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California BanCorp - Quarter Report: 2023 June (Form 10-Q)

10-Q
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OR THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
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 August 1, 2023: 8,384,842
 
 
 


CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2023

 

         Page  

Part I - Financial Information

  

Item 1.

  Financial Statements      3  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      43  

Item 4.

  Controls and Procedures      43  

Part II - Other Information

  

Item 1.

  Legal Proceedings      44  

Item 1A.

  Risk Factors      44  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      44  

Item 3.

  Defaults Upon Senior Securities      44  

Item 4.

  Mine Safety Disclosures      44  

Item 5.

  Other Information      45  

Item 6.

  Exhibits      45  

Signatures

       46  

 

2


http://fasb.org/us-gaap/2023#InterestReceivableAndOtherAssetshttp://fasb.org/us-gaap/2023#OperatingLeaseLiabilityP0MP0M
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollar amounts in thousands)
 
    
June 30,
2023
   
December 31,
2022
 
ASSETS:
    
Cash and due from banks
   $ 19,763     $ 16,686  
Federal funds sold
     187,904       215,696  
  
 
 
   
 
 
 
Total cash and cash equivalents
     207,667       232,382  
Investment securities:
    
Available for sale, at fair value
     44,867       47,012  
Held to maturity, at amortized cost, net of allowance for credit losses of $58 and $0 at June 30, 2023 and December 31, 2022, respectively
     106,262       108,866  
  
 
 
   
 
 
 
Total investment securities
     151,129       155,878  
Loans, net of allowance for credit losses of $15,722 and $17,005 at June 30, 2023 and December 31, 2022, respectively
     1,569,546       1,578,456  
Premises and equipment, net
     2,625       3,072  
Bank owned life insurance (BOLI)
     25,519       25,127  
Goodwill and other intangible assets
     7,452       7,472  
Accrued interest receivable and other assets
     41,708       39,828  
  
 
 
   
 
 
 
Total assets
   $ 2,005,646     $ 2,042,215  
  
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
    
Deposits
    
Non-interest
bearing
   $ 742,160     $ 811,671  
Interest bearing
     996,136       980,069  
  
 
 
   
 
 
 
Total deposits
     1,738,296       1,791,740  
Junior subordinated debt securities
     54,221       54,152  
Accrued interest payable and other liabilities
     28,894       24,069  
  
 
 
   
 
 
 
Total liabilities
     1,821,411       1,869,961  
Commitments and Contingencies (Note 5)
    
Shareholders’ equity
    
Common stock, no par value; 40,000,000 shares authorized; 8,383,772 and 8,332,479 issued and outstanding at June 30, 2023 and December 31, 2022, respectively
     112,167       111,257  
Retained earnings
     73,423       62,297  
Accumulated other comprehensive loss, net of taxes
     (1,355     (1,300
  
 
 
   
 
 
 
Total shareholders’ equity
     184,235       172,254  
  
 
 
   
 
 
 
Total liabilities and shareholders’ equity
   $ 2,005,646     $ 2,042,215  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
3

CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
    
Three Months Ended
June 30,
    
Six Months Ended

June 30,
 
    
2023
    
2022
    
2023
    
2022
 
Interest income
           
Loans
   $ 23,476      $ 16,298      $ 45,948      $ 31,184  
Federal funds sold
     2,238        280        3,998        416  
Investment securities
     1,458        1,128        2,765        2,030  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total interest income
     27,172        17,706        52,711        33,630  
Interest expense
           
Deposits
     7,493        796        13,515        1,602  
Borrowings and subordinated debt
     1,033        687        1,793        1,279  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total interest expense
     8,526        1,483        15,308        2,881  
Net interest income
     18,646        16,223        37,403        30,749  
Provision for credit losses
     444        925        802        1,875  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net interest income after provision for credit losses
     18,202        15,298        36,601        28,874  
Non-interest
income
           
Service charges and other fees
     867        1,134        1,730        2,023  
Gain on the sale of loans
     —          —          —          1,393  
Other
     268        260        512        512  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
non-interest
income
     1,135        1,394        2,242        3,928  
Non-interest
expense
           
Salaries and benefits
     7,831        7,146        15,707        14,239  
Premises and equipment
     1,168        1,267        2,348        2,569  
Professional fees
     470        547        920        1,139  
Data processing
     701        599        1,309        1,207  
Other
     1,433        1,260        3,162        2,581  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
non-interest
expense
     11,603        10,819        23,446        21,735  
Income before provision for income taxes
     7,734        5,873        15,397        11,067  
Provision for income taxes
     2,294        1,629        4,506        3,150  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net income
   $ 5,440      $ 4,244      $ 10,891      $ 7,917  
  
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per common share
           
Basic
   $ 0.65      $ 0.51      $ 1.30      $ 0.96  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.65      $ 0.51      $ 1.29      $ 0.94  
  
 
 
    
 
 
    
 
 
    
 
 
 
Average common shares outstanding
     8,369,907        8,295,014        8,354,564        8,285,950  
  
 
 
    
 
 
    
 
 
    
 
 
 
Average common and equivalent shares outstanding
     8,414,213        8,395,701        8,442,607        8,393,776  
  
 
 
    
 
 
    
 
 
    
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
4

CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
    
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
    
2023
   
2022
   
2023
   
2022
 
Net Income
   $ 5,440     $ 4,244     $ 10,891     $ 7,917  
Other comprehensive income (loss)
        
Unrealized gains (losses) on securities available for sale, net
     (315     (777     12       (782
Unrealized losses on securities transferred from available for sale to held to maturity, net
     —         —         —         (281
Reclassification adjustment for securities transferred from available for sale to held to maturity in prior year, net
     —         —         (61     —    
Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net
     (3     2       (1     4  
Tax effect
     93       230       (5     316  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive loss
     (225     (545     (55     (743
  
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income
   $ 5,215     $ 3,699     $ 10,836     $ 7,174  
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
5
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) - PART I
(Dollars in thousands)
 
     Common Stock     Retained     Accumulated
Other
Comprehensive
Income
    Total
Shareholders’
 
     Shares     Amount     Earnings     (Loss)     Equity  
Balance at December 31, 2022
     8,332,479     $ 111,257     $ 62,297     $ (1,300   $ 172,254  
Adoption of new accounting standard
     —         —         334       —         334  
Stock awards issued and related compensation expense
     34,560       631       —         —         631  
Shares withheld to pay taxes on stock based compensation
     (12,139     (285     —         —         (285
Stock options exercised
     478       6       —         —         6  
Net income
     —         —         5,451       —         5,451  
Other comprehensive income
     —         —         —         170       170  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2023
     8,355,378     $ 111,609     $ 68,082     $ (1,130   $ 178,561  
Adoption of new accounting standard
     —         —         (99     —         (99
Stock awards issued and related compensation expense
     32,558       611       —         —         611  
Shares withheld to pay taxes on stock based compensation
     (4,164     (53     —         —         (53
Net income
     —         —         5,440       —         5,440  
Other comprehensive loss
     —         —         —         (225     (225
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2023
     8,383,772     $ 112,167     $ 73,423     $ (1,355   $ 184,235  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
6

CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) - PART II
(Dollars in thousands)
 
     Common Stock     Retained      Accumulated
Other
Comprehensive
Income
    Total
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  
  
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
7

CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
 
    
Six Months Ended June 30,
 
    
2023
   
2022
 
Cash flows from operating activities:
    
Net income
   $ 10,891     $ 7,917  
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
    
Provision for credit losses
     802       1,875  
Provision for deferred taxes
     (84     218  
Depreciation
     482       778  
Deferred loan fees (costs), net
     404       (859
Stock based compensation, net
     904       795  
Increase in cash surrender value of life insurance
     (350     (330
Discount on retained portion of sold loans, net
     (18     (18
Gain on sale of loans
     —         (1,393
(Decrease) increase in accrued interest receivable and other assets
     (2,286     2,204  
(Increase) decrease in accrued interest payable and other liabilities
     5,047       (2,880
  
 
 
   
 
 
 
Net cash provided by operating activities
     15,792       8,307  
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Purchase of investment securities
     —         (78,780
Proceeds from principal payments on investment securities
     4,395       15,271  
Proceeds from sale of loans
     —         37,271  
Net decrease (increase) in loans
     9,561       (159,589
Capital calls on low income tax credit investments
     (273     (437
(Purchase) redemption of Federal Home Loan Bank stock
     (675     455  
Purchase of premises and equipment
     (35     (108
Purchase of bank-owned life insurance policies
     (42     (46
  
 
 
   
 
 
 
Net cash provided by (used for) investing activities
     12,931       (185,963
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Net decrease in customer deposits
     (53,444     (127,999
Paydown of long term borrowing, net
     —         (56,387
Proceeds from short term and overnight borrowings, net
     —         50,000  
Proceeds from exercised stock options, net
     6       21  
  
 
 
   
 
 
 
Net cash used for financing activities
     (53,438     (134,365
  
 
 
   
 
 
 
Decrease in cash and cash equivalents
     (24,715     (312,021
Cash and cash equivalents, beginning of period
     232,382       470,456  
  
 
 
   
 
 
 
Cash and cash equivalents, end of period
   $ 207,667     $ 158,435  
  
 
 
   
 
 
 
Supplemental disclosure of cash flow information:
    
Securities transferred from available for sale to the held to maturity classification
   $ —       $ 49,889  
Recording of right to use assets and operating lease liabilities
   $ 6,127     $ —    
Cash paid during the year for:
    
Interest
   $ 12,962     $ 3,007  
Income taxes
   $ —       $ 2,003  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
8

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, 2022, and the notes thereto, included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2022 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 six months ended June 30, 2023 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, 2023.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Actual results may differ from those estimates used in the Consolidated Financial Statements and related notes. Material estimates that are particularly susceptible to significant changes in the near term include estimates relating to: the determination of the allowance for credit losses; certain assets and liabilities carried at fair value; and accounting for income taxes.
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.
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.
 
9

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 interim impairment analysis of goodwill as of June 30, 2023 and determined there was no 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
June 30,
     Six months ended
June 30,
 
(Dollars in thousands, except per share data)
   2023      2022      2023      2022  
Net income available to common shareholders
   $ 5,440      $ 4,244      $ 10,891      $ 7,917  
Weighted average basic common shares outstanding
     8,369,907        8,295,014        8,354,564        8,285,950  
Add: dilutive potential common shares
     44,306        100,687        88,043        107,826  
  
 
 
    
 
 
    
 
 
    
 
 
 
Weighted average diluted common shares outstanding
     8,414,213        8,395,701        8,442,607        8,393,776  
Basic earnings per share
   $ 0.65      $ 0.51      $ 1.30      $ 0.96  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted earnings per share
   $ 0.65      $ 0.51      $ 1.29      $ 0.94  
  
 
 
    
 
 
    
 
 
    
 
 
 
Adoption of New Accounting Standards and Related Accounting Policies
On January 1, 2023, the Company adopted
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 adoption of this accounting guidance did not have a material impact on the Company’s Consolidated Financial Statements.
On January 1, 2023, the Company adopted
ASU
2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326)
. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and
held-to-maturity
debt securities, and some
off-balance
sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses (“ACL”).
 
10

The Company adopted ASC 326, and all related subsequent amendments thereto, using the modified retrospective approach for all financial assets measured at amortized cost and
off-balance
sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $1.8 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $1.4 million, which is recorded within other liabilities. Additionally, the Company recorded an allowance for credit losses for held to maturity securities of $110,000, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net increase to retained earnings of $334,000 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).
The following accounting policies have been updated/implemented in connection with the adoption of CECL and should be read in conjunction with the significant accounting policies contained in our 2022 Form
10-K
filed on March 24, 2023.
 
   
Allowance for Credit Losses on Loans
The ACL on loans represents the Company’s estimate of expected lifetime credit losses for its loans at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio as of the date of the consolidated statements of financial condition. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. Amortized cost does not include accrued interest, which management elected to exclude for the estimate of expected credit losses. The ACL on loans is increased by the provision for credit losses on loans, which is charged against current period operating results, and decreased by reversals of credit loss provisions as well as loan charge-offs, net of recoveries.
Management’s determination of the ACL on loans is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. Loans with similar risk characteristics are collectively assessed within pools (or segments).
The discounted cash flow (“DCF”) method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows for each individual loan and discounting them back to their present value using the loan’s contractual interest rate, which is adjusted for any net deferred fees, costs, premiums, or discounts existing at the loan’s origination or acquisition date (also referred to as the effective interest rate). The DCF method also considers factors such as loan term, prepayment or curtailment assumptions, and other relevant economic factors that could affect future cash flows. By discounting the cash flows, the method incorporates the time value of money and reflects the credit risk inherent in the loan.
The Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following
one-year
period. The Company considers economic forecasts of national gross domestic product, unemployment rates from the Federal Open Market Committee, and the House Price Index to inform the model for loss estimation. Historical loss rates used in the quantitative model were derived using both the Bank’s and peer bank data obtained from publicly-available sources.
Additionally, management considers qualitative and environmental factors that are likely to cause estimated credit losses within the Company’s existing portfolio to differ from historical loss (or peer) experience. Qualitative and environmental factors may include: consideration in trends of delinquencies, nonaccrual loans, and
charged-off
loans; trends in underlying collateral; effects in changes of lending policy and underwriting; regional and local economic trends; and conditions and concentrations of credit.
 
   
Allowance for Credit Losses on
Off-Balance
Sheet Credit Exposures
The Company maintains an ACL on unfunded loan commitments and other
off-balance
sheet credit exposures, if applicable, as part of other liabilities and accrued expenses in the consolidated statements of financial condition. Adjustments to the ACL on
off-balance
sheet credit exposures are made through a charge to provision for credit losses in the Company’s consolidated statements of income. The ACL on unfunded loan commitments is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees.
 
11

   
Allowance for Credit Losses on Available for Sale Securities
For available for sale securities in an unrealized loss position, the Company initially assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost is written down to fair value through income. For available for sale securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists an allowance for credit losses is recorded, through a charge to the provision to credit losses, to the extent that the fair value is less than the amortized cost basis. Accrued interest receivable on available for sale securities is excluded from the estimate of credit losses. The Company did not have any available for sale securities that required an ACL at June 30, 2023.
 
   
Allowance for Credit Losses on Held to Maturity Securities
The Company measures expected credit losses on held to maturity investment securities on a collective basis by major security type. Accrued interest receivable on held to maturity investment securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Changes in the ACL for held to maturity securities are recorded through the provision for credit losses in the consolidated statements of income.
2. INVESTMENT SECURITIES
The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at June 30, 2023 and December 31, 2022.
 
(Dollars in thousands)
   Amortized
Cost
     Gross
Unrealized /
Unrecognized
Gains
     Gross
Unrealized /
Unrecognized
Losses
     Estimated
Fair
Value
 
At June 30, 2023:
           
Mortgage backed securities
   $ 16,849      $ 13      $ (856    $ 16,006  
Government agencies
     29,862        —          (1,001      28,861  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total available for sale securities
   $ 46,711      $ 13      $ (1,857    $ 44,867  
  
 
 
    
 
 
    
 
 
    
 
 
 
Mortgage backed securities
   $ 59,002      $ 34      $ (7,163    $ 51,873  
Government agencies
     3,077        —          (577      2,500  
Corporate bonds
     44,183        —          (4,419      39,764  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total held to maturity securities, net
   $ 106,262      $ 34      $ (12,159    $ 94,137  
  
 
 
    
 
 
    
 
 
    
 
 
 
At December 31, 2022:
           
Mortgage backed securities
   $ 18,629      $ 26      $ (897    $ 17,758  
Government agencies
     29,809        —          (1,043      28,766  
Corporate bonds
     430        58        —          488  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total available for sale securities
   $ 48,868      $ 84      $ (1,940    $ 47,012  
  
 
 
    
 
 
    
 
 
    
 
 
 
Mortgage backed securities
   $ 61,363      $ —        $ (7,647    $ 53,716  
Government agencies
     3,083        —          (627      2,456  
Corporate bonds
     44,420        30        (3,739      40,711  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total held to maturity securities
   $ 108,866      $ 30      $ (12,013    $ 96,883  
  
 
 
    
 
 
    
 
 
    
 
 
 
The Company did not purchase any investment securities during the six months ended June 30, 2023. The Company purchased 8 available for sale securities for $36.0 million and 11 held to maturity securities for $42.8 million during the six months ended June 30, 2022. The Company did not sell any investment securities during the six months ended June 30, 2023 and 2022.
 
12

The following table summarizes the scheduled maturities of our available for sale and held to maturity investment securities as of June 30, 2023.
 
     Available for Sale      Held to Maturity  
(Dollars in thousands)
   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
Less that one year
   $ 16,711      $ 16,404      $ 10,523      $ 10,547  
One to five years
     19,887        19,109        20,626        19,927  
Five to ten years
     —          —          24,178        21,146  
Beyond ten years
     1,589        1,482        20,692        16,475  
Securities not due at a single maturity date
     8,524        7,872        30,243        26,042  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total investment securities
   $ 46,711      $ 44,867      $ 106,262      $ 94,137  
  
 
 
    
 
 
    
 
 
    
 
 
 
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, certain securities are not included in the specific maturity categories above and instead are shown separately as securities not due at a single maturity date.
Management monitors the credit quality of the investment portfolio through the use of credit ratings by major credit agencies and analysis of issuer financial information, if available. Additionally, securities issued by government-sponsored agencies, such as FNMA, FHLMC and SBA, have explicit credit guarantees by the United States Federal Government which protect us from credit losses on the contractual cash flows of the securities. The following table reflects the amortized cost and fair value of available for sale and held to maturity securities as of June 30, 2023, aggregated by credit quality indicators.
 
     Available for Sale      Held to Maturity  
(Dollars in thousands)
   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
Aaa
   $ 29,862      $ 28,861      $ 11,685      $ 9,544  
Aa1/Aa2/Aa3
     —          —          3,077        2,501  
A1/A2
     —          —          7,978        6,583  
BBB
     —          —          1,592        1,213  
Not rated
     16,849        16,006        81,930        74,296  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total investment securities
   $ 46,711      $ 44,867      $ 106,262      $ 94,137  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
13

At June 30, 2023 and December 31, 2022, the Company had 55 securities in an unrealized position. The following table summarizes the unrealized losses for those investment securities, at the respective reporting dates, 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 June 30, 2023:
               
Mortgage backed securities
   $ 796      $ (53   $ 13,009      $ (803   $ 13,805      $ (856
Government agencies
     —          —         28,860        (1,001     28,860        (1,001
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total available for sale securities
   $ 796      $ (53   $ 41,869      $ (1,804   $ 42,665      $ (1,857
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Mortgage backed securities
   $ —        $ —       $ 49,487      $ (7,163   $ 49,487      $ (7,163
Government agencies
     —          —         2,501        (577     2,501        (577
Corporate bonds
     4,546        (222     35,218        (4,197     39,764        (4,419
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total held to maturity securities
   $ 4,546      $ (222   $ 87,206      $ (11,937   $ 91,752      $ (12,159
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
At December 31, 2022:
               
Mortgage backed securities
   $ 10,920      $ (537   $ 4,347      $ (360   $ 15,267      $ (897
Government agencies
     28,765        (1,043     —          —         28,765        (1,043
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total available for sale securities
   $ 39,685      $ (1,580   $ 4,347      $ (360   $ 44,032      $ (1,940
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Mortgage backed securities
   $ 32,271      $ (5,244   $ 21,445      $ (2,403   $ 53,716      $ (7,647
Government agencies
     —          —         2,456        (627     2,456        (627
Corporate bonds
     14,607        (1,143     22,880        (2,596     37,487        (3,739
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total held to maturity securities
   $ 46,878      $ (6,387   $ 46,781      $ (5,626   $ 93,659      $ (12,013
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
At June 30, 2023, management determined that it did not intend to sell any available for sale investment securities with unrealized losses, and it is unlikely that the Company will be required to sell any of those securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized, individually or collectively, on available for sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at June 30, 2023.
The Company measures expected credit losses on held to maturity securities collectively by major security type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions along with reasonable and supportable forecasts. As of June 30, 2023, the Company determined that an allowance for credit losses of $58,000 was required for held to maturity securities. The allowance for credit losses pertained to corporate bonds and was presented as a reduction to the amortized cost of held to maturity securities outstanding.
The following table presents the balance and activity in the allowance for credit losses on held to maturity securities for the three and six months ended June 30, 2023.
 
     June 30, 2023  
(Dollars in thousands)
   Three
Months Ended
     Six
Months Ended
 
Beginning balance
   $ 110      $ —    
Adoption of new accounting standard
     —          110  
Provision for credit losses
     (52      (52
Net charge-offs
     —          —    
  
 
 
    
 
 
 
Balance at June 31, 2023
   $ 58      $ 58  
  
 
 
    
 
 
 
 
14
On a quarterly basis, the Company utilizes a comprehensive risk assessment which includes a rating methodology (PT Score) to identify, measure, and monitor risks associated with our held to maturity loan portfolio. The recovery of provision for credit losses in the second quarter of 2023 was primarily driven by a reduction in the risk of default pertaining to certain securities in the held to maturity portfolio, and was identified as part of the comprehensive quarterly analysis.
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans as of June 30, 2023 and December 31, 2022 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).
 
(Dollars in thousands)
   June 30,
2023
     December 31,
2022
 
Commercial and industrial
   $ 622,270      $ 634,535  
Real estate - other
     856,344        848,241  
Real estate - construction and land
     60,595        63,730  
SBA
     4,936        7,220  
Other
     39,486        39,695  
  
 
 
    
 
 
 
Total loans, gross
     1,583,631        1,593,421  
Deferred loan origination costs, net
     1,637        2,040  
Allowance for credit losses
     (15,722      (17,005
  
 
 
    
 
 
 
Total loans, net
   $ 1,569,546      $ 1,578,456  
  
 
 
    
 
 
 
The Company categorizes its loan portfolio into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:
Special Mention: A Special Mention credit has potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: A Doubtful credit has all the weaknesses inherent in Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually, as part of the above described process, are considered to be pass-rated loans.
 
15

The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of June 30, 2023.
 
     Term Loans by Year of Origination                
(Dollars in thousands)
   2023      2022      2021      Prior      Revolving      Total  
Commercial and industrial
                 
Pass
   $ 28,740      $ 131,962      $ 65,634      $ 94,341      $ 217,469      $ 538,146  
Special mention
     898        39,407        5,778        3,217        34,076        83,376  
Substandard
     —          —          —          748        —          748  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 29,638      $ 171,369      $ 71,412      $ 98,306      $ 251,545      $ 622,270  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Current period gross charge-offs
   $ —        $ —        $ —        $ —        $ 247      $ 247  
Real estate - other
                 
Pass
   $ 13,466      $ 198,796      $ 212,367      $ 314,639      $ 91,640      $ 830,908  
Special mention
     697        3,417        8,570        7,986        —          20,670  
Substandard
     —          —          —          4,766        —          4,766  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 14,163      $ 202,213      $ 220,937      $ 327,391      $ 91,640      $ 856,344  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Current period gross charge-offs
   $ —        $ —        $ —        $ —        $ —        $ —    
Real estate - construction and land
                 
Pass
   $ 2,514      $ 12,309      $ 44,095      $ —        $ —        $ 58,918  
Special mention
     —          —          —          1,677        —          1,677  
Substandard
     —          —          —          —          —          —    
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 2,514      $ 12,309      $ 44,095      $ 1,677      $ —        $ 60,595  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Current period gross charge-offs
   $ —        $ —        $ —        $ —        $ —        $ —    
SBA
                 
Pass
   $ —        $ 770      $ 104      $ 2,988      $ 130      $ 3,992  
Special mention
     —          —          —          147        —          147  
Substandard
     —          —          —          797        —          797  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ —        $ 770      $ 104      $ 3,932      $ 130      $ 4,936  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Current period gross charge-offs
   $ —        $ —        $ —        $ —        $ —        $ —    
Other
                 
Pass
   $ 10      $ 1,708      $ —        $ 35,005      $ 2,763      $ 39,486  
Special mention
     —          —          —          —          —          —    
Substandard
     —          —          —          —          —          —    
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 10      $ 1,708      $ —        $ 35,005      $ 2,763      $ 39,486  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Current period gross charge-offs
   $ —        $ —        $ —        $ —        $ —        $ —    
Total
                 
Pass
   $ 44,730      $ 345,545      $ 322,200      $ 446,973      $ 312,002      $ 1,471,450  
Special mention
     1,595        42,824        14,348        13,027        34,076        105,870  
Substandard
     —          —          —          6,311        —          6,311  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 46,325      $ 388,369      $ 336,548      $ 466,311      $ 346,078      $ 1,583,631  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Current period gross charge-offs
   $ —        $ —        $ —        $ —        $ 247      $ 247  
 
16

The following table reflects the loan portfolio allocated by the Company’s credit quality indicators as of December 31, 2022.
 
(Dollars in thousands)
   Commercial
and
Industrial
     Real Estate
Other
     Real Estate
Construction
and Land
     SBA      Other      Total  
As of December 31, 2022:
                 
Grade:
                 
Pass
   $ 613,395      $ 840,993      $ 62,031      $ 6,132      $ 39,695      $ 1,562,246  
Special Mention
     18,157        2,602        —          490        —          21,249  
Substandard
     2,983        4,646        1,699        598        —          9,926  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 634,535      $ 848,241      $ 63,730      $ 7,220      $ 39,695      $ 1,593,421  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
The increase in loans classified as special mention at June 30, 2023 compared to December 31, 2022 was primarily the result of certain commercial contractors incurring construction delays and project slowdowns due to an extended and severe winter season. Additionally, certain other commercial loans were classified as special mention due to heightened monitoring in response to current economic and operating trends.
The following table reflects an aging analysis of the loan portfolio by the time past due at June 30, 2023 and December 31, 2022.
 
(Dollars in thousands)
   30 Days      60 Days      90+ Days      Nonaccrual      Current      Total  
As of June 30, 2023:
                 
Commercial and industrial
   $ 493      $ —        $ —        $ —        $ 621,777      $ 622,270  
Real estate - other
     —          —          —          —          856,344        856,344  
Real estate - construction and land
     —          —          —          —          60,595        60,595  
SBA
     —          —          —          181        4,755        4,936  
Other
     —          —          —          —          39,486        39,486  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total loans, gross
   $ 493      $ —        $ —        $ 181      $ 1,582,957      $ 1,583,631  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2022:
                 
Commercial and industrial
   $ —        $ —        $ —        $ 1,028      $ 633,507      $ 634,535  
Real estate - other
     3,160        —          —          —          845,081        848,241  
Real estate - construction and land
     —          —          —          —          63,730        63,730  
SBA
     —          —          —          222        6,998        7,220  
Other
     —          —          —          —          39,695        39,695  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total loans, gross
   $ 3,160      $ —        $ —        $ 1,250      $ 1,589,011      $ 1,593,421  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
17

The Company measures expected credit losses on a pooled basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.
As of June 30, 2023 and December 31, 2022, the Company determined that certain loans did not share risk characteristics with other loans in the portfolio and therefore evaluated these loans for expected credit losses/impairment on an individual basis. The loans individually evaluated were classified as nonaccrual and were all collateral dependent. For collateral dependent loans, the Company has adopted the practical expedient under ASC 326 to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. None of the individually evaluated loans required an allowance for credit losses as of the respective reporting dates.
The following table reflects the recorded investment and unpaid principal balance for loans individually evaluated for expected credit losses/impairment as of June 30, 2023 and December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
 
(Dollars in thousands)
   Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
 
As of June 30, 2023:
        
SBA
   $ 181      $ 856      $ 202  
  
 
 
    
 
 
    
 
 
 
Total individually evaluated loans
   $ 181      $ 856      $ 202  
  
 
 
    
 
 
    
 
 
 
As of December 31, 2022:
        
Commercial and industrial
   $ 1,028      $ 1,678      $ 1,028  
SBA
     222        896        227  
  
 
 
    
 
 
    
 
 
 
Total individually evaluated loans
   $ 1,250      $ 2,574      $ 1,255  
  
 
 
    
 
 
    
 
 
 
The recorded investment in loans individually evaluated for expected credit losses/impairment excludes interest receivable and net deferred origination costs due to their immateriality.
The following table reflects the amortized cost of individually evaluated loans by type of collateral as of June 30, 2023 and December 31, 2022.
 
(Dollars in thousands)
   Residential
Property
     Business
Assets
     Total
Nonaccrual
Loans
 
As of June 30, 2023:
        
SBA
   $ 181      $ —        $ 181  
  
 
 
    
 
 
    
 
 
 
Total individually evaluated loans
   $ 181      $ —        $ 181  
  
 
 
    
 
 
    
 
 
 
As of December 31, 2022:
        
Commercial and industrial
   $ —        $ 1,028      $ 1,028  
SBA
     222        —          222  
  
 
 
    
 
 
    
 
 
 
Total individually evaluated loans
   $ 222      $ 1,028      $ 1,250  
  
 
 
    
 
 
    
 
 
 
 
18

The following table reflects nonaccrual loans and the related allowance for credit losses by portfolio segment as of June 30, 2023 under ASC 326 and nonaccrual loans as of December 31, 2022 under the previous accounting standard, respectively.
 
                          Incurred Loss  
     CECL      December 31,
2022
 
   June 30, 2023  
(Dollars in thousands)
   Nonaccrual
Loans with No
Allowance
     Nonaccrual
Loans with an
Allowance
     Total
Nonaccrual
Loans
     Nonaccrual
Loans
 
Commercial and industrial
   $ —        $ —        $ —        $ 1,028  
SBA
     181        —          181        222  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total individually evaluated loans
   $ 181      $ —        $ 181      $ 1,250  
  
 
 
    
 
 
    
 
 
    
 
 
 
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following table reflects information related to loans individually and collectively evaluated for impairment and related allowance for loan losses as of December 31, 2022.
 
(Dollars in thousands)
   Commercial
and
Industrial
     Real Estate
Other
     Real Estate
Construction
and Land
     SBA      Other      Total  
As of December 31, 2022:
                 
Gross loans:
                 
Loans individually evaluated for impairment
   $ 1,028      $ —        $ —        $ 222      $ —        $ 1,250  
Loans collectively evaluated for impairment
     633,507        848,241        63,730        6,998        39,695        1,592,171  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total gross loans
   $ 634,535      $ 848,241      $ 63,730      $ 7,220      $ 39,695      $ 1,593,421  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Allowance for loan losses:
                 
Loans individually evaluated for impairment
   $ —        $ —        $ —        $ —        $ —        $ —    
Loans collectively evaluated for impairment
     10,620        5,322        884        132        47        17,005  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total allowance for loan losses
   $ 10,620      $ 5,322      $ 884      $ 132      $ 47      $ 17,005  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Interest forgone on nonaccrual loans totaled $46,000 and $18,000 for the three months ended June 30, 2023 and 2022, respectively. Interest forgone on nonaccrual loans totaled $88,000 and $35,000 for the six months ended June 30, 2023 and 2022, respectively. There was
no
interest recognized on a cash-basis on loans individually evaluated for expected credit losses/impairment during the three and six months ended June 30, 2023 and 2022 under ASC 326 and the previous accounting standard, respectively.
The following tables reflect the changes in, and allocation of, the allowance for credit losses and allowance for loan losses by portfolio segment for the three and six months ended June 30, 2023 and 2022. The provision for credit losses of $340,000 for the second quarter of 2023 was primarily the result of changes in the forecast assumptions utilized in the CECL model. In addition to changes in forecast assumptions, the provision for credit losses of $804,000 for the six months ended June 30, 2023 was impacted by the recognition of net charge-offs of $247,000 during the first quarter of 2023.
 
19

(Dollars in thousands)
   Commercial
and
Industrial
    Real Estate
Other
    Real Estate
Construction
and Land
    SBA     Other     Total  
Three months ended June 30, 2023:
            
Beginning balance
   $ 10,719     $ 2,943     $ 743     $ 42     $ 935     $ 15,382  
Provision for credit losses
     84       27       (6     (2     237       340  
Charge-offs
     —         —         —         —         —         —    
Recoveries
     —         —         —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 10,803     $ 2,970     $ 737     $ 40     $ 1,172     $ 15,722  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Alowance for credit losses / gross loans
     1.74     0.35     1.22     0.81     2.97     0.99
Net recoveries (charge-offs) / gross loans
     0.00     0.00     0.00     0.00     0.00     0.00
Three months ended June 30, 2022:
            
Beginning balance
   $ 8,876     $ 5,080     $ 783     $ 283     $ 10     $ 15,032  
Provision for loan losses
     650       163       124       (10     (2     925  
Charge-offs
     —         —         —         —         —         —    
Recoveries
     —         —         —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 9,526     $ 5,243     $ 907     $ 273     $ 8     $ 15,957  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Alowance for loan losses / gross loans
     1.62     0.66     1.44     2.05     0.02     1.06
Net recoveries (charge-offs) / gross loans
     0.00     0.00     0.00     0.00     0.00     0.00
Six months ended June 30, 2023
            
Beginning balance
   $ 10,620     $ 5,322     $ 884     $ 132     $ 47     $ 17,005  
Adoption of new accounting standard
     (1,566     (1,725     1       (91     1,541       (1,840
Provision for credit losses
     1,996       (627     (148     (1     (416     804  
Charge-offs
     (247     —         —         —         —         (247
Recoveries
     —         —         —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 10,803     $ 2,970     $ 737     $ 40     $ 1,172     $ 15,722  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Alowance for credit losses / gross loans
     1.74     0.35     1.22     0.81     2.97     0.99
Net recoveries (charge-offs) / gross loans
     -0.04     0.00     0.00     0.00     0.00     -0.02
Six months ended June 30, 2022
            
Beginning balance
   $ 8,552     $ 4,524     $ 681     $ 309     $ 15     $ 14,081  
Provision for loan losses
     973       719       226       (36     (7     1,875  
Charge-offs
     —         —         —         —         —         —    
Recoveries
     1       —         —         —         —         1  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 9,526     $ 5,243     $ 907     $ 273     $ 8     $ 15,957  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Alowance for loan losses / gross loans
     1.62     0.66     1.44     2.05     0.02     1.06
Net recoveries (charge-offs) / gross loans
     0.00     0.00     0.00     0.00     0.00     0.00
 
20
Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, therefore a change to the allowance for credit losses is generally not recorded upon modification.
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction or principal forgiveness, may be granted. Upon the Company’s determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of that loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
At June 30, 2023, the Company had one loan with a recorded investment or commitment with terms that had been modified due to the borrower experiencing financial difficulties. This loan had no payments that were considered past due as of the reporting date. The following table reflects the type of concession granted and the financial effect of the modification.
 
(Dollars in thousands)
   Amortized
Cost
     % of Total
Portfolio
Segment
   
Financial Effect
SBA
   $ 51        0.01  
Term Extension - extended
forbearance expiration from March 31,
2023 to July 1, 2023
  
 
 
      
Total modified loans
   $ 51       
  
 
 
      
The Company had no loan modifications resulting from a borrower experiencing financial difficulties with a subsequent payment default within twelve months following the modification during the three and six months ended June 30, 2023.
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 June 30, 2023, amounts pledged and available borrowing capacity under such limits were approximately $434.4 million and $344.8 million, respectively. At December 31, 2022, amounts pledged and available borrowing capacity under such limits were approximately $484.1 million and $393.0 million, respectively.
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 June 30, 2023, amounts pledged and available borrowing capacity under such limits were approximately $451.3 million and $411.3 million, respectively. At December 31, 2022, amounts pledged and available borrowing capacity under such limits were approximately $386.1 million and $335.1 million, respectively. In March 2023, the Company secured a $25.0 million FHLB short term borrowing maturing on April 3, 2023 at a fixed rate of 5.11%. This FHLB short term borrowing was paid in full at maturity. Also, in March 2023, the Company secured a $50.0 million FHLB short term borrowing maturing on May 1, 2023 at a fixed rate of 5.02%. This FHLB short term borrowing was paid in full at maturity.
Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to $98.0 million. There were no borrowings outstanding under these arrangements at June 30, 2023 and December 31, 2022.
 
21

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 June 30, 2023 and December 31, 2022, no borrowings were outstanding under this line of credit.
The Company entered into a three-year borrowing arrangement with a correspondent bank on April 27, 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 June 30, 2023 and December 31, 2022.
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 June 30, 2023 and December 31, 2022, the balance remained at $20.0 million, net of the remaining unamortized issuance cost.
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 June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, the Company had outstanding unfunded commitments for loans of approximately $601.7 million and $644.1 million, respectively.
The outstanding unfunded commitments for loans at June 30, 2023 was comprised of fixed rate commitments of approximately $43.8 million and variable rate commitments of approximately $557.9 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan commitments as of June 30, 2023.
 
(Dollars in thousands)
   Due in
One Year
Or Less
     Over One
Year But
Less Than
Five Years
     Over
Five Years
     Total  
Unfunded fixed rate loan commitments:
           
Interest rate less than or equal to 4.00%
   $ 18,141      $ 4,203      $ 4,369      $ 26,713  
Interest rate between 4.00% and 5.00%
     —          7,437        107        7,544  
Interest rate greater than or equal to 5.00%
     4,087        2,566        2,871        9,524  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total unfunded fixed rate loan commitments
   $ 22,228      $ 14,206      $ 7,347      $ 43,781  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
22

The Company records an allowance for credit losses on
off-balance
sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s income statements. The allowance for credit losses on
off-balance
sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for credit losses related to unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets and was $1.9 million and $430,000 at June 30, 2023 and December 31, 2022, respectively.
The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2023.
 
     June 30, 2023  
(Dollars in thousands)
   Three
Months Ended
     Six
Months Ended
 
Beginning balance
   $ 1,721      $ 430  
Adoption of new accounting standard
     —          1,397  
Provision for credit losses
     156        50  
  
 
 
    
 
 
 
Balance at June 30, 2023
   $ 1,877      $ 1,877  
  
 
 
    
 
 
 
Operating Leases
The Company leases various office premises under long-term operating lease agreements. These leases expire between 2023 and 2030, 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 six months ended, and as of, June 30, 2023.
 
(Dollars in thousands)
   June 30,
2023
 
Operating lease cost (cost resulting from lease payments)
   $ 981  
Operating lease - operating cash flows (fixed payments)
   $ 787  
Operating lease
right-of-use
assets (other assets)
   $ 9,712  
Operating lease liabilities (other liabilities)
   $ 11,348  
Weighted average lease term - operating leases
     4.5 years  
Weighted average discount rate - operating leases
     4.55
 
23

The following table reflects the minimum commitments under these
non-cancellable
leases, before considering renewal options, as of June 30, 2023.
 
(Dollars in thousands)
   June 30,
2023
 
2023
   $ 866  
2024
     2,414  
2025
     2,486  
2026
     2,451  
2027
     1,402  
Thereafter
     3,140  
  
 
 
 
Total undiscounted cash flows
     12,759  
Discount on cash flows
     (1,411
  
 
 
 
Total lease liability
   $ 11,348  
  
 
 
 
Rent expense included in premises and equipment expense totaled $493,000 and $486,000 for the three months ended June 30, 2023 and 2022, respectively. Rent expense included in premises and equipment expense totaled $981,000 and $983,000 for the six months ended June 30, 2023 and 2022, 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 June 30, 2023, uninsured deposits at financial institutions were approximately $2.2 million. At December 31, 2022, uninsured deposits at financial institutions were approximately $2.9 million.
6. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:
Level 1 - Quoted market prices for identical instruments traded in active exchange markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
 
24

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
The carrying amounts and estimated fair values of financial instruments at June 30, 2023 and December 31, 2022 are as follows:
 
     Carrying
Amount
     Fair Value Measurements  
(Dollars in thousands)
   Level 1      Level 2      Level 3      Total  
As of June 30, 2023:
              
Financial assets:
              
Cash and cash equivalents
   $ 207,667      $ 207,667      $ —        $ —        $ 207,667  
Investment securities:
              
Available for sale
     44,867        —          44,687        —          44,687  
Held to
m
aturity
     106,262           86,750        7,387        94,137  
Loans, net
     1,569,546        —          —          1,503,599        1,503,599  
Accrued interest receivable
     7,289        —          957        6,292        7,249  
Financial liabilities:
              
Deposits
   $ 1,738,296      $ 1,405,104      $ 333,711      $ —        $ 1,738,815  
Subordinated debt
     54,221        —          —          49,378        49,378  
Accrued interest payable
     4,047        —          3,379        668        4,047  
As of December 31, 2022:
              
Financial assets:
              
Cash and due from banks
   $ 232,382      $ 232,382      $ —        $ —        $ 232,382  
Investment securities:
              
Available for sale
     47,012        —          47,012        —          47,012  
Held to
m
aturity
     108,866           89,433        7,450        96,883  
Loans, net
     1,578,456           —          1,519,903        1,519,903  
Accrued interest receivable
     7,769        —          926        6,843        7,769  
Financial liabilities:
              
Deposits
   $ 1,791,740      $ 1,520,502      $ 271,178      $ —        $ 1,791,680  
Other borrowings
     —          —          —          —          —    
Subordinated debt
     54,152        —          —          49,027        49,027  
Accrued interest payable
     1,678        —          1,007        671        1,678  
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.
 
25

Loans - Fair values of loans for June 30, 2023 and December 31, 2022 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. Loans are generally classified using Level 3 inputs.
Loans individually evaluated for expected credit losses/impairment - Certain loans are individually evaluated on a quarterly basis for additional expected credit losses/impairment and adjusted accordingly. The fair value of loans that are individually evaluated with specific allocations of the allowance for credit 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 individually evaluated 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.
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 by considering recent trading activity of similar instruments in the market, which may be inactive. Accordingly, senior notes are classified within the Level 3 classification.
Junior Subordinated Debt Securities - Fair values for subordinated debt are calculated based on their respective terms and discounted to the date of the valuation. A market rate based on recent debt offerings by peer banks, which may be unobservable, is used to discount the cash flows until the repricing date and the subsequent cash flows are discounted at Prime plus 2%. Additionally, the Company considers recent trading activity of similar instruments in the market, which may be inactive. Accordingly, junior subordinated debt securities 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, as well as considering the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
 
26

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 June 30, 2023 and December 31, 2022.
 
(Dollars in thousands)
   Fair Value      Level 1      Level 2      Level 3  
As of June 30, 2023:
                                   
Investments available for sale:
                                   
Mortgage backed securities
   $ 16,006      $ —        $ 16,006      $ —    
Government agencies
     28,861        —          28,861        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a recurring basis
   $ 44,867      $ —        $ 44,867      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2022:
                                   
Investments available for sale:
                                   
Mortgage backed securities
   $ 17,758      $ —        $ 17,758      $ —    
Government agencies
     28,766        —          28,766        —    
Corporate bonds
     488        —          488        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a recurring basis
   $ 47,012      $ —        $ 47,012      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Fair values for
available-for-sale
investment securities are based on quoted market prices for exact or similar securities. During the periods presented, there were no significant transfers in or out of Levels 1 and 2 and there were no changes in the valuation techniques used. Additionally, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2023 and December 31, 2022.
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 June 30, 2023 and December 31, 2022.
 
     Carrying
Amount
     Fair Value Measurements  
(Dollars in thousands)
   Level 1      Level 2      Level 3  
As of June 30, 2023:
                                   
Individually evaluated loans - SBA
   $ 181      $ —        $ —        $ 181  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a
non-recurring
basis
   $ 181      $ —        $ —        $ 181  
    
 
 
    
 
 
    
 
 
    
 
 
 
As of December 31, 2022:
                                   
Impaired loans - Commercial
   $ 1,028      $ —        $ —        $ 1,028  
Impaired loans - SBA
     222        —          —          222  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets measured at fair value on a
non-recurring
basis
   $ 1,250      $ —        $ —        $ 1,250  
    
 
 
    
 
 
    
 
 
    
 
 
 
The fair value of individually evaluated 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. Level 3 fair value measurement includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and 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 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 individually evaluated loans.
 
2
7


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

The following is a discussion of our financial condition at June 30, 2023 and December 31, 2022 and our results of operations for the three and six months ended June 30, 2023 and 2022, 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, 2022 that was filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2023 (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 June 30, 2023 (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 credit 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, any of which could cause us to incur 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 credit losses and adversely affect our results of operations in the future; changes in prevailing interest rates, which may adversely affect our interest margins, net interest income and the value of our investment securities; the risk that we will not be able to manage our liquidity, interest rate or operational risks effectively, in which event our operating results or financial condition 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. 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 six months ended, and our financial condition at, June 30, 2023.

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.

 

28


Overview

California BanCorp (the “Company,” “we” or “us”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”). The Bank has 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, 2022, 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.

Results of Operations – Three Months Ended June 30, 2023 and 2022:

Overview

For the three months ended June 30, 2023 and June 30, 2022, net income was $5.4 million and $4.2 million, respectively, representing an increase of $1.2 million, or 28%. Compared to the same period last year, net interest income after the provision for credit losses increased by $2.9 million, which was offset by a decrease in non-interest income of $259,000, an increase in non-interest expense of $784,000 and an increase in the provision for income taxes of $665,000.

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 June 30, 2023, was $18.6 million, an increase of $2.4 million, or 15% from $16.2 million for the same period in 2022. 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. Net interest margin increased by 28 basis points to 3.93% for the three months ended June 30, 2023, compared to 3.65% for the three months ended June 30, 2022.

Average total interest-earning assets were $1.90 billion in the second quarter of 2023 compared to $1.78 billion for the same period during 2022. The increase in total interest-earning assets was primarily due to growth of the loan portfolio. For the quarter ended June 30, 2023, the yield on average earning assets increased 175 basis points to 5.73% from 3.98% for the quarter ended June 30, 2022. The yield on total average gross loans in the three months ended June 30, 2023 was 5.97%, representing an increase of 151 basis points compared to 4.46% in the same period one year earlier. For the three months ended June 30, 2023 compared to the same period in 2022, the yield on average federal funds sold increased 449 basis points to 5.26% from 0.77%, and the yield on average investment securities increased 121 basis points to 3.83% from 2.62%.

For the three months ended June 30, 2023, average loans increased $112.6 million, or 8%, from the quarter ended June 30, 2022 while average interest-bearing deposit balances increased $132.9 million, or 16%, from the same quarter in the prior year. Average non-interest bearing deposits for the second quarter of 2023 decreased $16.3 million, or 2%, from the same period in the prior year. The average loan to deposit ratio for the second quarter of 2023 was 93.68% compared to 93.46% for the second quarter of 2022.

 

29


Of the $112.6 million increase in average loan balances year over year, average commercial and real estate loans increased by $50.8 million and $85.6 million, respectively, as a result of organic growth. These increases were offset by a decrease in average SBA loans of $21.4 million primarily due to PPP loan forgiveness and a decrease in other loans of $2.4 million.

Of the $132.9 million increase in average interest-bearing deposit balances year over year, $172.4 million was attributable to time deposits, offset by a decrease in money market and savings accounts of $27.5 million, and a decrease in demand accounts of $12.0 million. The cost of interest-bearing deposits was 3.11% during the quarter ended June 30, 2023 compared to 0.38% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances increased by 158 basis points to 1.78% in the second quarter of 2023 compared to 0.20% in the second quarter of 2022.

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 June 30, 2023 and 2022.

 

     Three months ended June 30,  
     2023      2022  
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
 

ASSETS

               

Interest earning assets:

               

Loans (1)

   $ 1,577,529        5.97   $ 23,476      $ 1,464,922        4.46   $ 16,298  

Federal funds sold

     170,608        5.26     2,238        145,329        0.77     280  

Investment securities

     152,781        3.83     1,458        172,766        2.62     1,128  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest earning assets

     1,900,918        5.73     27,172        1,783,017        3.98     17,706  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-earning assets:

               

Cash and due from banks

     19,207             19,735       

All other assets (2)

     63,752             61,444       
  

 

 

         

 

 

      

TOTAL

   $ 1,983,877           $ 1,864,196       
  

 

 

         

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Interest-bearing liabilities:

               

Deposits:

               

Demand

   $ 30,346        0.16     12      $ 42,380        0.08   $ 8  

Money market and savings

     609,200        2.50     3,793        636,692        0.37     582  

Time

     326,291        4.53     3,688        153,859        0.54     206  

Other

     90,188        4.59     1,033        119,970        2.30     687  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     1,056,025        3.24     8,526        952,901        0.62     1,483  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-bearing liabilities:

               

Demand deposits

     718,171             734,481       

Accrued expenses and other liabilities

     26,441             19,139       

Shareholders’ equity

     183,240             157,675       
  

 

 

         

 

 

      

TOTAL

   $ 1,983,877           $ 1,864,196       
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income and margin (3)

        3.93   $ 18,646           3.65   $ 16,223  
     

 

 

   

 

 

       

 

 

   

 

 

 

 

(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 (costs) fees of $(175,000) and $83,000, respectively.

(2)

Other noninterest-earning assets includes the allowance for credit losses of $15.4 million and $15.0 million, respectively.

(3)

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

 

30


The following table shows the effect of the interest differential of volume and rate changes for the quarters ended June 30, 2023 and 2022. 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 June 30,  
     2023 vs. 2022  
     Increase (Decrease) Due to  
     Change in:  
     Average      Average      Net  

(Dollars in thousands)

   Volume      Rate      Change  

Interest income:

        

Loans

   $ 1,676      $ 5,502      $ 7,178  

Federal funds sold

     332        1,626        1,958  

Investment securities

     (191      521        330  

Interest expense:

        

Deposits

        

Demand

     (5      9        4  

Money market and savings

     (171      3,382        3,211  

Time

     1,949        1,533        3,482  

Other borrowings

     (341      687        346  
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 385      $ 2,038      $ 2,423  
  

 

 

    

 

 

    

 

 

 

Interest Income

Interest income increased by $9.5 million in the second quarter of 2023 compared to the same period of 2022, 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 June 30, 2023 and June 30, 2022 was 8.25% and 4.75%, respectively. Interest earned on our loan portfolio of $23.5 million in the second quarter of 2023 represented an increase of $7.2 million, or 44%, compared to $16.3 million for the second quarter of 2022.

Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on federal funds sold of $2.2 million for the three months ended June 30, 2023 compared to $280,000 for the same period in the prior year. Interest earned on investment securities of $1.5 million for the three months ended June 30, 2023 compared to $1.1 million for the three months ended June 30, 2022.    

Interest Expense

Interest expense increased by $7.1 million in the second quarter of 2023 compared to the same period of 2022, primarily due to the effect of increased rates paid on interest-bearing deposits and other borrowings, combined with a higher level of interest-bearing deposits. The average rate paid on interest-bearing liabilities in the second quarter of 2023 compared to the same period one year earlier increased 262 basis point to 3.24% from 0.62%.

Provision for Credit Losses

The provision for credit losses of $444,000 for the three months ended June 30, 2023 was comprised of $340,000 pertaining to the ACL on loans and $156,000 pertaining to the ACL for unfunded loan commitments, partially offset by a release of reserves pertaining to the ACL for held to maturity securities of $52,000.

The provision for credit losses on loans of $444,000 for the second quarter of 2023 compared to a provision for loan losses of $925,000 for the second quarter of 2022. The Company had no loan charge-offs or recoveries during the second quarters of 2023 and 2022. The allowance for credit losses on loans as a percentage of outstanding loans was 0.99% at June 30, 2023 and 1.07% at December 31, 2022. On January 1, 2023, the Company adopted the current expected losses (CECL) accounting standard (ASC 326). The Company’s allowance for credit losses on loans was 0.95% upon adoption of the standard on January 1, 2023.

 

31


Non-interest Income

The following table reflects the major components of the Company’s non-interest income for the three months ended June 30, 2023 and 2022.

 

     Three Months Ended
June 30,
     Increase (Decrease)  

(Dollars in thousands)

   2023      2022      Amount      Percent  

Service charges and other fees

   $ 867      $ 1,134      $ (267      -24

Gain on sale of loans

     —          —          —          0

Earnings on BOLI

     177        165        12        7

Other

     91        95        (4      -4
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 1,135      $ 1,394      $ (259      -19
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income decreased by $259,000, or 19% in the second quarter of 2023, compared to the second quarter of 2022. The decrease was primarily due to a decrease in service charges and other fee income related to fewer prepayment penalties assessed on loans.

Non-interest Expense

The following table reflects the major components of the Company’s non-interest expense for the three months ended June 30, 2023 and 2022.

 

     Three Months Ended
June 30,
     Increase (Decrease)  

(Dollars in thousands)

   2023      2022      Amount      Percent  

Salaries and benefits

   $ 7,831      $ 7,146      $ 685        10

Premises and equipment

     1,168        1,267        (99      -8

Professional fees

     470        547        (77      -14

Data processing

     701        599        102        17

Other

     1,433        1,260        173        14
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 11,603      $ 10,819      $ 784        7
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense was $11.6 million and $10.8 million for the three months ended June 30, 2023 and 2022, respectively. Excluding capitalized loan origination costs, non-interest expense for the second quarter of 2023 was $12.3 million compared to $11.9 million for the second quarter of 2022, representing an increase of $405,000, or 3%. The increase in non-interest expense, excluding capitalized origination costs, from the second quarter of 2022 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 June 30, 2023 and 2022, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 58.66% and 61.41%, respectively.

Provision for Income Taxes

Income tax expense was $2.3 million for the second quarter of 2023 compared to $1.6 million for the same period in prior year. The effective tax rates for those time periods were 29.7% and 27.7%, respectively.

 

32


Results of Operations – Six Months Ended June 30, 2023 and 2022:

Overview

For the six months ended June 30, 2023 and June 30, 2022, net income was $10.9 million and $7.9 million, respectively, representing an increase of $3.0 million, or 38%. Compared to the same period last year, net interest income after the provision for credit losses increased by $7.7 million, which was offset by a decrease in non-interest income of $1.7 million, an increase in non-interest expense of $1.7 million and an increase in the provision for income taxes of $1.3 million.

Net Interest Income and Margin

Net interest income for the six months ended June 30, 2023, was $37.4 million, an increase of $6.7 million, or 22% from $30.7 million for the same period in 2022. 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. Net interest margin increased by 56 basis points to 3.98% for the six months ended June 30, 2023, compared to 3.42% for the six months ended June 30, 2022.

Average total interest-earning assets were $1.90 billion in the six months ended June 30, 2023 compared to $1.81 billion for the same period during 2022. The increase in total interest-earning assets was primarily due to growth of the loan portfolio. For the six months ended June 30, 2023, the yield on average earning assets increased 186 basis points to 5.60% from 3.74% for the six months ended June 30, 2022. The yield on total average gross loans for the six months ended June 30, 2023 was 5.86%, representing an increase of 143 basis points compared to 4.43% in the same period one year earlier. For the six months ended June 30, 2023 compared to the same period in 2022, the yield on federal funds sold increased 458 basis points to 4.92 % from 0.34%, and the yield on average investment securities increased 92 basis points to 3.63% from 2.71%.

For the six months ended June 30, 2023, average loans increased $161.6 million, or 11%, from the six months ended June 30, 2022 while average interest-bearing deposit balances increased $96.8 million, or 11%, from the same period in the prior year. Average non-interest bearing deposits for the first six months of 2023 decreased $14.4 million, or 2%, from the same period in the prior year. The average loan to deposit ratio for the six months ended June 30, 2023 was 93.38% compared to 88.12% for the six months ended June 30, 2022.

Of the $161.6 million increase in average loan balances year over year, average commercial and real estate loans increased by $100.3 million and $119.9 million, respectively, as a result of organic growth. These increases were offset by a decrease in average SBA loans of $38.1 million primarily due to PPP loan forgiveness and a decrease in other loans of $20.5 million primarily due to the sale of a portion of our solar loan portfolio.

Of the $96.8 million increase in average interest-bearing deposit balances year over year, $166.7 million was attributable to time deposits, offset by a decrease in money market and savings accounts of $61.8 million, and a decrease in demand accounts of $8.1 million. The cost of interest-bearing deposits was 2.81% during the six months ended June 30, 2023 compared to 0.37% for the same period one year earlier. In addition, the overall cost of average total deposit balances increased by 141 basis points to 1.61% during the six months ended June 30, 2023 compared to 0.20% during the six months ended June 30, 2022.

 

33


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 six months ended June 30, 2023 and 2022.

 

     Six months ended June 30,  
     2023      2022  
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
     Average
Balance
     Yields
or
Rates
    Interest
Income/
Expense
 

ASSETS

               

Interest earning assets:

               

Loans (1)

   $ 1,579,917        5.86   $ 45,948      $ 1,418,314        4.43   $ 31,184  

Federal funds sold

     163,812        4.92     3,998        244,809        0.34     416  

Investment securities

     153,719        3.63     2,765        151,324        2.71     2,030  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest earning assets

     1,897,448        5.60     52,711        1,814,447        3.74     33,630  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-earning assets:

               

Cash and due from banks

     18,656             19,244       

All other assets (2)

     63,003             62,500       
  

 

 

         

 

 

      

TOTAL

   $ 1,979,107           $ 1,896,191       
  

 

 

         

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Interest-bearing liabilities:

               

Deposits:

               

Demand

   $ 32,179        0.12     19      $ 40,300        0.09     17  

Money market and savings

     617,885        2.25     6,897        679,662        0.37     1,247  

Time

     318,313        4.18     6,599        151,588        0.45     338  

Other

     80,701        4.48     1,793        110,370        2.34     1,279  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     1,049,078        2.94     15,308        981,920        0.59     2,881  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest-bearing liabilities:

               

Demand deposits

     723,548             737,928       

Accrued expenses and other liabilities

     26,383             20,724       

Shareholders’ equity

     180,098             155,619       
  

 

 

         

 

 

      

TOTAL

   $ 1,979,107           $ 1,896,191       
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income and margin (3)

        3.98   $ 37,403           3.42   $ 30,749  
     

 

 

   

 

 

       

 

 

   

 

 

 

 

(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 (costs) fees of $(401,000) and $402,000, respectively.

(2)

Other noninterest-earning assets includes the allowance for credit losses of $16.2 million and $14.6 million, respectively.

(3)

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

 

34


The following table shows the effect of the interest differential of volume and rate changes for the six months ended June 30, 2023 and 2022. 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.

 

     Six Months Ended June 30,  
     2023 vs. 2022  
     Increase (Decrease) Due to  
     Change in:  
     Average      Average      Net  

(Dollars in thousands)

   Volume      Rate      Change  

Interest income:

        

Loans

   $ 4,700      $ 10,064      $ 14,764  

Federal funds sold

     (1,977      5,559        3,582  

Investment securities

     43        692        735  

Interest expense:

        

Deposits

        

Demand

     (5      7        2  

Money market and savings

     (690      6,340        5,650  

Time

     3,456        2,805        6,261  

Other borrowings

     (659      1,173        514  
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 664      $ 5,990      $ 6,654  
  

 

 

    

 

 

    

 

 

 

Interest Income

Interest income increased by $19.1 million for the six months ended June 30, 2023 compared to the same period of 2022, 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 June 30, 2023 and June 30, 2022 was 8.25% and 4.75%, respectively. The average prime rate for the six months ended June 30, 2023 and 2022 was 7.92% and 3.62%, respectively. Interest earned on our loan portfolio of $45.9 million for the six months ended June 30, 2023 represented an increase of $14.7 million, or 47%, compared to $31.2 million for the same period in 2022.

Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on federal funds sold of $4.0 million for the six months ended June 30, 2023 compared to $416,000 for the same period in the prior year. Interest earned on investment securities of $2.8 million for the six months ended June 30, 2023 compared to $2.0 million for the same period in the prior year.    

Interest Expense

Interest expense increased by $12.4 million for the six months ended June 30, 2023 compared to the same period of 2022, primarily due to the effect of increased rates paid on interest-bearing deposits and other borrowings, combined with a higher level of interest-bearing deposits. The average rate paid on interest-bearing liabilities for the six months ended June 30, 2023 compared to the same period one year earlier increased 235 basis point to 2.94% from 0.59%.

Provision for Credit Losses

The provision for credit losses of $802,000 for the six months ended June 30, 2023 was comprised of $804,000 pertaining to the ACL on loans and $50,000 pertaining to the ACL for unfunded loan commitments, partially offset by a release of reserves pertaining to the ACL for held to maturity securities of $52,000.

The provision for credit losses on loans of $802,000 for the six months ended June 30, 2023 compared to a provision for loan losses of $1.9 million for the same period in the prior year. The Company had net loan charge-offs of $247,000 and net loan recoveries of $1,000 during the first half 2023 and 2022, respectively. The allowance for credit losses on loans as a percentage of outstanding loans was 0.99% at June 30, 2023 and 1.07% at December 31, 2022. On January 1, 2023, the Company adopted the current expected losses (CECL) accounting standard (ASC 326). The Company’s allowance for credit losses on loans was 0.95% upon adoption of the standard on January 1, 2023.

 

35


Noninterest Income

The following table reflects the major components of the Company’s noninterest income for the six months ended June 30, 2023 and 2022.

 

     Six Months Ended
June 30,
     Increase (Decrease)  

(Dollars in thousands)

   2023      2022      Amount      Percent  

Service charges and other fees

   $ 1,730      $ 2,023      $ (293      -14

Gain on sale of SBA loans

     —          1,393        (1,393      100

Earnings on BOLI

     349        330        19        6

Other

     163        182        (19      -10
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 2,242      $ 3,928      $ (1,686      -43
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income decreased by $1.7 million, or 43%, for the six months ended June 30, 2023, compared to the six months ended of 2022. The decrease was primarily attributable to a gain of $1.4 million recognized on the sale of a portion of our solar loan portfolio in the prior year and a decrease of $293,000 pertaining to service charges and other fees.

Noninterest Expense

The following table reflects the major components of the Company’s noninterest expense for the six months ended June 30, 2023 and 2022.

 

     Six Months Ended
June 30,
     Increase (Decrease)  

(Dollars in thousands)

   2023      2022      Amount      Percent  

Salaries and benefits

   $ 15,707      $ 14,239      $ 1,468        10

Premises and equipment

     2,348        2,569        (221      -9

Professional fees

     920        1,139        (219      -19

Data processing

     1,309        1,207        102        8

Other

     3,162        2,581        581        23
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 23,446      $ 21,735      $ 1,711        8
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense was $23.4 million and $21.7 million for the six months ended June 30, 2023 and 2022, respectively. Excluding capitalized loan origination costs, non-interest expense for the six months ended June 30, 2023 was $24.8 million compared to $23.8 million for the six months ended June 30, 2022, representing an increase of $1.0 million, or 4%.

Salaries and benefits for the six months ended June 30, 2023 were $15.7 million, representing an increase of $1.5 million, or 10%, compared to $14.2 million for the six months ended June 30, 2022. The increase in salaries and benefits expense was primarily due to an increase in salaries and benefits related to investments to support the continued growth of the business combined with a reduction in capitalized loan origination costs.

For the six months ended June 30, 2023 and 2022, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 59.14% and 62.68%, respectively.

Provision for Income Taxes

Income tax expense was $4.5 million and $3.2 million for the six months ended June 30, 2023 and 2022. The effective tax rates for those time periods were 29.3% and 28.5%, respectively.

 

36


Financial Condition:

Overview

Total assets of the Company were $2.01 billion as of June 30, 2023 compared to $2.04 billion as of December 31, 2022. The decrease in total assets from year-end was primarily due to slower loan growth and decreased liquidity related to the seasonal outflow of deposits that occurs at the beginning of the year for many of our business clients combined with a reduction in other borrowings.

Loan Portfolio

Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances decreased by $9.8 million, or 1%, from December 31, 2022 to June 30, 2023 primarily due to a reduction in the commercial and industrial, construction and land, SBA and other loan portfolios, partially offset by an increase in real estate other loans due to organic growth.

The loan portfolio at June 30, 2023 was comprised of approximately 39% of commercial and industrial loans compared to 40% at December 31, 2022. In addition, commercial real estate loans comprised 58% of our loans at June 30, 2023 and 57% at December 31, 2022. 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 June 30, 2023 and December 31, 2022.

 

(Dollars in thousands)

   June 30,
2023
    December 31,
2022
 

Commercial and industrial

   $ 622,270     $ 634,535  

Real estate - other

     856,344       848,241  

Real estate - construction and land

     60,595       63,730  

SBA

     4,936       7,220  

Other

     39,486       39,695  
  

 

 

   

 

 

 

Total loans, gross

     1,583,631       1,593,421  

Deferred loan origination costs, net

     1,637       2,040  

Allowance for credit losses

     (15,722     (17,005
  

 

 

   

 

 

 

Total loans, net

   $ 1,569,546     $ 1,578,456  
  

 

 

   

 

 

 

Commercial and industrial

     39     40

Real estate - other

     54     53

Real estate - construction and land

     4     4

SBA

     1     1

Other

     2     2
  

 

 

   

 

 

 

Total loans, gross

     100     100
  

 

 

   

 

 

 

 

37


The following table shows the maturity distribution for total loans outstanding as of June 30, 2023. 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.

 

(Dollars in thousands)

   Due in
One Year
Or Less
     Over One
Year But
Less Than
Five Years
     Over Five
Years But
Less Than
Fifteen Years
     Over
Fifteen Years
     Total  

Commercial and industrial

   $ 196,178      $ 310,765      $ 115,327      $ —        $ 622,270  

Real estate - other

     49,770        395,070        400,078        11,426        856,344  

Real estate - construction and land

     50,543        9,032        1,020        —          60,595  

SBA

     461        888        2,768        819        4,936  

Other

     2,811        1,879        —          34,796        39,486  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, gross

   $ 299,763      $ 717,634      $ 519,193      $ 47,041      $ 1,583,631  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Loans With         

(Dollars in thousands)

   Fixed
Rates (1)
     Variable
Rates
     Total  

Commercial and industrial

   $ 175,481      $ 446,789      $ 622,270  

Real estate - other

     570,935        285,409        856,344  

Real estate - construction and land

     3,584        57,011        60,595  

SBA

     402        4,534        4,936  

Other

     36,665        2,821        39,486  
  

 

 

    

 

 

    

 

 

 

Total loans, gross

   $ 787,067      $ 796,564      $ 1,583,631  
  

 

 

    

 

 

    

 

 

 

 

(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 June 30, 2023. 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.

The following table presents information regarding the Company’s nonperforming and modified loans as of June 30, 2023 and December 31, 2022.

 

(Dollars in thousands)

   June 30,
2023
    December 31,
2022
 

Nonaccrual loans

   $ 181     $ 1,250  

Loans over 90 days past due and still accruing

     —         —    
  

 

 

   

 

 

 

Total nonperforming loans

     181       1,250  

Foreclosed assets

     —         —    
  

 

 

   

 

 

 

Total nonperforming assets

   $ 181     $ 1,250  
  

 

 

   

 

 

 

Modified loans

   $ 51     $ —    
  

 

 

   

 

 

 

Nonperforming loans / gross loans

     0.01     0.08

Allowance for credit losses / nonperforming loans

     8686.19     1360.40

 

38


Allowance for Credit Losses

Effective January 1, 2023, the Company adopted the Current Expected Credit Losses (CECL) Methodology for estimating the allowance for credit losses. Our allowance for credit losses is maintained at a level management believes is adequate to account for expected credit losses in the loan portfolio as of the reporting date. We determine the allowance based on a quarterly evaluation of risk.

Our allowance is established through charges to the provision for credit 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 credit 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 credit losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends.

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

 

     Commercial           Real Estate                    
     and     Real Estate     Construction                    

(Dollars in thousands)

   Industrial     Other     and Land     SBA     Other     Total  

Three months ended June 30, 2023:

            

Beginning balance

   $ 10,719     $ 2,943     $ 743     $ 42     $ 935     $ 15,382  

Provision for credit losses

     84       27       (6     (2     237       340  

Charge-offs

     —         —         —         —         —         —    

Recoveries

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,803     $ 2,970     $ 737     $ 40     $ 1,172     $ 15,722  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alowance for credit losses / gross loans

     1.74     0.35     1.22     0.81     2.97     0.99

Net recoveries (charge-offs) / gross loans

     0.00     0.00     0.00     0.00     0.00     0.00

Three months ended June 30, 2022:

            

Beginning balance

   $ 8,876     $ 5,080     $ 783     $ 283     $ 10     $ 15,032  

Provision for loan losses

     650       163       124       (10     (2     925  

Charge-offs

     —         —         —         —         —         —    

Recoveries

     —         —           —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alowance for loan losses / gross loans

     1.62     0.66     1.44     2.05     0.02     1.06

Net recoveries (charge-offs) / gross loans

     0.00     0.00     0.00     0.00     0.00     0.00

 

39


     Commercial           Real Estate                    
     and     Real Estate     Construction                    

(Dollars in thousands)

   Industrial     Other     and Land     SBA     Other     Total  

Six months ended June 30, 2023

            

Beginning balance

   $ 10,620     $ 5,322     $ 884     $ 132     $ 47     $ 17,005  

Adoption of new accounting standard

     (1,566     (1,725     1       (91     1,541       (1,840

Provision for credit losses

     1,996       (627     (148     (1     (416     804  

Charge-offs

     (247     —         —         —         —         (247

Recoveries

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,803     $ 2,970     $ 737     $ 40     $ 1,172     $ 15,722  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alowance for credit losses / gross loans

     1.74     0.35     1.22     0.81     2.97     0.99

Net recoveries (charge-offs) / gross loans

     -0.04     0.00     0.00     0.00     0.00     -0.02

Six months ended June 30, 2022

            

Beginning balance

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

Provision for loan losses

     973       719       226       (36     (7     1,875  

Charge-offs

     —         —         —         —         —         —    

Recoveries

     1       —         —         —         —         1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alowance for loan losses / gross loans

     1.62     0.66     1.44     2.05     0.02     1.06

Net recoveries (charge-offs) / gross loans

     0.00     0.00     0.00     0.00     0.00     0.00

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 re-designated securities consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, 2022. 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.

 

40


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 June 30, 2023 and December 31, 2022.

 

            Gross      Gross         
            Unrealized /      Unrealized /      Estimated  
     Amortized      Unrecognized      Unrecognized      Fair  

(Dollars in thousands)

   Cost      Gains      Losses      Value  

At June 30, 2023:

           

Mortgage backed securities

   $ 16,849      $ 13      $ (856    $ 16,006  

Government agencies

     29,862        —          (1,001      28,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 46,711      $ 13      $ (1,857    $ 44,867  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage backed securities

   $ 59,002      $ 34      $ (7,163    $ 51,873  

Government agencies

     3,077        —          (577      2,500  

Corporate bonds

     44,183        —          (4,419      39,764  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities, net

   $ 106,262      $ 34      $ (12,159    $ 94,137  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2022:

           

Mortgage backed securities

   $ 18,629      $ 26      $ (897    $ 17,758  

Government agencies

     29,809        —          (1,043      28,766  

Corporate bonds

     430        58        —          488  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 48,868      $ 84      $ (1,940    $ 47,012  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage backed securities

   $ 61,363      $ —        $ (7,647    $ 53,716  

Government agencies

     3,083        —          (627      2,456  

Corporate bonds

     44,420        30        (3,739      40,711  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 108,866      $ 30      $ (12,013    $ 96,883  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company adopted ASC 326 on January 1, 2023 and, as a result, records an allowance for credit losses on investment securities. No allowances for credit losses have been recognized, individually or collectively, on available for sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at June 30, 2023. As of June 30, 2023, the Company determined that an allowance for credit losses of $58,000 was required for held to maturity securities. The allowance for credit losses pertained to corporate bonds and was presented as a reduction to the amortized cost of held to maturity securities outstanding.

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 June 30, 2023, approximately 95% of commercial relationships held deposits at the Bank, primarily in operating accounts, and there were no significant industry concentrations. Additionally, at June 30, 2023 insured deposits represented 60% of the total deposit portfolio and uninsured deposits represented 40% of the total deposit portfolio.

At June 30, 2023, approximately 43% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at June 30, 2023 were held in interest-bearing demand, savings and money market accounts and time deposits. Approximately 38% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at June 30, 2023, which provide our customers with interest and liquidity. Time deposits comprised the remaining 19% of our deposits at June 30, 2023.

 

41


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 June 30, 2023:

     

Demand noninterest-bearing

   $ 742,160        43

Demand interest-bearing

     29,324        2

Money market and savings

     633,620        36

Time

     333,192        19
  

 

 

    

 

 

 

Total deposits

   $ 1,738,296        100
  

 

 

    

 

 

 

At December 31, 2022:

     

Demand noninterest-bearing

   $ 811,671        45

Demand interest-bearing

     37,815        2

Money market and savings

     671,016        38

Time

     271,238        15
  

 

 

    

 

 

 

Total deposits

   $ 1,791,740        100
  

 

 

    

 

 

 

The aggregate amount of time deposits in excess of the FDIC insurance limit was $35.1 million and $43.6 million at June 30, 2023 and December 31, 2022, respectively. The following table reflects the aggregate maturities of those deposits as of the respective reporting periods.

 

(Dollars in thousands)

   June 30,
2023
     December 31,
2022
 

3 months or less

   $ 16,054      $ 33,344  

Over 3 months through 6 months

     18,766        10,254  

Over 6 months through 12 months

     255        —    

Over 12 months

     —          —    
  

 

 

    

 

 

 

Total uninsured time deposits

   $ 35,075      $ 43,598  
  

 

 

    

 

 

 

Liquidity

Our primary source of funding is deposits from our core banking relationships. However, the majority of the Bank’s deposits are transaction accounts or money market accounts that are payable on demand. Additionally, a small number of customers represent a large portion of the Bank’s deposits, as evidenced by the fact that approximately 17% of deposits were represented by the 10 largest depositors at both June 30, 2023 and December 31, 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, the ability to supplement core deposits with brokered time deposits and/or utilization of the Certificate of Deposit Account Registry Service (CDARS) Network, and borrowing capacity through various secured and unsecured sources. Our borrowing capacity include lines of credit with the FRB, FHLB, and correspondent banks that enable us to borrow funds as described in Note 4 to the consolidated financial statements included in Item 1 of this Report.

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 June 30, 2023 and December 31, 2022, 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 June 30, 2023, the capital conservation buffer was 4.46%.

 

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At June 30, 2023, the Bank had a Tier 1 risk-based capital ratio of 11.56%, a total capital to risk-weighted assets ratio of 12.46%, and a leverage ratio of 11.42%. At December 31, 2022, the Bank had a Tier 1 risk-based capital ratio of 10.54%, a total capital to risk-weighted assets ratio of 11.40%, and a leverage ratio of 10.23%.

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 June 30, 2023 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

We disclosed certain risks and uncertainties that we face under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, which we filed with the SEC on March 24, 2023. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2022 Form 10-K.

Adverse developments affecting the banking industry have eroded customer confidence in the banking system and could have a material effect on our operations and/or stock price.

The recent high-profile failures of several depository institutions have negatively impacted customer confidence in the safety and soundness of some regional and community banks. As a result, we face that risk that customers may prefer to maintain deposits with larger financial institutions or invest in short-term fixed income securities instead of deposits with the Bank, either of which could materially adversely impact our liquidity, cost of funding, capital, and results of operations. In response to the failures of other depository institutions, we may face increased regulation and supervisory oversight, higher capital or liquidity requirements or a heightened risk of regulatory enforcement activities, any of which could have a material impact on our business. Further, our costs of deposit insurance may increase as a result of these bank failures and the resulting losses to the FDIC’s Deposit Insurance Fund. In addition, concerns about the banking industry’s operating environment and the public trading prices of bank holding companies are often correlated, particularly during times of financial stress, which could adversely impact the trading price of our common stock.

If we are required to sell securities to meet liquidity needs, we could realize significant losses.

As a result of increases in interest rates over the last year, the market values of previously issued government and other debt securities have declined significantly, resulting in unrealized losses in our securities portfolio. While we do not expect or intend to sell these securities, if we were required to sell these securities to meet liquidity needs, we may incur significant losses, which could impair our capital and financial condition and adversely affect our results of operations. Further, while we have taken actions to maximize our sources of liquidity, there is no guarantee that such sources will be available or sufficient in the event of sudden liquidity needs.

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

 

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Item 5. Other Information

None

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    Amended and Restated 2017 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 20, 2023)
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)

 

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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: August 10, 2023     By:  

/s/ Steven E. Shelton

      Steven E. Shelton
      Chief Executive Officer
      (Principal Executive Officer)
Dated: August 10, 2023     By:  

/s/ Thomas A. Sa

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

 

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