369,000 or 29% in the first quarter of 2021, compared to the first quarter of 2020. The decrease was primarily attributable to a decline in service charges and loan related fees.

Noninterest Expense

The following table reflects the major components of the Company’s noninterest expense.


	Three Months Ended
	March 31,				Increase (Decrease)
(Dollars in thousands)	2021		2020		Amount			Percent
Salaries and benefits	$	6,367	$	6,477	$	(110	)		-2	%
Premises and equipment		1,197		1,139		58			5	%
Professional fees		589		955		(366	)		-38	%
Data processing		580		526		54			10	%
Other		1,347		1,310		37			3	%

Total noninterest expense	$	10,080	$	10,407	$	(327	)		-3	%

During the three months ended March 31, 2021, non-interest expenses decreased by $327,000 or 3% to $10.1 million compared to $10.4 million in the same period of 2020. Of this decrease, $110,000 was in net salaries and benefits expense primarily as a result of capitalized loan origination costs related to growth in the loan portfolio offset, in part, by an increase in salaries related to the investment in our business.

Operating expenses for the three months ended March 31, 2021 also included a decrease in professional and legal fees of $366,000 related to implementation of FDICIA and SEC compliance controls and processes as well as the registration of the Company’s common shares during the first quarter of 2020.

Provision for Income Taxes

Income tax expense was $1.1 million for the first quarter of 2021 which compared to $192,000 for the same period one year earlier. The effective tax rates for those time periods were 27.5% and 28.9%, respectively.

Financial Condition:

Overview

Total assets of the Company were $1.95 billion as of March 31, 2021 compared to $1.91 billion as of December 31, 2020. The increase in assets was driven by an increase in both the loan portfolio and federal funds sold. Growth in assets was primarily funded by growth in deposits and other borrowings.

Loan Portfolio

Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances increased by $101.2 million or 7% from December 31, 2020 to March 31, 2021, primarily due to growth in commercial loans, commercial real estate loans, and loans funded under the PPP which were primarily classified as SBA loans. The loan portfolio was comprised of approximately 30% of commercial and industrial at March 31, 2021 and December 31, 2020. In addition, commercial real estate loans comprised 39% of our loans at March 31, 2021 compared to 40% at December 31, 2020. A substantial percentage of the commercial real estate loans are considered owner-occupied loans. Our loans are generated by our relationship managers and executives. Our senior management is actively involved in the lending, underwriting, and collateral valuation processes. Higher dollar loans or loan commitments are also approved through a bank loan committee comprised of executives and outside board members.

The following table reflects the composition of the Company’s loan portfolio and their percentage distribution.


(Dollars in thousands)	March 31, 2021			December 31, 2020
Commercial and industrial		439,044			414,548
Real estate—other		573,520			550,690
Real estate—construction and land		45,550			37,193
SBA		364,273			317,564
Other		47,926			49,075

Total loans, gross		1,470,313			1,369,070
Deferred loan origination (fees)/costs, net		(1,569	)		523
Allowance for loan losses		(14,577	)		(14,111	)

Total loans, net		1,454,167			1,355,482

Commercial and industrial		30	%		30	%
Real estate—other		39	%		40	%
Real estate—construction and land		3	%		3	%
SBA		25	%		23	%
Other		3	%		4	%

Total loans, gross		100	%		100	%

The following table shows the maturity distribution for total loans outstanding as of March 31, 2021. The maturity distribution is grouped by remaining scheduled principal payments that are due within one year, after one but within five years, or after five years. The principal balances of loans are indicated by both fixed and variable rate categories.


			Over One
	Due in		Year But						Loans With
	One Year		Less Than		Over				Fixed		Variable
(Dollars in thousands)	Or Less		Five Years		Five Years		Total		Rates (1)		Rates
Commercial and industrial	$	127,100	$	169,245	$	142,699	$	439,044	$	221,124	$	217,920
Real estate—other		26,339		173,980		373,201		573,520		270,599		302,921
Real estate—construction and land		20,955		11,459		13,136		45,550		13,218		32,332
SBA		442		354,812		9,019		364,273		353,624		10,649
Other		146		1,172		46,608		47,926		479		47,447

Total loans, gross	$	174,982	$	710,668	$	584,663	$	1,470,313	$	859,044	$	611,269

(1)	Excludes variable rate loans on floors

Nonperforming Assets

Nonperforming assets are comprised of loans on nonaccrual status, loans 90 days or more past due and still accruing interest, and other real estate owned. We had no loans 90 days or more past due and still accruing interest and no other real estate owned at March 31, 2021. A loan is placed on nonaccrual status if there is concern that principal and interest may not be fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is both well secured and in process of legal collection. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are returned to accrual status when they are brought current with respect to principal and interest payments and future payments are reasonably assured. Loans in which the borrower is encountering financial difficulties and we have modified the terms of the original loan are evaluated for impairment and classified as TDR loans. See “Part I – Financial Information, Notes to Unaudited Consolidated Financial Statements, Footnote 7 – Business Impact of COVID-19” for additional discussion of loan modifications that have occurred under the CARES Act.

The following table presents information regarding the Company’s nonperforming and restructured loans.


(Dollars in thousands)	March 31, 2021		December 31, 2020
Nonaccrual loans	$	234	$	234
Loans over 90 days past due and still accruing		—		—

Total nonperforming loans		234		234
Foreclosed assets		—		—

Total nonperforming assets	$	234	$	234

Performing TDR’s	$	—	$	—

Allowance for Loan Losses

Our allowance for loan losses is maintained at a level management believes is adequate to account for probable incurred credit losses in the loan portfolio as of the reporting date. We determine the allowance based on a quarterly evaluation of risk. That evaluation gives consideration to the nature of the loan portfolio, historical loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a

borrower’s ability to repay, current economic and environmental conditions and risk assessments assigned to each loan as a result of our ongoing reviews of the loan portfolio. This process involves a considerable degree of judgment and subjectivity. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.

Our allowance is established through charges to the provision for loan losses. Loans, or portions of loans, deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to our allowance for loan losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed excessive for the risks inherent in the portfolio. The allowance for loan losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends.

The following table provides information on the activity within the allowance for loan losses as of and for the periods indicated.


	Commercial					Real Estate
	and		Real Estate			Construction
(Dollars in thousands)	Industrial		Other			and Land			SBA			Other			Total
Three months ended March 31, 2021
Beginning balance	$	8,923	$	3,877		$	681		$	604		$	26		$	14,111
Provision for loan losses		142		80			117			(29	)		(10	)		300
Charge-offs		—		—			—			—			—			—
Recoveries		166		—			—			—			—			166

Ending balance	$	9,231	$	3,957		$	798		$	575		$	16		$	14,577

Three months ended March 31, 2020
Beginning balance	$	6,708	$	3,281		$	1,022		$	50		$	14		$	11,075
Provision for loan losses		1,045		(620	)		(292	)		271			(4	)		400
Charge-offs		—		—			—			—			—			—
Recoveries		90		—			—			—			—			90

Ending balance	$	7,843	$	2,661		$	730		$	321		$	10		$	11,565

Our provision of $300,000 for the quarter ended March 31, 2021 primarily reflects the growth in our loan portfolio. While there was a modest increase to qualitative assessments from the potential impact of the COVID-19 pandemic, this was offset by improvements in other qualitative assessments. As of March 31, 2021, our most direct potential exposure to the COVID-19 environment related to our dental practice acquisition loans, which are part of commercial loans, and we believe our actions to offer payment deferments and government guaranteed loans provides significant mitigation of risk in that segment. In addition, our assessment broadly anticipates that the most severe and direct impacts from the COVID-19 environment would manifest in consumer credit card and installment portfolios; segments of commercial loans related to consumer services; and real estate in heavily impacted segments such as retail strip malls, hospitality and restaurants. As such, the provision for the first quarter of 2021 reflects a heavier allocation toward commercial and real estate segments.

Investment Portfolio

Our investment portfolio is comprised of debt securities. We use two classifications for our investment portfolio: available-for-sale (AFS) and held-to-maturity (HTM). Securities that we have the positive intent and ability to hold to maturity are classified as “held-to-maturity securities” and reported at amortized cost. Securities not classified as held-to-maturity securities are classified as “investment securities available-for-sale” and reported at fair value.

At March 31, 2021 and December 31, 2020, we had no held-to-maturity investments.

Our investments provide a source of liquidity as they can be pledged to support borrowed funds or can be liquidated to generate cash proceeds. The investment portfolio is also a significant resource to us in managing interest rate risk, as the maturity and interest rate characteristics of this asset class can be readily changed to match changes in the loan and deposit portfolios. The majority of our available-for-sale investment portfolio is comprised of mortgage-backed securities (MBSs) that are either issued or guaranteed by U.S. government agencies or government-sponsored enterprises (GSEs) and corporate bonds.

The following table reflects the amortized cost and fair market values for the total portfolio for each of the categories of investments in our securities portfolio as of March 31, 2021 and December 31, 2020.


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At March 31, 2021:
Mortgage backed securities	$	29,305	$	538	$	(405	)	$	29,438
Government agencies		2,392		—		(7	)		2,385
Corporate bonds		26,241		500		(459	)		26,282

Total available for sale securities	$	57,938	$	1,038	$	(871	)	$	58,105

At December 31, 2020:
Mortgage backed securities	$	27,541	$	669	$	(17	)	$	28,193
Government agencies		2,418		—		(6	)		2,412
Corporate bonds		24,224		434		(170	)		24,488

Total available for sale securities	$	54,183	$	1,103	$	(193	)	$	55,093

Deposits

Our deposits are generated through core customer relationships, related predominantly to business relationships. Many of our business customers maintain high levels of liquid balances in their demand deposit accounts and use the Bank’s treasury management services.

At March 31, 2021, approximately 46% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at March 31, 2021 were held in interest-bearing demand, savings and money market accounts and time deposits. More than 43% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at March 31, 2021, which provide our customers with interest and liquidity. Time deposits comprised the remaining 11% of our deposits at March 31, 2021.

Information concerning average balances and rates paid on deposits by deposit type for the past two fiscal years is contained in the Distribution, Yield and Rate Analysis of Net Income table located in the previous section titled “Results of Operations—Net Interest Income and Net Interest Margin”.

The following table provides a comparative distribution of our deposits by outstanding balance as well as by percentage of total deposits at the dates indicated.


(Dollars in thousands)	Balance		% of Total
At March 31, 2021:
Demand noninterest-bearing	$	742,574		46	%
Demand interest-bearing		33,022		2	%
Money market and savings		670,517		41	%
Time		183,602		11	%

Total deposits	$	1,629,715		100	%

At December 31, 2020:
Demand noninterest-bearing	$	673,100		44	%
Demand interest-bearing		34,869		2	%
Money market and savings		623,603		41	%
Time		200,634		13	%

Total deposits	$	1,532,206		100	%

Liquidity

Our primary source of funding is deposits from our core banking relationships. The majority of the Bank’s deposits are transaction accounts or money market accounts that are payable on demand. A small number of customers represent a large portion of the Bank’s deposits, as evidenced by the fact that approximately 18% of deposits were represented by the 10 largest depositors as of March 31, 2021. We strive to manage our liquidity in a manner that enables us to meet expected and unexpected liquidity needs under both normal and adverse conditions. The Bank maintains significant on-balance sheet and off-balance liquidity sources, including a marketable securities portfolio and borrowing capacity through various secured and unsecured sources.

Capital Resources

We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. As of March 31, 2021 and December 31, 2020, we were in compliance with all applicable regulatory capital requirements, including the capital conservation buffer, and the Bank’s capital ratios exceeded the minimums necessary to be considered ‘‘well-capitalized’’ for purposes of the FDIC’s prompt corrective action regulations. At March 31, 2021, the capital conservation buffer was 2.50%.

At March 31, 2021, the Bank had a Tier 1 risk based capital ratio of 10.12%, a total capital to risk-weighted assets ratio of 11.55%, and a leverage ratio of 7.98%. At December 31, 2020, the Bank had a Tier 1 risk based capital ratio of 10.80%, a total capital to risk-weighted assets ratio of 12.33%, and a leverage ratio of 8.02%.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information required by this item.

Item 4. Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of March 31, 2021 of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, such controls.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to legal actions that are routine and incidental to our business. Given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business, we, like all banking organizations, are subject to heightened regulatory compliance and legal risk. However, based on available information, management does not expect the ultimate disposition of any or a combination of these actions to have a material adverse effect on our business, financial condition and results of operation.

Item 1A. Risk Factors

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, which we filed with the SEC on March 25, 2021, other than as follows.

Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.

We are a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. We funded 1,100 PPP loans with an aggregate outstanding principal amount of $353.4 million as of March 31, 2021. Under the PPP, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP began very shortly after it was authorized as part of the CARES Act, and there is some ambiguity in the laws, rules and guidance regarding the operation of the program, which exposes us to risks of noncompliance. In addition, a few other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, regulatory enforcement, litigation costs or reputational damage stemming from our participation in the PPP and any related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, we may be exposed to credit risk on PPP loans to the extent that the SBA determines that there is a deficiency in the manner we originated, funded or serviced a PPP loan. If the SBA identifies a deficiency, the SBA may deny its liability under the guaranty for the affected loan or loans, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits


Exhibit Number		Description of Exhibit

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protections Act of 2002

32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protections Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		California BanCorp

Dated: May 14, 2021	By:	/s/ Steven E. Shelton
		Steven E. Shelton
		President and Chief Executive Officer
		(Principal Executive Officer)

Dated: May 14, 2021	By:	/s/ Thomas A. Sa
		Thomas A. Sa
		Senior Executive Vice President
		Chief Financial Officer
		(Principal Financial and Accounting Officer)