10-Q

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended June 30, 2022

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

Commission File Number

001-39242

CALIFORNIA BANCORP

(Exact name of registrant as specified in its charter)


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

1300 Clay Street, Suite 500

Oakland, California 94612

(Address of principal executive offices)

(510)

457-3737

(Registrant’s telephone number, including area code)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Act). YES ☐ NO ☒

Number of shares outstanding of the registrant’s common stock as of August 1, 2022: 8,321,545

Table of Contents

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM

10-Q

FOR THE QUARTER ENDED JUNE 30, 2022


		Page
Part I - Financial Information

Item 1.	Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 4.	Controls and Procedures		46

Part II - Other Information

Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Mine Safety Disclosures		47
Item 5.	Other Information		47
Item 6.	Exhibits		49

Signatures			50

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form

10-Q

and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes thereto, included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2022.

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.

Subsequent Events

Management has reviewed all events through the date the unaudited consolidated financial statements were filed with the SEC and concluded that no event required any adjustment to the balances presented.

Use of Estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The estimates utilized to determine the appropriate allowance for loan losses at June 30, 2022 may be materially different from actual results due to the ongoing

COVID-19

pandemic and other qualitative factors.

Reclassifications

Certain prior balances in the unaudited consolidated financial statements may have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.

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Business Impact of

COVID-19

The

COVID-19

pandemic caused a substantial disruption to the global economy, U.S. economy, and the economies in which the Company operates. While the spread of the

COVID-19

virus has minimally impacted the Company’s operations as of June 30, 2022, we continue to closely monitor ongoing developments and remain focused on our ability to navigate these challenging conditions and on maintaining the underlying strength and stability of our Company.

Although the impact of

COVID-19

on the general economic environment and financial markets, including the Company’s market capitalization, has recently improved and stabilized, the continued uncertainty about the scope and longevity of its impact may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could result in a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments for investments, loans, and intangible assets.

Goodwill

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

The Company completed an impairment analysis of goodwill as of June 30, 2022 and determined there was no impairment. As part of the Company’s qualitative assessment of goodwill impairment, management considered

COVID-19

and determined that it was no longer a triggering event given that its impact on the general economic environment and financial markets, including the Company’s market capitalization, has improved and stabilized and, as such, does not currently represent an indicator of impairment.

Earnings Per Share (“EPS”)

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


	Three months ended				Six months ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2022		2021		2022		2021
Net income available to common shareholders	$	4,244	$	4,162	$	7,917	$	6,971
Weighted average basic common shares outstanding		8,295,014		8,209,678		8,285,950		8,195,380
Add: dilutive potential common shares		100,687		85,600		107,826		80,130

Weighted average diluted common shares outstanding		8,395,701		8,295,278		8,393,776		8,275,510
Basic earnings per share	$	0.51	$	0.51	$	0.96	$	0.85

Diluted earnings per share	$	0.51	$	0.50	$	0.94	$	0.84

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New Financial Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued “Simplifying the Accounting for Income Taxes (Topic 740)” (“ASU

2019-12”)

removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and clarifying and amending existing guidance to provide for more consistent application. ASU

2019-12

became effective for fiscal years beginning after December 15, 2021 and early adoption was permitted. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

In June 2016, the FASB issued ASU

2016-13,

Financial Instruments—Credit Losses (Topic 326). The guidance replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables,

held-to

maturity debt securities, and reinsurance receivables. It also applies to

off-balance

sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. In October of 2019, the FASB approved a proposal to defer implementation of the CECL model by smaller reporting companies to January 1, 2023. The Company qualifies for this deferral and has elected to defer adoption but has also taken steps to effect implementation of the guidance including: (1) forming a CECL Committee; (2) engaging a third party vendor to develop models and model assumptions; (3) established initial framework for portfolio segmentation for application of the models; and (4) received preliminary results for consideration and evaluation. The Company will continue to calibrate and validate its approach during the period of deferral.

2. INVESTMENT SECURITIES

The following table summarizes the amortized cost and estimated fair value of securities available for sale at June 30, 2022 and December 31, 2021.


			Gross		Gross
			Unrealized /		Unrealized /			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At June 30, 2022:
Mortgage backed securities	$	24,358	$	48	$	(654	)	$	23,752
Government agencies		29,755		—		(381	)		29,374
Corporate bonds		428		59		—			487

Total available for sale securities	$	54,541	$	107	$	(1,035	)	$	53,613

Mortgage backed securities	$	63,912	$	—	$	(5,465	)	$	58,447
Government agencies		3,088		—		(482	)		2,606
Corporate bonds		44,696		29		(1,997	)		42,728

Total held to maturity securities	$	111,696	$	29	$	(7,944	)	$	103,781

At December 31, 2021:
Mortgage backed securities	$	29,943	$	325	$	(320	)	$	29,948
Government agencies		3,093		—		(100	)		2,993
Corporate bonds		41,725		694		(468	)		41,951

Total available for sale securities	$	74,761	$	1,019	$	(888	)	$	74,892

Mortgage backed securities	$	22,772	$	—	$	(140	)	$	22,632
Government agencies		—		—		—			—
Corporate bonds		5,614		—		(30	)		5,584

Total held to maturity securities	$	28,386	$	—	$	(170	)	$	28,216

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The Company purchased 8 available for sale securities for $36.0 million and 11 held to maturity securities for $42.8 million during the six months ended June 30, 2022. The Company purchased 3 available for sale securities for $12.2 million and no held to maturity securities during the six months ended June 30, 2021. The Company did not sell any securities during the six months ended June 30, 2022 and June 30, 2021.

Net unrealized losses on available for sale investment securities totaling $928,000 were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at June 30, 2022. Net unrealized gains on available for sale investment securities totaling $131,000 were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at December 31, 2021, respectively.

During the first quarter of 2022, the Company

re-designated

certain securities previously classified as available for sale to the held to maturity classification. The securities

re-designated

consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, 2021. At the time of re-designation the securities included $281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.

The following table summarizes securities with unrealized losses at June 30, 2022 and December 31, 2021 aggregated by major security type and length of time in a continuous unrealized loss position.


	Less Than 12 Months					More Than 12 Months					Total
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
At June 30, 2022:
Mortgage backed securities	$	20,887	$	(654	)	$	—	$	—		$	20,887	$	(654	)
Government agencies		29,374		(381	)		—		—			29,374		(381	)
Corporate bonds		—		—			—		—			—		—

Total available for sale securities	$	50,261	$	(1,035	)	$	—	$	—		$	50,261	$	(1,035	)

Mortgage backed securities	$	58,447	$	(5,465	)	$	—	$	—		$	58,447	$	(5,465	)
Government agencies		2,606		(482	)		—		—			2,606		(482	)
Corporate bonds		35,425		(1,090	)		4,092		(907	)		39,517		(1,997	)

Total held to maturity securities	$	96,478	$	(7,037	)	$	4,092	$	(907	)	$	100,570	$	(7,944	)

At December 31, 2021:
Mortgage backed securities	$	14,302	$	(320	)	$	—	$	—		$	14,302	$	(320	)
Government agencies		2,993		(100	)		—		—			2,993		(100	)
Corporate bonds		15,233		(200	)		4,732		(268	)		19,965		(468	)

Total available for sale securities	$	32,528	$	(620	)	$	4,732	$	(268	)	$	37,260	$	(888	)

Mortgage backed securities	$	22,632	$	(140	)	$	—	$	—		$	22,632	$	(140	)
Government agencies		5,584		(30	)		—		—			5,584		(30	)
Corporate bonds		—		—			—		—			—		—

Total held to maturity securities	$	28,216	$	(170	)	$	—	$	—		$	28,216	$	(170	)

At June 30, 2022 the Company’s investment security portfolio consisted of 61 securities, 56 of which were in an unrealized loss position at quarter end. At December 31, 2021 the Company’s investment security portfolio consisted of 44 securities, 16 of which were in an unrealized loss position at year end. Management believes that changes in the market value since purchase are primarily attributable to changes in interest rates and relative illiquidity. Because the Company does not intend to sell and is unlikely to be required to sell until a recovery of fair value, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 30, 2022 and December 31, 2021, respectively. As part of the Company’s assessment of other-than-temporary-impairment (OTTI), management considered the current impact of the

COVID-19

pandemic and determined that its impact on the general economic environment and financial markets has improved and stabilized and, as such, does not currently represent an indicator of impairment.

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The following table summarizes the scheduled maturities of the Company’s investment securities as of June 30, 2022.


	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Less that one year	$	—	$	—	$	—	$	—
One to five years		41,822		41,195		23,651		23,016
Five to ten years		—		—		32,245		31,010
Beyond ten years		2,175		2,199		21,933		19,007
Securities not due at a single maturity date		10,544		10,219		33,867		30,748

Total investment securities	$	54,541	$	53,613	$	111,696	$	103,781

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

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans as of June 30, 2022 and December 31, 2021 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).


	June 30,			December 31,
(Dollars in thousands)	2022			2021
Commercial and industrial	$	589,562			474,281
Real estate - other		794,504			697,212
Real estate - construction and land		63,189			43,194
SBA		13,310			81,403
Other		39,814			80,559

Total loans, gross		1,500,379			1,376,649
Deferred loan origination costs, net		2,570			1,688
Allowance for credit losses		(15,957	)		(14,081	)

Total loans, net	$	1,486,992			1,364,256

SBA loans include Paycheck Protection Program (“PPP”) loans funded under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted as a result of the

COVID-19.

Of the $491.2 million in PPP loans funded by the Company as a result of the initial launch of the program in April 2020 and the

re-launch

of the program in January 2021, approximately $483.4 million of those balances have been granted forgiveness by the SBA as of June 30, 2022. Outstanding PPP loans were $7.8 million and $72.5 million as of June 30, 2022 and December 31, 2021, respectively.

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The following table reflects the loan portfolio allocated by management’s internal risk ratings at June 30, 2022 and December 31, 2021.


	Commercial				Real Estate
	and		Real Estate		Construction
(Dollars in thousands)	Industrial		Other		and Land		SBA		Other		Total
As of June 30, 2022
Grade:
Pass	$	572,866	$	788,970	$	60,282	$	11,726	$	39,814	$	1,473,658
Special Mention		12,739		854		—		865		—		14,458
Substandard		3,957		4,680		2,907		719		—		12,263

Total	$	589,562	$	794,504	$	63,189	$	13,310	$	39,814	$	1,500,379

As of December 31, 2021
Grade:
Pass	$	450,913	$	690,916	$	39,074	$	79,379	$	80,559	$	1,340,841
Special Mention		20,904		1,583		1,278		1,111		—		24,876
Substandard		2,464		4,713		2,842		913		—		10,932

Total	$	474,281	$	697,212	$	43,194	$	81,403	$	80,559	$	1,376,649

The following table reflects an aging analysis of the loan portfolio by the time past due at June 30, 2022 and December 31, 2021.


(Dollars in thousands)	30 Days		60 Days		90+ Days		Non-Accrual		Current		Total
As of June 30, 2022
Commercial and industrial	$	161	$	—	$	—	$	—	$	589,401	$	589,562
Real estate - other		—		—		—		—		794,504		794,504
Real estate - construction and land		—		—		—		—		63,189		63,189
SBA		—		—		—		549		12,761		13,310
Other		—		—		—		—		39,814		39,814

Total loans, gross	$	161	$	—	$	—	$	549	$	1,499,669	$	1,500,379

As of December 31, 2021
Commercial and industrial	$	—	$	2,597	$	—	$	—	$	471,684	$	474,281
Real estate - other		—		—		—		—		697,212		697,212
Real estate - construction and land		—		—		—		—		43,194		43,194
SBA		—		—		—		232		81,171		81,403
Other		—		—		—		—		80,559		80,559

Total loans, gross	$	—	$	2,597	$	—	$	232	$	1,373,820	$	1,376,649

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The following tables reflect the changes in, and allocation of, the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2022 and 2021.


(Dollars in thousands)	Commercial and Industrial			Real Estate Other			Real Estate Construction and Land			SBA			Other			Total
Three months ended June 30, 2022
Beginning balance	$	8,876		$	5,080		$	783		$	283		$	10		$	15,032
Provision for loan losses		650			163			124			(10	)		(2	)		925
Charge-offs		—			—			—			—			—			—
Recoveries		—			—			—			—			—			—

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

Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Three months ended June 30, 2021
Beginning balance	$	9,231		$	3,957		$	798		$	575		$	16		$	14,577
Provision for loan losses		(1,139	)		112			(101	)		20			8			(1,100	)
Charge-offs		—			—			—			(278	)		—			(278	)
Recoveries		41			—			—			—			—			41

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

Net recoveries (charge-offs) / gross loans		0.01	%		0.00	%		0.00	%		-0.14	%		0.00	%		-0.02	%
Six months ended June 30, 2022
Beginning balance	$	8,552		$	4,524		$	681		$	309		$	15		$	14,081
Provision for loan losses		973			719			226			(36	)		(7	)		1,875
Charge-offs		—			—			—			—			—			—
Recoveries		1			—			—			—			—			1

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

Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Six months ended June 30, 2021
Beginning balance	$	8,923		$	3,877		$	681		$	604		$	26		$	14,111
Provision for loan losses		(997	)		192			16			(9	)		(2	)		(800	)
Charge-offs		—			—			—			(278	)		—			(278	)
Recoveries		207			—			—			—			—			207

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

Net recoveries (charge-offs) / gross loans		0.05	%		0.00	%		0.00	%		-0.14	%		0.00	%		-0.01	%

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Interest forgone on nonaccrual loans totaled $18,000 and $53,000 for the three months ended June 30, 2022 and 2021, respectively. Interest forgone on nonaccrual loans totaled $35,000 and $61,000 for the six months ended June 30, 2022 and 2021, respectively. There was no interest recognized on a cash-basis on impaired loans for the three months ended June 30, 2022 and 2021.

Troubled Debt Restructurings

At June 30, 2022 and December 31, 2021, the Company had no recorded investments or allocated specific reserves related to loans with terms that had been modified in troubled debt restructurings.

The Company had no commitments as of June 30, 2022 and December 31, 2021 to customers with outstanding loans that were classified as troubled debt restructurings. There were no new troubled debt restructurings during the three and six months ended June 30, 2022.

The Company had no troubled debt restructurings with a subsequent payment default within twelve months following the modification during the three and six months ended June 30, 2022.

4. BORROWING ARRANGEMENTS

The Company has a borrowing arrangement with the Federal Reserve Bank of San Francisco (FRB) under which advances are secured by portions of the Bank’s loan and investment securities portfolios. The Company’s credit limit varies according to the amount and composition of the assets pledged as collateral. At June 30, 2022, amounts pledged and available borrowing capacity under such limits were approximately $412.9 million and $330.0 million, respectively. At December 31, 2021, amounts pledged and available borrowing capacity under such limits were approximately $317.8 million and $218.9 million, respectively. In April 2020, the Company secured an additional arrangement with the FRB for a $332.7 million Paycheck Protection Liquidity Facility (PPPLF) two year term borrowing maturing in April 2022 at a fixed rate of 0.35%. The Company repaid the PPPLF borrowing in full during the second quarter of 2022 and therefore had no balance outstanding as of June 30, 2022. At December 31, 2021, the PPPLF borrowing arrangement had an outstanding balance of $56.4 million.

The Company has a borrowing arrangement with the Federal Home Loan Bank (FHLB) under which advances are secured by portions of the Bank’s loan portfolio. The Company’s credit limit varies according to its total assets and the amount and composition of the loan portfolio pledged as collateral. At June 30, 2022, amounts pledged and available borrowing capacity under such limits were approximately $355.9 million and $209.9 million, respectively. At December 31, 2021, amounts pledged and available borrowing capacity under such limits were approximately $184.1 million and $88.1 million, respectively. In May 2022, the Company secured a FHLB short term borrowing for $50.0 million maturing on July 25, 2022 at a fixed rate of 1.17%. This FHLB short term borrowing had an outstanding balance of $50.0 million at June 30, 2022. In June 2022, the Company secured an additional FHLB short term borrowing for $50.0 million maturing on August 17, 2022 at a fixed rate of 1.98%. This FHLB short term borrowing had an outstanding balance of $50.0 million at June 30, 2022.

Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to $113.0 million. There were no borrowings outstanding under these arrangements at June 30, 2022 and December 31, 2021.

The Company maintains a revolving line of credit with a commitment of $3.0 million for a six month term at a rate of Prime plus 0.40%. At June 30, 2022 and December 31, 2021, no borrowings were outstanding under this line of credit.

The Company entered into a three year borrowing arrangement with a correspondent bank on March 20, 2020 for $12.0 million. The note is secured by the Company’s investment in the Bank and has a fixed rate of 3.95%. There were no borrowings outstanding under this arrangement at June 30, 2022 and December 31, 2021.

The Company issued $20.0 million in subordinated debt on September 30, 2020. The subordinated debt has a fixed interest rate of 5.00% for the first 5 years and a stated maturity of September 30, 2030. After the fifth year, the interest rate changes to a quarterly variable rate equal to then current three-month term SOFR plus 0.488%. The subordinated debt was recorded net of related issuance costs of $300,000. At June 30, 2022 and December 31, 2021, the balance remained at $20.0 million, net of the remaining unamortized issuance cost.

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The Company issued an additional $35.0 million in subordinated debt on August 17, 2021. The subordinated debt has a fixed interest rate of 3.50% for the first 5 years and a stated maturity of September 1, 2031. After the fifth year, the interest rate changes to a quarterly variable rate equal to then current three-month term SOFR plus 0.286%. The subordinated debt was recorded net of related issuance costs of $760,000. At June 30, 2022 and December 31, 2021, the balance remained at $35.0 million, net of the remaining unamortized issuance cost.

5. COMMITMENTS AND CONTINGENT LIABILITIES

Financial Instruments with

Off-Balance

Sheet Risk

The Company is a party to financial instruments with

off-balance-sheet

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

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

case-by-case

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

At June 30, 2022 and December 31, 2021, the Company had outstanding unfunded commitments for loans of approximately $618.7 million and $620.0 million, respectively. Unfunded loan commitment reserves, included in the allowance for loan losses, totaled $430,000 and $380,000 at June 30, 2022 and December 31, 2021, respectively.

The outstanding unfunded commitments for loans at June 30, 2022 was comprised of fixed rate commitments of approximately $39.9 million and variable rate commitments of approximately $578.8 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan commitments as of June 30, 2022.


(Dollars in thousands)	Due in One Year Or Less		Over One Year But Less Than Five Years		Over Five Years		Total
Unfunded fixed rate loan commitments:
Interest rate less than or equal to 4.00%	$	18,620	$	3,810	$	6,246	$	28,676
Interest rate between 4.00% and 5.00%		1,472		2,705		6,019		10,196
Interest rate greater than or equal to 5.00%		—		1,053		—		1,053

Total unfunded fixed rate loan commitments	$	20,092	$	7,568	$	12,265	$	39,925

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Operating Leases

The Company leases various office premises under long-term operating lease agreements. These leases expire between 2022 and 2027, with certain leases containing either three, five, or seven year renewal options.

The following table reflects the quantitative information for the Company’s leases for the six months ended, and as of, June 30, 2022.


(Dollars in thousands)	June 30, 2022
Operating lease cost (cost resulting from lease payments)	$	983
Operating lease - operating cash flows (fixed payments)	$	1,246
Operating lease - ROU assets	$	5,476
Operating lease - liabilities	$	7,059
Weighted average lease term - operating leases		2.6 years
Weighted average discount rate - operating leases		2.95	%

The following table reflects the minimum commitments under these

non-cancellable

leases, before considering renewal options, as of June 30, 2022.


(Dollars in thousands)	June 30, 2022
2022	$	1,195
2023		1,497
2024		1,456
2025		1,500
2026		1,435
Thereafter		357

Total undiscounted cash flows		7,440
Discount on cash flows		(381	)

Total lease liability	$	7,059

Rent expense included in premises and equipment expense totaled $486,000 and $526,000 for the three months ended June 30, 2022 and 2021, respectively. Rent expense included in premises and equipment expense totaled $983,000 and $1.1 million for the six months ended June 30, 2022 and 2021, respectively.

Contingencies

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

Correspondent Banking Agreements

The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Insured financial institution deposits up to $250,000 are fully insured by the FDIC under the FDIC’s general deposit insurance rules.

At June 30, 2022, uninsured deposits at financial institutions were approximately $3.6 million. At December 31, 2021, uninsured deposits at financial institutions were approximately $11.0 million.

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6. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

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

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

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

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

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

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

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The carrying amounts and estimated fair values of financial instruments at June 30, 2022 and December 31, 2021 are as follows:


	Carrying Amount		Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
As of June 30, 2022
Financial assets:
Cash and cash equivalents	$	158,435	$	158,435	$	—	$	—	$	158,435
Investment securities:
Available for sale		53,613		—		53,613		—		53,613
Held to Maturity		111,696				94,915		8,866		103,781
Loans, net		1,486,992		—		—		1,449,817		1,449,817
Accrued interest receivable		5,805		—		885		4,920		5,805
Financial liabilities:
Deposits	$	1,552,139	$	1,387,098	$	164,969	$	—	$	1,552,067
Other borrowings		100,000		—		—		100,000		100,000
Subordinated debt		54,097		—		—		53,104		53,104
Accrued interest payable		734		—		66		668		734
As of December 31, 2021
Financial assets:
Cash and cash equivalents	$	470,456	$	470,456	$	—	$	—	$	470,456
Investment securities:
Available for sale		74,892		—		67,981		6,911		74,892
Held to Maturity		28,386				22,632		5,584		28,216
Loans, net		1,364,256				—		1,353,888		1,353,888
Accrued interest receivable		5,713		—		633		5,080		5,713
Financial liabilities:
Deposits	$	1,680,138	$	1,525,935	$	154,146	$	—	$	1,680,081
Other borrowings		106,387		—		—		106,387		106,387
Subordinated debt		54,028		—		—		56,092		56,092
Accrued interest payable		859		—		42		817		859

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The methods and assumptions used to estimate fair values are described as follows:

Cash and Due from banks - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Investment Securities - Since quoted prices are generally not available for identical securities, fair values are calculated based on market prices of similar securities on similar dates, resulting in Level 2 classification. For securities where market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators, resulting in Level 3 classification.

FHLB, IBFC, PCBB Stock - It is not practical to determine the fair value of these correspondent bank stocks due to restrictions placed on their transferability.

Loans—Fair values of loans for June 30, 2022 and December 31, 2021 are estimated on an exit price basis with contractual cash flow, prepayments, discount spreads, credit loss and liquidity premium assumptions. Loans with similar characteristics such as prepayment rates, terms and rate indexed are aggregated for purposes of the calculations.

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

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

non-interest

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

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

Paycheck Protection Program Liquidity Facility (PPPLF) - The fair value of PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current rates at which similar advances would be obtained resulting in Level 3 classification.

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

Junior Subordinated Debt Securities - Fair values for subordinated debt are calculated based on its terms and were discounted to the date of the valuation to calculate the fair value on the debt. A market rate based on recent debt offering by peer bank was used to discount cash flow until reprice date and subsequently cash flow were discounted at Prime plus 2% for its security. These assumptions which may be unobservable, and considering recent trading activity of similar instruments in market which can be inactive and accordingly are classified within the Level 3 classification.

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

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

Off Balance Sheet Instruments - Fair values for

off-balance

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

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Assets Recorded at Fair Value on a Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.


(Dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
As of June 30, 2022
Investments available for sale:
Mortgage backed securities	$	23,752	$	—	$	23,752	$	—
Government agencies		29,374		—		29,374		—
Corporate bonds		487		—		487		—

Total assets measured at fair value on a recurring basis	$	53,613	$	—	$	53,613	$	—

As of December 31, 2021
Investments available for sale:
Mortgage backed securities	$	29,948	$	—	$	29,948	$	—
Government agencies		2,993		—		2,993		—
Corporate bonds		41,951		—		35,040		6,911

Total assets measured at fair value on a recurring basis	$	74,892	$	—	$	67,981	$	6,911

The following table reflects the changes in all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2022.


(Dollars in thousands)	Corporate Securities
Balance at December 31, 2021	$	6,911
Purchases		—
Transfers into Level 3		—
Transfers out of Level 3		(6,911	)

Balance at June 30, 2022	$	—

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Assets Recorded at Fair Value on a

Non-Recurring

Basis

The Company may be required, from time to time, to measure certain assets at fair value on a

non-recurring

basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date. The following table summarizes impaired loans measured at fair value on a

non-recurring

basis as of June 30, 2022 and December 31, 2021.


	Carrying Amount		Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3
As of June 30, 2022
Impaired loans - SBA	$	549	$	—	$	—	$	549

Total assets measured at fair value on a non-recurring basis	$	549	$	—	$	—	$	549

As of December 31, 2021
Impaired loans - SBA	$	731	$	—	$	—	$	731

Total assets measured at fair value on a non-recurring basis	$	731	$	—	$	—	$	731

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

charge-off

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

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

The following is a discussion of our financial condition at June 30, 2022 and December 31, 2021 and our results of operations for the three and six months ended June 30, 2022 and 2021, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form

10-K

for the year ended December 31, 2021 that was filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2022 (our “Annual Report”) and with the accompanying unaudited notes to consolidated financial statements set forth in this Quarterly Report on Form

10-Q

for the quarterly period ended June 30, 2022 (this “Report”). Because we conduct all of our material business operations through our bank subsidiary, California Bank of Commerce, the discussion and analysis relates to activities primarily conducted by the Bank.

Forward Looking Statements

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

In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of

COVID-19,

any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk of a recession in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; risks associated with seeking new client relationships and maintaining existing client relationships; and the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the

COVID-19

pandemic and any worsening of the global business and economic environment as a result. Readers of this Report are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in Part I, Item 1A of our Annual Report and in Part II, Item 1A of this Report, as such information may be updated from time to time in subsequent filings we may make with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three and six months ended, and our financial condition at, June 30, 2022.

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

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Overview

California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”). The Company has a full service branch in California located in Contra Costa County and 4 loan production offices in California located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County.

Selected Financial Data

The following tables set forth the Company’s selected historical consolidated financial data for the periods and as of the dates indicated. You should read this information together with the Company’s audited consolidated financial statements included in our Annual Report and the unaudited consolidated financial statements and related notes included elsewhere in this Report. The selected historical consolidated financial data as of and for the three and six months ended June 30, 2022 and 2021 are derived from our unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report on Form

10-Q.

The Company’s historical results for any prior period are not necessarily indicative of future performance.


	Three months ended
	June 30,
(Dollars in thousands, except per share data)	2022			2021
Income Statement Data:
Interest income	$	17,706		$	15,179
Interest expense		1,483			1,593

Net interest income		16,223			13,586
Provision for credit losses		925			(1,100	)

Net interest income after provision for credit losses		15,298			14,686
Other income		1,394			956
Other expenses		10,819			9,835

Income before taxes		5,873			5,807
Income taxes		1,629			1,645

Net income	$	4,244		$	4,162

Per Share Data:
Basic earnings per share	$	0.51		$	0.51
Diluted earnings per share	$	0.51		$	0.50
Performance Measures:
Return on average assets		0.91	%		0.87	%
Return on average tangible equity (1)		11.34	%		12.42	%
Net interest margin		3.65	%		2.98	%
Efficiency ratio		61.41	%		67.63	%

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

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	Six months ended
	June 30,
(Dollars in thousands, except per share data)	2022			2021
Income Statement Data:
Interest income	$	33,630		$	30,211
Interest expense		2,881			3,289

Net interest income		30,749			26,922
Provision for credit losses		1,875			(800	)

Net interest income after provision for credit losses		28,874			27,722
Other income		3,928			1,877
Other expenses		21,735			19,915

Income before taxes		11,067			9,684
Income taxes		3,150			2,713

Net income	$	7,917		$	6,971

Per Share Data:
Basic earnings per share	$	0.96		$	0.85
Diluted earnings per share	$	0.94		$	0.84
Performance Measures:
Return on average assets		0.84	%		0.73	%
Return on average tangible equity (1)		10.78	%		10.59	%
Net interest margin		3.42	%		2.96	%
Efficiency ratio		62.68	%		69.15	%

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


	June 30,			December 31,
(Dollars in thousands)	2022			2021
Balance Sheet Data:
Assets	$	1,885,352		$	2,014,996
Loans, net	$	1,486,992		$	1,364,256
Deposits	$	1,552,139		$	1,680,138
Shareholders’ equity	$	158,744		$	150,754
Asset Quality Data:
Allowance for loan losses / gross loans		1.06	%		1.02	%
Allowance for loan losses / nonperforming loans		2906.56	%		6069.40	%
Nonperforming assets / total assets		0.03	%		0.01	%
Nonperforming loans / gross loans		0.04	%		0.02	%
Capital Adequacy Measures:
Tier I leverage ratio		8.27	%		7.23	%
Tier I risk-based capital ratio		8.09	%		8.62	%
Total risk-based capital ratio		11.84	%		12.75	%

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Critical Accounting Policies

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

Our most significant accounting policies are described in Note 1 to our audited financial statements for the year ended December 31, 2021, included in our Annual Report on Form

10-K

and in Note 1 to our unaudited financial statements, which are included elsewhere in this Quarterly Report on Form

10-Q.

Non-GAAP

Financial Measures

Some of the financial measures discussed in this Quarterly Report on Form

10-Q

are considered

non-GAAP

financial measures. In accordance with SEC rules, we classify a financial measure as being a

non-GAAP

financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, from the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles.

The following tables reflect the details of the

non-GAAP

financial measures the Company included in this Quarterly Report on Form

10-Q.

We believe that these

non-GAAP

financial measures provide useful information to management and investors that is supplementary to our statements of financial condition, results of income and cash flows computed in accordance with GAAP. However, we acknowledge that our

non-GAAP

financial measures have limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to

non-GAAP

financial measures that other banking companies use. Other banking companies may use names similar to those we use for the

non-GAAP

financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their

non-GAAP

financial measures when making comparisons.


	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2022			2021			2022			2021
Return on average tangible common equity:
Net income	$	4,244		$	4,162		$	7,917		$	6,971
Tangible equity:
Average equity	$	157,675		$	141,919		$	155,619		$	140,251
Average goodwill / core deposit intangible		7,499			7,540			7,504			7,545

Tangible equity	$	150,176		$	134,379		$	148,115		$	132,706

Return on average tangible common equity		11.34	%		12.42	%		10.78	%		10.59	%

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	June 30,			December 31,
(Dollars in thousands)	2022			2021
Allowance for credit losses as a percentage of outstanding loans, excluding PPP loans:
Allowance for credit losses	$	15,957		$	14,081
Gross loans		1,500,379			1,376,649
Less: PPP loans		7,843			72,527

Gross loans, net of PPP loans		1,492,536			1,304,122

Allowance for credit losses as a percentage of outstanding loans, excluding PPP loans		1.07	%		1.08	%

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

Overview

For both the three months ended June 30, 2022 and June 30, 2021, net income was $4.2 million. Compared to the same period last year, net interest income increased by $2.6 million which was primarily offset by an increase in the provision for credit losses of $2.0 million. Additionally,

non-interest

income increased by $438,000 and

non-interest

expense increased by $984,000.

Net Interest Income and Margin

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

Net interest income for the three months ended June 30, 2022, was $16.2 million, an increase of $2.6 million, or 19% from $13.6 million for the same period in 2021. The increase in net interest income was primarily attributable to a more favorable mix of higher yielding earning assets combined with a reduction in the cost of total deposits offset, in part, by a reduction in the amortization of net fees received on PPP loans. Amortization of net fees received on PPP loans was $667,000 and $1.7 million for the second quarter of 2022 and 2021, respectively.

Average total interest-earning assets were $1.78 billion in the second quarter of 2022 compared to $1.83 billion for the same period during 2021. For the quarter ended June 30, 2022, the yield on average earning assets increased 65 basis points to 3.98% from 3.33% for the quarter ended June 30, 2021. The yield on total average gross loans in the three months ended June 30, 2022 was 4.46%, representing an increase of 29 basis points compared to 4.17% in the same period one year earlier. For the three months ended June 30, 2022 and 2021, the yield on average investment securities decreased 5 basis points to 2.62% from 2.67%.

For the three months ended June 30, 2022, average loans increased $49.2 million, or 3%, from the quarter ended June 30, 2021 while average deposit balances decreased $40.4 million, or 3%, for the same period. As a result, the average loan to deposit ratio for the second quarter of 2022 was 93.46% compared to 88.05% for the second quarter of 2021.

Of the $49.2 million increase in average loan balances year over year, average commercial and real estate other loans increased by $150.6 million and $189.0 million, respectively, as a result of organic growth. These increases were partially offset by a decrease in average SBA loans of $291.3 million primarily due to PPP loan forgiveness.

Of the $40.4 million decrease in average total deposit balances year over year, $36.8 million was attributable to money market and savings accounts and $18.5 million was attributable to time deposits. These decreases were offset by an increase in total demand deposits of $14.9 million. The cost of interest-bearing deposits was 0.38% during the quarter ended June 30, 2022 compared to 0.52% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances decreased by 8 basis points to 0.20% in the second quarter of 2022 compared to 0.28% in the second quarter of 2021.

As a result, the net interest margin increased by 67 basis points to 3.65% for the three months ended June 30, 2022, compared to 2.98% for the three months ended June 30, 2021.

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The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the quarters ended June 30, 2022 and 2021.


	Three months ended June 30,
	2022							2021
			Yields			Interest				Yields			Interest
	Average		or			Income/		Average		or			Income/
	Balance		Rates			Expense		Balance		Rates			Expense
ASSETS
Interest earning assets:
Loans (1)	$	1,464,922		4.46	%	$	16,298	$	1,415,729		4.17	%	$	14,703
Federal funds sold		145,329		0.77	%		280		355,457		0.09	%		84
Investment securities		172,766		2.62	%		1,128		58,794		2.67	%		392

Total interest earning assets		1,783,017		3.98	%		17,706		1,829,980		3.33	%		15,179

Noninterest-earning assets:
Cash and due from banks		19,735							19,147
All other assets (2)		61,444							60,431

TOTAL	$	1,864,196						$	1,909,558

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	42,380		0.08	%	$	8	$	33,861		0.12	%	$	10
Money market and savings		636,692		0.37	%		582		673,460		0.55	%		925
Time		153,859		0.54	%		206		172,452		0.47	%		203
Other		119,970		2.30	%		687		139,458		1.31	%		455

Total interest-bearing liabilities		952,901		0.62	%		1,483		1,019,231		0.63	%		1,593

Noninterest-bearing liabilities:
Demand deposits		734,481							728,074
Accrued expenses and other liabilities		19,139							20,334
Shareholders’ equity		157,675							141,919

TOTAL	$	1,864,196						$	1,909,558

Net interest income and margin (3)				3.65	%	$	16,223				2.98	%	$	13,586

(1)	Nonperforming loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of net deferred loan fees of $83,000 and $1.2 million, respectively.

(2)	Other noninterest-earning assets includes the allowance for loan losses of $15.0 million and $14.6 million, respectively.

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

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The following table shows the effect of the interest differential of volume and rate changes for the quarters ended June 30, 2022 and 2021. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.


	Three Months Ended June 30, 2022 vs. 2021
	Increase (Decrease) Due to Change in:
(Dollars in thousands)	Average Volume			Average Rate			Net Change
Interest income:
Loans	$	547		$	1,048		$	1,595
Federal funds sold		(405	)		601			196
Investment securities		744			(8	)		736
Interest expense:
Deposits
Demand		2			(4	)		(2	)
Money market and savings		(34	)		(309	)		(343	)
Time		(25	)		28			3
Other borrowings		(112	)		344			232

Net interest income	$	1,055		$	1,582		$	2,637

Interest Income

Interest income increased by $2.5 million in the second quarter of 2022 compared to the same period of 2021, primarily due to an increase in the prime rate which generated higher yields on our loan portfolio combined with PPP loans that were forgiven by the SBA being replaced with higher yielding commercial and real estate other loans, partially offset by a decrease in amortization of net fees collected on PPP loans. The prime rate at June 30, 2022 and June 30, 2021 was 4.75% and 3.25%, respectively. Interest earned on our loan portfolio of $16.3 million in the second quarter of 2022 represented an increase of $1.6 million, or 11%, compared to $14.7 million for the second quarter of 2021.

Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on our investment securities portfolio of $1.1 million for the three months ended June 30, 2022 increased $736,000, or 188%, over $392,000 for the same period in the prior year.

Interest Expense

Interest expense decreased by $110,000 in the second quarter of 2022 compared to the same period of 2021, primarily due to the effect of decreased rates paid on interest-bearing deposits and a decrease in outstanding borrowings due to a lower PPPLF term borrowing, partially offset by increased interest pertaining to junior subordinated debt securities. The average rate paid on interest-bearing liabilities in the second quarter of 2022 compared to the same period one year earlier decreased 1 basis point to 0.62% from 0.63%.

Provision for Credit Losses

The provision for credit losses increased to $925,000 for the second quarter of 2022 compared to a release of reserves of $1.1 million for the second quarter of 2021. The Company had no loan charge-offs or recoveries during the second quarter of 2022 compared to net loan charge-offs of $237,000, or 0.02% of gross loans, in the same period of 2021. The allowance for credit losses as a percent of outstanding loans was 1.06% at June 30, 2022 and 1.02% at December 31, 2021. The reserve percentage excluding PPP loans, which are guaranteed by the SBA, was 1.07% at June 30,

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2021 compared to 1.08% at December 31, 2021 (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations

Non-GAAP

Financial Measures”). See further discussion of the Provision for Credit Losses and Allowance for Credit losses in “Financial Condition – Allowance for Credit Losses”.

Noninterest Income

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


	Three Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2022		2021		Amount			Percent
Service charges and other fees	$	1,134	$	638	$	496			78	%
Earnings on BOLI		165		163		2			1	%
Other		95		155		(60	)		-39	%

Total noninterest income	$	1,394	$	956	$	438			46	%

Noninterest income increased by $438,000, or 46% in the second quarter of 2022, compared to the second quarter of 2021. The increase was primarily the result of an increase in service charges and other fee income.

Noninterest Expense

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


	Three Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2022		2021		Amount		Percent
Salaries and benefits	$	7,146	$	6,374	$	772		12	%
Premises and equipment		1,267		1,209		58		5	%
Professional fees		547		527		20		4	%
Data processing		599		484		115		24	%
Other		1,260		1,241		19		2	%

Total non-interest expense	$	10,819	$	9,835	$	984		10	%

Non-interest

expense was $10.8 million and $9.8 million for the three months ended June 30, 2022 and 2021, respectively. Excluding capitalized loan origination costs,

non-interest

expense for the second quarter of 2022 was $11.9 million compared to $11.1 million for the second quarter of 2021, representing an increase of $840,000, or 8%.

Salaries and benefits for the second quarter of 2022 were $7.1 million, representing an increase of $772,000, or 12%, compared to $6.4 million for the second quarter of 2021. The increase in salaries and benefits expense was primarily due to an increase in salaries and benefits related to investments to support the continued growth of the business combined with a reduction in capitalized loan origination costs.

For the three months ended June 30, 2022 and 2021, the Company’s efficiency ratio, the ratio of

non-interest

expense to revenues, was 61.41% and 67.63%, respectively.

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Provision for Income Taxes

Income tax expense was $1.6 million for both the second quarter of 2022 and the same period in prior year. The effective tax rates for those time periods were 27.7% and 28.3%, respectively.

Results of Operations – Six Months Ended June 30, 2022 and 2021:

Overview

For the six months ended June 30, 2022 and June 30, 2021, net income was $7.9 million and $7.0 million, respectively. The increase of $946,000, or 14%, was primarily attributable to an increase in net interest income increased by $3.8 million and an increase in

non-interest

income of $2.1 million, partially offset by an increase in the provision for credit losses of $2.7 million, an increase in

non-interest

expense of $1.8 million and an increase in income tax expense of $437,000.

Net Interest Income and Margin

Net interest income for the six months ended June 30, 2022, was $30.7 million, an increase of $3.8 million, or 14% from $26.9 million for the same period in 2021. The increase in net interest income was primarily attributable to a more favorable mix of higher yielding earning assets combined with a reduction in the cost of total deposits offset, in part, by a reduction in the amortization of net fees received on PPP loans. Amortization of net fees received on PPP loans was $1.5 million and $3.3 million for the six months ended June 30, 2022 and 2021, respectively.

Average total interest-earning assets were $1.81 billion in the six months ended of 2022 compared to $1.84 billion for the same period during 2021. For the six months ended June 30, 2022, the yield on average earning assets increased 42 basis points to 3.74% from 3.32% for the six months ended June 30, 2021. The yield on total average gross loans in the six months ended June 30, 2022 was 4.43%, representing an increase of 26 basis points compared to 4.17% in the same period one year earlier. For the six months ended June 30, 2022 and 2021, the yield on average investment securities increased 5 basis points to 2.71% from 2.66%.

For the six months ended June 30, 2022, average loans increased $2.7 million from the six months ended June 30, 2021 while average deposit balances increased $21.1 million for the same period. As a result, the average loan to deposit ratio for the six months ended of 2022 was 88.12% compared to 89.12% for the six months ended of 2021.

Of the $2.7 million increase in average loan balances year over year, average commercial, real estate other and construction and land loans increased by $104.8 million, $167.5 million and $8.2 million, respectively, as a result of organic growth. Additionally, average purchased solar loans increased by $10.0 million. These increases were primarily offset by a decrease in lower yielding average SBA loans of $287.0 million as a result of PPP loan forgiveness.

Of the $21.1 million increase in average total deposit balances year over year, $28.9 million was attributable to an increase in noninterest-bearing demand deposits, a $20.5 million increase in money market and savings accounts and a $6.1 million increase in interest-bearing demand deposit accounts. These increases were partially offset by a decrease in time deposits of $34.4 million. The cost of interest-bearing deposits was 0.37% during the six months ended June 30, 2022 compared to 0.53% in the same period one year earlier. In addition, the overall cost of average total deposit balances decreased by 10 basis points to 0.20% in the six months ended of 2022 compared to 0.30% in the six months ended of 2021.

As a result of the more favorable mix of higher yielding earning assets combined with a lower cost of deposits, the net interest margin increased by 46 basis points to 3.42% for the six months ended June 30, 2022, compared to 2.96% for the six months ended June 30, 2021.

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The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the six months ended June 30, 2022 and 2021.


	Six months ended June 30,
	2022							2021
	Average Balance		Yields or Rates			Interest Income/ Expense		Average Balance		Yields or Rates			Interest Income/ Expense
ASSETS
Interest earning assets:
Loans (1)	$	1,418,314		4.43	%	$	31,184	$	1,415,618		4.17	%	$	29,287
Federal funds sold		244,809		0.34	%		416		362,301		0.10	%		172
Investment securities		151,324		2.71	%		2,030		57,109		2.66	%		752

Total interest earning assets		1,814,447		3.74	%		33,630		1,835,028		3.32	%		30,211

Noninterest-earning assets:
Cash and due from banks		19,244							20,978
All other assets (2)		62,500							60,719

TOTAL	$	1,896,191						$	1,916,725

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	40,300		0.09	%		17	$	34,185		0.12	%	$	21
Money market and savings		679,662		0.37	%		1,247		659,180		0.58	%		1,897
Time		151,588		0.45	%		338		186,021		0.45	%		411
Other		110,370		2.34	%		1,279		165,957		1.17	%		960

Total interest-bearing liabilities		981,920		0.59	%		2,881		1,045,343		0.63	%		3,289

Noninterest-bearing liabilities:
Demand deposits		737,928							709,022
Accrued expenses and other liabilities		20,724							22,109
Shareholders’ equity		155,619							140,251

TOTAL	$	1,896,191						$	1,916,725


Net interest income and margin (3)				3.42	%	$	30,749				2.96	%	$	26,922

(1)	Nonperforming loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of net deferred loan fees of $402,000 and $2.3 million, respectively.

(2)	Other noninterest-earning assets includes the allowance for loan losses of $14.6 million and $14.4 million, respectively.

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

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The following table shows the effect of the interest differential of volume and rate changes for the six months ended June 30, 2022 and 2021. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.


	Six Months Ended June 30, 2022 vs. 2021
	Increase (Decrease) Due to Change in:
(Dollars in thousands)	Average Volume			Average Rate			Net Change
Interest income:
Loans	$	59		$	1,838		$	1,897
Federal funds sold		(200	)		444			244
Investment securities		1,264			14			1,278
Interest expense:
Deposits
Demand		3			(7	)		(4	)
Money market and savings		38			(688	)		(650	)
Time		(77	)		4			(73	)
Other borrowings		(644	)		963			319

Net interest income	$	1,803		$	2,024		$	3,827

Interest Income

Interest income increased by $3.4 million in the six months ended June 30, 2022 compared to the same period of 2021, primarily due to an increase in the prime rate which generated higher yields on our loan portfolio combined with PPP loans that were forgiven by the SBA being replaced with higher yielding commercial and real estate other loans, partially offset by a decrease in amortization of net fees collected on PPP loans. The prime rate at June 30, 2022 and June 30, 2021 was 4.75% and 3.25%, respectively. Interest earned on our loan portfolio of $31.2 million in the six months ended June 30, 2022 represented an increase of $1.9 million, or 6%, compared to $29.3 million for the same period in 2021.

Additionally, the Company benefited from a more favorable mix of other earning assets. Interest earned on our investment securities portfolio of $2.0 million for the six months ended June 30, 2022 increased $1.3 million, or 170%, over $752,000 for the same period in the prior year.

Interest Expense

Interest expense decreased by $408,000 in the six months ended June 30, 2022 compared to the same period of 2021, primarily due to the effect of decreased rates paid on interest-bearing deposits and a decrease in outstanding borrowings due to a lower PPPLF term borrowing, partially offset by increased interest pertaining to junior subordinated debt securities. The average rate paid on interest-bearing liabilities in the six months ended of 2022 compared to the same period one year earlier decreased 4 basis points to 0.59% from 0.63%.

Provision for Credit Losses

The provision for credit losses increased to $1.9 million for the six months ended of 2022 compared to a release of reserves of $800,000 for the six months ended of 2021. The Company had net recoveries of $1,000 during the six months ended of 2022 compared to net loan charge-offs of $71,000, or 0.02% of gross loans, in the same period of 2021. The allowance for credit losses as a percent of outstanding loans was 1.06% at June 30, 2022 and 1.02% at December 31, 2021. The reserve percentage excluding PPP loans, which are guaranteed by the SBA, was 1.07% at June 30, 2022 compared to 1.08% at December 31, 2021 (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations

Non-GAAP

Financial Measures”). See further discussion of the Provision for Credit Losses and Allowance for Credit losses in “Financial Condition – Allowance for Credit Losses”.

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Noninterest Income

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


	Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2022		2021		Amount			Percent
Service charges and other fees	$	2,023	$	1,279	$	744			58	%
Gain on sale of SBA loans		1,393		—		1,393			100	%
Earnings on BOLI		330		325		5			2	%
Other		182		273		(91	)		-33	%

Total noninterest income	$	3,928	$	1,877	$	2,051			109	%

Noninterest income increased by $2.1 million, or 109%, in the six months ended June 30, 2022, compared to the six months ended of 2021. The increase was primarily attributable to a gain of $1.4 million recognized on the sale of a portion of our solar loan portfolio and an increase of $744,000 pertaining to service charges and other fees.

Noninterest Expense

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


	Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2022		2021		Amount			Percent
Salaries and benefits	$	14,239	$	12,741	$	1,498			12	%
Premises and equipment		2,569		2,406		163			7	%
Professional fees		1,139		1,116		23			2	%
Data processing		1,207		1,064		143			13	%
Other		2,581		2,588		(7	)		0	%

Total non-interest expense	$	21,735	$	19,915	$	1,820			9	%

Non-interest

expense was $21.7 million and $19.9 million for the six months ended June 30, 2022 and 2021, respectively. Excluding capitalized loan origination costs,

non-interest

expense for the six months ended June 30, 2022 was $23.8 million compared to $22.6 million for the six months ended June 30, 2021, representing an increase of $1.1 million, or 5%.

Salaries and benefits for the six months ended June 30, 2022 were $14.2 million, representing an increase of $1.5 million, or 12%, compared to $12.7 million for the six months ended June 30, 2021. The increase in salaries and benefits expense was primarily due to an increase in salaries and benefits related to investments to support the continued growth of the business combined with a reduction in capitalized loan origination costs.

For the six months ended June 30, 2022 and 2021, the Company’s efficiency ratio, the ratio of

non-interest

expense to revenues, was 62.68% and 69.15%, respectively.

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Provision for Income Taxes

Income tax expense was $3.2 million and $2.7 million for the six months ended June 30, 2022 and 2021. The effective tax rates for those time periods were 28.5% and 28.0%, respectively.

Financial Condition:

Overview

Total assets of the Company were $1.89 billion as of June 30, 2022 compared to $2.01 billion as of December 31, 2021. The decrease in total assets from

year-end

was primarily due to decreased liquidity resulting from deposit outflows related to forgiveness of PPP loans combined with an increase in outstanding loan balances.

Loan Portfolio

Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances increased by $123.7 million, or 9%, from December 31, 2021 to June 30, 2022 primarily due to organic growth in the commercial and industrial and real estate other loan portfolios, partially offset by a reduction in SBA loans due to PPP loan forgiveness and a reduction in the other loan portfolio as a result of the Company selling a portion of its residential solar loan portfolio.

The loan portfolio at June 30, 2022 was comprised of approximately 39% of commercial and industrial loans compared to 34% at December 31, 2021. In addition, commercial real estate loans comprised 57% of our loans at June 30, 2022 compared to 54% at December 31, 2021. A substantial percentage of the commercial real estate loans are considered owner-occupied loans. Our loans are generated by our relationship managers and executives. Our senior management is actively involved in the lending, underwriting, and collateral valuation processes. Higher dollar loans or loan commitments are also approved through a bank loan committee comprised of executives and outside board members.

The following table reflects the composition of the Company’s loan portfolio and the percentage distribution at June 30, 2022 and December 31, 2021.


(Dollars in thousands)	June 30, 2022			December 31, 2021
Commercial and industrial	$	589,562			474,281
Real estate - other		794,504			697,212
Real estate - construction and land		63,189			43,194
SBA		13,310			81,403
Other		39,814			80,559

Total loans, gross		1,500,379			1,376,649
Deferred loan origination costs, net		2,570			1,688
Allowance for credit losses		(15,957	)		(14,081	)

Total loans, net	$	1,486,992			1,364,256

Commercial and industrial		39	%		34	%
Real estate - other		53	%		51	%
Real estate - construction and land		4	%		3	%
SBA		1	%		6	%
Other		3	%		6	%

Total loans, gross		100	%		100	%

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


			Over One		Over Five
	Due in		Year But		Years But
	One Year		Less Than		Less Than		Over
(Dollars in thousands)	Or Less		Five Years		Fifteen Years		Fifteen Years		Total
Commercial and industrial	$	224,160	$	203,563	$	161,839	$	—	$	589,562
Real estate - other		24,351		322,308		438,455		9,390		794,504
Real estate - construction and land		45,942		12,843		4,404		—		63,189
SBA		73		8,950		2,956		1,331		13,310
Other		1,074		354		38,386		—		39,814

Total loans, gross	$	295,600	$	548,018	$	646,040	$	10,721	$	1,500,379


	Loans With
	Fixed		Variable
(Dollars in thousands)	Rates (1)		Rates		Total
Commercial and industrial	$	211,935	$	377,627	$	589,562
Real estate - other		511,585		282,919		794,504
Real estate - construction and land		5,658		57,531		63,189
SBA		7,843		5,467		13,310
Other		38,693		1,121		39,814

Total loans, gross	$	775,714	$	724,665	$	1,500,379

(1) Excludes variable rate loans on floors

Nonperforming Assets

Nonperforming assets are comprised of loans on nonaccrual status, loans 90 days or more past due and still accruing interest, and other real estate owned. We had no loans 90 days or more past due and still accruing interest and no other real estate owned at June 30, 2022. A loan is placed on nonaccrual status if there is concern that principal and interest may not be fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is both well secured and in process of legal collection. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are returned to accrual status when they are brought current with respect to principal and interest payments and future payments are reasonably assured. Loans in which the borrower is encountering financial difficulties and we have modified the terms of the original loan are evaluated for impairment and classified as TDR loans.

The CARES Act and the revised interagency guidance issued in April 2020, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)”, provided banks the option to temporarily suspend certain requirements under GAAP related to Troubled Debt Restructurings (“TDRs”) for a limited time to account for the effects of

COVID-19.

As a result, the Company did not recognize eligible

COVID-19

loan modifications as TDRs. Additionally, loans qualifying for these modifications were not required to be reported as delinquent, nonaccrual, impaired or criticized solely as a result of a

COVID-19

loan modification. As of June 30, 2022, the Company had no loans remaining on a deferred status or that had a structure modification under the Cares Act guidelines. As of December 31, 2021, two loans totaling $3.5 million were on a deferred status or that had a structure modification under the Cares Act guidelines.

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


	June 30,			December 31,
(Dollars in thousands)	2022			2021
Nonaccrual loans	$	549		$	232
Loans over 90 days past due and still accruing		—			—

Total nonperforming loans		549			232
Foreclosed assets		—			—

Total nonperforming assets	$	549		$	232

Performing TDR’s	$	—		$	—

Nonperforming loans / gross loans		0.04	%		0.02	%
Allowance for loan losses / nonperforming loans		2906.56	%		6069.40	%

Allowance for Credit Losses

Our allowance for credit losses is maintained at a level management believes is adequate to account for probable incurred credit losses in the loan portfolio as of the reporting date. We determine the allowance based on a quarterly evaluation of risk. That evaluation gives consideration to the nature of the loan portfolio, historical loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a borrower’s ability to repay, current economic and environmental conditions and risk assessments assigned to each loan as a result of our ongoing reviews of the loan portfolio. This process involves a considerable degree of judgment and subjectivity. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.

Our allowance is established through charges to the provision for loan losses. Loans, or portions of loans, deemed to be uncollectible are charged against the allowance. Recoveries of previously

charged-off

amounts are credited to our allowance for loan losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed excessive for the risks inherent in the portfolio. The allowance for loan losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends.

Table of Contents

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


	Commercial						Real Estate
	and			Real Estate			Construction
(Dollars in thousands)	Industrial			Other			and Land			SBA			Other			Total
Three months ended June 30, 2022
Beginning balance	$	8,876		$	5,080		$	783		$	283		$	10		$	15,032
Provision for loan losses		650			163			124			(10	)		(2	)		925
Charge-offs		—			—			—			—			—			—
Recoveries		—			—			—			—			—			—

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

Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Three months ended June 30, 2021
Beginning balance	$	9,231		$	3,957		$	798		$	575		$	16		$	14,577
Provision for loan losses		(1,139	)		112			(101	)		20			8			(1,100	)
Charge-offs		—			—			—			(278	)		—			(278	)
Recoveries		41			—			—			—			—			41

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

Net recoveries (charge-offs) / gross loans		0.01	%		0.00	%		0.00	%		-0.14	%		0.00	%		-0.02	%
Six months ended June 30, 2022
Beginning balance	$	8,552		$	4,524		$	681		$	309		$	15		$	14,081
Provision for loan losses		973			719			226			(36	)		(7	)		1,875
Charge-offs		—			—			—			—			—			—
Recoveries		1			—			—			—			—			1

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

Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Six months ended June 30, 2021
Beginning balance	$	8,923		$	3,877		$	681		$	604		$	26		$	14,111
Provision for loan losses		(997	)		192			16			(9	)		(2	)		(800	)
Charge-offs		—			—			—			(278	)		—			(278	)
Recoveries		207			—			—			—			—			207

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

Net recoveries (charge-offs) / gross loans		0.05	%		0.00	%		0.00	%		-0.14	%		0.00	%		-0.01	%

Table of Contents

The provision for loan losses of $925,000 and $1.9 million for the quarter and six months ended June 30, 2022, respectively, were primarily the result of growth in our core loan portfolio along with continued qualitative assessments of the general macroeconomic environment, including the potential impact of

COVID-19

and regulatory sanctions imposed upon other countries.

Investment Portfolio

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

During the first quarter of 2022, the Company

re-designated

certain securities previously classified as available for sale to the held to maturity classification. The securities

re-designated

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.

Table of Contents

The following table reflects the amortized cost and fair market values for the total portfolio for each of the categories of investments in our securities portfolio as of June 30, 2022 and December 31, 2021.


			Gross		Gross
			Unrealized /		Unrealized /			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
(Dollars in thousands)
At June 30, 2022:
Mortgage backed securities	$	24,358	$	48	$	(654	)	$	23,752
Government agencies		29,755		—		(381	)		29,374
Corporate bonds		428		59		—			487

Total available for sale securities	$	54,541	$	107	$	(1,035	)	$	53,613

Mortgage backed securities	$	63,912	$	—	$	(5,465	)	$	58,447
Government agencies		3,088		—		(482	)		2,606
Corporate bonds		44,696		29		(1,997	)		42,728

Total held to maturity securities	$	111,696	$	29	$	(7,944	)	$	103,781

At December 31, 2021:
Mortgage backed securities	$	29,943	$	325	$	(320	)	$	29,948
Government agencies		3,093		—		(100	)		2,993
Corporate bonds		41,725		694		(468	)		41,951

Total available for sale securities	$	74,761	$	1,019	$	(888	)	$	74,892

Mortgage backed securities	$	22,772	$	—	$	(140	)	$	22,632
Government agencies		—		—		—			—
Corporate bonds		5,614		—		(30	)		5,584

Total held to maturity securities	$	28,386	$	—	$	(170	)	$	28,216

Deposits

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

At June 30, 2022, approximately 46% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at June 30, 2022 were held in interest-bearing demand, savings and money market accounts and time deposits. Approximately 43% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at June 30, 2022, which provide our customers with interest and liquidity. Time deposits comprised the remaining 11% of our deposits at June 30, 2022.

Table of Contents

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


(Dollars in thousands)	Balance		% of Total
At June 30, 2022:
Demand noninterest-bearing	$	715,432		46	%
Demand interest-bearing		45,511		3	%
Money market and savings		626,156		40	%
Time		165,040		11	%

Total deposits	$	1,552,139		100	%

At December 31, 2021:
Demand noninterest-bearing	$	771,205		46	%
Demand interest-bearing		37,250		2	%
Money market and savings		717,480		43	%
Time		154,203		9	%

Total deposits	$	1,680,138		100	%

Liquidity

Our primary source of funding is deposits from our core banking relationships. The majority of the Bank’s deposits are transaction accounts or money market accounts that are payable on demand. A small number of customers represent a large portion of the Bank’s deposits, as evidenced by the fact that approximately 20% of deposits were represented by the 10 largest depositors as of June 30, 2022. We strive to manage our liquidity in a manner that enables us to meet expected and unexpected liquidity needs under both normal and adverse conditions. The Bank maintains significant

on-balance

sheet and

off-balance

liquidity sources, including a marketable securities portfolio and borrowing capacity through various secured and unsecured sources.

Capital Resources

We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and

off-balance

sheet items as calculated under regulatory accounting policies. As of June 30, 2022 and December 31, 2021, we were in compliance with all applicable regulatory capital requirements, including the capital conservation buffer, and the Bank’s capital ratios exceeded the minimums necessary to be considered ‘‘well-capitalized’’ for purposes of the FDIC’s prompt corrective action regulations. At June 30, 2022, the capital conservation buffer was 3.40%.

At June 30, 2022, the Bank had a Tier 1 risk based capital ratio of 10.53%, a total capital to risk-weighted assets ratio of 11.39%, and a leverage ratio of 10.75%. At December 31, 2021, the Bank had a Tier 1 risk based capital ratio of 11.38%, a total capital to risk-weighted assets ratio of 12.25%, and a leverage ratio of 9.51%.

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form

10-K

for the year ended December 31, 2021, which we filed with the SEC on March 23, 2022.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

On August 9, 2022, the Bank entered into an employment agreement with Scott Myers (the “Employment Agreement”), pursuant to which he will continue to serve as Senior Executive Vice President and Chief Lending Officer. The Employment Agreement has a three year term, which will automatically extend for additional one year terms unless either party declines to extend. The Employment Agreement provides that Mr. Myers will receive an annual base salary of $290,600 (which is subject to annual review by the Compensation Committee of the Bank), and will be eligible for an annual bonus pursuant to an executive incentive plan to be developed each year by the Bank’s Board of Directors. Mr. Myers is also entitled to an automobile allowance of $900 per month plus reimbursement in an amount not to exceed $750 per month for club dues and expenses. If the Bank terminates Mr. Myers’ employment without cause or he terminates his employment for good reason (as defined in the Employment Agreement), subject to his providing a release of claims in favor of the Bank, Mr. Myers will receive a lump sum payment equal to

one-half

of the sum of his annual base salary plus the average of his three most recent annual bonuses in addition to monthly payments in amounts equal to the cost of his COBRA premiums for up to 12 months. Following a change in control of the Company, in the event Mr. Myers is terminated without cause or terminates his employment for good reason, he will instead be entitled to a lump sum payment equal to his annual base salary plus the average of his three most recent annual bonuses, the COBRA benefits described above and accelerated vesting of his restricted stock and stock options.

The Bank and Mr. Myers have also entered into an Executive Supplemental Compensation Agreement (the “ESC Agreement”) providing for an annual projected target benefit of $60,000, payable monthly for a period of ten years, generally commencing upon separation from service. This benefit is subject to vesting based on continued service, with full vesting if he is terminated or quits for good reason (as defined in the agreement) in connection with a change of control. The Bank and Mr. Myers have also entered into a split-dollar agreement (the “Split-Dollar Agreement”) that shares the proceeds of bank owned life insurance previously purchased on his life such that if he should he die while employed, his named beneficiaries would receive a specified sum or the net amount at risk, whichever is smaller.


	June 30, 2022			December 31, 2021
ASSETS:
Cash and due from banks	$	20,378		$	4,539
Federal funds sold		138,057			465,917

Total cash and cash equivalents		158,435			470,456
Investment securities:
Available for sale, at fair value		53,613			74,892
Held to maturity, at amortized cost		111,696			28,386

Total investment securities		165,309			103,278
Loans, net of allowance for losses of $15,957 and $14,081 at June 30, 2022 and December 31, 2021, respectively		1,486,992			1,364,256
Premises and equipment, net		3,736			4,405
Bank owned life insurance (BOLI)		24,788			24,412
Goodwill and other intangible assets		7,493			7,513
Accrued interest receivable and other assets		38,599			40,676

Total assets	$	1,885,352		$	2,014,996

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits
Non-interest bearing	$	715,432		$	771,205
Interest bearing		836,707			908,933

Total deposits		1,552,139			1,680,138
Other borrowings		100,000			106,387
Junior subordinated debt securities		54,097			54,028
Accrued interest payable and other liabilities		20,372			23,689

Total liabilities		1,726,608			1,864,242
Commitments and Contingencies (Note 5)
Shareholders’ equity
Common stock, no par value; 40,000,000 shares authorized; 8,317,161 and 8,264,300 issued and outstanding at June 30, 2022 and December 31, 2021, respectively		110,289			109,473
Retained earnings		49,106			41,189
Accumulated other comprehensive income, net of taxes		(651	)		92

Total shareholders’ equity		158,744			150,754

Total liabilities and shareholders’ equity	$	1,885,352		$	2,014,996


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net Income	$	4,244		$	4,162		$	7,917		$	6,971
Other comprehensive income
Unrealized (losses) gains on securities available for sale, net		(777	)		588			(782	)		(155	)
Unrealized losses on securities transferred from available for sale to held to maturity, net		—			—			(281	)		—
Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net		2			—			4			—
Tax effect		230			(174	)		316			46

Total other comprehensive (loss) income		(545	)		414			(743	)		(109	)

Total comprehensive income	$	3,699		$	4,576		$	7,174		$	6,862


									Accumulated Other Comprehensive Income (Loss)

												Total Shareholders’ Equity
	Common Stock						Retained Earnings
	Shares			Amount			Retained Earnings
Balance at December 31, 2021		8,264,300		$	109,473		$	41,189	$	92		$	150,754
Stock awards issued and related compensation expense		11,513			494			—		—			494
Shares withheld to pay taxes on stock based compensation		(7,459	)		(173	)		—		—			(173	)
Stock options exercised		4,200			55			—		—			55
Shares withheld to pay exercise price on stock options		(1,653	)		(34	)		—		—			(34	)
Net income		—			—			3,673		—			3,673
Other comprehensive loss		—			—			—		(198	)		(198	)

Balance at March 31, 2022		8,270,901		$	109,815		$	44,862	$	(106	)	$	154,571
Stock awards issued and related compensation expense		43,855			539			—		—			539
Shares withheld to pay taxes on stock based compensation		(3,153	)		(65	)		—		—			(65	)
Stock options exercised		7,350			42			—		—			42
Shares withheld to pay exercise price on stock options		(1,792	)		(42	)		—		—			(42	)
Net income		—			—			4,244		—			4,244
Other comprehensive loss		—			—			—		(545	)		(545	)

Balance at June 30, 2022		8,317,161		$	110,289		$	49,106	$	(651	)	$	158,744


									Accumulated Other Comprehensive Income (Loss)

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

Balance at March 31, 2021		8,189,598		$	108,430		$	30,630	$	118		$	139,178
Stock awards issued and related compensation expense		28,562			234			—		—			234
Shares withheld to pay taxes on stock based compensation		(2,740	)		(150	)							(150	)
Stock options exercised		21,770			48			—		—			48
Shares withheld to pay exercise price on stock options		(8,074	)		(145	)		—		—			(145	)
Net income		—			—			4,162		—			4,162
Other comprehensive income		—			—			—		414			414

Balance at June 30, 2021		8,229,116		$	108,417		$	34,792	$	532		$	143,741


	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	7,917		$	6,971
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		1,875			(800	)
Provision for deferred taxes		218			238
Depreciation		778			1,490
Deferred loan (costs) fees, net		(859	)		1,215
Accretion on discount of purchased loans, net		(22	)		(62	)
Stock based compensation, net		795			467
Increase in cash surrender value of life insurance		(330	)		(327	)
Discount on retained portion of sold loans, net		(18	)		(18	)
Gain on sale of loans, net		(1,393	)		—
(Increase) decrease in accrued interest receivable and other assets		2,226			(1,924	)
Decrease in accrued interest payable and other liabilities		(2,880	)		(684	)

Net cash provided by operating activities		8,307			6,566

Cash flows from investing activities:
Purchase of investment securities		(78,780	)		(12,245	)
Proceeds from principal payments on investment securities		15,271			6,155
Proceeds from sale of loans		37,271			—
Net (decrease) increase in loans		(159,589	)		16,378
Capital calls on low income tax credit investments		(437	)		(549	)
Redemption of Federal Home Loan Bank stock		455			—
Purchase of premises and equipment		(108	)		(801	)
Purchase of bank-owned life insurance policies		(46	)		(40	)

Net cash used for investing activities		(185,963	)		8,898

Cash flows from financing activities:
Net (decrease) increase in customer deposits		(127,999	)		147,566
Paydown of long term borrowing, net		(56,387	)		(189,043	)
Paydown of short term and overnight borrowings, net		50,000			—
Proceeds from exercised stock options, net		21			2

Net cash provided by financing activities		(134,365	)		(41,475	)

Decrease in cash and cash equivalents		(312,021	)		(26,011	)
Cash and cash equivalents, beginning of period		470,456			418,517

Cash and cash equivalents, end of period	$	158,435		$	392,506

Supplemental disclosure of cash flow information:
Securities transferred from available for sale to the held to maturity classification	$	49,889		$	—
Cash paid during the year for:
Interest	$	3,007		$	3,739
Income taxes	$	2,003		$	1,521


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
As of June 30, 2022
With no related allowance recorded:
SBA	$	57	$	334	$	—	$	145	$	—
With an allowance recorded:
SBA	$	492	$	492	$	159	$	495	$	7
Total:
SBA	$	549	$	826	$	159	$	640	$	7
As of December 31, 2021
With no related allowance recorded:
SBA	$	232	$	705	$	—	$	233	$	14
With an allowance recorded:
SBA	$	499	$	499	$	142	$	477	$	59
Total:
SBA	$	731	$	1,204	$	142	$	710	$	73


Exhibit Number		Description of Exhibit

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

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

10.1		First Amendment to Employment Agreement, dated as of April 28, 2022, by and between California Bank of Commerce and Steven E. Shelton (incorporated by reference to Exhibit 10.1 of California BanCorp’s Form 8-K filed on May 2, 2022)

10.2		First Amendment to Employment Agreement, dated as of April 28, 2022, by and between California Bank of Commerce and Thomas A. Sa (incorporated by reference to Exhibit 10.2 of California BanCorp’s Form 8-K filed on May 2, 2022)

10.3		Employment Agreement, dated as of August 9, 2022, by and between California Bank of Commerce and Scott Myers

10.4		Form of Executive Supplemental Compensation Agreement by and between California Bank of Commerce and each of Scott Myers, Thomas M. Dorrance, Vivian Mui and Michele Wirfel

10.5		Split-Dollar Agreement by and between California Bank of Commerce and Scott Myers

10.6		Employment Agreement, dated as of March 10, 2016, by and between California Bank of Commerce and Thomas M. Dorrance

10.7		Amendment No. 1 to Employment Agreement, dated as of June 19, 2018, by and between California Bank of Commerce and Thomas M. Dorrance

10.8		Employment Agreement, dated as of July 1, 2019, by and between California Bank of Commerce and Vivian Mui

10.9		Employment Agreement, dated as of June 19, 2018, by and between California Bank of Commerce and Michele Wirfel

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


Exhibit Number		Description of Exhibit

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)


		California BanCorp

Dated: August 11, 2022	By:	/s/ Steven E. Shelton
		Steven E. Shelton
		Chief Executive Officer
		(Principal Executive Officer)

Dated: August 11, 2022	By:	/s/ Thomas A. Sa
		Thomas A. Sa
		President and Chief Financial Officer
		(Principal Financial and Accounting Officer)