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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2024

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

Commission File Number 001-39242

CALIFORNIA BANCORP

(Exact name of registrant as specified in its charter)


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

1300 Clay Street, Suite 500

Oakland,

California

94612

(Address of principal executive offices)

(510) 457-3737

(Registrant’s telephone number, including area code)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒ No ☐

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

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

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

Number of shares outstanding of the registrant’s common stock as of May 1, 2024: 8,439,185

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2024


		Page
Part I - Financial Information

Item 1.	Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		38

Part II - Other Information

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

Signatures			41

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(Dollar amounts in thousands)


	March 31, 2024			December 31, 2023
ASSETS:
Cash and due from banks	$	12,071		$	27,520
Federal funds sold		191,027			184,834

Total cash and cash equivalents		203,098			212,354
Investment securities:
Available for sale, at fair value		31,078			44,560
Held to maturity, at amortized cost, net of allowance for credit losses of $75 and $55 at March 31, 2024 and December 31, 2023, respectively		95,840			100,841

Total investment securities		126,918			145,401
Loans, net of allowance for credit losses of $15,981 and $16,028 at March 31, 2024 and December 31, 2023, respectively		1,506,133			1,544,612
Premises and equipment, net		1,987			2,207
Bank owned life insurance (BOLI)		26,084			25,878
Goodwill and other intangible assets		7,422			7,432
Accrued interest receivable and other assets		50,899			48,021

Total assets	$	1,922,541		$	1,985,905

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits
Noninterest-bearing	$	633,489		$	657,302
Interest-bearing		1,006,027			967,942

Total deposits		1,639,516			1,625,244
Other borrowings		—			75,000
Junior subordinated debt securities		54,326			54,291
Accrued interest payable and other liabilities		28,014			34,909

Total liabilities		1,721,856			1,789,444
Commitments and Contingencies (Note 5)
Shareholders’ equity
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2024 and December 31, 2023		—			—
Common stock, no par value; 40,000,000 shares authorized; 8,436,732 and 8,402,482 issued and outstanding at March 31, 2024 and December 31, 2023, respectively		113,566			113,227
Retained earnings		87,982			84,165
Accumulated other comprehensive loss, net of taxes		(863	)		(931	)

Total shareholders’ equity		200,685			196,461

Total liabilities and shareholders’ equity	$	1,922,541		$	1,985,905

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

Table of Contents

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollar amounts in thousands, except per share data)


	Three Months Ended March 31,
	2024		2023
Interest income
Loans	$	23,574	$	22,472
Federal funds sold		2,334		1,760
Investment securities		1,474		1,307

Total interest income		27,382		25,539
Interest expense
Deposits		9,096		6,022
Borrowings and subordinated debt		571		760

Total interest expense		9,667		6,782
Net interest income		17,715		18,757
Provision for credit losses		126		358

Net interest income after provision for credit losses		17,589		18,399
Non-interest income
Service charges and other fees		1,379		863
Other		326		244

Total non-interest income		1,705		1,107
Non-interest expense
Salaries and benefits		8,852		7,876
Premises and equipment		1,452		1,180
Merger related expenses		1,024		—
Professional fees		443		450
Data processing		432		608
Other		1,501		1,729

Total non-interest expense		13,704		11,843
Income before provision for income taxes		5,590		7,663
Provision for income taxes		1,773		2,212

Net income	$	3,817	$	5,451

Earnings per common share
Basic	$	0.45	$	0.65

Diluted	$	0.45	$	0.64

Average common shares outstanding		8,413,735		8,339,080

Average common and equivalent shares outstanding		8,566,712		8,492,067

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

Table of Contents

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollar amounts in thousands)


	Three Months Ended March 31,
	2024			2023
Net Income	$	3,817		$	5,451
Other comprehensive income (loss)
Unrealized gains (losses) on securities available for sale, net		87			326
Reclassification adjustment for securities transferred from available for sale to held to maturity in prior year, net		—			(61	)
Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net		6			2
Tax effect		(25	)		(97	)

Total other comprehensive income		68			170

Total comprehensive income	$	3,885		$	5,621

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

Table of Contents

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)


	Common Stock						Retained		Accumulated Other Comprehensive Income			Total Shareholders’
	Shares			Amount			Earnings		(Loss)			Equity
Balance at December 31, 2023		8,402,482		$	113,227		$	84,165	$	(931	)	$	196,461
Stock awards issued and related compensation expense		50,428			772			—		—			772
Shares withheld to pay taxes on stock based compensation		(18,361	)		(433	)		—		—			(433	)
Stock options exercised		5,775			79			—		—			79
Shares withheld to pay exercise price on stock options		(3,592	)		(79	)		—		—			(79	)
Net income		—			—			3,817		—			3,817
Other comprehensive income		—			—			—		68			68

Balance at March 31, 2024		8,436,732		$	113,566		$	87,982	$	(863	)	$	200,685


	Common Stock						Retained		Other Comprehensive Income			Total Shareholders’
	Shares			Amount			Earnings		(Loss)			Equity
Balance at December 31, 2022		8,332,479		$	111,257		$	62,297	$	(1,300	)	$	172,254
Adoption of new accounting standard		—			—			334		—			334
Stock awards issued and related compensation expense		34,560			631			—		—			631
Shares withheld to pay taxes on stock based compensation		(12,139	)		(285	)		—		—			(285	)
Stock options exercised		478			6			—		—			6
Net income		—			—			5,451		—			5,451
Other comprehensive income		—			—			—		170			170

Balance at March 31, 2023		8,355,378		$	111,609		$	68,082	$	(1,130	)	$	178,561

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

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CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands)


	Three Months Ended March 31,
	2024			2023
Cash flows from operating activities:
Net income	$	3,817		$	5,451
Adjustments to reconcile net income to net cash (used for) provided by operating activities:
Provision for credit losses		126			358
Provision for deferred taxes		28			1,987
Depreciation		228			251
Deferred loan (costs) fees, net		(116	)		276
Stock based compensation, net		339			346
Increase in cash surrender value of life insurance		(185	)		(173	)
Discount on retained portion of sold loans, net		(9	)		(9	)
Net changes in accrued interest receivable and other assets		(2,840	)		(7,346	)
Net changes in accrued interest payable and other liabilities		(6,694	)		1,581

Net cash (used for) provided by operating activities		(5,306	)		2,722

Cash flows from investing activities:
Proceeds from principal payments on investment securities		18,509			2,081
Net decrease (increase) in loans		38,303			(23,842	)
Capital calls on low income tax credit investments		(5	)		(234	)
Purchase of premises and equipment		(7	)		(26	)
Purchase of bank-owned life insurance policies		(22	)		(34	)

Net cash provided by (used for) investing activities		56,778			(22,055	)

Cash flows from financing activities:
Net increase (decrease) in customer deposits		14,272			(74,130	)
(Paydown) proceeds from short term and overnight borrowings, net		(75,000	)		75,000
Proceeds from exercised stock options, net		—			6

Net cash (used for) provided by financing activities		(60,728	)		876

Decrease in cash and cash equivalents		(9,256	)		(18,457	)
Cash and cash equivalents, beginning of period		212,354			232,382

Cash and cash equivalents, end of period	$	203,098		$	213,925

Supplemental disclosure of cash flow information:
Recording of right to use assets and operating lease liabilities	$	—		$	6,127
Cash paid during the year for:
Interest	$	9,743		$	6,095
Income taxes	$	10		$	—

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

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CALIFORNIA BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

Organization

California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”), which offers a broad range of commercial banking services to closely held businesses and professionals located throughout Northern California. The Bank has a full-service branch located in Contra Costa County and 4 loan production offices located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County.

Proposed Merger with Southern California Bancorp

On January 30, 2024, the Company entered into a merger agreement with Southern California Bancorp (“SCB”), the bank holding company for Bank of Southern California, N.A. (“BSC”). The merger agreement provides that, subject to the receipt of required regulatory and shareholders approvals and the satisfaction of other conditions, the Company will merge with and into SCB and the Bank will merge with and into BSC. As a result of the merger, each outstanding share of California BanCorp common stock will convert into the right to receive 1.590 shares of SCB common stock. Immediately after the merger, the Company expects that the Company’s shareholders will own approximately 43% of the combined company and SCB’s shareholders will own approximately 57% of the combined company.

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, 2023, and the notes thereto, included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2023 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, 2024 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, 2024.

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.

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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.

The Company completed an interim impairment analysis of goodwill as of March 31, 2024 and determined there was no impairment.

Earnings Per Share (“EPS”)

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


	Three months ended
	March 31,
(Dollars in thousands, except per share data)	2024		2023
Net income available to common shareholders	$	3,817	$	5,451
Weighted average basic common shares outstanding		8,413,735		8,339,080
Add: dilutive potential common shares		152,977		152,987

Weighted average diluted common shares outstanding		8,566,712		8,492,067
Basic earnings per share	$	0.45	$	0.65

Diluted earnings per share	$	0.45	$	0.64

Recent Accounting Pronouncements

In December 2023, the FASB issued

ASU No.

2023-09

Income Taxes (Topic 740): Improvements to Income Tax Disclosures

. The amendments require disaggregated information about the effective tax rate reconciliation and additional disclosures on reconciling items and taxes paid that meet a quantitative threshold. The amendments are effective for annual reporting periods beginning after December 15, 2024, and may be adopted either prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of the amendments on our financial statement disclosures upon adoption.

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2. INVESTMENT SECURITIES

The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at March 31, 2024 and December 31, 2023.


(Dollars in thousands)	Amortized Cost		Gross Unrealized / Unrecognized Gains		Gross Unrealized / Unrecognized Losses			Estimated Fair Value
At March 31, 2024:
Mortgage backed securities	$	12,288	$	22	$	(787	)	$	11,523
Government agencies		19,941		—		(386	)		19,555

Total available for sale securities	$	32,229	$	22	$	(1,173	)	$	31,078

Mortgage backed securities	$	51,997	$	76	$	(6,718	)	$	45,355
Government agencies		3,070		—		(507	)		2,563
Corporate bonds		40,773		—		(3,978	)		36,795

Total held to maturity securities, net	$	95,840	$	76	$	(11,203	)	$	84,713

At December 31, 2023:
Mortgage backed securities	$	15,882	$	25	$	(758	)	$	15,149
Government agencies		29,916		—		(505	)		29,411

Total available for sale securities	$	45,798	$	25	$	(1,263	)	$	44,560

Mortgage backed securities	$	56,928	$	—	$	(6,140	)	$	50,788
Government agencies		3,072		—		(513	)		2,559
Corporate bonds		40,841		—		(4,158	)		36,683

Total held to maturity securities, net	$	100,841	$	—	$	(10,811	)	$	90,030

The Company did not purchase or sell any investment securities during the three months ended March 31, 2024 and 2023.

The following table summarizes the scheduled maturities of our available for sale and held to maturity investment securities as of March 31, 2024.


	Available for Sale				Held to Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Less that one year	$	18,372	$	18,100	$	13,673	$	13,640
One to five years		4,976		4,846		14,480		14,044
Five to ten years		—		—		19,593		16,885
Beyond ten years		1,448		1,328		20,094		16,036
Securities not due at a single maturity date		7,433		6,804		28,000		24,108

Total investment securities	$	32,229	$	31,078	$	95,840	$	84,713

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

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Management monitors the credit quality of held to maturity investment securities through the use of credit ratings by major credit agencies and analysis of issuer financial information, if available. Additionally, securities issued by government-sponsored agencies, such as FNMA, FHLMC and SBA, have implicit and/or explicit credit guarantees by the United States Federal Government which protect us from credit losses on the contractual cash flows of the securities. The following table reflects the amortized cost and fair value of held to maturity investment securities as of March 31, 2024 and December 31, 2023, aggregated by credit quality indicators.


	March 31, 2024				December 31, 2023
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Aaa	$	11,261	$	9,179	$	11,382	$	9,473
Aa1/Aa2/Aa3		3,069		2,563		3,072		2,559
A1/A2/A3		4,774		3,466		4,770		3,543
Not rated		76,736		69,505		81,617		74,455

Total held to maturity securities	$	95,840	$	84,713	$	100,841	$	90,030

At March 31, 2024, the Company had 51 securities in an unrealized loss position. At December 31, 2023, the Company had 55 securities in an unrealized loss position. The following table summarizes the unrealized losses for those investment securities, at the respective reporting dates, aggregated by major security type and length of time in a continuous unrealized loss position.


	Less Than 12 Months				More Than 12 Months					Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
At March 31, 2024:
Mortgage backed securities	$	—	$	—	$	9,783	$	(787	)	$	9,783	$	(787	)
Government agencies		—		—		19,555		(386	)		19,555		(386	)

Total available for sale securities	$	—	$	—	$	29,338	$	(1,173	)	$	29,338	$	(1,173	)

Mortgage backed securities	$	—	$	—	$	42,113	$	(6,718	)	$	42,113	$	(6,718	)
Government agencies		—		—		2,563		(507	)		2,563		(507	)
Corporate bonds		—		—		36,795		(3,978	)		36,795		(3,978	)

Total held to maturity securities	$	—	$	—	$	81,472	$	(11,203	)	$	81,472	$	(11,203	)

At December 31, 2023:
Mortgage backed securities	$	—	$	—	$	13,314	$	(758	)	$	13,314	$	(758	)
Government agencies		—		—		29,411		(505	)		29,411		(505	)

Total available for sale securities	$	—	$	—	$	42,725	$	(1,263	)	$	42,725	$	(1,263	)

Mortgage backed securities	$	—	$	—	$	50,788	$	(6,140	)	$	50,788	$	(6,140	)
Government agencies		—		—		2,559		(513	)		2,559		(513	)
Corporate bonds		—		—		36,683		(4,158	)		36,683		(4,158	)

Total held to maturity securities	$	—	$	—	$	90,030	$	(10,811	)	$	90,030	$	(10,811	)

At March 31, 2024 and December 31, 2023, management determined that it did not intend to sell any available for sale investment securities with unrealized losses, and it was unlikely that the Company would be required to sell any of those securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses were recognized, individually or collectively, on available for sale securities in an unrealized loss position, as management did not believe any of the securities were impaired due to reasons of credit quality at March 31, 2024 and December 31, 2023.

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The Company measures expected credit losses on held to maturity securities collectively by major security type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions along with reasonable and supportable forecasts. At March 31, 2024 and December 31, 2023, the Company determined that an allowance for credit losses of $75,000 and $55,000, respectively, was required for held to maturity securities. The allowance for credit losses pertained to corporate bonds and was presented as a reduction to the amortized cost of held to maturity securities outstanding.

The following table presents the balance and activity in the allowance for credit losses on held to maturity securities for the three months ended March 31, 2024 and 2023.


	Three Months Ended March 31,
(Dollars in thousands)	2024		2023
Beginning balance	$	55	$	—
Adoption of new accounting standard		—		110
Provision for credit losses		20		—
Net charge-offs		—		—

Ending balance	$	75	$	110

On a quarterly basis, the Company utilizes a comprehensive risk assessment which includes an external rating methodology to identify, measure, and monitor risks associated with our held to maturity loan portfolio. The provision for credit losses in the first quarter of 2024 was primarily driven by an increase in the risk of default pertaining to certain securities in the held to maturity portfolio, and was identified as part of the comprehensive quarterly analysis.

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans as of March 31, 2024 and December 31, 2023 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).


(Dollars in thousands)	March 31, 2024			December 31, 2023
Commercial and industrial	$	610,459		$	626,615
Real estate - other		834,143			849,306
Real estate - construction and land		35,886			44,186
SBA		3,919			4,032
Other		36,484			35,394

Total loans, gross		1,520,891			1,559,533
Deferred loan origination costs, net		1,223			1,107
Allowance for credit losses		(15,981	)		(16,028	)

Total loans, net	$	1,506,133		$	1,544,612

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The Company categorizes its loan portfolio into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:

Special Mention: A Special Mention credit has potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: A Doubtful credit has all the weaknesses inherent in Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually, as part of the above described process, are considered to be pass-rated loans.

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The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of March 31, 2024.


	Term Loans by Year of Origination
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		Total
Commercial and industrial
Pass	$	2,575	$	79,677	$	131,880	$	51,887	$	14,380	$	58,129	$	212,976	$	551,504
Special mention		—		117		250		1,815		442		937		22,159		25,720
Substandard		—		751		10,173		2,445		57		431		19,378		33,235

Total	$	2,575	$	80,545	$	142,303	$	56,147	$	14,879	$	59,497	$	254,513	$	610,459

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - other
Pass	$	6,979	$	41,701	$	186,703	$	187,023	$	83,281	$	210,914	$	69,193	$	785,794
Special mention		—		—		4,267		33,165		—		4,137		—		41,569
Substandard		—		—		—		1,638		—		5,142		—		6,780

Total	$	6,979	$	41,701	$	190,970	$	221,826	$	83,281	$	220,193	$	69,193	$	834,143

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - construction and land
Pass	$	—	$	4,786	$	3,535	$	8,806	$	—	$	—	$	—	$	17,127
Special mention		—		—		—		14,227		—		—		—		14,227
Substandard		—		2,889		—		—		—		1,643		—		4,532

Total	$	—	$	7,675	$	3,535	$	23,033	$	—	$	1,643	$	—	$	35,886

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
SBA
Pass	$	—	$	—	$	734	$	—	$	—	$	2,243	$	102	$	3,079
Special mention		—		—		—		—		—		88		—		88
Substandard		—		—		—		—		—		752		—		752

Total	$	—	$	—	$	734	$	—	$	—	$	3,083	$	102	$	3,919

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	309	$	—	$	309
Other
Pass	$	33	$	28	$	1,372	$	—	$	148	$	32,451	$	2,452	$	36,484
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—

Total	$	33	$	28	$	1,372	$	—	$	148	$	32,451	$	2,452	$	36,484

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	130	$	—	$	130
Total
Pass	$	9,587	$	126,192	$	324,224	$	247,716	$	97,809	$	303,737	$	284,723	$	1,393,988
Special mention		—		117		4,517		49,207		442		5,162		22,159		81,604
Substandard		—		3,640		10,173		4,083		57		7,968		19,378		45,299

Total	$	9,587	$	129,949	$	338,914	$	301,006	$	98,308	$	316,867	$	326,260	$	1,520,891

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	439	$	—	$	439

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The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of December 31, 2023.


	Term Loans by Year of Origination
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial and industrial
Pass	$	86,292	$	136,525	$	55,779	$	15,517	$	27,484	$	35,217	$	206,037	$	562,851
Special mention		124		3,700		1,940		502		730		336		24,048		31,380
Substandard		751		10,888		1,319		111		443		—		18,872		32,384

Total	$	87,167	$	151,113	$	59,038	$	16,130	$	28,657	$	35,553	$	248,957	$	626,615

Current period gross charge-offs	$	—	$	136	$	—	$	—	$	—	$	20	$	247	$	403
Real estate - other
Pass	$	44,570	$	181,849	$	186,142	$	84,708	$	58,419	$	160,252	$	83,755	$	799,695
Special mention		—		4,293		33,356		—		1,575		3,575		—		42,799
Substandard		—		—		1,649		—		587		4,576		—		6,812

Total	$	44,570	$	186,142	$	221,147	$	84,708	$	60,581	$	168,403	$	83,755	$	849,306

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - construction and land
Pass	$	3,982	$	10,134	$	25,544	$	—	$	—	$	—	$	—	$	39,660
Special mention		2,871		—		—		—		—		—		—		2,871
Substandard		—		—		—		—		—		1,655		—		1,655

Total	$	6,853	$	10,134	$	25,544	$	—	$	—	$	1,655	$	—	$	44,186

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
SBA
Pass	$	—	$	747	$	17	$	—	$	570	$	1,721	$	108	$	3,163
Special mention		—		—		—		—		—		102		—		102
Substandard		—		—		—		—		398		369		—		767

Total	$	—	$	747	$	17	$	—	$	968	$	2,192	$	108	$	4,032

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other
Pass	$	—	$	1,511	$	—	$	169	$	—	$	33,329	$	385	$	35,394
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—

Total	$	—	$	1,511	$	—	$	169	$	—	$	33,329	$	385	$	35,394

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total
Pass	$	134,844	$	330,766	$	267,482	$	100,394	$	86,473	$	230,519	$	290,285	$	1,440,763
Special mention		2,995		7,993		35,296		502		2,305		4,013		24,048		77,152
Substandard		751		10,888		2,968		111		1,428		6,600		18,872		41,618

Total	$	138,590	$	349,647	$	305,746	$	101,007	$	90,206	$	241,132	$	333,205	$	1,559,533

Current period gross charge-offs	$	—	$	136	$	—	$	—	$	—	$	20	$	247	$	403

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The following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2024 and December 31, 2023.


(Dollars in thousands)	30 Days		60 Days		90+ Days		Nonaccrual		Current		Total
As of March 31, 2024:
Commercial and industrial	$	4,933	$	—	$	—	$	1,159	$	604,367	$	610,459
Real estate - other		5,044		—		—		—		829,099		834,143
Real estate - construction and land		—		16,793		—		—		19,093		35,886
SBA		—		398		—		53		3,468		3,919
Other		241		169		240		—		35,834		36,484

Total loans, gross	$	10,218	$	17,360	$	240	$	1,212	$	1,491,861	$	1,520,891

As of December 31, 2023:
Commercial and industrial	$	—	$	—	$	—	$	3,728	$	622,887	$	626,615
Real estate - other		1,824		—		—		—		847,482		849,306
Real estate - construction and land		—		—		—		—		44,186		44,186
SBA		—		—		—		53		3,979		4,032
Other		—		—		—		—		35,394		35,394

Total loans, gross	$	1,824	$	—	$	—	$	3,781	$	1,553,928	$	1,559,533

The increase in past due loans during the first quarter of 2024 was primarily due to one construction loan that was paid off in full during April 2024.

The following table reflects nonaccrual loans by portfolio segment as of March 31, 2024 and December 31, 2023.


(Dollars in thousands)	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans
As of March 31, 2024:
Commercial and industrial	$	1,159	$	—	$	1,159
SBA		53		—		53

Total nonaccrual loans	$	1,212	$	—	$	1,212

As of December 31, 2023:
Commercial and industrial	$	3,708	$	20	$	3,728
SBA		53		—		53

Total nonaccrual loans	$	3,761	$	20	$	3,781

Interest forgone on nonaccrual loans totaled $62,000 and $42,000 for the three months ended March 31, 2024 and 2023, 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, 2024 and 2023.

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.

The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management designates as having higher risk. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. For collateral dependent loans, the Company has adopted the practical expedient under the ASC 326 to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

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The following table reflects the Company’s collateral dependent loans by portfolio segment and by type of collateral as of March 31, 2024 and December 31, 2023.


(Dollars in thousands)	Residential Property		Business Assets		Total Collateral Dependent Loans
As of March 31, 2024:
Commercial and industrial	$	—	$	8,785	$	8,785
SBA		451		—		451

Total collateral dependent loans	$	451	$	8,785	$	9,236

As of December 31, 2023:
Commercial and industrial	$	—	$	3,728	$	3,728
SBA		53		—		53

Total collateral dependent loans	$	53	$	3,728	$	3,781

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The following table reflects 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, 2024 and 2023.


(Dollars in thousands)	Commercial and Industrial			Real Estate Other			Real Estate Construction and Land			SBA			Other			Total
Three months ended March 31, 2024:
Beginning balance	$	10,853		$	3,218		$	492		$	521		$	944		$	16,028
Provision for credit losses		231			(120	)		50			(7	)		147			301
Charge-offs		—			—			—			(309	)		(130	)		(439	)
Recoveries		91			—			—			—			—			91

Ending balance	$	11,175		$	3,098		$	542		$	205		$	961		$	15,981

Allowance for credit losses / gross loans		1.83	%		0.37	%		1.51	%		5.23	%		2.63	%		1.05	%
Net recoveries (charge-offs) / gross loans		0.01	%		0.00	%		0.00	%		-7.88	%		-0.36	%		-0.02	%
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		—			—			—			—			—			—

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

Allowance for loan 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	%

Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, therefore a change to the allowance for credit losses is generally not recorded upon modification.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction or principal forgiveness, may be granted. Upon the Company’s determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of that loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

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During the three months ended March 31, 2024, the Company had two loans with a recorded investment or commitment with terms that had been modified due to the borrower experiencing financial difficulties. These loans had no payments that were considered past due as of the reporting date. During the three months ended March 31, 2023, the Company had no loans with a recorded investment or commitment with terms that had been modified due to the borrower experiencing financial difficulties. The following table reflects the type of concession granted and the financial effect of the modifications for the three months ended March 31, 2024.


(Dollars in thousands)	Amortized Cost		% of Total Portfolio Segment			Financial Effect
Commercial and industrial	$	11,065		1.81	%	Term Extension - maturity date extended from March 15, 2024 to December 15, 2024
Commercial and industrial		3,641		0.60	%	Term Extension - maturity date extended from January 31, 2024 to April 30, 2024

Total modified loans	$	14,706

The Company had no loan modifications resulting from a borrower experiencing financial difficulties with a subsequent payment default within twelve months following the modification during the three months ended March 31, 2024.

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, 2024, amounts pledged and available borrowing capacity under such limits were approximately $410.5 million and $334.3 million, respectively. At December 31, 2023, amounts pledged and available borrowing capacity under such limits were approximately $432.5 million and $343.3 million, respectively.

The Company has a borrowing arrangement with the Federal Home Loan Bank of San Francisco (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, 2024, amounts pledged and available borrowing capacity under such limits were approximately $397.0 million and $351.5 million, respectively. At December 31, 2023, amounts pledged and available borrowing capacity under such limits were approximately $401.4 million and $280.9 million, respectively. On December 29, 2023, the Company secured a FHLB short-term borrowing for $75.0 million at a fixed rate of 5.70%. This borrowing was repaid in full on January 2, 2024.

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, 2024 and December 31, 2023.

The Company maintains a revolving line of credit with a commitment of $3.0 million for a

one-year

term at a rate of Prime plus 0.40%. At March 31, 2024 and December 31, 2023, no borrowings were outstanding under this line of credit.

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 Secured Overnight Financing Rate (“SOFR”) plus 0.488%. The subordinated debt was recorded net of related issuance costs of $300,000. At March 31, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, the balance remained at $35.0 million, net of the remaining unamortized issuance cost.

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5. COMMITMENTS AND CONTINGENT LIABILITIES

Financial Instruments with

Off-Balance

Sheet Risk

The Company is a party to financial instruments with

off-balance

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a

case-by-case

basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, and deeds of trust on residential real estate and income-producing commercial properties.

At March 31, 2024 and December 31, 2023, the Company had outstanding unfunded commitments for loans of approximately $612.6 million and $676.1 million, respectively.

The outstanding unfunded commitments for loans at March 31, 2024 was comprised of fixed rate commitments of approximately $31.2 million and variable rate commitments of approximately $581.4 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan commitments as of March 31, 2024.


(Dollars in thousands)	Due in One Year Or Less		Over One Year But Less Than Five Years		Over Five Years		Total
Unfunded fixed rate loan commitments:
Interest rate less than or equal to 4.00%	$	17,140	$	2,929	$	106	$	20,175
Interest rate between 4.00% and 5.00%		450		3,491		219		4,160
Interest rate greater than or equal to 5.00%		2,270		2,667		1,967		6,904

Total unfunded fixed rate loan commitments	$	19,860	$	9,087	$	2,292	$	31,239

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 $2.0 million and $2.2 million at March 31, 2024 and December 31, 2023, respectively.

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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, 2024 and 2023.


	Three Months Ended March 31,
(Dollars in thousands)	2024			2023
Beginning balance	$	2,166		$	430
Adoption of new accounting standard		—			1,397
Provision for credit losses		(195	)		(106	)

Ending balance	$	1,971		$	1,721

Operating Leases

The Company leases various office premises under long-term operating lease agreements. These leases expire between 2026 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, 2024.


(Dollars in thousands)	March 31, 2024
Operating lease cost (cost resulting from lease payments)	$	590
Operating lease - operating cash flows (fixed payments)	$	598
Operating lease right-of-use assets (other assets)	$	8,557
Operating lease liabilities (other liabilities)	$	10,265
Weighted average lease term - operating leases		5.1 years
Weighted average discount rate - operating leases		3.39	%

The following table reflects the minimum commitments under these

non-cancellable

leases, before considering renewal options, as of March 31, 2024.


(Dollars in thousands)	March 31, 2024
2024	$	1,814
2025		2,486
2026		2,451
2027		1,402
2028		1,078
Thereafter		2,063

Total undiscounted cash flows		11,294
Discount on cash flows		(1,029	)

Total lease liability	$	10,265

Rent expense included in premises and equipment expense totaled $590,000 and $488,000 for the three months ended March 31, 2024 and 2023, 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.

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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, 2024, uninsured deposits at financial institutions were approximately $2.5 million. At December 31, 2023, uninsured deposits at financial institutions were approximately $3.0 million.

6. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

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

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

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

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

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

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

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The carrying amounts and estimated fair values of financial instruments at March 31, 2024 and December 31, 2023 are as follows:


	Carrying Amount		Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
As of March 31, 2024:
Financial assets:
Cash and cash equivalents	$	203,098	$	203,098	$	—	$	—	$	203,098
Investment securities:
Available for sale		31,078		—		31,078		—		31,078
Held to maturity		95,840				77,361		7,352		84,713
Loans, net		1,506,133		—		—		1,438,856		1,438,856
Accrued interest receivable		10,120		—		1,018		9,102		10,120
Financial liabilities:
Deposits	$	1,639,516	$	1,311,636	$	328,188	$	—	$	1,639,824
Subordinated debt		54,326		—		—		50,196		50,196
Accrued interest payable		3,216		—		3,114		102		3,216
As of December 31, 2023:
Financial assets:
Cash and due from banks	$	212,354	$	212,354	$	—	$	—	$	212,354
Investment securities:
Available for sale		44,560		—		44,560		—		44,560
Held to maturity		100,841				82,806		7,224		90,030
Loans, net		1,544,612				—		1,470,794		1,470,794
Accrued interest receivable		8,847		—		982		7,865		8,847
Financial liabilities:
Deposits	$	1,625,244	$	1,315,032	$	311,213	$	—	$	1,626,245
Other borrowings		75,000		—		—		75,000		75,000
Subordinated debt		54,291		—		—		50,248		50,248
Accrued interest payable		3,292		—		2,593		699		3,292

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, 2024 and December 31, 2023 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.

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

Deposits—The fair values disclosed for demand deposits (e.g., interest and

non-interest

checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. The carrying amounts of variable rate and fixed-term money market accounts approximate their fair values at the reporting date resulting in Level 1 classification. For time certificates of deposit, the estimated remaining cash flows were discounted, based on current rates for similar instruments in market, to determine the fair value (premium)/discount and accordingly are classified as Level 2.

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

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

Junior Subordinated Debt Securities—Fair values for subordinated debt are calculated based on their respective terms and discounted to the date of the valuation. A market rate based on recent debt offerings by peer banks, which may be unobservable, is used to discount the cash flows until the repricing date and the subsequent cash flows are discounted at Prime plus 2%. Additionally, the Company considers recent trading activity of similar instruments in the market, which may be inactive. Accordingly, junior subordinated debt securities are classified within the Level 3 classification.

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

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

Off Balance Sheet Instruments—Fair values for

off-balance

sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, as well as considering the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

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Assets Recorded at Fair Value on a Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of March 31, 2024 and December 31, 2023.


(Dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
As of March 31, 2024:
Investments available for sale:
Mortgage backed securities	$	11,523	$	—	$	11,523	$	—
Government agencies		19,555		—		19,555		—

Total assets measured at fair value on a recurring basis	$	31,078	$	—	$	31,078	$	—

As of December 31, 2023:
Investments available for sale:
Mortgage backed securities	$	15,149	$	—	$	15,149	$	—
Government agencies		29,411		—		29,411		—

Total assets measured at fair value on a recurring basis	$	44,560	$	—	$	44,560	$	—

Fair values for

available-for-sale

investment securities are based on quoted market prices for exact or similar securities. During the periods presented, there were no significant transfers in or out of Levels 1 and 2 and there were no changes in the valuation techniques used. Additionally, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2024 and December 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, 2024 and December 31, 2023.


	Carrying Amount		Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3
As of March 31, 2024:
Individually evaluated loans - Commercial	$	1,159	$	—	$	—	$	1,159
Individually evaluated loans - SBA		53		—		—		53

Total assets measured at fair value on a non-recurring basis	$	1,212	$	—	$	—	$	1,452

As of December 31, 2023:
Impaired loans - Commercial	$	3,728	$	—	$	—	$	3,728
Impaired loans - SBA		53		—		—		53

Total assets measured at fair value on a non-recurring basis	$	3,781	$	—	$	—	$	3,781

The fair value of individually evaluated loans is based upon independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less selling costs. Level 3 fair value measurement includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and loans collateralized by real property and other business asset collateral where a specific reserve has been established or a

charge-off

has been recorded. The unobservable inputs and qualitative information about the unobservable inputs are based on management’s best estimates of appropriate discounts in arriving at fair value. Increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of individually evaluated loans.

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, 2024 and December 31, 2023 and our results of operations for the three months ended March 31, 2024 and 2023, 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, 2023 that was filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2024 (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, 2024 (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. Additionally, statements regarding expectations, plans or objectives for future operations, products or services, loan recoveries and the proposed merger (the “Merger”) of the Company and Southern California Bancorp may be forward-looking statements. Often, forward-looking statements 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; 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; our ability to retain deposits during the pendency of the Merger, and integration and conversion activities related to the Merger; terms and conditions in our merger agreement with Southern California Bancorp that restrict our business while the Merger is pending; the occurrence of any event, change, or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement; delays in completing the Merger; the failure to satisfy any of the conditions to the Merger on a timely basis or at all; the possibility that the anticipated benefits of the Merger will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas we and California Bank of Commerce do business; certain restrictions during the pendency of the Merger that may impact the parties’ ability to pursue certain business opportunities or strategic transactions; the possibility that the Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities during the pendency of the Merger; and potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Merger and the integration of the two companies and banks. 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 on Form 10-K for the year ended December 31, 2023, 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, 2024.

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

Overview

California BanCorp (the “Company,” “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.

Proposed Merger with Southern California Bancorp

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, 2023, included in our Annual Report on Form 10-K and in Note 1 to our unaudited financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

Some of the financial measures discussed in this Report are considered non-GAAP financial measures. A non-GAAP financial measure is a financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, from the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles.

We believe that non-GAAP financial measures provide useful information to management and investors that is supplementary to our statements of financial condition, results of income and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have limitations. As such, you should not view this disclosure as a substitute for results determined in accordance with GAAP, and it is not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons.

The following table summarizes the details of the non-GAAP financial measure reflecting net income adjusted for the impact of merger related expenses that the Company has included in this Report for the three months ended March 31, 2024 and 2023.


	Three months ended
	March 31,
(Dollars in thousands)	2024		2023
Net income	$	3,817	$	5,451
Add: After-tax merger related expenses		1,024		—

Adjusted net income	$	4,841	$	5,451

The following table summarizes the details of the non-GAAP financial measure reflecting earnings per share adjusted for the impact of merger related expenses that the Company has included in this Report for the three months ended March 31, 2024 and 2023.


	Three months ended
	March 31,
(Dollars in thousands, except per share data)	2024		2023
Adjusted net income	$	4,841	$	5,451
Adjusted basic earnings per share	$	0.58	$	0.65

Adjusted diluted earnings per share	$	0.57	$	0.64

Average common shares outstanding		8,413,735		8,339,080

Average common and equivalent shares outstanding		8,566,712		8,492,067

The following table summarizes the details of the non-GAAP financial measure reflecting total revenue that the Company has included in this Report for the three months ended March 31, 2024 and 2023.


	Three months ended
	March 31,
(Dollars in thousands)	2024		2023
Net interest income	$	17,715	$	18,757
Non-interest income		1,705		1,107

Total revenue	$	19,420	$	19,864

The following table summarizes the details of the non-GAAP financial measure reflecting non-interest expense adjusted for capitalized loan origination costs and the impact of merger related expenses that the Company has included in this Report for the three months ended March 31, 2024 and 2023.


	Three months ended
	March 31,
(Dollars in thousands)	2024			2023
Non-interest expense	$	13,704		$	11,843
Add: Capitalized loan origination costs		414			651
Less: Merger related expenses		(1,024	)		—

Total non-interest expense, before capitalization of loan origination costs and merger related expenses	$	13,094		$	12,494

The following table summarizes the details of the non-GAAP financial measure reflecting the efficiency ratio adjusted for the impact of merger related expenses that the Company has included in this Report for the three months ended March 31, 2024 and 2023.


	Three months ended
	March 31,
(Dollars in thousands)	2024			2023
Non-interest expense	$	13,704		$	11,843
Less: Merger related expenses		(1,024	)		—

Total non-interest expense, before merger related expenses	$	12,680		$	11,843
Total revenue	$	19,420		$	19,864

Adjusted efficiency ratio		65.29	%		59.62	%

Results of Operations – Three Months Ended March 31, 2024 and 2023:

Overview

For the three months ended March 31, 2024 and March 31, 2023, net income was $3.8 million and $5.5 million, respectively, representing a decrease of $1.6 million, or 30%. Compared to the same period last year, net interest income after the provision for credit losses decreased by $810,000, non-interest income increased by $598,000, non-interest expense increased by $1.9 million, and income tax expense decreased by $439,000. Excluding the impact of merger related expenses pertaining to the pending transaction with Southern California Bancorp, the Company’s net income for the first quarter of 2024 was $4.8 million (See Non-GAAP Financial Measures).

Diluted earnings per share were $0.45 for the first quarter of 2024, compared to $0.64 for the first quarter of 2023. Excluding the impact of merger related expenses, the Company’s diluted earnings per share were $0.57 for the first quarter of 2024 (See Non-GAAP Financial Measures).

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, 2024, was $17.7 million, a decrease of $1.1 million, or 6% from $18.8 million for the same period in 2023. The decrease in net interest income was primarily attributable to a less favorable mix of average earning assets and an increase in the cost of deposits, which negatively impacted net interest margin. Contributing to the less favorable mix of average earning assets, the Company experienced a reduction in loan balances as a result of conservative underwriting combined with decreased demand and pay-offs occurring in the normal course of business. Net interest margin decreased by 13 basis points to 3.89% for the three months ended March 31, 2024, compared to 4.02% for the three months ended March 31, 2023.

Average total interest-earning assets were $1.83 billion in the first quarter of 2024 compared to $1.89 billion for the same period during 2023. The decrease in total interest-earning assets was primarily due to the reduction in the loan portfolio combined with decreased liquidity resulting from a lower balance of demand deposits. For the quarter ended March 31, 2024, the yield on average earning assets increased 54 basis points to 6.01% from 5.47% for the quarter ended March 31, 2023. The yield on total average gross loans in the three months ended March 31, 2024 was 6.24%, representing an increase of 48 basis points compared to 5.76% in the same period one year earlier. For the three months ended March 31, 2024 compared to the same period in 2023, the yield on average federal funds sold increased 83 basis points to 5.38% from 4.55%, and the yield on average investment securities increased 86 basis points to 4.29% from 3.43%.

For the three months ended March 31, 2024, average loans decreased $63.6 million, or 4%, from the quarter ended March 31, 2023 and average interest-bearing deposit balances decreased $1.4 million, or 0%, from the same quarter in the prior year. Average noninterest-bearing deposits for the first quarter of 2024 decreased $71.7 million, or 10%, from the same period in the prior year. The average loan to deposit ratio for the first quarter of 2024 was 93.19% compared to 93.08% for the first quarter of 2023.

Of the $63.6 million decrease in average loan balances year over year, average commercial and real estate related loans decreased by $31.0 million and $27.3 million, respectively. Additionally, SBA loans decreased by $2.0 million, and other loans decreased by $3.3 million.

The cost of interest-bearing deposits was 3.76% during the quarter ended March 31, 2024 compared to 2.49% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances increased by 82 basis points to 2.24% in the first quarter of 2024 compared to 1.42% in the first quarter of 2023.

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, 2024 and 2023.


	Three months ended March 31,
	2024							2023
(Dollars in thousands)	Average Balance		Yields or Rates			Interest Income/ Expense		Average Balance		Yields or Rates			Interest Income/ Expense
ASSETS
Interest earning assets:
Loans (1)	$	1,518,722		6.24	%	$	23,574	$	1,582,332		5.76	%	$	22,472
Federal funds sold		174,551		5.38	%		2,334		156,941		4.55	%		1,760
Investment securities		138,060		4.29	%		1,474		154,667		3.43	%		1,307

Total interest earning assets		1,831,333		6.01	%		27,382		1,893,940		5.47	%		25,539

Noninterest-earning assets:
Cash and due from banks		18,858							18,098
All other assets (2)		65,951							62,247

TOTAL	$	1,916,142						$	1,974,285

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	24,736		0.20	%		12	$	34,032		0.08	%	$	7
Money market and savings		635,696		3.12	%		4,928		626,666		2.01	%		3,104
Time		311,884		5.36	%		4,156		310,246		3.81	%		2,911
Other		55,130		4.17	%		571		71,108		4.33	%		760

Total interest-bearing liabilities		1,027,446		3.78	%		9,667		1,042,052		2.64	%		6,782

Noninterest-bearing liabilities:
Demand deposits		657,320							728,986
Accrued expenses and other liabilities		30,856							26,326
Shareholders’ equity		200,520							176,921

TOTAL	$	1,916,142						$	1,974,285



Net interest income and margin (3)				3.89	%	$	17,715				4.02	%	$	18,757

(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 of $34,000 and $226,000 for the three months ended March 31, 2024 and 2023, respectively.

(2)	Other noninterest-earning average assets includes the allowance for credit losses of $16.1 million and $17.0 million for the three months ended March 31, 2024 and 2023, respectively.

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

The following table shows the effect of the interest differential of volume and rate changes for the quarters ended March 31, 2024 and 2023. 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,
	2024 vs. 2023
	Increase (Decrease) Due to
	Change in:
(Dollars in thousands)	Average Volume			Average Rate			Net Change
Interest income:
Loans	$	(987	)	$	2,089		$	1,102
Federal funds sold		235			339			574
Investment securities		(177	)		344			167
Interest expense:
Deposits
Demand		(5	)		10			5
Money market and savings		70			1,754			1,824
Time		22			1,223			1,245
Other borrowings		(165	)		(24	)		(189	)

Net interest income	$	(851	)	$	(191	)	$	(1,042	)

Interest Income

Interest income increased by $1.9 million in the first quarter of 2024 compared to the same period of 2023, primarily due to an increase in the prime rate which generated higher yields on our loan portfolio. The prime rate at March 31, 2024 and March 31, 2023 was 8.50% and 8.00%, respectively. Interest earned on our loan portfolio of $23.6 million in the first quarter of 2024 represented an increase of $1.1 million, or 5%, compared to $22.5 million for the first quarter of 2023. Interest earned on federal funds sold of $2.3 million for the three months ended March 31, 2024 compared to $1.8 million for the same period in the prior year. Interest earned on investment securities of $1.5 million for the three months ended March 31, 2024 compared to $1.3 million for the three months ended March 31, 2023.

Interest Expense

Interest expense increased by $2.9 million in the first quarter of 2024 compared to the same period of 2023, 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 2024 compared to the same period one year earlier increased 114 basis point to 3.78% from 2.64%.

Provision for Credit Losses

The provision for credit losses of $126,000 for the three months ended March 31, 2024 was comprised of $301,000 pertaining to the allowance for credit losses on loans, $(195,000) pertaining to the allowance for credit losses for unfunded loan commitments, and $20,000 pertaining to the allowance for credit losses for held to maturity securities.

The provision for credit losses on loans of $301,000 for the first quarter of 2024 compared to a provision for credit losses on loans of $464,000 for the first quarter of 2023. The Company had loan charge-offs of $439,000 and recoveries of $91,000 during the first quarter of 2024, compared to loan charge-offs of $247,000 and no recoveries during the first quarter of 2023. The allowance for credit losses on loans as a percentage of outstanding loans was 1.05% at March 31, 2024 and 1.03% at December 31, 2023.

Non-interest Income

The following table reflects the major components of the Company’s non-interest income for the three months ended March 31, 2024 and 2023.


	Three Months Ended March 31,				Increase (Decrease)
(Dollars in thousands)	2024		2023		Amount		Percent
Service charges and other fees	$	1,379	$	863	$	516		60	%
Earnings on BOLI		185		173		12		7	%
Other		141		71		70		99	%

Total non-interest income	$	1,705	$	1,107	$	598		54	%

Non-interest income increased by $598,000, or 54% in the first quarter of 2024, compared to the first quarter of 2023. The increase was primarily due to an increase in service charges and other fee income related to treasury management activities and prepayment penalties assessed on loans.

Net interest income and non-interest income comprised total revenue of $19.4 million and $19.9 million for the quarters ended March 31, 2024 and March 31, 2023, respectively (See Non-GAAP Financial Measures).

Non-interest Expense

The following table reflects the major components of the Company’s non-interest expense for the three months ended March 31, 2024 and 2023.


	Three Months Ended March 31,				Increase (Decrease)
(Dollars in thousands)	2024		2023		Amount			Percent
Salaries and benefits	$	8,852	$	7,876	$	976			12	%
Premises and equipment		1,452		1,180		272			23	%
Merger related expenses		1,024		—		1,024			100	%
Professional fees		443		450		(7	)		-2	%
Data processing		432		608		(176	)		-29	%
Other		1,501		1,729		(228	)		-13	%

Total non-interest expense	$	13,704	$	11,843	$	1,861			16	%

Non-interest expense was $13.7 million and $11.8 million for the three months ended March 31, 2024 and 2023, respectively. Excluding capitalized loan origination costs and the impact of merger related expenses, non-interest expense for the first quarter of 2024 was $13.1 million compared to $12.5 million for the first quarter of 2023, representing an increase of $600,000, or 5% (See Non-GAAP Financial Measures). The increase in non-interest expense, excluding capitalized origination costs and merger related expenses, from the first quarter of 2024 was primarily due to an increase in salaries and benefits as well as premises and equipment related to investments to support the growth of the business.

For the three months ended March 31, 2024 and 2023, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 70.57% and 59.62%, respectively. Excluding the impact of merger related expenses, the Company’s efficiency ratio was 65.29% for the first quarter of 2024 (See Non-GAAP Financial Measures).

Provision for Income Taxes

Income tax expense was $1.8 million for the first quarter of 2024 and $2.2 million for the same period in prior year. The effective tax rates for those time periods were 31.7% and 28.9%, respectively. The increase in the effective tax rate from the prior year was due to the recognition of non-deductible merger related expenses.

Financial Condition:

Overview

Total assets of the Company were $1.92 billion as of March 31, 2024 compared to $1.99 billion as of December 31, 2023. The decrease in total assets from year-end was primarily due to slower loan growth as a result of conservative new loan production and decreased liquidity related to a reduction in non-interest bearing deposits and other borrowings.

Loan Portfolio

Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances decreased by $38.6 million, or 2%, from December 31, 2023 to March 31, 2024 primarily due to a reduction in commercial and industrial loans and real estate related loans.

The loan portfolio at March 31, 2024 and December 31, 2023 was comprised of approximately 40% of commercial and industrial loans. In addition, commercial real estate loans comprised 57% of our loans at March 31, 2024 and December 31, 2023. 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, 2024 and December 31, 2023.


(Dollars in thousands)	March 31, 2024			December 31, 2023
Commercial and industrial	$	610,459		$	626,615
Real estate - other		834,143			849,306
Real estate - construction and land		35,886			44,186
SBA		3,919			4,032
Other		36,484			35,394

Total loans, gross		1,520,891			1,559,533
Deferred loan origination costs, net		1,223			1,107
Allowance for credit losses		(15,981	)		(16,028	)

Total loans, net	$	1,506,133		$	1,544,612

Commercial and industrial		40	%		40	%
Real estate - other		55	%		54	%
Real estate - construction and land		2	%		3	%
SBA		1	%		1	%
Other		2	%		2	%

Total loans, gross		100	%		100	%

The following table shows the maturity distribution for total loans outstanding as of March 31, 2024. 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	$	191,014	$	317,172	$	102,273	$	—	$	610,459
Real estate - other		40,144		492,815		289,810		11,374		834,143
Real estate - construction and land		33,653		1,227		1,006		—		35,886
SBA		53		1,062		1,996		808		3,919
Other		2,464		1,569				32,451		36,484

Total loans, gross	$	267,328	$	813,845	$	395,085	$	44,633	$	1,520,891


	Loans With
(Dollars in thousands)	Fixed Rates (1)		Variable Rates		Total
Commercial and industrial	$	150,375	$	460,084	$	610,459
Real estate - other		570,177		263,966		834,143
Real estate - construction and land		3,541		32,345		35,886
SBA		—		3,919		3,919
Other		33,972		2,512		36,484

Total loans, gross	$	758,065	$	762,826	$	1,520,891

(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, 2024 and December 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.

The following table presents information regarding the Company’s nonperforming and modified loans as of March 31, 2024 and December 31, 2023.


(Dollars in thousands)	March 31, 2024			December 31, 2023
Nonaccrual loans	$	1,212		$	3,781
Loans over 90 days past due and still accruing		240			—

Total nonperforming loans		1,452			3,781
Foreclosed assets		—			—

Total nonperforming assets	$	1,452		$	3,781

Modified loans	$	14,706		$	9,737

Nonperforming loans / gross loans		0.10	%		0.24	%
Allowance for credit losses / nonperforming loans		1100.62	%		423.91	%

Allowance for Credit Losses

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

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

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


(Dollars in thousands)	Commercial and Industrial			Real Estate Other			Real Estate Construction and Land			SBA			Other			Total
Three months ended March 31, 2024:
Beginning balance	$	10,853		$	3,218		$	492		$	521		$	944		$	16,028
Provision for credit losses		231			(120	)		50			(7	)		147			301
Charge-offs		—			—			—			(309	)		(130	)		(439	)
Recoveries		91			—			—			—			—			91

Ending balance	$	11,175		$	3,098		$	542		$	205		$	961		$	15,981

Allowance for credit losses / gross loans		1.83	%		0.37	%		1.51	%		5.23	%		2.63	%		1.05	%
Net recoveries (charge-offs) / gross loans		0.01	%		0.00	%		0.00	%		-7.88	%		-0.36	%		-0.02	%
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		—			—			—			—			—			—

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

Allowance for loan 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	%

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.

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.

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, 2024 and December 31, 2023.


(Dollars in thousands)	Amortized Cost		Gross Unrealized / Unrecognized Gains		Gross Unrealized / Unrecognized Losses			Estimated Fair Value
At March 31, 2024:
Mortgage backed securities	$	12,288	$	22	$	(787	)	$	11,523
Government agencies		19,941		—		(386	)		19,555

Total available for sale securities	$	32,229	$	22	$	(1,173	)	$	31,078

Mortgage backed securities	$	51,997	$	76	$	(6,718	)	$	45,355
Government agencies		3,070		—		(507	)		2,563
Corporate bonds		40,773		—		(3,978	)		36,795

Total held to maturity securities, net	$	95,840	$	76	$	(11,203	)	$	84,713

At December 31, 2023:
Mortgage backed securities	$	15,882	$	25	$	(758	)	$	15,149
Government agencies		29,916		—		(505	)		29,411

Total available for sale securities	$	45,798	$	25	$	(1,263	)	$	44,560

Mortgage backed securities	$	56,928	$	—	$	(6,140	)	$	50,788
Government agencies		3,072		—		(513	)		2,559
Corporate bonds		40,841		—		(4,158	)		36,683

Total held to maturity securities, net	$	100,841	$	—	$	(10,811	)	$	90,030

The Company adopted ASC 326 on January 1, 2023 and, as a result, records an allowance for credit losses on investment securities. No allowances for credit losses have been recognized, individually or collectively, on available for sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at March 31, 2024. As of March 31, 2024 and December 31, 2023, the Company determined that an allowance for credit losses of $75,000 and $55,000, respectively, was required for held to maturity securities. The allowance for credit losses pertained to corporate bonds and was presented as a reduction to the amortized cost of held to maturity securities outstanding.

Deposits

Our deposits are primarily 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. An additional source of deposits is periodically obtained through third-party brokers. At March 31, 2024 and December 31, 2023, the Company held wholesale brokered time deposits of $261.6 million and $244.0 million, respectively.

The Company is also a participant in the Certificate of Deposit Account Registry Service (CDARS), IntraFi Network (ICS), and Reich & Tang Deposit Solutions (R&T) network, all of which provide reciprocal deposit placement services to fully qualify large customer deposits for FDIC insurance among other participating banks. At March 31, 2024 and December 31, 2023, the Company had $456.8 million and $460.0 million of reciprocal deposits, respectively. At March 31, 2024 and December 31, 2023 insured deposits represented 61% of the total deposit portfolio and uninsured deposits represented 39% of the total deposit portfolio.

At March 31, 2024, approximately 39% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at March 31, 2024 were held in interest-bearing demand, savings and money market accounts and time deposits. Approximately 41% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at March 31, 2024, which provide our customers with interest and liquidity. Time deposits comprised the remaining 20% of our deposits at March 31, 2024.

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, 2024:
Demand noninterest-bearing	$	633,489		39	%
Demand interest-bearing		21,911		1	%
Money market and savings		656,236		40	%
Time		327,880		20	%

Total deposits	$	1,639,516		100	%

At December 31, 2023:
Demand noninterest-bearing	$	657,302		40	%
Demand interest-bearing		26,715		2	%
Money market and savings		631,015		39	%
Time		310,212		19	%

Total deposits	$	1,625,244		100	%

The aggregate amount of time deposits in excess of the FDIC insurance limit was $33.9 million at March 31, 2024 and December 31, 2023. The following table reflects the aggregate maturities of those deposits as of the respective reporting periods.


(Dollars in thousands)	March 31, 2024		December 31, 2023
3 months or less	$	28,024	$	5,827
Over 3 months through 6 months		5,847		28,022
Over 6 months through 12 months		9		6
Over 12 months		—		—

Total uninsured time deposits	$	33,880	$	33,855

Liquidity

Our primary source of funding is deposits from our core banking relationships. However, the majority of the Bank’s deposits are transaction accounts or money market accounts that are payable on demand. Additionally, a small number of customers represent a large portion of the Bank’s deposits, as evidenced by the fact that approximately 20% of deposits were represented by the 10 largest depositors at both March 31, 2024 and December 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, the ability to supplement core deposits with brokered time deposits combined with the stability provided by utilizing reciprocal deposit networks, and our borrowing capacity through various secured and unsecured sources. Our borrowing capacity includes lines of credit with the FRB, FHLB, and correspondent banks that enable us to borrow funds as described in Note 4 to the consolidated financial statements included in Item 1 of this Report.

Capital Resources

We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. At March 31, 2024 and December 31, 2023, 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, 2024, the capital conservation buffer was 5.63%.

At March 31, 2024, the Bank had a Tier 1 risk-based capital ratio of 12.69%, a total capital to risk-weighted assets ratio of 13.63%, and a leverage ratio of 12.72%. At December 31, 2023, the Bank had a Tier 1 risk-based capital ratio of 12.04%, a total capital to risk-weighted assets ratio of 12.96%, and a leverage ratio of 12.14%.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of September 30, 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risks and uncertainties that we described 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, 2023, which we filed with the SEC on March 21, 2024.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits


Exhibit Number		Description of Exhibit

2.1		Agreement and Plan of Merger and Reorganization, dated as of January 30, 2024, by and between Southern California Bancorp and California BanCorp (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 30, 2024)

3.1		Articles of Incorporation of California BanCorp (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10 filed with the Commission on March 4, 2020)

3.2		Amended and Restated Bylaws of California BanCorp (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed with the Commission on March 4, 2020)

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

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

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

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

101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Signatures

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


	California BanCorp

Dated: May 9, 2024	By:	/s/ Steven E. Shelton
		Steven E. Shelton
		Chief Executive Officer
		(Principal Executive Officer)

Dated: May 9, 2024	By:	/s/ Thomas A. Sa
		Thomas A. Sa
		President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

California BanCorp 10-Q