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California BanCorp - Quarter Report: 2022 September (Form 10-Q)

Table of Contents
 
 
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 September 30, 2022
OR
 
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.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    YES  ☐    NO  ☒
Number of shares outstanding of the registrant’s common stock as of November 1, 2022: 8,328,613
 
 
 


Table of Contents

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022

 

         Page  

Part I - Financial Information

  

Item 1.

 

Financial Statements

     3  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     44  

Item 4.

 

Controls and Procedures

     44  

Part II - Other Information

  

Item 1.

 

Legal Proceedings

     45  

Item 1A.

 

Risk Factors

     45  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     45  

Item 3.

 

Defaults Upon Senior Securities

     45  

Item 4.

 

Mine Safety Disclosures

     45  

Item 5.

 

Other Information

     45  

Item 6.

 

Exhibits

     46  

Signatures

     46  

 

 

2


Table of Contents
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollar amounts in thousands)
 
    
September 30,
   
December 31,
 
    
2022
   
2021
 
ASSETS:
                
Cash and due from banks
   $ 24,709     $ 4,539  
Federal funds sold
     216,345       465,917  
    
 
 
   
 
 
 
Total cash and cash equivalents
     241,054       470,456  
Investment securities:
                
Available for sale, at fair value
     47,359       74,892  
Held to maturity, at amortized cost
     110,172       28,386  
    
 
 
   
 
 
 
Total investment securities
     157,531       103,278  
Loans, net of allowance for losses of $16,555 and $14,081 at September 30, 2022 and December 31, 2021, respectively
     1,573,248       1,364,256  
Premises and equipment, net
     3,382       4,405  
Bank owned life insurance (BOLI)
     24,955       24,412  
Goodwill and other intangible assets
     7,483       7,513  
Accrued interest receivable and other assets
     40,848       40,676  
    
 
 
   
 
 
 
Total assets
   $ 2,048,501     $ 2,014,996  
    
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
                
Deposits
                
Non-interest
bearing
   $ 758,716     $ 771,205  
Interest bearing
     950,362       908,933  
    
 
 
   
 
 
 
Total deposits
     1,709,078       1,680,138  
Other borrowings
     100,000       106,387  
Junior subordinated debt securities
     54,117       54,028  
Accrued interest payable and other liabilities
     21,248       23,689  
    
 
 
   
 
 
 
Total liabilities
     1,884,443       1,864,242  
Commitments and Contingencies (Note 5)
                
Shareholders’ equity
                
Common stock, no par value; 40,000,000 shares authorized; 8,327,781 and 8,264,300 issued and outstanding at September 30, 2022 and December 31, 2021, respectively
     110,786       109,473  
Retained earnings
     54,628       41,189  
Accumulated other comprehensive income, net of taxes
     (1,356     92  
    
 
 
   
 
 
 
Total shareholders’ equity
     164,058       150,754  
    
 
 
   
 
 
 
Total liabilities and shareholders’ equity
   $ 2,048,501     $ 2,014,996  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
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CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 30,
    
September 30,
 
    
2022
    
2021
    
2022
    
2021
 
Interest income
                                   
Loans
   $ 19,084      $ 14,870      $ 50,268      $ 44,157  
Federal funds sold
     867        199        1,283        371  
Investment securities
     1,217        470        3,247        1,222  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total interest income
     21,168        15,539        54,798        45,750  
Interest expense
                                   
Deposits
     1,672        1,152        3,274        3,481  
Borrowings and subordinated debt
     1,133        546        2,412        1,506  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total interest expense
     2,805        1,698        5,686        4,987  
Net interest income
     18,363        13,841        49,112        40,763  
Provision for credit losses
     800        300        2,675        (500
    
 
 
    
 
 
    
 
 
    
 
 
 
Net interest income after provision for credit losses
     17,563        13,541        46,437        41,263  
Non-interest
income
                                   
Service charges and other fees
     1,237        905        3,260        2,184  
Gain on the sale of loans
     —          —          1,393        —    
Other
     247        397        759        995  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
non-interest
income
     1,484        1,302        5,412        3,179  
Non-interest
expense
                                   
Salaries and benefits
     7,415        6,920        21,654        19,661  
Premises and equipment
     1,275        1,372        3,844        3,778  
Professional fees
     524        334        1,662        1,450  
Data processing
     744        540        1,951        1,604  
Other
     1,259        1,347        3,841        3,935  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
non-interest
expense
     11,217        10,513        32,952        30,428  
Income before provision for income taxes
     7,830        4,330        18,897        14,014  
Provision for income taxes
     2,308        1,114        5,458        3,827  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income
   $ 5,522      $ 3,216      $ 13,439      $ 10,187  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per common share
                                   
Basic
   $ 0.66      $ 0.39      $ 1.62      $ 1.24  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.66      $ 0.39      $ 1.60      $ 1.23  
    
 
 
    
 
 
    
 
 
    
 
 
 
Average common shares outstanding
     8,322,529        8,244,154        8,298,269        8,211,907  
    
 
 
    
 
 
    
 
 
    
 
 
 
Average common and equivalent shares outstanding
     8,405,669        8,310,799        8,394,439        8,283,683  
    
 
 
    
 
 
    
 
 
    
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
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CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
                                 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,
   
September 30,
 
    
2022
   
2021
   
2022
   
2021
 
Net Income
   $ 5,522     $ 3,216     $ 13,439     $ 10,187  
Other comprehensive income
                                
Unrealized losses on securities available for sale, net
     (1,006     (440     (1,788     (595
Unrealized losses on securities transferred from available for sale to held to maturity, net
     —         —         (281     —    
Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net
     2       —         6       —    
Tax effect
     299       130       615       176  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive loss
     (705     (310     (1,448     (419
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income
   $ 4,817     $ 2,906     $ 11,991     $ 9,768  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
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CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) - PART I
(Dollars in thousands)
 
                        Accumulated        
                        Other        
                        Comprehensive     Total  
     Common Stock     Retained      Income     Shareholders’  
     Shares     Amount     Earnings      (Loss)     Equity  
Balance at December 31, 2021
     8,264,300     $ 109,473     $ 41,189      $ 92     $ 150,754  
Stock awards issued and related compensation expense
     11,513       494       —          —         494  
Shares withheld to pay taxes on stock based compensation
     (7,459     (173     —          —         (173
Stock options exercised
     4,200       55       —          —         55  
Shares withheld to pay exercise price on stock options
     (1,653     (34     —          —         (34
Net income
     —         —         3,673        —         3,673  
Other comprehensive loss
     —         —         —          (198     (198
  
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at March 31, 2022
     8,270,901     $ 109,815     $ 44,862      $ (106   $ 154,571  
Stock awards issued and related compensation expense
     43,855       539       —          —         539  
Shares withheld to pay taxes on stock based compensation
     (3,153     (65     —          —         (65
Stock options exercised
     7,350       42       —          —         42  
Shares withheld to pay exercise price on stock options
     (1,792     (42     —          —         (42
Net income
     —         —         4,244        —         4,244  
Other comprehensive loss
     —         —         —          (545     (545
  
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at June 30, 2022
     8,317,161     $ 110,289     $ 49,106      $ (651   $ 158,744  
  
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Stock awards issued and related compensation expense
     14,314       586       —          —         586  
Shares withheld to pay taxes on stock based compensation
     (3,694     (89     —          —         (89
Net income
     —         —         5,522        —         5,522  
Other comprehensive loss
     —         —         —          (705     (705
  
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at September 30, 2022
     8,327,781     $ 110,786     $ 54,628      $ (1,356   $ 164,058  
  
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
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CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) - PART II
(Dollars in thousands)
 
                        Accumulated        
                        Other        
                        Comprehensive     Total  
     Common Stock     Retained      Income     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 loss
     —         —         —          (523     (523
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at March 31, 2021
     8,189,598     $ 108,430     $ 30,630      $ 118     $ 139,178  
Stock awards issued and related compensation expense
     28,562       234       —          —         234  
Shares withheld to pay taxes on stock based compensation
     (2,740     (150                      (150
Stock options exercised
     21,770       48       —          —         48  
Shares withheld to pay exercise price on stock options
     (8,074     (145     —          —         (145
Net income
     —         —         4,162        —         4,162  
Other comprehensive income
     —         —         —          414       414  
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at June 30, 2021
     8,229,116     $ 108,417     $ 34,792      $ 532     $ 143,741  
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Stock awards issued and related compensation expense
     30,053       723       —          —         723  
Shares withheld to pay taxes on
     —                                     
stock based compensation
     (10,056     (82                      (82
Stock options exercised
     3,750       —         —          —         —    
Shares withheld to pay exercise price on stock options
     (2,754     (49     —          —         (49
Net income
     —         —         3,216        —         3,216  
Other comprehensive loss
     —         —         —          (310     (310
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at September 30, 2021
     8,250,109     $ 109,009     $ 38,008      $ 222     $ 147,239  
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
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CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
 
    
Nine Months Ended September 30,
 
    
2022
   
2021
 
Cash flows from operating activities:
                
Net income
   $ 13,439     $ 10,187  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for credit losses
     2,675       (500
Provision for deferred taxes
     (1,383     (1,851
Depreciation
     1,168       1,166  
Deferred loan costs, net
     (182     (152
Accretion on discount of purchased loans, net
     (32     (85
Stock based compensation, net
     1,292       1,108  
Increase in cash surrender value of life insurance
     (497     (487
Discount on retained portion of sold loans, net
     (27     (26
Gain on sale of loans, net
     (1,393     —    
Increase in accrued interest receivable and other assets
     1,986       1,050  
(Increase) decrease in accrued interest payable and other liabilities
     (1,894     321  
    
 
 
   
 
 
 
Net cash provided by operating activities
     15,152       10,731  
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Purchase of investment securities
     (78,780     (36,548
Proceeds from principal payments on investment securities
     21,859       8,848  
Proceeds from sale (purchase) of loans
     37,271       (20,008
Net (increase) decrease in loans
     (247,304     87,092  
Capital calls on low income tax credit investments
     (438     (565
Redemption (purchase) of Federal Home Loan Bank stock
     455       (1,344
Purchase of premises and equipment
     (145     (165
Purchase of bank-owned life insurance policies
     (46     (42
    
 
 
   
 
 
 
Net cash (used for) provided by investing activities
     (267,128     37,268  
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Net increase in customer deposits
     28,940       209,848  
Paydown of long term borrowing, net
     (56,387     (109,507
Proceeds from short term and overnight borrowings, net
     50,000       —    
Proceeds from issuance of subordinated debt, net
     —         34,240  
Proceeds from exercised stock options, net
     21       (47
    
 
 
   
 
 
 
Net cash provided by financing activities
     22,574       134,534  
    
 
 
   
 
 
 
(Decrease) increase in cash and cash equivalents
     (229,402     182,533  
Cash and cash equivalents, beginning of period
     470,456       418,517  
    
 
 
   
 
 
 
Cash and cash equivalents, end of period
   $ 241,054     $ 601,050  
    
 
 
   
 
 
 
Supplemental disclosure of cash flow information:
                
Securities transferred from available for sale to the held to maturity classification
   $ 49,889     $ —    
Cash paid during the year for:
                
Interest
   $ 6,089     $ 5,490  
Income taxes
   $ 5,303     $ 4,684  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
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CALIFORNIA BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Organization
California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”), which offers a broad range of commercial banking services to closely held businesses and professionals located throughout Northern California. The Bank has a full service branch located in Contra Costa County and 4 loan production offices 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, 2021, and the notes thereto, included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021 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 and nine months ended September 30, 2022 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, 2022.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
Subsequent Events
Management has reviewed all events through the date the unaudited consolidated financial statements were filed with the SEC 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 September 30, 2022 may be materially different from actual results due to the ongoing
COVID-19
pandemic and other qualitative factors.
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.
 
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Business Impact of
COVID-19
The
COVID-19
pandemic caused a substantial disruption to the global economy, U.S. economy, and the economies in which the Company operates. While the spread of the
COVID-19
virus has minimally impacted the Company’s operations as of September 30, 2022, we continue to closely monitor ongoing developments and remain focused on our ability to navigate these challenging conditions and on maintaining the underlying strength and stability of our Company.
Although the impact of
COVID-19
on the general economic environment and financial markets, including the Company’s market capitalization, has recently improved and stabilized, the continued uncertainty about the scope and longevity of its impact 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.
Goodwill
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”).
The Company completed an impairment analysis of goodwill as of September 30, 2022 and determined there was no impairment. As part of the Company’s qualitative assessment of goodwill impairment, management considered
COVID-19
and determined that it was no longer a triggering event given that its impact on the general economic environment and financial markets, including the Company’s market capitalization, has improved and stabilized and, as such, does not currently represent an indicator of impairment.
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      Nine months ended  
     September 30,      September 30,  
(Dollars in thousands, except per share data)
   2022      2021      2022      2021  
Net income available to common shareholders
   $ 5,522      $ 3,216      $ 13,439      $ 10,187  
Weighted average basic common shares outstanding
     8,322,529        8,244,154        8,298,269        8,211,907  
Add: dilutive potential common shares
     83,140        66,645        96,170        71,776  
    
 
 
    
 
 
    
 
 
    
 
 
 
Weighted average diluted common shares outstanding
     8,405,669        8,310,799        8,394,439        8,283,683  
Basic earnings per share
   $ 0.66      $ 0.39      $ 1.62      $ 1.24  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted earnings per share
   $ 0.66      $ 0.39      $ 1.60      $ 1.23  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
10

Table of Contents
New Financial Accounting Standards
In
March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU
2022-02, Financial
Instruments—Credit Losses (Topic 326). The amendments in this update eliminate the accounting guidance and related disclosures for Troubled Debt Restructurings (TDRs) by creditors in Subtopic
310-40, Receivables—Troubled
Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic
326-20, Financial
Instruments—Credit Losses—Measured at Amortized Cost. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this update is permitted. An entity may elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The adoption of this accounting guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the 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
became effective for fiscal years beginning after December 15, 2021 and early adoption was permitted. The adoption of this standard did not 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 replaces 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 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.
 
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2. INVESTMENT SECURITIES
The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2022 and December 31, 2021.
 
(Dollars in thousands)
   Amortized
Cost
     Gross
Unrealized /
Unrecognized
Gains
     Gross
Unrealized /
Unrecognized
Losses
     Estimated
Fair
Value
 
At September 30, 2022:
                                   
Mortgage backed securities
   $ 19,080      $ 21      $ (933    $ 18,168  
Government agencies
     29,782        —          (1,068      28,714  
Corporate bonds
     429        48        —          477  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total available for sale securities
   $ 49,291      $ 69      $ (2,001    $ 47,359  
    
 
 
    
 
 
    
 
 
    
 
 
 
Mortgage backed securities
   $ 62,525      $ —        $ (8,245    $ 54,280  
Government agencies
     3,087        —          (677      2,410  
Corporate bonds
     44,560        31        (3,577      41,014  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total held to maturity securities
   $ 110,172      $ 31      $ (12,499    $ 97,704  
    
 
 
    
 
 
    
 
 
    
 
 
 
At December 31, 2021:
                                   
Mortgage backed securities
   $ 29,943      $ 325      $ (320    $ 29,948  
Government agencies
     3,093        —          (100      2,993  
Corporate bonds
     41,725        694        (468      41,951  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total available for sale securities
   $ 74,761      $ 1,019      $ (888    $ 74,892  
    
 
 
    
 
 
    
 
 
    
 
 
 
Mortgage backed securities
   $ 22,772      $ —        $ (140    $ 22,632  
Government agencies
     —          —          —          —    
Corporate bonds
     5,614        —          (30      5,584  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total held to maturity securities
   $ 28,386      $ —        $ (170    $ 28,216  
    
 
 
    
 
 
    
 
 
    
 
 
 
The Company purchased 8 available for sale securities for $36.0 million and 11 held to maturity securities for $42.8 million during the nine months ended September 30, 2022. The Company purchased 9 available for sale securities for $36.5 million and no held to maturity securities during the nine months ended September 30, 2021. The Company did not sell any securities during the nine months ended September 30, 2022 and September 30, 2021.
Net unrealized losses on available for sale investment securities totaling $1.9 million were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at September 30, 2022. Net unrealized gains on available for sale investment securities totaling $131,000 were recorded, net of deferred tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2021.
During the first quarter of 2022, the Company
re-designated
certain securities previously classified as available for sale to the held to maturity classification. The securities
re-designated
consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, 2021. At the time of re-designation the securities included $281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.
 
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The following table summarizes securities with unrealized losses at September 30, 2022 and December 31, 2021 aggregated by major security type and length of time in a continuous unrealized loss position.
 
     Less Than 12 Months     More Than 12 Months     Total  
(Dollars in thousands)
   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
At September 30, 2022:
                                                   
Mortgage backed securities
   $ 11,221      $ (541   $ —        $ —       $  11,221      $ (541
Government agencies
     28,714        (1,068     4,434        (392     33,148        (1,460
Corporate bonds
     —          —         —          —         —           —    
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total available for sale securities
   $ 39,935      $  (1,609)     $ 4,434      $ (392)     $ 44,369      $ (2,001)  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Mortgage backed securities
   $ 51,717      $ (7,767)     $ 2,563      $ (478)     $ 54,280      $ (8,245)  
Government agencies
     —          —         2,410        (677)       2,410        (677)  
Corporate bonds
     20,046        (1,258)       17,748        (2,319)       37,794        (3,577)  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total held to maturity securities
   $ 71,763      $ (9,025)     $  22,721      $  (3,474)     $ 94,484      $  (12,499)  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
At December 31, 2021:
                                                   
Mortgage backed securities
   $ 14,302      $ (320)     $ —        $ —       $ 14,302      $ (320)  
Government agencies
     2,993        (100)       —          —         2,993        (100)  
Corporate bonds
     15,233        (200)       4,732        (268)       19,965        (468)  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total available for sale securities
   $ 32,528      $ (620)     $ 4,732      $ (268)     $ 37,260      $ (888)  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Mortgage backed securities
   $ 22,632      $ (140)     $ —        $ —       $ 22,632      $ (140)  
Government agencies
     5,584        (30)       —          —         5,584        (30)  
Corporate bonds
     —          —         —          —         —          —    
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total held to maturity securities
   $  28,216      $ (170)     $ —        $ —       $ 28,216      $ (170)  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
At September 30, 2022 the Company’s investment security portfolio consisted of 60 securities, 55 of which were in an unrealized loss position at quarter end. At December 31, 2021 the Company’s investment security portfolio consisted of 44 securities, 16 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 September 30, 2022 and December 31, 2021, respectively.
The following table summarizes the scheduled maturities of the Company’s investment securities as of September 30, 2022.
 
     Available for Sale      Held to Maturity  
(Dollars in thousands)
   Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  
Less that one year
   $ —        $ —        $ 2,521      $ 2,478  
One to five years
     34,810        33,645        21,080        20,377  
Five to ten years
     2,141        2,100        32,139        30,049  
Beyond ten years
     2,512        2,477        21,606        16,811  
Securities not due at a single maturity date
     9,828        9,137        32,826        27,989  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total investment securities
   $  49,291      $  47,359      $  110,172      $  97,704  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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 CREDIT LOSSES
Outstanding loans as of September 30, 2022 and December 31, 2021 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).
 
(Dollars in thousands)
   September 30,
2022
     December 31,
2021
 
Commercial and industrial
   $ 643,131        474,281  
Real estate - other
     824,867        697,212  
Real estate - construction and land
     71,523        43,194  
SBA
     8,565        81,403  
Other
     39,815        80,559  
    
 
 
    
 
 
 
Total loans, gross
     1,587,901        1,376,649  
Deferred loan origination costs, net
     1,902        1,688  
Allowance for credit losses
     (16,555      (14,081
    
 
 
    
 
 
 
Total loans, net
   $  1,573,248        1,364,256  
    
 
 
    
 
 
 
SBA loans include Paycheck Protection Program (“PPP”) loans funded under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted as a result of the
COVID-19.
Of the $491.2 million in PPP loans funded by the Company as a result of the initial launch of the program in April 2020 and the
re-launch
of the program in January 2021, approximately $487.4 million of those balances have been granted forgiveness by the SBA as of September 30, 2022. Outstanding PPP loans were $3.8 million and $72.5 million as of September 30, 2022 and December 31, 2021, respectively.
The following table reflects the loan portfolio allocated by management’s internal risk ratings at September 30, 2022 and December 31, 2021.
 
(Dollars in thousands)
   Commercial
and
Industrial
     Real Estate
Other
     Real Estate
Construction
and Land
     SBA      Other      Total  
As of September 30, 2022
                                                     
Grade:
                                                     
Pass
   $ 619,363      $ 816,546      $ 69,813      $ 7,488      $  39,815      $  1,553,025  
Special Mention
     20,438        3,658        —          503        —          24,599  
Substandard
     3,330        4,663        1,710        574        —          10,277  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 643,131      $ 824,867      $  71,523      $ 8,565      $ 39,815      $ 1,587,901  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2021
                                                     
Grade:
                                                     
Pass
   $ 450,913      $ 690,916      $ 39,074      $  79,379      $ 80,559      $ 1,340,841  
Special Mention
     20,904        1,583        1,278        1,111        —          24,876  
Substandard
     2,464        4,713        2,842        913        —          10,932  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 474,281      $ 697,212      $ 43,194      $ 81,403      $ 80,559      $ 1,376,649  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
14

Table of Contents
The following
table reflects an aging analysis of the loan portfolio by the time past due at September 30, 2022 and December 31, 2021.
 
(Dollars in thousands)
   30 Days      60 Days      90+ Days     
Non-Accrual
     Current      Total  
As of September 30, 2022
                                                     
Commercial and industrial
   $ 524      $ —        $ 161      $ —        $ 642,446      $ 643,131  
Real estate - other
     4,060        —          —          —          820,807        824,867  
Real estate - construction and land
     —          —          —          —          71,523        71,523  
SBA
     —          —          —          182        8,383        8,565  
Other
     —          —          —          —          39,815        39,815  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total loans, gross
   $  4,584      $ —        $ 161      $ 182      $ 1,582,974      $ 1,587,901  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2021
                                                     
Commercial and industrial
   $ —        $ 2,597      $ —        $ —        $ 471,684      $ 474,281  
Real estate - other
     —          —          —          —          697,212        697,212  
Real estate - construction and land
     —          —          —          —          43,194        43,194  
SBA
     —          —          —          232        81,171        81,403  
Other
     —          —          —          —          80,559        80,559  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total loans, gross
   $ —        $  2,597      $  —        $  232      $  1,373,820      $  1,376,649  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
15

Table of Contents
The following table reflects the impairment methodology applied to gross loans by portfolio segment and the related allowance for credit losses as of September 30, 2022 and December 31, 2021.
 
(Dollars in thousands)
   Commercial
and
Industrial
     Real Estate
Other
     Real Estate
Construction
and Land
     SBA      Other      Total  
As of September 30, 2022
                                                     
Gross loans:
                                                     
Loans individually evaluated for impairment
   $ —        $ —        $ —        $ 182      $ —        $ 182  
Loans collectively evaluated for impairment
     643,131        824,867        71,523        8,383        39,815        1,587,719  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total gross loans
   $ 643,131      $ 824,867      $ 71,523      $ 8,565      $ 39,815      $ 1,587,901  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Allowance for loan losses:
                                                     
Loans individually evaluated for impairment
   $ —        $ —        $ —        $ —        $ —        $ —    
Loans collectively evaluated for impairment
     10,225        5,173        997        128        32        16,555  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total allowance for loan losses
   $ 10,225      $ 5,173      $ 997      $ 128      $ 32      $ 16,555  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2021
                                                     
Gross loans:
                                                     
Loans individually evaluated for impairment
   $ —        $ —        $ —        $ 731      $ —        $ 731  
Loans collectively evaluated for impairment
     474,281        697,212        43,194        80,672        80,559        1,375,918  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total gross loans
   $ 474,281      $ 697,212      $  43,194      $  81,403      $  80,559      $  1,376,649  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Allowance for loan losses:
                                                     
Loans individually evaluated for impairment
   $ —        $ —        $ —        $ 142      $ —        $ 142  
Loans collectively evaluated for impairment
     8,552        4,524        681        167        15        13,939  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total allowance for loan losses
   $ 8,552      $ 4,524      $ 681      $ 309      $ 15      $ 14,081  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
16

Table of Contents
The following table reflects information related to impaired loans as of September 30, 2022 and December 31, 2021.
 
(Dollars in thousands)
   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
As of September 30, 2022
                                            
With no related allowance recorded:
                                            
SBA
   $  182      $ 580      $  —        $  207      $  —    
With an allowance recorded:
                                            
SBA
   $ —        $ —        $ —        $ 249      $ —    
Total:
                                            
SBA
   $ 182      $ 580      $ —        $ 457      $ —    
As of December 31, 2021
                                            
With no related allowance recorded:
                                            
SBA
   $ 232      $ 705      $ —        $ 233      $ 14  
With an allowance recorded:
                                            
SBA
   $ 499      $ 499      $ 142      $ 477      $ 59  
Total:
                                            
SBA
   $ 731      $  1,204      $ 142      $ 710      $ 73  
The recorded investment in impaired loans in the table above excludes interest receivable and net deferred origination costs due to their immateriality.
 
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Table of Contents
The following tables reflect the changes in, and allocation of, the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2022 and 2021.
 
     Commercial           Real Estate                    
     and     Real Estate     Construction                    
(Dollars in thousands)
   Industrial     Other     and Land     SBA     Other     Total  
Three months ended September 30, 2022
                                                
Beginning balance
   $ 9,526     $  5,243     $ 907     $ 273     $ 8     $  15,957  
Provision for loan losses
     699       (70     90       57       24       800  
Charge-offs
     —         —         —         (202     —         (202
Recoveries
     —         —         —         —         —         —    
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $  10,225     $ 5,173     $ 997     $ 128     $ 32     $ 16,555  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net recoveries (charge-offs) / gross loans
     0.00     0.00     0.00     -2.36     0.00     -0.01
Three months ended September 30, 2021
                                                
Beginning balance
   $ 8,133     $ 4,069     $ 697     $ 317     $ 24     $ 13,240  
Provision for loan losses
     45       324       (22     (44     (3     300  
Charge-offs
     —         —         —         —         —         —    
Recoveries
     31       —         —         —         —         31  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 8,209     $ 4,393     $ 675     $ 273     $ 21     $ 13,571  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net recoveries (charge-offs) / gross loans
     0.01     0.00     0.00     0.00     0.00     0.00
Nine months ended September 30, 2022
                                                
Beginning balance
   $ 8,552     $ 4,524     $ 681     $ 309     $ 15     $ 14,081  
Provision for loan losses
     1,672       649       316       21       17       2,675  
Charge-offs
     —         —         —         (202     —         (202
Recoveries
     1       —         —         —         —         1  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 10,225     $ 5,173     $ 997     $ 128     $ 32     $ 16,555  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net recoveries (charge-offs) / gross loans
     0.00     0.00     0.00     -2.36     0.00     -0.01
Nine months ended September 30, 2021
                                                
Beginning balance
   $ 8,923     $ 3,877     $ 681     $ 604     $ 26     $ 14,111  
Provision for loan losses
     (952     516       (6     (53     (5     (500
Charge-offs
     —         —         —         (278     —         (278
Recoveries
     238       —         —         —         —         238  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 8,209     $ 4,393     $ 675     $ 273     $ 21     $ 13,571  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net recoveries (charge-offs) / gross loans
     0.06     0.00     0.00     -0.26     0.00     0.00
 
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Interest forgone on nonaccrual loans totaled $25,000 and $31,000 for the three months ended September 30, 2022 and 2021, respectively. Interest forgone on nonaccrual loans totaled $60,000 and $84,000 for the nine months ended September 30, 2022 and 2021, respectively. There was no interest recognized on a cash-basis on impaired loans for the three and nine months ended September 30, 2022 and 2021, respectively.
Troubled Debt Restructurings
At September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021 to customers with outstanding loans that were classified as troubled debt restructurings. There were no new troubled debt restructurings during the three and nine months ended September 30, 2022.
The Company had no troubled debt restructurings with a subsequent payment default within twelve months following the modification during the three and nine months ended September 30, 2022.
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 September 30, 2022, amounts pledged and available borrowing capacity under such limits were approximately $436.6 million and $346.0 million, respectively. At December 31, 2021, amounts pledged and available borrowing capacity under such limits were approximately $317.8 million and $218.9 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%. The Company repaid the PPPLF borrowing in full during the second quarter of 2022 and therefore had no balance outstanding as of September 30, 2022. At December 31, 2021, the PPPLF borrowing arrangement had an outstanding balance of $56.4 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 September 30, 2022, amounts pledged and available borrowing capacity under such limits were approximately $362.6 million and $211.6 million, respectively. At December 31, 2021, amounts pledged and available borrowing capacity under such limits were approximately $184.1 million and $88.1 million, respectively. In May 2022, the Company secured a FHLB short term borrowing for $50.0 million which matured during the third quarter of 2022. In August 2022, the Company secured a FHLB short term borrowing for $50.0 million maturing on October 17, 2022 at a fixed rate of 2.68%. This FHLB short term borrowing had an outstanding balance of $50.0 million at September 30, 2022. In September 2022, the Company secured an additional FHLB short term borrowing for $50.0 million maturing on October 26, 2022 at a fixed rate of 3.25%. This FHLB short term borrowing had an outstanding balance of $50.0 million at September 30, 2022.
Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to $123.0 million. There were no borrowings outstanding under these arrangements at September 30, 2022 and December 31, 2021.
The Company maintains a revolving line of credit with a commitment of $3.0 million for a six month term at a rate of Prime plus 0.40%. At September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021.
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 September 30, 2022 and December 31, 2021, the balance remained at $20.0 million, net of the remaining unamortized issuance cost.
 
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The Company issued an additional $35.0 million in subordinated debt on August 17, 2021. The subordinated debt has a fixed interest rate of 3.50% for the first 5 years and a stated maturity of September 1, 2031. After the fifth year, the interest rate changes to a quarterly variable rate equal to then current three-month term SOFR plus 0.286%. The subordinated debt was recorded net of related issuance costs of $760,000. At September 30, 2022 and December 31, 2021, the balance remained at $35.0 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 September 30, 2022 and December 31, 2021, the Company had outstanding unfunded commitments for loans of approximately $626.8 million and $620.0 million, respectively. Unfunded loan commitment reserves, included in the allowance for loan losses, totaled $430,000 and $380,000 at September 30, 2022 and December 31, 2021, respectively.
The outstanding unfunded commitments for loans at September 30, 2022 was comprised of fixed rate commitments of approximately $42.0 million and variable rate commitments of approximately $584.8 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan commitments as of September 30, 2022.
 
            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%
   $  20,982      $ 3,751      $  4,973      $  29,706  
Interest rate between 4.00% and 5.00%
     1,108        9,188        719        11,015  
Interest rate greater than or equal to 5.00%
     —          1,254        —          1,254  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total unfunded fixed rate loan commitments
   $ 22,090      $  14,193      $ 5,692      $ 41,975  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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Operating Leases
The Company leases various office premises under long-term operating lease agreements. These leases expire between 2022 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 for the nine months ended, and as of, September 30, 2022.
 
     September 30,  
(Dollars in thousands)
   2022  
Operating lease cost (cost resulting from lease payments)
   $  1,452  
Operating lease - operating cash flows (fixed payments)
   $ 1,844  
Operating lease - ROU assets
   $ 5,015  
Operating lease - liabilities
   $ 6,502  
Weighted average lease term—operating leases
     2.3 years  
Weighted average discount rate—operating leases
     3.76
The following table reflects the minimum commitments under these
non-cancellable
leases, before considering renewal options, as of September 30, 2022.
 
     September 30,  
(Dollars in thousands)
   2022  
2022
   $ 597  
2023
     1,497  
2024
     1,456  
2025
     1,500  
2026
     1,435  
Thereafter
     357  
    
 
 
 
Total undiscounted cash flows
     6,842  
Discount on cash flows
     (340
    
 
 
 
Total lease liability
   $  6,502  
    
 
 
 
Rent expense included in premises and equipment expense totaled $469,000 and $521,000 for the three months ended September 30, 2022 and 2021, respectively. Rent expense included in premises and equipment expense totaled $1.5 million and $1.6 million for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022, uninsured deposits at financial institutions were approximately $2.1 million. At December 31, 2021, uninsured deposits at financial institutions were approximately $11.0 million.
 
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6. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:
Level 1 - Quoted market prices for identical instruments traded in active exchange markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
 
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The carrying
amounts and estimated fair values of financial instruments at September 30, 2022 and December 31, 2021 are as follows:
 
     Carrying      Fair Value Measurements  
(Dollars in thousands)
   Amount      Level 1      Level 2      Level 3      Total  
As of September 30, 2022
                                            
Financial assets:
                                            
Cash and cash equivalents
   $ 241,054      $ 241,054      $ —        $ —        $ 241,054  
Investment securities:
                                            
Available for sale
     47,359        —          47,359        —          47,359  
Held to Maturity
     110,172                 89,069        8,635        97,704  
Loans, net
     1,573,248        —          —          1,524,759        1,524,759  
Accrued interest receivable
     6,628        —          851        5,777        6,628  
Financial liabilities:
                                            
Deposits
   $ 1,709,078      $ 1,391,143      $ 318,310      $ —        $ 1,709,453  
Other borrowings
     100,000        —          —          100,000        100,000  
Subordinated debt
     54,117        —          —          51,564        51,564  
Accrued interest payable
     457        —          355        102        457  
As of December 31, 2021
                                            
Financial assets:
                                            
Cash and cash equivalents
   $ 470,456      $ 470,456      $ —        $ —        $ 470,456  
Investment securities:
                                            
Available for sale
     74,892        —          67,981        6,911        74,892  
Held to Maturity
     28,386                 22,632        5,584        28,216  
Loans, net
     1,364,256                 —          1,353,888        1,353,888  
Accrued interest receivable
     5,713        —          633        5,080        5,713  
Financial liabilities:
                                            
Deposits
   $ 1,680,138      $ 1,525,935      $ 154,146      $ —        $ 1,680,081  
Other borrowings
     106,387        —          —          106,387        106,387  
Subordinated debt
     54,028        —          —          56,092        56,092  
Accrued interest payable
     859        —          42        817        859  
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. For securities where market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators, resulting in Level 3 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 September 30, 2022 and December 31, 2021 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. The fair values of loans are classified as Level 3.
 
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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. For time certificates of deposit, the estimated remaining cash flows were discounted, based on current rates for similar instruments in market, to determine the fair value (premium)/discount and accordingly are classified as Level 2.
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.
Junior Subordinated Debt Securities - Fair values for subordinated debt are calculated based on its terms and were discounted to the date of the valuation to calculate the fair value on the debt. A market rate based on recent debt offering by peer bank was used to discount cash flow until reprice date and subsequently cash flow were discounted at Prime plus 2% for its security. These assumptions which may be unobservable, and considering recent trading activity of similar instruments in market which can be inactive and accordingly are classified within the Level 3 classification.
Accrued Interest Receivable - The carrying amounts of accrued interest receivable approximate fair value resulting in a Level 2 classification for accrued interest receivable on investment securities and a Level 3 classification for accrued interest receivable on loans since investment securities are generally classified using Level 2 inputs and loans are generally classified using Level 3 inputs.
Accrued Interest Payable - The carrying amounts of accrued interest payable approximate fair value resulting in a Level 2 classification, since accrued interest payable is from deposits that are generally classified using Level 2 inputs.
Off Balance Sheet Instruments - Fair values for
off-balance
sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
 
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Table of Contents
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 as of September 30, 2022 and December 31, 2021.
 
(Dollars in thousands)
   Fair Value      Level 1      Level 2      Level 3  
As of September 30, 2022
                                   
Investments available for sale:
                                   
Mortgage backed securities
   $ 18,168      $ —        $ 18,168      $ —    
Government agencies
     28,714        —          28,714        —    
Corporate bonds
     477        —          477        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a recurring basis
   $ 47,359      $ —        $ 47,359      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2021
                                   
Investments available for sale:
                                   
Mortgage backed securities
   $ 29,948      $ —        $ 29,948      $ —    
Government agencies
     2,993        —          2,993        —    
Corporate bonds
     41,951        —          35,040        6,911  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a recurring basis
   $ 74,892      $ —        $ 67,981      $ 6,911  
    
 
 
    
 
 
    
 
 
    
 
 
 
The following table reflects the changes in all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022.
 
(Dollars in thousands)
   Corporate
Securities
 
Balance at December 31, 2021
   $ 6,911  
Purchases
     —    
Transfers into Level 3
     —    
Transfers out of Level 3
     (6,911
    
 
 
 
Balance at September 30, 2022
   $ —    
    
 
 
 
 
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Table of Contents
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 September 30, 2022 and December 31, 2021.​​​​​​​
 
     Carrying      Fair Value Measurements  
(Dollars in thousands)
   Amount      Level 1      Level 2      Level 3  
As of September 30, 2022
                                   
Impaired loans - SBA
   $ 182      $ —        $ —        $ 182  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a
non-recurring
basis
   $ 182      $ —        $ —        $ 182  
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2021
                                   
Impaired loans - SBA
   $ 731      $ —        $ —        $ 731  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a
non-recurring
basis
   $ 731      $ —        $ —        $ 731  
    
 
 
    
 
 
    
 
 
    
 
 
 
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
charge-off
has been recorded. The unobservable inputs and qualitative information about the unobservable inputs are based on management’s best estimates of appropriate discounts in arriving at fair market value. Increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of impaired loans.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial condition at September 30, 2022 and December 31, 2021 and our results of operations for the three and nine months ended September 30, 2022 and 2021, 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, 2021 that was filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2022 (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 September 30, 2022 (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 future events, such as 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; the impacts of inflation; 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 may 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 filings we may make 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 and nine months ended, and our financial condition at, September 30, 2022.

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.

 

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Table of Contents

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 a full service branch in California located in Contra Costa County and 4 loan production offices in California located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County.

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, 2021, 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.

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 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.

 

(Dollars in thousands)

   September 30,
2022
    December 31,
2021
 

Allowance for credit losses as a percentage of outstanding loans, excluding PPP loans:

    

Allowance for credit losses

   $ 16,555     $ 14,081  

Gross loans

     1,587,901       1,376,649  

Less: PPP loans

     3,797       72,527  
  

 

 

   

 

 

 

Gross loans, net of PPP loans

     1,584,104       1,304,122  
  

 

 

   

 

 

 

Allowance for credit losses as a percentage of outstanding loans, excluding PPP loans

     1.05     1.08
  

 

 

   

 

 

 

 

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Results of Operations – Three Months Ended September 30, 2022 and 2021:

Overview

For the three months ended September 30, 2022 and September 30, 2021, net income was $5.5 million and $3.2 million, respectively, representing an increase of $2.3 million, or 72%. Compared to the same period last year, net interest income increased by $4.5 million and non-interest income increased by $182,000, which was offset by an increase in the provision for credit losses of $500,000, an increase in non-interest expense of $704,000 and an increase in the provision for income taxes of $1.2 million.

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 September 30, 2022, was $18.4 million, an increase of $4.5 million, or 33% from $13.8 million for the same period in 2021. The increase in net interest income was primarily attributable to the rising interest rate environment combined with a more favorable mix of higher yielding earning assets offset, in part, by an increase in the cost of total deposits and a reduction in the amortization of net fees received on PPP loans. Amortization of net fees received on PPP loans was $278,000 and $1.6 million for the third quarter of 2022 and 2021, respectively.

Average total interest-earning assets were $1.85 billion in the third quarter of 2022 compared to $1.91 billion for the same period during 2021. For the quarter ended September 30, 2022, the yield on average earning assets increased 132 basis points to 4.54% from 3.22% for the quarter ended September 30, 2021. The yield on total average gross loans in the three months ended September 30, 2022 was 4.97%, representing an increase of 49 basis points compared to 4.48% in the same period one year earlier. For the three months ended September 30, 2022 and 2021, the yield on average investment securities increased 12 basis points to 2.95% from 2.83%.

For the three months ended September 30, 2022, average loans increased $207.4 million, or 16%, from the quarter ended September 30, 2021 while average deposit balances decreased $126.4 million, or 7%, for the same period. As a result, the average loan to deposit ratio for the third quarter of 2022 was 95.69% compared to 76.58% for the third quarter of 2021.

Of the $207.4 million increase in average loan balances year over year, average commercial and real estate other loans increased by $165.6 million and $177.3 million, respectively, as a result of organic growth. These increases were partially offset by a decrease in average SBA loans of $142.6 million primarily due to PPP loan forgiveness.

Of the $126.4 million decrease in average total deposit balances year over year, $135.7 million was attributable to money market and savings accounts and $37.2 million was attributable to total demand deposits. These decreases were offset by an increase in time deposits of $43.2 million and an increase in interest-bearing demand deposits of $3.3 million. The cost of interest-bearing deposits was 0.78% during the quarter ended September 30, 2022 compared to 0.49% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances increased by 15 basis points to 0.42% in the third quarter of 2022 compared to 0.27% in the third quarter of 2021.

As a result, the net interest margin increased by 107 basis points to 3.94% for the three months ended September 30, 2022, compared to 2.87% for the three months ended September 30, 2021.

 

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Table of Contents

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 September 30, 2022 and 2021.

 

     Three months ended September 30,  
     2022      2021  
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
 

ASSETS

               

Interest earning assets:

               

Loans (1)

   $ 1,523,442        4.97   $ 19,084      $ 1,316,080        4.48   $ 14,870  

Federal funds sold

     162,314        2.12     867        530,806        0.15     199  

Investment securities

     163,486        2.95     1,217        65,811        2.83     470  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest earning assets

     1,849,242        4.54     21,168        1,912,697        3.22     15,539  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-earning assets:

               

Cash and due from banks

     20,153             18,627       

All other assets (2)

     60,832             54,570       
  

 

 

         

 

 

      

TOTAL

   $ 1,930,227           $ 1,985,894       
  

 

 

         

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Interest-bearing liabilities:

               

Deposits:

               

Demand

   $ 40,044        0.08   $ 8      $ 36,696        0.09   $ 8  

Money market and savings

     600,100        0.62     938        735,785        0.52     961  

Time

     213,001        1.35     726        169,849        0.43     183  

Other

     154,101        2.92     1,133        102,287        2.12     546  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     1,007,246        1.10     2,805        1,044,617        0.64     1,698  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-bearing liabilities:

               

Demand deposits

     738,951             776,195       

Accrued expenses and other liabilities

     21,094             18,719       

Shareholders’ equity

     162,936             146,363       
  

 

 

         

 

 

      

TOTAL

   $ 1,930,227           $ 1,985,894       
  

 

 

         

 

 

      
     

 

 

   

 

 

       

 

 

   

 

 

 

Net interest income and margin (3)

        3.94   $ 18,363           2.87   $ 13,841  
     

 

 

   

 

 

       

 

 

   

 

 

 

 

(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 net deferred loan fees of $100,000 and $1.0 million, respectively.

(2)

Other noninterest-earning assets includes the allowance for loan losses of $16.0 million and $13.3 million, respectively.

(3)

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

 

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The following table shows the effect of the interest differential of volume and rate changes for the quarters ended September 30, 2022 and 2021. 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 September 30,
2022 vs. 2021
 
     Increase (Decrease) Due to  
     Change in:  
     Average      Average      Net  

(Dollars in thousands)

   Volume      Rate      Change  

Interest income:

        

Loans

   $ 2,598      $ 1,616      $ 4,214  

Federal funds sold

     (1,968      2,636        668  

Investment securities

     727        20        747  

Interest expense:

        

Deposits

        

Demand

     1        (1      —    

Money market and savings

     (212      189        (23

Time

     147        396        543  

Other borrowings

     381        206        587  
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 1,040      $ 3,482      $ 4,522  
  

 

 

    

 

 

    

 

 

 

Interest Income

Interest income increased by $5.6 million in the third quarter of 2022 compared to the same period of 2021, primarily due to an increase in the prime rate which generated higher yields on our loan portfolio combined with PPP loans that were forgiven by the SBA being replaced with higher yielding commercial and real estate other loans, partially offset by a decrease in amortization of net fees collected on PPP loans. The prime rate at September 30, 2022 and September 30, 2021 was 6.25% and 3.25%, respectively. Interest earned on our loan portfolio of $19.1 million in the third quarter of 2022 represented an increase of $4.2 million, or 28%, compared to $14.9 million for the third quarter of 2021.

Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on our investment securities portfolio of $1.2 million for the three months ended September 30, 2022 increased $747,000, or 159%, over $470,000 for the same period in the prior year.

Interest Expense

Interest expense increased by $1.1 million in the third quarter of 2022 compared to the same period of 2021, primarily due to the effect of increased rates paid on interest-bearing deposits and other borrowings. The average rate paid on interest-bearing liabilities in the third quarter of 2022 compared to the same period one year earlier increased 46 basis point to 1.1% from 0.64%.

Provision for Credit Losses

The provision for credit losses increased to $800,000 for the third quarter of 2022 compared to $300,000 for the third quarter of 2021. The increase in the provision for credit losses was primarily attributable to the growth of the loan portfolio. The Company had net loan charge-offs of $202,000, or 0.01% of gross loans, during the third quarter of 2022 compared to net loan recoveries of $31,000, or 0.00% of gross loans, in the same period of 2021. The allowance for credit losses as a percent of outstanding loans was 1.04% at September 30, 2022 and 1.02% at December 31, 2021. The reserve percentage excluding PPP loans, which are guaranteed by the SBA, was 1.05% at September 30, 2022 compared to 1.08% at December 31, 2021 (See “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 Credit losses in “Financial Condition – Allowance for Credit Losses”.

 

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Table of Contents

Noninterest Income

The following table reflects the major components of the Company’s noninterest income for the three months ended September 30, 2022 and 2021.

 

     Three Months Ended                
     September 30,      Increase (Decrease)  

(Dollars in thousands)

   2022      2021      Amount      Percent  

Service charges and other fees

   $ 1,237      $ 905      $ 332        37

Earnings on BOLI

     167        162        5        3

Other

     80        235        (155      -66
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 1,484      $ 1,302      $ 182        14
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income increased by $182,000, or 14% in the third quarter of 2022, compared to the third quarter of 2021. The increase was primarily the result of an increase in service charges and other fee income.

Noninterest Expense

The following table reflects the major components of the Company’s noninterest expense for the three months ended September 30, 2022 and 2021.

 

     Three Months Ended                
     September 30,      Increase (Decrease)  

(Dollars in thousands)

   2022      2021      Amount      Percent  

Salaries and benefits

   $ 7,415      $ 6,920      $ 495        7

Premises and equipment

     1,275        1,372        (97      -7

Professional fees

     524        334        190        57

Data processing

     744        540        204        38

Other

     1,259        1,347        (88      -7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 11,217      $ 10,513      $ 704        7
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense was $11.2 million and $10.5 million for the three months ended September 30, 2022 and 2021, respectively. Excluding capitalized loan origination costs, non-interest expense for the third quarter of 2022 was $12.3 million compared to $11.7 million for the third quarter of 2021, representing an increase of $609,000, or 5%. The increase in non-interest expense, excluding capitalized origination costs, from the third quarter of 2021 was primarily due to an increase in salaries and benefits related to investments to support the continued growth of the business.

For the three months ended September 30, 2022 and 2021, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 56.52% and 69.42%, respectively.

Provision for Income Taxes

Income tax expense was $2.3 million for the third quarter of 2022 compared to $1.1 million for the same period in prior year. The effective tax rates for those time periods were 29.5% and 25.7%, respectively.

 

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Table of Contents

Results of Operations – Nine Months Ended September 30, 2022 and 2021:

Overview

For the nine months ended September 30, 2022 and September 30, 2021, net income was $13.4 million and $10.2 million, respectively. The increase of $3.2 million, or 32%, was primarily attributable to an increase in net interest income of $8.3 million and an increase in non-interest income of $2.2 million, offset by an increase in the provision for credit losses of $3.2 million, an increase in non-interest expense of $2.5 million and an increase in income tax expense of $1.6 million.

Net Interest Income and Margin

Net interest income for the nine months ended September 30, 2022, was $49.1 million, an increase of $8.3 million, or 20% from $40.8 million for the same period in 2021. The increase in net interest income was primarily attributable to a more favorable mix of higher yielding earning assets, partially offset by an increase in the cost of borrowings and a reduction in the amortization of net fees received on PPP loans. Amortization of net fees received on PPP loans was $1.7 million and $4.8 million for the nine months ended September 30, 2022 and 2021, respectively.

Average total interest-earning assets were $1.91 billion in the nine months ended of 2022 compared to $1.94 billion for the same period during 2021. For the nine months ended September 30, 2022, the yield on average earning assets increased 73 basis points to 4.01% from 3.28% for the nine months ended September 30, 2021. The yield on total average gross loans in the nine months ended September 30, 2022 was 4.62%, representing an increase of 35 basis points compared to 4.27% in the same period one year earlier. For the nine months ended September 30, 2022 and 2021, the yield on average investment securities increased 7 basis points to 2.79% from 2.72%.

For the nine months ended September 30, 2022, average loans increased $71.7 million from the nine months ended September 30, 2021 while average deposit balances decreased $28.6 million for the same period. As a result, the average loan to deposit ratio for the nine months ended of 2022 was 90.65% compared to 84.67% for the nine months ended of 2021.

Of the $71.7 million increase in average loan balances year over year, average commercial, real estate other and construction and land loans increased by $125.3 million, $170.6 million and $15.1 million, respectively, as a result of organic growth. These increases were primarily offset by a decrease in lower yielding average SBA loans of $238.3 million as a result of PPP loan forgiveness.

Of the $28.6 million decrease in average total deposit balances year over year, $32.1 million was attributable to a decrease in money market and savings accounts and a decrease in time deposits of $8.3 million. These decreases were offset by an increase in total demand deposits of $11.8 million. The cost of interest-bearing deposits was 0.51% during the nine months ended September 30, 2022 compared to 0.52% in the same period one year earlier. In addition, the overall cost of average total deposit balances decreased by 2 basis points to 0.27% in the nine months ended of 2022 compared to 0.29% in the nine months ended of 2021.

As a result of the more favorable mix of higher yielding earning assets, the net interest margin increased by 68 basis points to 3.60% for the nine months ended September 30, 2022, compared to 2.92% for the nine months ended September 30, 2021.

 

33


Table of Contents

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 nine months ended September 30, 2022 and 2021.

 

     Nine months ended September 30,  
     2022      2021  
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
 

ASSETS

               

Interest earning assets:

               

Loans (1)

   $  1,453,741        4.62   $  50,268      $  1,382,074        4.27   $  44,157  

Federal funds sold

     217,008        0.79     1,283        422,050        0.12     371  

Investment securities

     155,423        2.79     3,247        60,042        2.72     1,222  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest earning assets

     1,826,172        4.01     54,798        1,864,166        3.28     45,750  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-earning assets:

               

Cash and due from banks

     19,550             17,223       

All other assets (2)

     61,939             58,646       
  

 

 

         

 

 

      

TOTAL

   $ 1,907,661           $ 1,940,035       
  

 

 

         

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Interest-bearing liabilities:

               

Deposits:

               

Demand

   $ 40,214        0.08     25      $ 35,031        0.11   $ 29  

Money market and savings

     652,849        0.45     2,185        684,995        0.56     2,858  

Time

     172,284        0.83     1,064        180,572        0.44     594  

Other

     125,108        2.58     2,412        144,501        1.39     1,506  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     990,455        0.77     5,686        1,045,099        0.64     4,987  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-bearing liabilities:

               

Demand deposits

     738,273             731,659       

Accrued expenses and other liabilities

     20,848             20,966       

Shareholders’ equity

     158,085             142,311       
  

 

 

         

 

 

      

TOTAL

   $ 1,907,661           $ 1,940,035       
  

 

 

         

 

 

      
     

 

 

   

 

 

       

 

 

   

 

 

 

Net interest income and margin (3)

        3.60   $ 49,112           2.92   $ 40,763  
     

 

 

   

 

 

       

 

 

   

 

 

 

 

(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 net deferred loan fees of $501,000 and $3.3 million, respectively. respectively.

(2)

Other noninterest-earning assets includes the allowance for loan losses of $15.0 million and $14.0 million, respectively.

(3)

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

 

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Table of Contents

The following table shows the effect of the interest differential of volume and rate changes for the nine months ended September 30, 2022 and 2021. 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.

 

     Nine Months Ended September 30,
2022 vs. 2021
 
     Increase (Decrease) Due to
Change in:
 

(Dollars in thousands)

   Average
Volume
     Average
Rate
     Net
Change
 

Interest income:

        

Loans

   $ 2,478      $  3,633      $  6,111  

Federal funds sold

     (1,212      2,124        912  

Investment securities

     1,993        32        2,025  

Interest expense:

        

Deposits

        

Demand

     3        (7      (4

Money market and savings

     (108      (565      (673

Time

     (51      521        470  

Other borrowings

     (374      1,280        906  
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 3,789      $ 4,560      $ 8,349  
  

 

 

    

 

 

    

 

 

 

Interest Income

Interest income increased by $9.0 million in the nine months ended September 30, 2022 compared to the same period of 2021, primarily due to an increase in the prime rate which generated higher yields on our loan portfolio combined with PPP loans that were forgiven by the SBA being replaced with higher yielding commercial and real estate other loans, partially offset by a decrease in amortization of net fees collected on PPP loans. The prime rate at September 30, 2022 and September 30, 2021 was 6.25% and 3.25%, respectively. Interest earned on our loan portfolio of $50.3 million in the nine months ended September 30, 2022 represented an increase of $6.1 million, or 14%, compared to $44.2 million for the same period in 2021.

Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on our investment securities portfolio of $3.2 million for the nine months ended September 30, 2022 increased $2.0 million, or 166%, over $1.2 million for the same period in the prior year.    

Interest Expense

Interest expense increased by $699,000 in the nine months ended September 30, 2022 compared to the same period of 2021, primarily due to the effect of increased rates paid on other borrowings. The average rate paid on interest-bearing liabilities in the nine months ended of 2022 compared to the same period one year earlier increased 13 basis points to 0.77% from 0.64%.

Provision for Credit Losses

The provision for credit losses increased to $2.7 million for the nine months ended of 2022 compared to a release of reserves of $500,000 for the nine months ended of 2021. The increase in the provision for credit losses was primarily attributable to the growth of the loan portfolio. The Company had net loan charge-offs of $201,000, or 0.01 % of gross loans, during the nine months ended of 2022 compared to net loan charge-offs of $40,000, or 0.00% of gross loans, in the same period of 2021. The allowance for credit losses as a percent of outstanding loans was 1.04% at

 

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September 30, 2022 and 1.02% at December 31, 2021. The reserve percentage excluding PPP loans, which are guaranteed by the SBA, was 1.05% at September 30, 2022 compared to 1.08% at December 31, 2021 (See “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 Credit losses in “Financial Condition – Allowance for Credit Losses”.

Noninterest Income

The following table reflects the major components of the Company’s noninterest income for the nine months ended September 30, 2022 and 2021.

 

     Nine Months Ended
September 30,
     Increase (Decrease)  

(Dollars in thousands)

   2022      2021      Amount      Percent  

Service charges and other fees

   $  3,260      $  2,184      $  1,076        49

Gain on sale of SBA loans

     1,393        —          1,393        100

Earnings on BOLI

     497        487        10        2

Other

     262        508        (246      -48
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $    5,412      $    3,179      $ 2,233        70
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income increased by $2.2 million, or 70%, in the nine months ended September 30, 2022, compared to the nine months ended of 2021. The increase was primarily attributable to a gain of $1.4 million recognized on the sale of a portion of our solar loan portfolio and an increase of $1.1 million pertaining to service charges and other fees.

Noninterest Expense

The following table reflects the major components of the Company’s noninterest expense for the nine months ended September 30, 2022 and 2021.

 

     Nine Months Ended
September 30,
     Increase (Decrease)  

(Dollars in thousands)

   2022      2021      Amount      Percent  

Salaries and benefits

   $  21,654      $  19,661      $  1,993        10

Premises and equipment

     3,844        3,778        66        2

Professional fees

     1,662        1,450        212        15

Data processing

     1,951        1,604        347        22

Other

     3,841        3,935        (94      -2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 32,952      $ 30,428      $ 2,524        8
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense was $33.0 million and $30.4 million for the nine months ended September 30, 2022 and 2021, respectively. Excluding capitalized loan origination costs, non-interest expense for the nine months ended September 30, 2022 was $36.1 million compared to $34.4 million for the nine months ended September 30, 2021, representing an increase of $1.7 million, or 5%.

Salaries and benefits for the nine months ended September 30, 2022 were $21.7 million, representing an increase of $2.0 million, or 10%, compared to $19.7 million for the nine months ended September 30, 2021. The increase in salaries and benefits expense was primarily due to investments to support the continued growth of the business combined with a reduction in capitalized loan origination costs.

For the nine months ended September 30, 2022 and 2021, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 60.44% and 69.25%, respectively.

 

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Provision for Income Taxes

Income tax expense was $5.5 million and $3.8 million for the nine months ended September 30, 2022 and 2021. The effective tax rates for those time periods were 28.9% and 27.3%, respectively.

Financial Condition:

Overview

Total assets of the Company were $2.05 billion as of September 30, 2022 compared to $2.01 billion as of December 31, 2021. The increase in total assets from year-end was primarily due to growth in the loan portfolio, partially offset by decreased liquidity resulting from deposit outflows related to forgiveness of PPP loans.

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 $211.3 million, or 15%, from December 31, 2021 to September 30, 2022 primarily due to organic growth in the commercial and industrial and real estate other loan portfolios, partially offset by a reduction in SBA loans due to PPP loan forgiveness and a reduction in the other loan portfolio as a result of the Company selling a portion of its residential solar loan portfolio.

The loan portfolio at September 30, 2022 was comprised of approximately 41% of commercial and industrial loans compared to 34% at December 31, 2021. In addition, commercial real estate loans comprised 56% of our loans at September 30, 2022 compared to 54% at December 31, 2021. 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 the percentage distribution at September 30, 2022 and December 31, 2021.

 

     September 30,     December 31,  

(Dollars in thousands)

   2022     2021  

Commercial and industrial

   $ 643,131       474,281  

Real estate - other

     824,867       697,212  

Real estate - construction and land

     71,523       43,194  

SBA

     8,565       81,403  

Other

     39,815       80,559  
  

 

 

   

 

 

 

Total loans, gross

     1,587,901       1,376,649  

Deferred loan origination costs, net

     1,902       1,688  

Allowance for credit losses

     (16,555     (14,081
  

 

 

   

 

 

 

Total loans, net

   $ 1,573,248       1,364,256  
  

 

 

   

 

 

 

Commercial and industrial

     41     34

Real estate - other

     52     51

Real estate - construction and land

     4     3

SBA

     1     6

Other

     2     6
  

 

 

   

 

 

 

Total loans, gross

     100     100
  

 

 

   

 

 

 

 

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The following table shows the maturity distribution for total loans outstanding as of September 30, 2022. The maturity distribution is grouped by remaining scheduled principal payments that are due within one year, after one but within five years, after five years but within fifteen years, or after fifteen years. The principal balances of loans are indicated by both fixed and variable rate categories.

 

            Over One      Over Five                
     Due in      Year But      Years But                
     One Year      Less Than      Less Than      Over         

(Dollars in thousands)

   Or Less      Five Years      Fifteen Years      Fifteen Years      Total  

Commercial and industrial

   $ 241,875      $ 255,203      $ 146,053      $ —        $ 643,131  

Real estate - other

     21,238        354,926        439,317        9,386        824,867  

Real estate - construction and land

     53,539        11,518        6,466        —          71,523  

SBA

     115        4,480        2,647        1,323        8,565  

Other

     262        2,260        37,293        —          39,815  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, gross

   $ 317,029      $ 628,387      $ 631,776      $ 10,709      $ 1,587,901  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Loans With         
     Fixed      Variable         

(Dollars in thousands)

   Rates (1)      Rates      Total  

Commercial and industrial

   $ 200,191      $ 442,940      $ 643,131  

Real estate - other

     536,935        287,932        824,867  

Real estate - construction and land

     5,996        65,527        71,523  

SBA

     3,797        4,768        8,565  

Other

     39,500        315        39,815  
  

 

 

    

 

 

    

 

 

 

Total loans, gross

   $ 786,419      $ 801,482      $ 1,587,901  
  

 

 

    

 

 

    

 

 

 

 

(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 other real estate owned at September 30, 2022. 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.

The 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)”, provided 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 did not recognize eligible COVID-19 loan modifications as TDRs. Additionally, loans qualifying for these modifications were not required to be reported as delinquent, nonaccrual, impaired or criticized solely as a result of a COVID-19 loan modification. As of September 30, 2022, the Company had no loans remaining on a deferred status or that had a structure modification under the Cares Act guidelines. As of December 31, 2021, two loans totaling $3.5 million were on a deferred status or that had a structure modification under the Cares Act guidelines.

 

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The following table presents information regarding the Company’s nonperforming and restructured loans as of September 30, 2022 and December 31, 2021.

 

     September 30,     December 31,  

(Dollars in thousands)

   2022     2021  

Nonaccrual loans

   $ 182     $ 232  

Loans over 90 days past due and still accruing

     161       —    
  

 

 

   

 

 

 

Total nonperforming loans

     343       232  

Foreclosed assets

     —         —    
  

 

 

   

 

 

 

Total nonperforming assets

   $ 343     $ 232  
  

 

 

   

 

 

 

Performing TDR’s

   $ —       $ —    
  

 

 

   

 

 

 

Nonperforming loans / gross loans

     0.02     0.02

Allowance for loan losses / nonperforming loans

     4826.53     6069.40

Allowance for Credit Losses

Our allowance for credit 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.

 

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

 

(Dollars in thousands)

   Commercial
and
Industrial
    Real Estate
Other
    Real Estate
Construction
and Land
    SBA     Other     Total  

Three months ended September 30, 2022

            

Beginning balance

   $ 9,526     $ 5,243     $ 907     $ 273     $ 8     $ 15,957  

Provision for loan losses

     699       (70     90       57       24       800  

Charge-offs

     —         —         —         (202     —         (202

Recoveries

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,225     $ 5,173     $ 997     $ 128     $ 32     $ 16,555  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net recoveries (charge-offs) / gross loans

     0.00     0.00     0.00     -2.36     0.00     -0.01

Three months ended September 30, 2021

            

Beginning balance

   $ 8,133     $ 4,069     $ 697     $ 317     $ 24     $ 13,240  

Provision for loan losses

     45       324       (22     (44     (3     300  

Charge-offs

     —         —         —         —         —         —    

Recoveries

     31       —         —         —         —         31  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,209     $ 4,393     $ 675     $ 273     $ 21     $ 13,571  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net recoveries (charge-offs) / gross loans

     0.01     0.00     0.00     0.00     0.00     0.00

Nine months ended September 30, 2022

            

Beginning balance

   $ 8,552     $ 4,524     $ 681     $ 309     $ 15     $ 14,081  

Provision for loan losses

     1,672       649       316       21       17       2,675  

Charge-offs

     —         —         —         (202     —         (202

Recoveries

     1       —         —         —         —         1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,225     $ 5,173     $ 997     $ 128     $ 32     $ 16,555  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net recoveries (charge-offs) / gross loans

     0.00     0.00     0.00     -2.36     0.00     -0.01

Nine months ended September 30, 2021

            

Beginning balance

   $ 8,923     $ 3,877     $ 681     $ 604     $ 26     $ 14,111  

Provision for loan losses

     (952     516       (6     (53     (5     (500

Charge-offs

     —         —         —         (278     —         (278

Recoveries

     238       —         —         —         —         238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,209     $ 4,393     $ 675     $ 273     $ 21     $ 13,571  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net recoveries (charge-offs) / gross loans

     0.06     0.00     0.00     -0.26     0.00     0.00

 

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The provision for loan losses of $800,000 and $2.7 million for the quarter and nine months ended September 30, 2022, respectively, were primarily the result of growth in our core loan portfolio along with continued qualitative assessments of the general macroeconomic environment, including the potential impact of COVID-19 and regulatory sanctions imposed upon other countries.

Investment Portfolio

Our investment portfolio is comprised of debt securities. We use two classifications for our investment portfolio: available for sale and held to maturity. 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.

During the first quarter of 2022, the Company re-designated certain securities previously classified as available for sale to the held to maturity classification. The securities re-designated consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, 2021. At the time of re-designation the securities included $281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.

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 investment portfolio is comprised of mortgage backed securities, government agency securities, and corporate bonds.

 

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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 September 30, 2022 and December 31, 2021.

 

            Gross      Gross         
            Unrealized /      Unrealized /      Estimated  
     Amortized      Unrecognized      Unrecognized      Fair  

(Dollars in thousands)

   Cost      Gains      Losses      Value  

At September 30, 2022:

           

Mortgage backed securities

   $ 19,080      $ 21      $ (933    $  18,168  

Government agencies

     29,782        —          (1,068      28,714  

Corporate bonds

     429        48        —          477  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 49,291      $ 69      $ (2,001    $ 47,359  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage backed securities

   $ 62,525      $ —        $ (8,245    $ 54,280  

Government agencies

     3,087        —          (677      2,410  

Corporate bonds

     44,560        31        (3,577      41,014  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $  110,172      $ 31      $  (12,499    $ 97,704  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2021:

           

Mortgage backed securities

   $ 29,943      $ 325      $ (320    $ 29,948  

Government agencies

     3,093        —          (100      2,993  

Corporate bonds

     41,725        694        (468      41,951  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 74,761      $  1,019      $ (888    $ 74,892  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage backed securities

   $ 22,772      $ —        $ (140    $ 22,632  

Government agencies

     —          —          —          —    

Corporate bonds

     5,614        —          (30      5,584  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 28,386      $ —        $ (170    $ 28,216  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2022, approximately 44% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at September 30, 2022 were held in interest-bearing demand, savings and money market accounts and time deposits. Approximately 37% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at September 30, 2022, which provide our customers with interest and liquidity. Time deposits comprised the remaining 19% of our deposits at September 30, 2022.

 

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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 September 30, 2022:

     

Demand noninterest-bearing

   $ 758,716        44

Demand interest-bearing

     35,183        2

Money market and savings

     597,244        35

Time

     317,935        19
  

 

 

    

 

 

 

Total deposits

   $ 1,709,078        100
  

 

 

    

 

 

 

At December 31, 2021:

     

Demand noninterest-bearing

   $ 771,205        46

Demand interest-bearing

     37,250        2

Money market and savings

     717,480        43

Time

     154,203        9
  

 

 

    

 

 

 

Total deposits

   $ 1,680,138        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 September 30, 2022. 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 September 30, 2022 and December 31, 2021, 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 September 30, 2022, the capital conservation buffer was 3.17%.

At September 30, 2022, the Bank had a Tier 1 risk based capital ratio of 10.32%, a total capital to risk-weighted assets ratio of 11.17%, and a leverage ratio of 10.62%. At December 31, 2021, the Bank had a Tier 1 risk based capital ratio of 11.38%, a total capital to risk-weighted assets ratio of 12.25%, and a leverage ratio of 9.51%.

 

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Table of Contents

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 September 30, 2022 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.

 

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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, 2021, which we filed with the SEC on March 23, 2022.

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

 

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Table of Contents

Item 6. Exhibits

 

Exhibit

Number

  

Description of Exhibit

    3.1    Articles of Incorporation of California BanCorp (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10 filed with the Commission on March 4, 2020)
    3.2    Amended and Restated Bylaws of California Bancorp (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed with the Commission on March 4, 2020)
  10.1    Employment Agreement, dated as of August 9, 2022, by and between California Bank of Commerce and Scott Myers (incorporated by reference to Exhibit 10.3 of California BanCorp’s Form 10-Q filed on August 11, 2022).
  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    Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH    Inline XBRL Taxonomy Extension Schema Document
101.CAL    Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    Inline XBRL Taxonomy Extension Presentation Linkbase Document
104    Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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: November 10, 2022     By:  

/s/ Steven E. Shelton

      Steven E. Shelton
      Chief Executive Officer
      (Principal Executive Officer)
Dated: November 10, 2022     By:  

/s/ Thomas A. Sa

      Thomas A. Sa
      President and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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