QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OR THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Title of class) |
(Trading Symbol) |
(Name of exchange on which registered) |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
CALIFORNIA BANCORP
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2023
| Page | ||||||
| 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 | 39 | ||||
| Item 4. |
Controls and Procedures | 39 | ||||
| Item 1. |
Legal Proceedings | 40 | ||||
| Item 1A. |
Risk Factors | 40 | ||||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 40 | ||||
| Item 3. |
Defaults Upon Senior Securities | 40 | ||||
| Item 4. |
Mine Safety Disclosures | 40 | ||||
| Item 5. |
Other Information | 41 | ||||
| Item 6. |
Exhibits | 41 | ||||
| 42 | ||||||
2
March 31, |
December 31, |
|||||||
2023 |
2022 |
|||||||
ASSETS: |
||||||||
Cash and due from banks |
$ | $ | ||||||
Federal funds sold |
||||||||
Total cash and cash equivalents |
||||||||
Investment securities: |
||||||||
Available for sale, at fair value |
||||||||
Held to maturity, at amortized cost, net of allowance for credit losses of $ |
||||||||
Total investment securities |
||||||||
Loans, net of allowance for credit losses of $ |
||||||||
Premises and equipment, net |
||||||||
Bank owned life insurance (BOLI) |
||||||||
Goodwill and other intangible assets |
||||||||
Accrued interest receivable and other assets |
||||||||
Total assets |
$ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
||||||||
Deposits |
||||||||
Non-interest bearing |
$ | $ | ||||||
Interest bearing |
||||||||
Total deposits |
||||||||
Other borrowings |
||||||||
Junior subordinated debt securities |
||||||||
Accrued interest payable and other liabilities |
||||||||
Total liabilities |
||||||||
Commitments and Contingencies (Note 5) |
||||||||
Shareholders’ equity |
||||||||
Common stock, |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive loss, net of taxes |
( |
) | ( |
) | ||||
Total shareholders’ equity |
||||||||
Total liabilities and shareholders’ equity |
$ | $ | ||||||
Three Months Ended |
||||||||
March 31, |
||||||||
2023 |
2022 |
|||||||
| Interest income |
||||||||
| Loans |
$ | $ | ||||||
| Federal funds sold |
||||||||
| Investment securities |
||||||||
| |
|
|
|
|||||
| Total interest income |
||||||||
| Interest expense |
||||||||
| Deposits |
||||||||
| Borrowings and subordinated debt |
||||||||
| |
|
|
|
|||||
| Total interest expense |
||||||||
| Net interest income |
||||||||
| Provision for credit losses |
||||||||
| |
|
|
|
|||||
| Net interest income after provision for credit losses |
||||||||
| Non-interest income |
||||||||
| Service charges and other fees |
||||||||
| Gain on the sale of loans |
||||||||
| Other |
||||||||
| |
|
|
|
|||||
| Total non-interest income |
||||||||
| Non-interest expense |
||||||||
| Salaries and benefits |
||||||||
| Premises and equipment |
||||||||
| Professional fees |
||||||||
| Data processing |
||||||||
| Other |
||||||||
| |
|
|
|
|||||
| Total non-interest expense |
||||||||
| Income before provision for income taxes |
||||||||
| Provision for income taxes |
||||||||
| |
|
|
|
|||||
| Net income |
$ | $ | ||||||
| |
|
|
|
|||||
| Earnings per common share |
||||||||
| Basic |
$ | $ | ||||||
| |
|
|
|
|||||
| Diluted |
$ | $ | ||||||
| |
|
|
|
|||||
| Average common shares outstanding |
||||||||
| |
|
|
|
|||||
| Average common and equivalent shares outstanding |
||||||||
| |
|
|
|
|||||
Three Months Ended |
||||||||
March 31, |
||||||||
2023 |
2022 |
|||||||
| Net Income |
$ | $ | ||||||
| Other comprehensive income (loss) |
||||||||
| Unrealized gains (losses) on securities available for sale, net |
( |
) | ||||||
| Unrealized losses on securities transferred from available for sale to held to maturity, net |
( |
) | ||||||
| Reclassification adjustment for securities transferred from available for sale to held to maturity in prior year, net |
( |
) | ||||||
| Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net |
||||||||
| Tax effect |
( |
) | ||||||
| |
|
|
|
|||||
| Total other comprehensive income (loss) |
( |
) | ||||||
| |
|
|
|
|||||
| Total comprehensive income |
$ | $ | ||||||
| |
|
|
|
|||||
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Comprehensive | Total | |||||||||||||||||||
| Common Stock | Retained | Income | Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | (Loss) | Equity | ||||||||||||||||
Balance at December 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
Adoption of new accounting standard |
— | — | — | |||||||||||||||||
Stock awards issued and related compensation expense |
||||||||||||||||||||
Shares withheld to pay taxes on stock based compensation |
( |
) | ( |
) | ( |
) | ||||||||||||||
Stock options exercised |
||||||||||||||||||||
Net income |
— | — | ||||||||||||||||||
Other comprehensive income |
— | |||||||||||||||||||
Balance at March 31, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Comprehensive | Total | |||||||||||||||||||
| Common Stock | Retained | Income | Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | (Loss) | Equity | ||||||||||||||||
Balance at December 31, 2021 |
$ | $ | $ | $ | ||||||||||||||||
Stock awards issued and related compensation expense |
||||||||||||||||||||
Shares withheld to pay taxes on stock based compensation |
( |
) | ( |
) | ( |
) | ||||||||||||||
Stock options exercised |
||||||||||||||||||||
Shares withheld to pay exercise price on stock options |
( |
) | ( |
) | — | — | ( |
) | ||||||||||||
Net income |
— | — | ||||||||||||||||||
Other comprehensive loss |
— | ( |
) | ( |
) | |||||||||||||||
Balance at March 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
Three Months Ended March 31, |
||||||||
2023 |
2022 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
||||||||
Provision for credit losses |
||||||||
Provision for deferred taxes |
||||||||
Depreciation |
||||||||
Deferred loan costs, net |
( |
) | ||||||
Stock based compensation, net |
||||||||
Increase in cash surrender value of life insurance |
( |
) | ( |
) | ||||
Discount on retained portion of sold loans, net |
( |
) | ( |
) | ||||
Gain on sale of loans |
( |
) | ||||||
(Decrease) increase in accrued interest receivable and other assets |
( |
) | ||||||
(Increase) decrease in accrued interest payable and other liabilities |
( |
) | ||||||
Net cash provided by (used for) operating activities |
( |
) | ||||||
Cash flows from investing activities: |
||||||||
Purchase of investment securities |
( |
) | ||||||
Proceeds from principal payments on investment securities |
||||||||
Proceeds from sale of loans |
||||||||
Net increase in loans |
( |
) | ( |
) | ||||
Capital calls on low income tax credit investments |
( |
) | ( |
) | ||||
Purchase of premises and equipment |
( |
) | ( |
) | ||||
Purchase of bank-owned life insurance policies |
( |
) | ( |
) | ||||
Net cash used for investing activities |
( |
) | ( |
) | ||||
Cash flows from financing activities: |
||||||||
Net decrease in customer deposits |
( |
) | ( |
) | ||||
Paydown of long term borrowing, net |
( |
) | ||||||
Proceeds from short term and overnight borrowings, net |
( |
) | ||||||
Proceeds from exercised stock options, net |
||||||||
Net cash provided by (used for) financing activities |
( |
) | ||||||
Decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
Cash and cash equivalents, beginning of period |
||||||||
Cash and cash equivalents, end of period |
$ | |
$ | |||||
Supplemental disclosure of cash flow information: |
||||||||
Securities transferred from available for sale to the held to maturity classification |
$ | $ | ||||||
Recording of right to use assets and operating lease liabilities |
$ | $ | ||||||
Cash paid during the year for: |
||||||||
Interest |
$ | $ | ||||||
Income taxes |
$ | $ | ||||||
| Three months ended | ||||||||
| March 31, | ||||||||
(Dollars in thousands, except per share data) |
2023 | 2022 | ||||||
Net income available to common shareholders |
$ | $ | ||||||
Weighted average basic common shares outstanding |
||||||||
Add: dilutive potential common shares |
||||||||
Weighted average diluted common shares outstanding |
||||||||
Basic earnings per share |
$ | $ | ||||||
Diluted earnings per share |
$ | $ | ||||||
| • | Allowance for Credit Losses on Loans |
| • | Allowance for Credit Losses on Off-Balance Sheet Credit Exposures |
| • | Allowance for Credit Losses on Available for Sale Securities |
| • | Allowance for Credit Losses on Held to Maturity Securities |
Gross |
Gross |
|||||||||||||||
Unrealized / |
Unrealized / |
Estimated |
||||||||||||||
Amortized |
Unrecognized |
Unrecognized |
Fair |
|||||||||||||
(Dollars in thousands) |
Cost |
Gains |
Losses |
Value |
||||||||||||
At March 31 2023: |
||||||||||||||||
Mortgage backed securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Government agencies |
( |
) |
||||||||||||||
Corporate bonds |
||||||||||||||||
Total available for sale securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Mortgage backed securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Government agencies |
( |
) |
||||||||||||||
Corporate bonds |
( |
) |
||||||||||||||
Total held to maturity securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
At December 31, 2022: |
||||||||||||||||
Mortgage backed securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Government agencies |
( |
) |
||||||||||||||
Corporate bonds |
||||||||||||||||
Total available for sale securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Mortgage backed securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Government agencies |
( |
) |
||||||||||||||
Corporate bonds |
( |
) |
||||||||||||||
Total held to maturity securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Less Than 12 Months |
More Than 12 Months |
Total |
||||||||||||||||||||||
Unrealized |
Unrealized |
Unrealized |
||||||||||||||||||||||
(Dollars in thousands) |
Fair Value |
Losses |
Fair Value |
Losses |
Fair Value |
Losses |
||||||||||||||||||
At March 31, 2023: |
||||||||||||||||||||||||
Mortgage backed securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||||||
Government agencies |
( |
) |
( |
) |
( |
) | ||||||||||||||||||
Total available for sale securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||||||
At December 31, 2022: |
||||||||||||||||||||||||
Mortgage backed securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||||||
Government agencies |
( |
) |
— |
— |
( |
) | ||||||||||||||||||
Total available for sale securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||||||
Mortgage backed securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||||||
Government agencies |
( |
) |
( |
) | ||||||||||||||||||||
Corporate bonds |
( |
) |
( |
) |
( |
) | ||||||||||||||||||
Total held to maturity securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||||||
Available for Sale |
Held to Maturity |
|||||||||||||||
Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
(Dollars in thousands) |
Cost |
Value |
Cost |
Value |
||||||||||||
Less that one year |
$ |
$ |
$ |
$ |
||||||||||||
One to five years |
||||||||||||||||
Five to ten years |
||||||||||||||||
Beyond ten years |
||||||||||||||||
Securities not due at a single maturity date |
||||||||||||||||
Total investment securities |
$ |
$ |
$ |
$ |
||||||||||||
(Dollars in thousands) |
March 31, 2023 |
December 31, 2022 |
||||||
Commercial and industrial |
$ |
|||||||
Real estate - other |
||||||||
Real estate - construction and land |
||||||||
SBA |
||||||||
Other |
||||||||
Total loans, gross |
||||||||
Deferred loan origination costs, net |
||||||||
Allowance for credit losses |
( |
) |
( |
) | ||||
Total loans, net |
$ |
|||||||
| Term Loans by Year of Origination | ||||||||||||||||||||||||
(Dollars in thousands) |
2023 | 2022 | 2021 | Prior | Revolving | Total | ||||||||||||||||||
Commercial and industrial |
||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Special mention |
— | |||||||||||||||||||||||
Substandard |
— | — | — | |||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Current period gross charge-offs |
$ | — | $ | — | $ | — | $ | — | $ | $ | ||||||||||||||
Real estate - other |
||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Special mention |
— | — | — | |||||||||||||||||||||
Substandard |
— | — | — | — | ||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Current period gross charge-offs |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Real estate - construction and land |
||||||||||||||||||||||||
Pass |
$ | — | $ | $ | $ | $ | — | $ | ||||||||||||||||
Special mention |
— | — | — | — | — | — | ||||||||||||||||||
Substandard |
— | — | — | — | ||||||||||||||||||||
Total |
$ | — | $ | $ | $ | $ | $ | |||||||||||||||||
Current period gross charge-offs |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
SBA |
||||||||||||||||||||||||
Pass |
$ | — | $ | $ | $ | $ | $ | |||||||||||||||||
Special mention |
— | — | — | — | ||||||||||||||||||||
Substandard |
— | — | — | — | ||||||||||||||||||||
Total |
$ | — | $ | $ | $ | $ | $ | |||||||||||||||||
Current period gross charge-offs |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Other |
||||||||||||||||||||||||
Pass |
$ | — | $ | $ | — | $ | $ | $ | ||||||||||||||||
Special mention |
— | — | — | — | ||||||||||||||||||||
Substandard |
— | — | — | — | — | — | ||||||||||||||||||
Total |
$ | — | $ | $ | $ | $ | $ | |||||||||||||||||
Current period gross charge-offs |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Total |
||||||||||||||||||||||||
Pass |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Special mention |
— |
|||||||||||||||||||||||
Substandard |
— |
— |
— |
|||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Current period gross charge-offs |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
$ |
||||||||||||||
(Dollars in thousands) |
Commercial and Industrial |
Real Estate Other |
Real Estate Construction and Land |
SBA | Other | Total | ||||||||||||||||||
As of December 31, 2022: |
||||||||||||||||||||||||
Grade: |
||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Special Mention |
— | — | ||||||||||||||||||||||
Substandard |
— | |||||||||||||||||||||||
Total |
$ | $ | |
$ | $ | |
$ | |
$ | |
||||||||||||||
(Dollars in thousands) |
30 Days | 60 Days | 90+ Days | Non-Accrual |
Current | Total | ||||||||||||||||||
As of March 31, 2023: |
||||||||||||||||||||||||
Commercial and industrial |
$ | $ | $ | $ | — | $ | $ | |||||||||||||||||
Real estate - other |
— | — | — | |||||||||||||||||||||
Real estate - construction and land |
— | — | — | — | ||||||||||||||||||||
SBA |
— | — | ||||||||||||||||||||||
Other |
— | — | — | — | ||||||||||||||||||||
Total loans, gross |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of December 31, 2022: |
||||||||||||||||||||||||
Commercial and industrial |
$ | — | $ | — | $ | — | $ | $ | $ | |||||||||||||||
Real estate - other |
— | — | — | |||||||||||||||||||||
Real estate - construction and land |
— | — | — | — | ||||||||||||||||||||
SBA |
— | — | — | |||||||||||||||||||||
Other |
— | — | — | — | ||||||||||||||||||||
Total loans, gross |
$ | |
$ | — | $ | — | $ | $ | |
$ | |
|||||||||||||
(Dollars in thousands) |
Commercial and Industrial |
Real Estate Other |
Real Estate Construction and Land |
SBA | Other | Total | ||||||||||||||||||
As of March 31, 2023: |
||||||||||||||||||||||||
Gross loans: |
||||||||||||||||||||||||
Loans individually evaluated for expected credit loss |
$ | — | $ | — | $ | — | $ | $ | — | $ | ||||||||||||||
Loans collectively evaluated for expected credit loss |
||||||||||||||||||||||||
Total gross loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Loans individually evaluated for expected credit loss |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Loans collectively evaluated for expected credit loss |
||||||||||||||||||||||||
Total allowance for credit losses |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of December 31, 2022: |
||||||||||||||||||||||||
Gross loans: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | $ | — | $ | — | $ | $ | — | $ | |||||||||||||||
Loans collectively evaluated for impairment |
||||||||||||||||||||||||
Total gross loans |
$ | $ | |
$ | $ | |
$ | |
$ | |
||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Loans collectively evaluated for impairment |
||||||||||||||||||||||||
Total allowance for loan losses |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
(Dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
As of March 31, 2023: |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
SBA |
$ | $ | $ | — | $ | $ | ||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
SBA |
$ | $ | $ | $ | $ | |||||||||||||||
Total: |
||||||||||||||||||||
SBA |
$ | $ | $ | $ | $ | |||||||||||||||
As of December 31, 2022: |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | $ | |
$ | $ | $ | ||||||||||||||
SBA |
$ | $ | $ | — | $ | $ | ||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
SBA |
$ | $ | $ | $ | $ | |||||||||||||||
Total: |
||||||||||||||||||||
Commercial and industrial |
$ | $ | $ | $ | $ | |||||||||||||||
SBA |
$ | $ | $ | $ | $ | |||||||||||||||
(Dollars in thousands) |
Commercial and Industrial |
Real Estate Other |
Real Estate Construction and Land |
SBA | Other | Total | ||||||||||||||||||
Three months ended March 31, 2023: |
||||||||||||||||||||||||
Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Adoption of new accounting standard |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
Provision for credit losses |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
Charge-offs |
( |
) | — | — | — | ( |
) | |||||||||||||||||
Recoveries |
— | — | — | — | ||||||||||||||||||||
Ending balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Alowance for credit losses / gross loans |
% | % | % | % | % | % | ||||||||||||||||||
Net recoveries (charge-offs) / gross loans |
- |
% | % | % | % | % | - |
% | ||||||||||||||||
Three months ended March 31, 2022: |
||||||||||||||||||||||||
Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Provision for loan losses |
( |
) | ( |
) | ||||||||||||||||||||
Charge-offs |
— | — | ||||||||||||||||||||||
Recoveries |
— | — | — | — | ||||||||||||||||||||
Ending balance |
$ | $ | $ | $ | $ | $ | |
|||||||||||||||||
Alowance for loan losses / gross loans |
% | % | % | % | % | % | ||||||||||||||||||
Net recoveries (charge-offs) / gross loans |
% | % | % | % | % | % | ||||||||||||||||||
(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 |
$ | $ | $ | $ | ||||||||||||
Interest rate between |
||||||||||||||||
Interest rate greater than or equal to |
||||||||||||||||
Total unfunded fixed rate loan commitments |
$ | |
$ | $ | $ | |
||||||||||
(Dollars in thousands) |
March 31, 2023 |
|||
Balance at December 31, 2022 |
$ | |||
Adoption of new accounting standard |
||||
Provision for credit losses |
( |
) | ||
Balance at March 31, 2023 |
$ | |||
| March 31, | ||||
(Dollars in thousands) |
2023 | |||
Operating lease cost (cost resulting from lease payments) |
$ | |||
Operating lease - operating cash flows (fixed payments) |
$ | |||
- ROU assets |
$ | |||
Operating lease - liabilities |
$ | |
||
Weighted average lease term - operating leases |
||||
Weighted average discount rate - operating leases |
% | |||
| March 31, | ||||
(Dollars in thousands) |
2023 | |||
2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total undiscounted cash flows |
||||
Discount on cash flows |
( |
) | ||
liability |
$ | |
||
| Carrying | Fair Value Measurements | |||||||||||||||||||
(Dollars in thousands) |
Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
As of March 31, 2023: |
||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | $ | $ | — | $ | — | $ | |||||||||||||
Investment securities: |
||||||||||||||||||||
Available for sale |
— | |||||||||||||||||||
Held to Maturity |
||||||||||||||||||||
Loans, net |
— | — | ||||||||||||||||||
Accrued interest receivable |
— | |||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Deposits |
$ | $ | $ | $ | — | $ | ||||||||||||||
Other borrowings |
— | — | ||||||||||||||||||
Subordinated debt |
— | — | ||||||||||||||||||
Accrued interest payable |
— | |||||||||||||||||||
As of December 31, 2022: |
||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | $ | $ | — | $ | — | $ | |||||||||||||
Investment securities: |
||||||||||||||||||||
Available for sale |
— | |||||||||||||||||||
Held to Maturity |
||||||||||||||||||||
Loans, net |
— | |||||||||||||||||||
Accrued interest receivable |
— | |||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Deposits |
$ | $ | $ | $ | — | $ | ||||||||||||||
Other borrowings |
— | — | — | — | — | |||||||||||||||
Subordinated debt |
— | — | ||||||||||||||||||
Accrued interest payable |
— | |||||||||||||||||||
(Dollars in thousands) |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
As of March 31, 2023: |
||||||||||||||||
Investments available for sale: |
||||||||||||||||
Mortgage backed securities |
$ |
$ |
— |
$ |
$ |
— |
||||||||||
Government agencies |
— |
— |
||||||||||||||
Corporate bonds |
— |
|||||||||||||||
Total assets measured at fair value on a recurring basis |
$ |
$ |
— |
$ |
$ |
|||||||||||
As of December 31, 2022: |
||||||||||||||||
Investments available for sale: |
||||||||||||||||
Mortgage backed securities |
$ |
$ |
— |
$ |
$ |
— |
||||||||||
Government agencies |
— |
— |
||||||||||||||
Corporate bonds |
— |
|||||||||||||||
Total assets measured at fair value on a recurring basis |
$ |
$ |
— |
$ |
$ |
|||||||||||
Carrying |
Fair Value Measurements |
|||||||||||||||
(Dollars in thousands) |
Amount |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
As of March 31, 2023: |
||||||||||||||||
Individually evaluated loans - SBA |
$ |
$ |
— |
$ |
— |
$ |
||||||||||
Total assets measured at fair value on a non-recurring basis |
$ |
$ |
— |
$ |
— |
$ |
||||||||||
As of December 31, 2022: |
||||||||||||||||
Impaired loans - Commercial |
$ |
$ |
— |
$ |
— |
$ |
||||||||||
Impaired loans - SBA |
— |
— |
||||||||||||||
Total assets measured at fair value on a non-recurring basis |
$ |
$ |
— |
$ |
— |
$ |
||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition at March 31, 2023 and December 31, 2022 and our results of operations for the three months ended March 31, 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 March 31, 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 months ended, and our financial condition at, March 31, 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 March 31, 2023 and 2022:
Overview
For the three months ended March 31, 2023 and March 31, 2022, net income was $5.5 million and $3.7 million, respectively, representing an increase of $1.8 million, or 48%. Compared to the same period last year, net interest income after the provision for credit losses increased by $4.8 million, which was offset by a decrease in non-interest income of $1.4 million, an increase in non-interest expense of $927,000 and an increase in the provision for income taxes of $691,000.
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 March 31, 2023, was $18.8 million, an increase of $4.2 million, or 29% from $14.5 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.
Average total interest-earning assets were $1.89 billion in the first quarter of 2023 compared to $1.85 billion for the same period during 2022. For the quarter ended March 31, 2023, the yield on average earning assets increased 197 basis points to 5.47% from 3.50% for the quarter ended March 31, 2022. The yield on total average gross loans in the three months ended March 31, 2023 was 5.76%, representing an increase of 136 basis points compared to 4.40% in the same period one year earlier. For the three months ended March 31, 2023 compared to the same period in 2022, the yield on average investment securities increased 61 basis points to 3.43% from 2.82%.
For the three months ended March 31, 2023, average loans increased $211.1 million, or 15%, from the quarter ended March 31, 2022 while average deposit balances increased $47.9 million, or 3%, for the same period. As a result, the average loan to deposit ratio for the first quarter of 2023 was 93.08% compared to 83.00% for the first quarter of 2022.
Of the $211.1 million increase in average loan balances year over year, average commercial and real estate other loans increased by $148.8 million and $135.6 million, respectively, as a result of organic growth. These increases were partially offset by a decrease in average SBA loans of $55.0 million primarily due to PPP loan forgiveness and a decrease in other loans of $38.7 million.
29
Of the $47.9 million increase in average total deposit balances year over year, $161.0 million was attributable to time deposits, offset by a decrease in money market and savings accounts of $96.4 million, and a decrease in demand accounts of $16.6 million. The cost of interest-bearing deposits was 2.46% during the quarter ended March 31, 2023 compared to 0.36% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances increased by 121 basis points to 1.41% in the first quarter of 2023 compared to 0.20% in the first quarter of 2022.
As a result, the net interest margin increased by 83 basis points to 4.02% for the three months ended March 31, 2023, compared to 3.19% for the three months ended March 31, 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 March 31, 2023 and 2022.
| Three months ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Average Balance |
Yields or Rates |
Interest Income/ Expense |
Average Balance |
Yields or Rates |
Interest Income/ Expense |
|||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Interest earning assets: |
||||||||||||||||||||||||
| Loans (1) |
$ | 1,582,332 | 5.76 | % | $ | 22,472 | $ | 1,371,187 | 4.40 | % | $ | 14,886 | ||||||||||||
| Federal funds sold |
156,941 | 4.55 | % | 1,760 | 345,394 | 0.16 | % | 136 | ||||||||||||||||
| Investment securities |
154,667 | 3.43 | % | 1,307 | 129,644 | 2.82 | % | 902 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total interest earning assets |
1,893,940 | 5.47 | % | 25,539 | 1,846,225 | 3.50 | % | 15,924 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Noninterest-earning assets: |
||||||||||||||||||||||||
| Cash and due from banks |
18,098 | 18,748 | ||||||||||||||||||||||
| All other assets (2) |
62,247 | 63,569 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| TOTAL |
$ | 1,974,285 | $ | 1,928,542 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Demand |
$ | 34,032 | 0.08 | % | $ | 7 | $ | 38,197 | 0.10 | % | $ | 9 | ||||||||||||
| Money market and savings |
626,666 | 2.01 | % | 3,104 | 723,109 | 0.37 | % | 665 | ||||||||||||||||
| Time |
310,246 | 3.81 | % | 2,911 | 149,293 | 0.36 | % | 132 | ||||||||||||||||
| Other |
71,108 | 4.33 | % | 760 | 100,664 | 2.39 | % | 592 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total interest-bearing liabilities |
1,042,052 | 2.64 | % | 6,782 | 1,011,263 | 0.56 | % | 1,398 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Noninterest-bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits |
728,986 | 741,414 | ||||||||||||||||||||||
| Accrued expenses and other liabilities |
26,326 | 22,325 | ||||||||||||||||||||||
| Shareholders’ equity |
176,921 | 153,540 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| TOTAL |
$ | 1,974,285 | $ | 1,928,542 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net interest income and margin (3) |
4.02 | % | $ | 18,757 | 3.19 | % | $ | 14,526 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (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 $(226,000) and $318,000, respectively. |
| (2) | Other noninterest-earning assets includes the allowance for credit losses of $17.0 million and $14.1 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 March 31, 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 March 31, | ||||||||||||
| 2023 vs. 2022 | ||||||||||||
| Increase (Decrease) Due to | ||||||||||||
| Change in: | ||||||||||||
| Average | Average | Net | ||||||||||
| (Dollars in thousands) |
Volume | Rate | Change | |||||||||
| Interest income: |
||||||||||||
| Loans |
$ | 2,999 | $ | 4,587 | $ | 7,586 | ||||||
| Federal funds sold |
(2,113 | ) | 3,737 | 1,624 | ||||||||
| Investment securities |
211 | 194 | 405 | |||||||||
| Interest expense: |
||||||||||||
| Deposits |
||||||||||||
| Demand |
(1 | ) | (1 | ) | (2 | ) | ||||||
| Money market and savings |
(478 | ) | 2,917 | 2,439 | ||||||||
| Time |
1,510 | 1,269 | 2,779 | |||||||||
| Other borrowings |
(316 | ) | 484 | 168 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net interest income |
$ | 382 | $ | 3,849 | $ | 4,231 | ||||||
|
|
|
|
|
|
|
|||||||
Interest Income
Interest income increased by $9.6 million in the first 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 March 31, 2023 and March 31, 2022 was 8.00% and 3.50%, respectively. Interest earned on our loan portfolio of $22.5 million in the first quarter of 2023 represented an increase of $7.6 million, or 51%, compared to $14.9 million for the first quarter of 2022.
Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on federal funds sold of $1.8 million for the three months ended March 31, 2023 compared to $136,000 for the same period in the prior year. Interest earned on investment securities of $1.3 million for the three months ended March 31, 2023 compared to $902,000 for the three months ended March 31, 2022.
Interest Expense
Interest expense increased by $5.4 million in the first 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. The average rate paid on interest-bearing liabilities in the first quarter of 2023 compared to the same period one year earlier increased 208 basis point to 0.56% from 2.64%.
Provision for Credit Losses
The provision for credit losses of $358,000 for the three months ended was comprised of $464,000 pertaining to the ACL on loans, partially offset by a release of reserves pertaining to the ACL for unfunded loan commitments of $106,000.
31
The provision for credit losses for the first quarter of 2023 compared to a provision for loan losses of $950,000 for the first quarter of 2022. The Company had net loan charge-offs of $247,000, or 0.02% of gross loans, during the first quarter of 2023 compared to net loan recoveries of $1,000, or 0.00% of gross loans, in the same period of 2022. The allowance for credit losses as a percent of outstanding loans was 0.95% at March 31, 2023 and 1.07% at December 31, 2022.
Non-interest Income
The following table reflects the major components of the Company’s non-interest income for the three months ended March 31, 2023 and 2022.
| Three Months Ended March 31, |
Increase (Decrease) | |||||||||||||||
| (Dollars in thousands) |
2023 | 2022 | Amount | Percent | ||||||||||||
| Service charges and other fees |
$ | 863 | $ | 889 | $ | (26 | ) | -3 | % | |||||||
| Gain on sale of loans |
— | 1,393 | (1,393 | ) | 0 | % | ||||||||||
| Earnings on BOLI |
173 | 165 | 8 | 5 | % | |||||||||||
| Other |
71 | 87 | (16 | ) | -18 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total non-interest income |
$ | 1,107 | $ | 2,534 | $ | (1,427 | ) | -56 | % | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
Non-interest income decreased by $1.4 million, or 56% in the first quarter of 2023, compared to the first quarter of 2022. The decrease was primarily the result of recognizing a gain on the sale of a portion of our solar loan portfolio in the prior year.
Non-interest Expense
The following table reflects the major components of the Company’s non-interest expense for the three months ended March 31, 2023 and 2022.
| Three Months Ended March 31, |
Increase (Decrease) | |||||||||||||||
| (Dollars in thousands) |
2023 | 2022 | Amount | Percent | ||||||||||||
| Salaries and benefits |
$ | 7,876 | $ | 7,093 | $ | 783 | 11 | % | ||||||||
| Premises and equipment |
1,180 | 1,302 | (122 | ) | -9 | % | ||||||||||
| Professional fees |
450 | 592 | (142 | ) | -24 | % | ||||||||||
| Data processing |
608 | 608 | — | 0 | % | |||||||||||
| Other |
1,729 | 1,321 | 408 | 31 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total non-interest expense |
$ | 11,843 | $ | 10,916 | $ | 927 | 9 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Non-interest expense was $11.8 million and $10.9 million for the three months ended March 31, 2023 and 2022, respectively. Excluding capitalized loan origination costs, non-interest expense for the first quarter of 2023 was $12.5 million compared to $11.9 million for the first quarter of 2022, representing an increase of $594,000, or 5%. The increase in non-interest expense, excluding capitalized origination costs, from the first 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 March 31, 2023 and 2022, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 59.62% and 63.99%, respectively.
Provision for Income Taxes
Income tax expense was $2.2 million for the first quarter of 2023 compared to $1.5 million for the same period in prior year. The effective tax rates for those time periods were 28.9% and 29.3%, respectively.
32
Financial Condition:
Overview
Total assets of the Company were $2.05 billion as of March 31, 2023 compared to $2.04 billion as of December 31, 2022. The increase in total assets from year-end was primarily due to growth of the loan portfolio, partially offset by decreased liquidity related to the seasonal outflow of deposits that occurs at the beginning of the year for many of our business clients.
Loan Portfolio
Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances increased by $23.8 million, or 1%, from December 31, 2022 to March 31, 2023 primarily due to organic growth in the commercial and industrial and real estate other loan portfolios, partially offset by a reduction in SBA loans and other loans related to the ordinary course of business.
The loan portfolio at March 31, 2023 was comprised of approximately 41% of commercial and industrial loans compared to 40% at December 31, 2022. In addition, commercial real estate loans comprised 57% of our loans at March 31, 2023 and at December 31, 2022. A substantial percentage of the commercial real estate loans are considered owner-occupied loans. Our loans are generated by our relationship managers and executives. Our senior management is actively involved in the lending, underwriting, and collateral valuation processes. Higher dollar loans or loan commitments are also approved through a bank loan committee comprised of executives and outside board members.
The following table reflects the composition of the Company’s loan portfolio and the percentage distribution at March 31, 2023 and December 31, 2022.
| (Dollars in thousands) |
March 31, 2023 |
December 31, 2022 |
||||||
| Commercial and industrial |
$ | 656,519 | 634,535 | |||||
| Real estate - other |
853,431 | 848,241 | ||||||
| Real estate - construction and land |
63,928 | 63,730 | ||||||
| SBA |
5,610 | 7,220 | ||||||
| Other |
37,775 | 39,695 | ||||||
|
|
|
|
|
|||||
| Total loans, gross |
1,617,263 | 1,593,421 | ||||||
| Deferred loan origination costs, net |
1,765 | 2,040 | ||||||
| Allowance for credit losses |
(15,382 | ) | (17,005 | ) | ||||
|
|
|
|
|
|||||
| Total loans, net |
$ | 1,603,646 | 1,578,456 | |||||
|
|
|
|
|
|||||
| Commercial and industrial |
41 | % | 40 | % | ||||
| Real estate - other |
53 | % | 53 | % | ||||
| Real estate - construction and land |
4 | % | 4 | % | ||||
| SBA |
0 | % | 1 | % | ||||
| Other |
2 | % | 2 | % | ||||
|
|
|
|
|
|||||
| Total loans, gross |
100 | % | 100 | % | ||||
|
|
|
|
|
|||||
33
The following table shows the maturity distribution for total loans outstanding as of March 31, 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 |
$ | 215,092 | $ | 315,713 | $ | 125,714 | $ | — | $ | 656,519 | ||||||||||
| Real estate - other |
41,065 | 391,444 | 409,479 | 11,443 | 853,431 | |||||||||||||||
| Real estate - construction and land |
44,619 | 11,318 | 7,991 | — | 63,928 | |||||||||||||||
| SBA |
866 | 986 | 2,935 | 823 | 5,610 | |||||||||||||||
| Other |
306 | 2,049 | — | 35,420 | 37,775 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total loans, gross |
$ | 301,948 | $ | 721,510 | $ | 546,119 | $ | 47,686 | $ | 1,617,263 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Loans With | ||||||||||||
| (Dollars in thousands) |
Fixed Rates (1) |
Variable Rates |
Total | |||||||||
| Commercial and industrial |
$ | 180,115 | $ | 476,404 | $ | 656,519 | ||||||
| Real estate - other |
570,715 | 282,716 | 853,431 | |||||||||
| Real estate - construction and land |
7,554 | 56,374 | 63,928 | |||||||||
| SBA |
926 | 4,684 | 5,610 | |||||||||
| Other |
37,403 | 372 | 37,775 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total loans, gross |
$ | 796,713 | $ | 820,550 | $ | 1,617,263 | ||||||
|
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|
|
|
|
|
|||||||
| (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 March 31, 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.
34
The following table presents information regarding the Company’s nonperforming and modified loans as of March 31, 2023 and December 31, 2022.
| (Dollars in thousands) |
March 31, 2023 |
December 31, 2022 |
||||||
| Nonaccrual loans |
$ | 222 | $ | 1,250 | ||||
| Loans over 90 days past due and still accruing |
— | — | ||||||
|
|
|
|
|
|||||
| Total nonperforming loans |
222 | 1,250 | ||||||
| Foreclosed assets |
— | — | ||||||
|
|
|
|
|
|||||
| Total nonperforming assets |
$ | 222 | $ | 1,250 | ||||
|
|
|
|
|
|||||
| Modified loans |
$ | — | $ | — | ||||
|
|
|
|
|
|||||
| Nonperforming loans / gross loans |
0.01 | % | 0.08 | % | ||||
| Allowance for credit losses / nonperforming loans |
6928.83 | % | 1360.40 | % | ||||
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.
35
The following table provides 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 March 31, 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 |
1,912 | (654 | ) | (142 | ) | 1 | (653 | ) | 464 | |||||||||||||||
| Charge-offs |
(247 | ) | — | — | — | — | (247 | ) | ||||||||||||||||
| Recoveries |
— | — | — | — | — | — | ||||||||||||||||||
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|
|||||||||||||
| Ending balance |
$ | 10,719 | $ | 2,943 | $ | 743 | $ | 42 | $ | 935 | $ | 15,382 | ||||||||||||
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|||||||||||||
| Alowance for credit losses / gross loans |
1.63 | % | 0.34 | % | 1.16 | % | 0.75 | % | 2.48 | % | 0.95 | % | ||||||||||||
| Net recoveries (charge-offs) / gross loans |
-0.04 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | -0.02 | % | ||||||||||||
| Three months ended March 31, 2022: |
||||||||||||||||||||||||
| Beginning balance |
$ | 8,552 | $ | 4,524 | $ | 681 | $ | 309 | $ | 15 | $ | 14,081 | ||||||||||||
| Provision for loan losses |
323 | 556 | 102 | (26 | ) | (5 | ) | 950 | ||||||||||||||||
| Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
| Recoveries |
1 | — | — | — | — | 1 | ||||||||||||||||||
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|
|||||||||||||
| Ending balance |
$ | 8,876 | $ | 5,080 | $ | 783 | $ | 283 | $ | 10 | $ | 15,032 | ||||||||||||
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|
|||||||||||||
| Alowance for loan losses / gross loans |
1.70 | % | 0.68 | % | 1.53 | % | 0.64 | % | 0.02 | % | 1.07 | % | ||||||||||||
| 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 securities re-designated 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.
36
The following table reflects the amortized cost and fair market values for the total portfolio for each of the categories of investments in our securities portfolio as of March 31, 2023 and December 31, 2022.
| Gross | Gross | |||||||||||||||
| Unrealized / | Unrealized / | Estimated | ||||||||||||||
| Amortized | Unrecognized | Unrecognized | Fair | |||||||||||||
| (Dollars in thousands) |
Cost | Gains | Losses | Value | ||||||||||||
| At March 31 2023: |
||||||||||||||||
| Mortgage backed securities |
$ | 17,504 | $ | 29 | $ | (792 | ) | $ | 16,741 | |||||||
| Government agencies |
29,835 | — | (819 | ) | 29,016 | |||||||||||
| Corporate bonds |
431 | 52 | — | 483 | ||||||||||||
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|
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|
|
|
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|
|
|||||||||
| Total available for sale securities |
$ | 47,770 | $ | 81 | $ | (1,611 | ) | $ | 46,240 | |||||||
|
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|
|
|
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|
|||||||||
| Mortgage backed securities |
$ | 60,305 | $ | — | $ | (6,924 | ) | $ | 53,381 | |||||||
| Government agencies |
2,995 | — | (451 | ) | 2,544 | |||||||||||
| Corporate bonds |
44,229 | 52 | (3,679 | ) | 40,602 | |||||||||||
|
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|
|
|
|
|
|
|||||||||
| Total held to maturity securities |
$ | 107,529 | $ | 52 | $ | (11,054 | ) | $ | 96,527 | |||||||
|
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|
|
|
|
|
|
|||||||||
| 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 | |||||||
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|
|
|
|
|
|
|||||||||
At the time of adopting ASC 326, the Company had no available for sale securities that required an allowance for credit losses under ASC 326, and had held to maturity securities that required an allowance for credit losses of $110,000. The allowance for credit losses pertained primarily to corporate bonds and was presented as a reduction to held to maturity securities outstanding. During the first quarter of 2023, there were no charge-offs or recoveries of securities and no additional provision for credit losses was required.
Deposits
Our deposits are generated through core customer relationships, related predominantly to business relationships. Many of our business customers maintain high levels of liquid balances in their demand deposit accounts and use the Bank’s treasury management services. At March 31, 2023, insured and collateralized deposits represented 53% of the total deposit portfolio and uninsured deposits represented 47% of the total deposit portfolio.
Additionally, at March 31, 2023, approximately 43% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at March 31, 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 March 31, 2023, which provide our customers with interest and liquidity. Time deposits comprised the remaining 19% of our deposits at March 31, 2023.
37
The following table provides a comparative distribution of our deposits by outstanding balance as well as by percentage of total deposits at the dates indicated.
| (Dollars in thousands) |
Balance | % of Total | ||||||
| At March 31, 2023: |
||||||||
| Demand noninterest-bearing |
$ | 740,650 | 43 | % | ||||
| Demand interest-bearing |
30,798 | 2 | % | |||||
| Money market and savings |
616,864 | 36 | % | |||||
| Time |
329,298 | 19 | % | |||||
|
|
|
|
|
|||||
| Total deposits |
$ | 1,717,610 | 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 | % | ||||
|
|
|
|
|
|||||
Liquidity
Our primary source of funding is deposits from our core banking relationships. The majority of the Bank’s deposits are transaction accounts or money market accounts that are payable on demand. A small number of customers represent a large portion of the Bank’s deposits, as evidenced by the fact that approximately 18% of deposits were represented by the 10 largest depositors as of March 31, 2023. We strive to manage our liquidity in a manner that enables us to meet expected and unexpected liquidity needs under both normal and adverse conditions. The Bank maintains significant on-balance sheet and off-balance liquidity sources, including a marketable securities portfolio and borrowing capacity through various secured and unsecured sources. 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 ltem 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 March 31, 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 March 31, 2023, the capital conservation buffer was 3.73%.
At March 31, 2023, the Bank had a Tier 1 risk based capital ratio of 10.88%, a total capital to risk-weighted assets ratio of 11.73%, and a leverage ratio of 11.16%. 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%.
38
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of March 31, 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.
39
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
40
Item 5. Other Information
None
Item 6. Exhibits
41
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| California BanCorp | ||||||
| Dated: May 15, 2023 | By: | /s/ Steven E. Shelton | ||||
| Steven E. Shelton | ||||||
| Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| Dated: May 15, 2023 | By: | /s/ Thomas A. Sa | ||||
| Thomas A. Sa | ||||||
| President and Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) | ||||||
42
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven E. Shelton, certify that:
| 1. | I have reviewed this periodic report on Form 10-Q of California BanCorp. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 15, 2023
| /s/ Steven E. Shelton |
| Steven E. Shelton |
| Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas A. Sa, certify that:
| 1. | I have reviewed this periodic report on Form 10-Q of California BanCorp. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 15, 2023
| /s/ Thomas A. Sa |
| Thomas A. Sa President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE
PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002
In connection with the periodic report of California BanCorp (the “Company”) on Form 10-Q for the period ended March 31, 2023, as filed with the Securities and Exchange Commission (the “Report”), I, Steven E. Shelton, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Dated: May 15, 2023
| /s/ Steven E. Shelton |
| Steven E. Shelton |
| Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002
In connection with the periodic report of California Bancorp (the “Company”) on Form 10-Q for the period ended March 31, 2023, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas A. Sa, President and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Dated: May 15, 2023
| /s/ Thomas A. Sa |
| Thomas A. Sa President and Chief Financial Officer |
Consolidated Statements of Financial Condition (Parenthetical) - USD ($) $ in Thousands |
Mar. 31, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Held to maturity, at amortized cost | $ 110 | $ 0 |
| Allowance for losses | $ 15,382 | $ 17,005 |
| Common stock, par value | $ 0 | $ 0 |
| Common stock, shares authorized | 40,000,000 | 40,000,000 |
| Common stock, shares issued | 8,355,378 | 8,332,479 |
| Common stock, shares outstanding | 8,355,378 | 8,332,479 |
Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
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| Statement of Comprehensive Income [Abstract] | ||
| Net Income | $ 5,451 | $ 3,673 |
| Other comprehensive income (loss) | ||
| Unrealized gains (losses) on securities available for sale, net | 326 | (5) |
| Unrealized losses on securities transferred from available for sale to held to maturity, net | 0 | (281) |
| Reclassification adjustment for securities transferred from available for sale to held to maturity in prior year, net | (61) | 0 |
| Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net | 2 | 2 |
| Tax effect | (97) | 86 |
| Total other comprehensive income (loss) | 170 | (198) |
| Total comprehensive income | $ 5,621 | $ 3,475 |
Nature of Operations |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nature of Operations | 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 months ended March 31, 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. 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 March 31, 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.
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) 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)held-to-maturity 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”). 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.
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.
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.
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 March 31, 2023.
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.
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Investment Securities |
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| Investments, Debt and Equity Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment Securities | 2. INVESTMENT SECURITIES The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at March 31, 2023 and December 31, 2022.
The Company adopted ASC 326 on January 1, 2023. At the time of adoption, the Company had no available for sale securities that required an allowance for credit losses under ASC 326, and had held to maturity securities that required an allowance for credit losses of $110,000. The allowance for credit losses pertained primarily to corporate bonds and was presented as a reduction to held to maturity securities outstanding. During the first quarter of 2023, there were no charge-offs or recoveries of securities and no additional provision for credit losses was required. At March 31, 2023, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments, nor did the Company have any securities held to maturity that were classified as non-accrual. The Company did not purchase any investment securities during the three months ended March 31, 2023. The Company purchased 7 available for sale securities for $34.2 million and 10 held to maturity securities for $40.8 million during the three months ended March 31, 2022. The Company did not sell any investment securities during the three months ended March 31, 2023 and 2022. During the first quarter of 2022, the Company re-designated certain securities previously classified as available for sale to the held to maturity classification. The securities re-designated consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, 2021. At the time of re-designation the securities included $281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount. Net unrealized losses on available for sale investment securities totaling $1.5 million were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at March 31, 2023. Net unrealized gains on available for sale investment securities totaling $1.9 million were recorded, net of deferred tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2022. The following table summarizes unrealized losses for investment securities at March 31, 2023 and December 31, 2022 aggregated by major security type and length of time in a continuous unrealized loss position. Investment securities at March 31, 2023 reflect the disclosure requirements required by the Company’s adoption of ASC 326, and investment securities at December 31, 2022 are presented based upon prior accounting standards.
At March 31, 2023 the Company’s investment security portfolio consisted of 60 securities, 54 of which were in an unrealized loss position. At December 31, 2022 the Company’s investment security portfolio consisted of 60 securities, 55 of which were in an unrealized loss position. Management believes that changes in the market value since purchase are primarily attributable to changes in interest rates and relative illiquidity. Because the Company does not intend to sell and is unlikely to be required to sell until a recovery of fair value, which may be at maturity, the Company determined that there was no expected credit loss at March 31, 2023 and did not consider any investments to be other-than-temporarily impaired at December 31, 2022. The following table summarizes the scheduled maturities of the Company’s investment securities as of March 31, 2023.
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. As such, mortgage backed securities and government agencies are not included in the maturity categories above and instead are shown separately as securities not due at a single maturity date.
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Loans and Allowance For Credit Losses |
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| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans and Allowance For Credit Losses | 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES Outstanding loans as of March 31, 2023 and December 31, 2022 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).
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 weakness that deserves 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 institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Substandard: Substandard credits are assets 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. The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of March 31, 2023.
The following table reflects the loan portfolio allocated by the Company’s credit quality indicators as of December 31, 2022.
The following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2023 and December 31, 2022.
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 March 31, 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 collateral dependent. The following table reflects the evaluation methodology applied to gross loans by portfolio segment and the related allowance for credit losses as of March 31, 2023 and allowance for loan losses as of December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
The following table reflects information related to loans individually evaluated for expected credit losses/impairment as of March 31, 2023 and December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
The recorded investment in loans individually evaluated for expected credit losses/impairment in the table above excludes interest receivable and net deferred origination costs due to their immateriality. 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 months ended March 31, 2023 and 2022 under ASC 326 and the previous accounting standard, respectively.
Interest forgone on nonaccrual loans totaled $42,000 and $17,000 for the three months ended March 31, 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 months ended March 31, 2023 and 2022 under ASC 326 and the previous accounting standard, respectively. 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. At March 31, 2023 and December 31, 2022, the Company had no recorded investments or commitments related to loans with terms that had been modified to borrowers experiencing financial difficulties. Additionally, the Company had no loan modifications with a subsequent payment default within twelve months following the modification during the three months ended March 31, 2023.
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Borrowing Arrangements |
3 Months Ended |
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Mar. 31, 2023 | |
| Debt Disclosure [Abstract] | |
| Borrowing Arrangements | 4. BORROWING ARRANGEMENTS The Company has a borrowing arrangement with the Federal Reserve Bank of San Francisco (FRB) under which advances are secured by portions of the Bank’s loan and investment securities portfolios. The Company’s credit limit varies according to the amount and composition of the assets pledged as collateral. At March 31, 2023, amounts pledged and available borrowing capacity under such limits were approximately $458.2 million and $370.3 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 March 31, 2023, amounts pledged and available borrowing capacity under such limits were approximately $401.2 million and $275.2 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 had an outstanding balance of $25.0 million at March 31, 2023. 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 had an outstanding balance of $50.0 million at March 31, 2023. Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to $123.0 million. There were no borrowings outstanding under these arrangements at March 31, 2023 and December 31, 2022. The Company maintains a revolving line of credit with a commitment of $3.0 million for a six month term at a rate of Prime plus 0.40%. At March 31, 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 March 31, 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 March 31, 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 March 31, 2023 and December 31, 2022, the balance remained at $35.0 million, net of the remaining unamortized issuance cost.
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Commitments and Contingent Liabilities |
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| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingent Liabilities | 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 At March 31, 2023 and December 31, 2022, the Company had outstanding unfunded commitments for loans of approximately $592.4 million and $644.1 million, respectively. The outstanding unfunded commitments for loans at March 31, 2023 was comprised of fixed rate commitments of approximately $42.2 million and variable rate commitments of approximately $550.2 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan commitments as of March 31, 2023.
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 $1.7 million and $430,000 at March 31, 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 months ended March 31, 2023.
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 three months ended, and as of, March 31, 2023.
The following table reflects the minimum commitments under these non-cancellable leases, before considering renewal options, as of March 31, 2023.
Rent expense included in premises and equipment expense totaled $488,000 and $497,000 for the three months ended March 31, 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 March 31, 2023, uninsured deposits at financial institutions were approximately $1.8 million. At December 31, 2022, uninsured deposits at financial institutions were approximately $2.9 million.
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Fair Value Measurements |
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| Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurements | 6. FAIR VALUE MEASUREMENTS Fair Value Hierarchy The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon: Level 1 - Quoted market prices for identical instruments traded in active exchange markets. Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data. Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. The carrying amounts and estimated fair values of financial instruments at March 31, 2023 and December 31, 2022 are as follows:
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The methods and assumptions used to estimate fair values are described as follows: Cash and Due from banks - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1. Investment Securities - Since quoted prices are generally not available for identical securities, fair values are calculated based on market prices of similar securities on similar dates, resulting in Level 2 classification. For securities where market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators, resulting in Level 3 classification. FHLB, IBFC, PCBB Stock - It is not practical to determine the fair value of these correspondent bank stocks due to restrictions placed on their transferability. Loans - Fair values of loans for March 31, 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 considering recent trading activity of similar instruments in market which can be inactive and accordingly are classified within in the Level 3 classification. Junior Subordinated Debt Securities - Fair values for subordinated debt are calculated based on its terms and were discounted to the date of the valuation to calculate the fair value on the debt. A market rate based on recent debt offering by peer bank was used to discount cash flow until reprice date and subsequently cash flow were discounted at Prime plus 2% for its security. These assumptions which may be unobservable, and considering recent trading activity of similar instruments in market which can be inactive and accordingly are classified within the Level 3 classification. Accrued Interest Receivable - The carrying amounts of accrued interest receivable approximate fair value resulting in a Level 2 classification for accrued interest receivable on investment securities and a Level 3 classification for accrued interest receivable on loans since investment securities are generally classified using Level 2 inputs and loans are generally classified using Level 3 inputs. Accrued Interest Payable - The carrying amounts of accrued interest payable approximate fair value resulting in a Level 2 classification, since accrued interest payable is from deposits that are generally classified using Level 2 inputs. Off Balance Sheet Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, and taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material. Assets Recorded at Fair Value on a Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.
Fair values for available-for-sale March 31, 2023 and December 31, 2022 or during the quarter ended March 31, 2023. Assets Recorded at Fair Value on a Non-Recurring Basis The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date. The following table summarizes impaired loans measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022.
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, generally. 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 market value. Increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of individually evaluated loans. |
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Nature of Operations (Tables) |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Earnings Per Share, Basic and Diluted |
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Investment Securities (Tables) |
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| Investments, Debt and Equity Securities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities, Available-for-sale | The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at March 31, 2023 and December 31, 2022.
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| Summary of available for sale securities and held to maturity securities continuous unrealized loss position fair value |
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| Summary of maturities available for sale investment securities | The following table summarizes the scheduled maturities of the Company’s investment securities as of March 31, 2023.
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Loans and Allowance For Credit Losses (Tables) |
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| Loans and Leases Receivable Disclosure [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Outstanding Loans | Outstanding loans as of March 31, 2023 and December 31, 2022 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).
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| Summary of Investment in Loans by Credit Quality Indicators | The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of March 31, 2023.
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| Summary of Financing Receivable and Related Impairment Methodology | The loans individually evaluated were classified as nonaccrual and were collateral dependent. The following table reflects the evaluation methodology applied to gross loans by portfolio segment and the related allowance for credit losses as of March 31, 2023 and allowance for loan losses as of December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
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| Summary of Allowance for Loan Losses | 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 months ended March 31, 2023 and 2022 under ASC 326 and the previous accounting standard, respectively.
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| Summary of Loan Portfolio Allocated by Management's Internal Risk Ratings | The following table reflects the loan portfolio allocated by the Company’s credit quality indicators as of December 31, 2022.
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| Summary of Aging Analysis of the Loan Portfolio by the Time Past Due | The following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2023 and December 31, 2022.
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| Summary of Information Related to Impaired Loans | The following table reflects information related to loans individually evaluated for expected credit losses/impairment as of March 31, 2023 and December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
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Commitments and Contingent Liabilities (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Unfunded Fixed Rate Loan Commitments |
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| Summary of credit losses for unfunded loan commitments | The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2023.
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| Summary of Quantitative Information About Operating Leases | The following table reflects the quantitative information for the Company’s leases for the three months ended, and as of, March 31, 2023.
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| Summary of Lessee, Operating Lease | The following table reflects the minimum commitments under these non-cancellable leases, before considering renewal options, as of March 31, 2023.
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Fair Value Measurements (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Carrying Amounts and Estimated Fair Values of Financial Instruments | The carrying amounts and estimated fair values of financial instruments at March 31, 2023 and December 31, 2022 are as follows:
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| Summary of Assets 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 March 31, 2023 and December 31, 2022.
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| Summary of Impaired Loans Measured at Fair Value on a Non-Recurring Basis | The following table summarizes impaired loans measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022.
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Nature Of Operations - Summary of Earnings Per Share, Basic and Diluted (Detail) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
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| Earnings Per Share [Abstract] | ||
| Net income available to common shareholders | $ 5,451 | $ 3,673 |
| Weighted average basic common shares outstanding | 8,339,080 | 8,276,761 |
| Add: dilutive potential common shares | 152,987 | 116,041 |
| Weighted average diluted common shares outstanding | 8,492,067 | 8,392,802 |
| Basic earnings per share | $ 0.65 | $ 0.44 |
| Diluted earnings per share | $ 0.64 | $ 0.44 |
Nature Of Operations - Additional Information (Detail) - USD ($) $ in Thousands |
Jan. 01, 2023 |
Mar. 31, 2023 |
Dec. 31, 2022 |
|---|---|---|---|
| Organization Consolidation And Presentation Of Financial Statements [Line Items] | |||
| Increase decrease in allowance for credit losses on loans | $ 1,800 | ||
| Held to maturity, at amortized cost | $ 110 | $ 0 | |
| Net increase in retained earnings | $ 68,082 | $ 62,297 | |
| Cumulative Effect, Period of Adoption, Adjustment [Member] | |||
| Organization Consolidation And Presentation Of Financial Statements [Line Items] | |||
| Held to maturity, at amortized cost | 110,000 | ||
| Net increase in retained earnings | 334,000,000 | ||
| Unfunded Loan Commitment [Member] | |||
| Organization Consolidation And Presentation Of Financial Statements [Line Items] | |||
| Increase decrease in allowance for credit losses on loans | $ 1,400 |
Loans and Allowance For Credit Losses - Additional Information (Detail) |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
|
Mar. 31, 2023
USD ($)
Loans
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Mar. 31, 2022
USD ($)
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Dec. 31, 2022
Loans
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| Accounts, Notes, Loans and Financing Receivable [Line Items] | |||
| Interest forgone on nonaccrual loans | $ | $ 42,000 | $ 17,000 | |
| Financing Receivable, Modifications, Number of Contracts | Loans | 0 | 0 | |
Commitments and Contingent Liabilities - Additional Information (Details) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Dec. 31, 2022 |
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| Percentage Of Commercial And industrial Loans to Total Loans | |||
| Cash Deposit FDIC Insurance Limit | $ 250,000 | ||
| Uninsured deposits at financial institutions | 1,800,000 | $ 2,900,000 | |
| Commitments for loans | 592,400,000 | 644,100,000 | |
| Rent and equipment expense | 488,000 | $ 497,000 | |
| Outstanding unfunded commitments for loans fixed rate of interest amount | 42,200,000 | ||
| Outstanding unfunded commitments for loans fixed rate of interest amount | 550,200,000 | ||
| Allowances for credit loss for unfunded loan commitment | $ 1,721,000 | $ 430,000 | |
Commitments and Contingent Liabilities - Summary Of Credit Losses For Unfunded Loan Commitments (Detail) |
3 Months Ended |
|---|---|
|
Mar. 31, 2023
USD ($)
| |
| Leases [Abstract] | |
| Balance at December 31, 2022 | $ 430,000 |
| Adoption of new accounting standard | 1,397,000 |
| Provision for credit losses | (106,000) |
| Balance at March 31, 2023 | $ 1,721,000 |
Commitments and Contingent Liabilities - Summary of Quantitative Information for the Company's Leases (Detail) $ in Thousands |
3 Months Ended |
|---|---|
|
Mar. 31, 2023
USD ($)
| |
| Operating lease cost (cost resulting from lease payments) | $ 488 |
| Operating lease - operating cash flows (fixed payments) | 434 |
| Operating lease - ROU assets | 10,203 |
| Operating lease - liabilities | $ 11,669 |
| Weighted average lease term - operating leases | 4 years 7 months 6 days |
| Weighted average discount rate - operating leases | 4.17% |
| Operating Lease, Right-of-Use Asset, Statement of Financial Position [Extensible Enumeration] | Interest Receivable and Other Assets |
Commitments and Contingent Liabilities - Summary of Operating Lease (Detail) $ in Thousands |
Mar. 31, 2023
USD ($)
|
|---|---|
| 2023 | $ 1,219 |
| 2024 | 2,414 |
| 2025 | 2,486 |
| 2026 | 2,451 |
| 2027 | 1,402 |
| Thereafer | 3,140 |
| Total undiscounted cash flows | 13,112 |
| Discount on cash flows | (1,443) |
| Total lease liability | $ 11,669 |
| Operating Lease, Liability, Statement of Financial Position [Extensible List] | Total lease liability |
Fair Value Measurements - Additional Information (Detail) - USD ($) $ in Thousands |
3 Months Ended | ||
|---|---|---|---|
Apr. 15, 2016 |
Mar. 31, 2023 |
Dec. 31, 2022 |
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| Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | |||
| Fair Value Measurement With Unobservable Inputs Transfers Net | $ 0 | ||
| Fair Value, Inputs, Level 3 [Member] | |||
| Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | |||
| Fair Value Measurement With Unobservable Inputs Asset Value | $ 0 | $ 0 | |
| Junior Subordinated Debt [Member] | Prime Rate [Member] | |||
| Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | |||
| Debt Instrument, Variable Rate | 2.00% |
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