UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended ~~March 31, 2020~~

June 30, 2023

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

~~For the transition period from~~to

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) ~~(Zip Code)~~

(510)

457-3737

(Registrant’s telephone number, including area code)

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


~~Title of each class~~ Common Stock, No Par Value	~~Trading~~ ~~Symbol~~ CALB	~~Name of each exchange~~ ~~on which registered~~
~~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 ~~March 31, 2020: 8,121,848~~August 1, 2023: 8,384,842

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM10-Q

FOR THE QUARTER ENDED ~~MARCH 31, 2020~~JUNE 30, 2023


		Page
Part I—I - Financial Information

Item 1.	Financial Statements		3

Item 1.2.	~~Financial Statements~~		3
~~Item 2.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2128

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
~~Item 4.~~	~~Controls and Procedures~~		31

~~Part II—Other Information~~			3243

Item 1.4.	~~Legal Proceedings~~Controls and Procedures		3243
~~Item 1A.~~
Part II - Other Information

Item 1.	~~Risk Factors~~Legal Proceedings		3244

Item 2.1A.	Risk Factors		44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
~~Item 3.~~	~~Defaults Upon Senior Securities~~		32
~~Item 4.~~	~~Mine Safety Disclosures~~		33
~~Item 5.~~	~~Other Information~~		33
~~Item 6.~~	~~Exhibits~~		3344

Item 3.	Defaults Upon Senior Securities		44

Item 4.	Mine Safety Disclosures		44

Item 5.	Other Information		45

Item 6.	Exhibits		45

Signatures			3346

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(Dollar amounts in thousands)

   March 31,
2020    December 31,
2019
ASSETS:

Cash and due from banks
   $ 22,792    $ 19,579
Federal funds sold
   117,818    94,763




Total cash and cash equivalents
   140,610    114,342
Investment securities, available for sale
   34,344    28,555
Loans, net of allowance for losses of $11,565 and $11,075 at March 31, 2020 and December 31, 2019, respectively
   960,282    941,132
Premises and equipment, net
   3,427    3,668
Bank owned life insurance (BOLI)
   23,284    22,316
Goodwill and other intangible assets
   7,585    7,595
Accrued interest receivable and other assets
   37,950    34,426




Total assets
   $ 1,207,482    $ 1,152,034




LIABILITIES AND SHAREHOLDERS’ EQUITY:

Deposits

Non-interest bearing
   $ 403,248    $ 387,267
Interest bearing
   625,613    600,969




Total deposits
   1,028,861    988,236
Other borrowings
   22,000    10,000
Junior Subordinated debt securities
   4,981    4,977
Accrued interest payable and other liabilities
   20,447    18,565




Total liabilities
   1,076,289    1,021,778
Commitments and Contingencies (Note 5)

Shareholders’ equity

Common stock, no par value; 40,000,000 shares authorized; 8,121,848 and 8,092,966 issued and outstanding at March 31, 2020 and December 31, 2019, respectively
   106,790    106,427
Retained earnings
   23,991    23,518
Accumulated other comprehensive income, net of taxes
   412    311




Total shareholders’ equity
   131,193    130,256




Total liabilities and shareholders’ equity
   $ 1,207,482    $ 1,152,034


	June 30, 2023			December 31, 2022
ASSETS:
Cash and due from banks	$	19,763		$	16,686
Federal funds sold		187,904			215,696

Total cash and cash equivalents		207,667			232,382
Investment securities:
Available for sale, at fair value		44,867			47,012
Held to maturity, at amortized cost, net of allowance for credit losses of $58 and $0 at June 30, 2023 and December 31, 2022, respectively		106,262			108,866

Total investment securities		151,129			155,878
Loans, net of allowance for credit losses of $15,722 and $17,005 at June 30, 2023 and December 31, 2022, respectively		1,569,546			1,578,456
Premises and equipment, net		2,625			3,072
Bank owned life insurance (BOLI)		25,519			25,127
Goodwill and other intangible assets		7,452			7,472
Accrued interest receivable and other assets		41,708			39,828

Total assets	$	2,005,646		$	2,042,215

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits
Non-interest bearing	$	742,160		$	811,671
Interest bearing		996,136			980,069

Total deposits		1,738,296			1,791,740
Junior subordinated debt securities		54,221			54,152
Accrued interest payable and other liabilities		28,894			24,069

Total liabilities		1,821,411			1,869,961
Commitments and Contingencies (Note 5)
Shareholders’ equity
Common stock, no par value; 40,000,000 shares authorized; 8,383,772 and 8,332,479 issued and outstanding at June 30, 2023 and December 31, 2022, respectively		112,167			111,257
Retained earnings		73,423			62,297
Accumulated other comprehensive loss, net of taxes		(1,355	)		(1,300	)

Total shareholders’ equity		184,235			172,254

Total liabilities and shareholders’ equity	$	2,005,646		$	2,042,215

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

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CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollar amounts in thousands, except per share data)

   Three Months Ended March 31,
   2020    2019
Interest income

Loans
   $ 11,783    $ 10,954
Federal funds sold
   329    209
Investment securities
   191    331




Total interest income
   12,303    11,494
Interest expense

Deposits
   1,994    1,543
Borrowings and subordinated debt
   127    114




Total interest expense
   2,121    1,657
Net interest income
   10,182    9,837
Provision for credit losses
   400    581




Net interest income after provision for credit losses
   9,782    9,256
Non-interest income

Service charges and other fees
   970    625
Gain on the sale of SBA loans
   —      23
Other
   320    215




Totalnon-interest income
   1,290    863
Non-interest expense

Salaries and benefits
   6,477    4,515
Premises and equipment
   1,139    745
Other
   2,791    2,355




Totalnon-interest expense
   10,407    7,615
Income before provision for income taxes
   665    2,504
Provision for income taxes
   192    636




Net income
   $ 473    $ 1,868




Earnings per common share

Basic
   $ 0.06    $ 0.23




Diluted
   $ 0.06    $ 0.23




Average common shares outstanding
   8,103,248    8,020,456




Average common and equivalent shares outstanding
   8,169,898    8,102,543


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest income
Loans	$	23,476	$	16,298	$	45,948	$	31,184
Federal funds sold		2,238		280		3,998		416
Investment securities		1,458		1,128		2,765		2,030

Total interest income		27,172		17,706		52,711		33,630
Interest expense
Deposits		7,493		796		13,515		1,602
Borrowings and subordinated debt		1,033		687		1,793		1,279

Total interest expense		8,526		1,483		15,308		2,881
Net interest income		18,646		16,223		37,403		30,749
Provision for credit losses		444		925		802		1,875

Net interest income after provision for credit losses		18,202		15,298		36,601		28,874
Non-interest income
Service charges and other fees		867		1,134		1,730		2,023
Gain on the sale of loans		—		—		—		1,393
Other		268		260		512		512

Total non-interest income		1,135		1,394		2,242		3,928
Non-interest expense
Salaries and benefits		7,831		7,146		15,707		14,239
Premises and equipment		1,168		1,267		2,348		2,569
Professional fees		470		547		920		1,139
Data processing		701		599		1,309		1,207
Other		1,433		1,260		3,162		2,581

Total non-interest expense		11,603		10,819		23,446		21,735
Income before provision for income taxes		7,734		5,873		15,397		11,067
Provision for income taxes		2,294		1,629		4,506		3,150

Net income	$	5,440	$	4,244	$	10,891	$	7,917

Earnings per common share
Basic	$	0.65	$	0.51	$	1.30	$	0.96

Diluted	$	0.65	$	0.51	$	1.29	$	0.94

Average common shares outstanding		8,369,907		8,295,014		8,354,564		8,285,950

Average common and equivalent shares outstanding		8,414,213		8,395,701		8,442,607		8,393,776

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

Table of Contents

CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollar amounts in thousands)

   Three Months Ended March 31,
   2020 2019
Net Income
   $ 473 $ 1,868
Other comprehensive income

Unrealized gains on securities available for sale
   75 235
Reclassification adjustment for realized loss on securities available for sale
   70 —
Tax effect
   (44 ) (69 )


Total other comprehensive income
   101 166


Total comprehensive income
   $ 574 $ 2,034


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net Income	$	5,440		$	4,244		$	10,891		$	7,917
Other comprehensive income (loss)
Unrealized gains (losses) on securities available for sale, net		(315	)		(777	)		12			(782	)
Unrealized losses on securities transferred from available for sale to held to maturity, net		—			—			—			(281	)
Reclassification adjustment for securities transferred from available for sale to held to maturity in prior year, net		—			—			(61	)		—
Amortization of unrealized losses on securities transferred from available for sale to held to maturity, net		(3	)		2			(1	)		4
Tax effect		93			230			(5	)		316

Total other comprehensive loss		(225	)		(545	)		(55	)		(743	)

Total comprehensive income	$	5,215		$	3,699		$	10,836		$	7,174

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

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CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

- PART I

(Dollars in thousands)

      Accumulated
Other
Comprehensive
Income
(Loss)    Total
Shareholders’
Equity


Common Stock
Retained
Earnings
   Shares Amount
Balance at December 31, 2018
   7,993,908 $ 104,561 $ 16,517    $ 1    $ 121,079
Stock awards issued and related compensation expense
   12,638 172 —      —      172
Stock options exercised
   40,008 372 —      —      372
Net income
   —   —   1,868    —      1,868
Other comprehensive income
   —   —   —      166    166






Balance at March 31, 2019
   8,046,554 $ 105,105 $ 18,385    $ 167    $ 123,657






Balance at December 31, 2019
   8,092,966 $ 106,427 $ 23,518    $ 311    $ 130,256
Stock awards issued and related compensation expense
   25,215 413 —      —      413
Shares withheld to pay taxes on stock based compensation
   (7,550 ) (133 ) —      —      (133 )
Stock options exercised
   11,217 83 —      —      83
Net income
   —   —   473    —      473
Other comprehensive income
   —   —   —      101    101






Balance at March 31, 2020
   8,121,848 $ 106,790 $ 23,991    $ 412    $ 131,193


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

Balance at March 31, 2023		8,355,378		$	111,609		$	68,082		$	(1,130	)	$	178,561
Adoption of new accounting standard		—			—			(99	)		—			(99	)
Stock awards issued and related compensation expense		32,558			611			—			—			611
Shares withheld to pay taxes on stock based compensation		(4,164	)		(53	)		—			—			(53	)
Net income		—			—			5,440			—			5,440
Other comprehensive loss		—			—			—			(225	)		(225	)

Balance at June 30, 2023		8,383,772		$	112,167		$	73,423		$	(1,355	)	$	184,235

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

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CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

- PART II

(~~Dollar amounts~~Dollars in thousands)

   Three Months Ended March 31,
   2020 2019
Cash flows from operating activities:

Net income
   $ 473 $ 1,868
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses
   400 581
Depreciation
   315 183
Deferred loan costs, net
   312 115
Accretion on discount of purchased loans, net
   (35 ) (67 )
Stock based compensation, net
   280 172
Increase in cash surrender value of life insurance
   (153 ) (105 )
Discount on retained portion of sold loans, net
   (156 ) (6 )
Loss on sale of investment securities, net
   70 —
Gain on sale of loans, net
   —   (23 )
Increase in accrued interest receivable and other assets
   167 1,020
Decrease in accrued interest payable and other liabilities
   (1,730 ) (2,313 )


Net cash from operating activities
   (57 ) 1,425


Cash flows from investing activities:

Purchase of investment securities, net
   (7,438 ) —
Proceeds from principal payments on investment securities
   1,641 1,652
Net increase in loans
   (19,671 ) (42,529 )
Purchase of low income tax credit investments
   (26 ) (197 )
Purchase of premises and equipment
   (74 ) (29 )
Purchase of bank-owned life insurance policies
   (815 ) —


Net cash used in investing activities
   (26,383 ) (41,103 )


Cash flows from financing activities:

Net increase (decrease) in customer deposits
   40,625 (3,079 )
Proceeds from short term and overnight borrowings
   12,000 25,000
Proceeds from exercised stock options
   83 372


Net cash provided by financing activities
   52,708 22,293


Increase (decrease) in cash and cash equivalents
   26,268 (17,385 )
Cash and cash equivalents, beginning of period
   114,342 78,705


Cash and cash equivalents, end of period
   $ 140,610 $ 61,320


Supplemental disclosure of cash flow information:

Transfer of SBA loans to held-for-sale from loan portfolio
   $ 0 $ 146
Recording of right to use assets and operating lease liabilities
   $ 4,079 $ 5,052
Cash paid during the year for:

Interest
   $ 2,147 $ 1,509
Income taxes
   $ 164 $ 710


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

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

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

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

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CALIFORNIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands)


	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities:
Net income	$	10,891		$	7,917
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for credit losses		802			1,875
Provision for deferred taxes		(84	)		218
Depreciation		482			778
Deferred loan fees (costs), net		404			(859	)
Stock based compensation, net		904			795
Increase in cash surrender value of life insurance		(350	)		(330	)
Discount on retained portion of sold loans, net		(18	)		(18	)
Gain on sale of loans		—			(1,393	)
(Decrease) increase in accrued interest receivable and other assets		(2,286	)		2,204
(Increase) decrease in accrued interest payable and other liabilities		5,047			(2,880	)

Net cash provided by operating activities		15,792			8,307

Cash flows from investing activities:
Purchase of investment securities		—			(78,780	)
Proceeds from principal payments on investment securities		4,395			15,271
Proceeds from sale of loans		—			37,271
Net decrease (increase) in loans		9,561			(159,589	)
Capital calls on low income tax credit investments		(273	)		(437	)
(Purchase) redemption of Federal Home Loan Bank stock		(675	)		455
Purchase of premises and equipment		(35	)		(108	)
Purchase of bank-owned life insurance policies		(42	)		(46	)

Net cash provided by (used for) investing activities		12,931			(185,963	)

Cash flows from financing activities:
Net decrease in customer deposits		(53,444	)		(127,999	)
Paydown of long term borrowing, net		—			(56,387	)
Proceeds from short term and overnight borrowings, net		—			50,000
Proceeds from exercised stock options, net		6			21

Net cash used for financing activities		(53,438	)		(134,365	)

Decrease in cash and cash equivalents		(24,715	)		(312,021	)

Cash and cash equivalents, beginning of period		232,382			470,456

Cash and cash equivalents, end of period	$	207,667		$	158,435

Supplemental disclosure of cash flow information:
Securities transferred from available for sale to the held to maturity classification	$	—		$	49,889
Recording of right to use assets and operating lease liabilities	$	6,127		$	—
Cash paid during the year for:
Interest	$	12,962		$	3,007
Income taxes	$	—		$	2,003

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

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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 ~~conducts its business from its headquarters in Lafayette, California. The Company~~ has ~~2 full service branches in California~~a full-service branch located in Contra Costa County and ~~Santa Clara County and 3~~4 loan production offices ~~in California~~ located in Alameda County, Contra Costa County, Sacramento County, and ~~Sacramento~~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 ~~stockholders’~~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 ~~stockholders’~~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, ~~2019,~~2022, and the notes thereto, included in the Company’s Annual Report on Form

10-K

for the year ended December 31, ~~2019~~2022 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

The results of operations for the three and six months ended ~~March 31, 2020~~June 30, 2023 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, ~~2020.~~

2023.

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~~

Use of Estimates

The preparation of financial statements ~~were filed~~in conformity with ~~the SEC. See Note 7 to the unaudited consolidated financial statements for additional information regarding theCOVID-19~~ ~~pandemic.~~

~~Use of Estimates~~

~~Management is required~~GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ~~unaudited~~ consolidated financial statements, and the reported amounts of revenues and expenses during the reporting ~~period. These~~periods presented. Actual results may differ from those estimates ~~and assumptions affect the amounts reported~~used in the ~~unaudited consolidated financial statements~~Consolidated Financial Statements and related notes. Material estimates that are particularly susceptible to significant changes in the ~~disclosures provided, and actual results could differ. The~~near term include estimates ~~utilized to determine~~relating to: the ~~appropriate~~determination of the allowance for ~~loan losses~~credit losses; certain assets and liabilities carried at ~~March 31, 2020 may be materially different from actual results due to theCOVID-19~~ ~~pandemic. See Note 7 to the unaudited consolidated financial statements~~fair value; and accounting for ~~additional information regarding theCOVID-19~~ ~~pandemic.~~

income taxes.

Reclassifications

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

Subsequent Events

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

Table of Contents

Goodwill

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

The Company completed an interim impairment analysis of goodwill as of June 30, 2023 and determined there was no impairment.

Earnings Per Share (“EPS”)

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

   Three months ended
(Dollars in thousands, except per share data)
   2020    2019
Net income available to common shareholders
   $ 473    $ 1,868
Weighted average basic common shares outstanding
   8,103,248    8,020,456
Add: dilutive potential common shares
   66,650    82,087




Weighted average diluted common shares outstanding
   8,169,898    8,102,543
Basic earnings per share
   $ 0.06    $ 0.23




Diluted earnings per share
   $ 0.06    $ 0.23


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands, except per share data)	2023		2022		2023		2022
Net income available to common shareholders	$	5,440	$	4,244	$	10,891	$	7,917
Weighted average basic common shares outstanding		8,369,907		8,295,014		8,354,564		8,285,950
Add: dilutive potential common shares		44,306		100,687		88,043		107,826

Weighted average diluted common shares outstanding		8,414,213		8,395,701		8,442,607		8,393,776
Basic earnings per share	$	0.65	$	0.51	$	1.30	$	0.96

Diluted earnings per share	$	0.65	$	0.51	$	1.29	$	0.94

Adoption of New ~~Financial~~ Accounting Standards

~~In December 2019, the Financial~~ and Related Accounting ~~Standards Board (“FASB”) issued “Simplifying the Accounting for Income Taxes (Topic 740)” (“ASU2019-12”)~~ ~~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. ASU2019-12~~ will become effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset which is an asset that represents the lessees’ right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessors accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new guidance also requires enhanced disclosure about an entity’s leasing arrangements. The Company adopted Topic 842 onPolicies

On January 1, ~~2019, as required for public business entities. See Note 5 Commitments and Contingent Liabilities regarding~~2023, the ~~impact of this new accounting standard on the consolidated financial statements.~~

~~In June 2016, the FASB issued~~ Company adopted

ASU ~~2016-13,~~

2022-02,

Financial Instruments—Credit Losses (Topic 326)

. The amendments in this update eliminate the accounting guidance and related disclosures for Troubled Debt Restructurings (TDRs) by creditors in Subtopic

310-40, Receivables—Troubled

Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to ~~replace~~disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic

326-20, Financial

Instruments—Credit Losses—Measured at Amortized Cost. The adoption of this accounting guidance did not have a material impact on the Company’s Consolidated Financial Statements.

On January 1, 2023, the Company adopted

ASU

2016-13

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326)

. This standard replaced the incurred loss ~~model~~methodology with an expected loss ~~model, which~~methodology that is referred to as the current expected credit loss ~~(CECL) model. The~~(“CECL”) methodology. CECL ~~model is applicable to the measurement~~requires an estimate of credit losses onfor the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables ~~held-to maturity~~ and

held-to-maturity

debt securities, and ~~reinsurance receivables. It also applies to~~ some

off-balance

sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses (“ACL”).

Table of Contents

The Company adopted ASC 326, and all related subsequent amendments thereto, using the modified retrospective approach for all financial assets measured at amortized cost and

off-balance

sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $1.8 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $1.4 million, which is recorded within other liabilities. Additionally, the Company recorded an allowance for credit losses for held to maturity securities of $110,000, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net increase to retained earnings of $334,000 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

The following accounting policies have been updated/implemented in connection with the adoption of CECL and should be read in conjunction with the significant accounting policies contained in our 2022 Form

10-K

filed on March 24, 2023.

Allowance for Credit Losses on Loans

The ACL on loans represents the Company’s estimate of expected lifetime credit losses for its loans at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio as of the date of the consolidated statements of financial condition. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. Amortized cost does not ~~accounted~~include accrued interest, which management elected to exclude for ~~as insurance (loan commitments, standby letters~~the estimate of expected credit losses. The ACL on loans is increased by the provision for credit losses on loans, which is charged against current period operating results, and decreased by reversals of credit ~~financial guarantees,~~loss provisions as well as loan charge-offs, net of recoveries.

Management’s determination of the ACL on loans is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. Loans with similar ~~instruments)~~risk characteristics are collectively assessed within pools (or segments).

The discounted cash flow (“DCF”) method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows for each individual loan and discounting them back to their present value using the loan’s contractual interest rate, which is adjusted for any net ~~investments~~deferred fees, costs, premiums, or discounts existing at the loan’s origination or acquisition date (also referred to as the effective interest rate). The DCF method also considers factors such as loan term, prepayment or curtailment assumptions, and other relevant economic factors that could affect future cash flows. By discounting the cash flows, the method incorporates the time value of money and reflects the credit risk inherent in ~~leases recognized~~the loan.

The Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following

one-year

period. The Company considers economic forecasts of national gross domestic product, unemployment rates from the Federal Open Market Committee, and the House Price Index to inform the model for loss estimation. Historical loss rates used in the quantitative model were derived using both the Bank’s and peer bank data obtained from publicly-available sources.

Additionally, management considers qualitative and environmental factors that are likely to cause estimated credit losses within the Company’s existing portfolio to differ from historical loss (or peer) experience. Qualitative and environmental factors may include: consideration in trends of delinquencies, nonaccrual loans, and

charged-off

loans; trends in underlying collateral; effects in changes of lending policy and underwriting; regional and local economic trends; and conditions and concentrations of credit.

Allowance for Credit Losses on

Off-Balance

Sheet Credit Exposures

The Company maintains an ACL on unfunded loan commitments and other

off-balance

sheet credit exposures, if applicable, as part of other liabilities and accrued expenses in the consolidated statements of financial condition. Adjustments to the ACL on

off-balance

sheet credit exposures are made through a charge to provision for credit losses in the Company’s consolidated statements of income. The ACL on unfunded loan commitments is estimated by ~~a lessor. In October~~loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees.

Table of ~~2019,~~Contents

Allowance for Credit Losses on Available for Sale Securities

For available for sale securities in an unrealized loss position, the ~~FASB approved a proposal~~Company initially assesses whether it intends to ~~defer implementation~~sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the ~~CECL model by smaller reporting companies~~criteria regarding intent or requirement to ~~January 1, 2023.~~sell is met, the security’s amortized cost is written down to fair value through income. For available for sale securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists an allowance for credit losses is recorded, through a charge to the provision to credit losses, to the extent that the fair value is less than the amortized cost basis. Accrued interest receivable on available for sale securities is excluded from the estimate of credit losses. The Company ~~currently qualifies~~did not have any available for ~~this deferral and has elected~~sale securities that required an ACL at June 30, 2023.

Allowance for Credit Losses on Held 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. Maturity Securities

The Company ~~will continue~~measures expected credit losses on held to ~~calibrate~~maturity investment securities on a collective basis by major security type. Accrued interest receivable on held to maturity investment securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and ~~validate its approach during~~reasonable and supportable forecasts. Changes in the ~~period~~ACL for held to maturity securities are recorded through the provision for credit losses in the consolidated statements of ~~deferral.~~

income.

2. INVESTMENT SECURITIES

The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019.~~

(Dollars in thousands)
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Estimated
Fair
Value
At March 31, 2020:

Residential mortgage backed and government securities
   $ 23,763    $ 760    $ —      $ 24,523
Government agencies
   2,987    4    —      2,991
Corporate bonds
   7,009    —      (179 )    6,830








Total available for sale securities
   $ 33,759    $ 764    $ (179 )    $ 34,344








At December 31, 2019:

Residential mortgage backed and government securities
   $ 20,291    $ 436    $ (5 )    $ 20,722
Government agencies
   7,824    9    —      7,833
Corporate bonds
   —      —      —      —








Total available for sale securities
   $ 28,115    $ 445    $ (5 )    $ 28,555

Net unrealized gains on available for sale investment securities totaling $585,000 and $440,000 were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at March 31, 2020 and December 31, 2019, respectively.

~~The Company purchased 3 securities for $15.1 million and sold 6 securities for total proceeds of $7.7 million during the three months ended March 31, 2020.~~ 2022.


(Dollars in thousands)	Amortized Cost		Gross Unrealized / Unrecognized Gains		Gross Unrealized / Unrecognized Losses			Estimated Fair Value
At June 30, 2023:
Mortgage backed securities	$	16,849	$	13	$	(856	)	$	16,006
Government agencies		29,862		—		(1,001	)		28,861

Total available for sale securities	$	46,711	$	13	$	(1,857	)	$	44,867

Mortgage backed securities	$	59,002	$	34	$	(7,163	)	$	51,873
Government agencies		3,077		—		(577	)		2,500
Corporate bonds		44,183		—		(4,419	)		39,764

Total held to maturity securities, net	$	106,262	$	34	$	(12,159	)	$	94,137

At December 31, 2022:
Mortgage backed securities	$	18,629	$	26	$	(897	)	$	17,758
Government agencies		29,809		—		(1,043	)		28,766
Corporate bonds		430		58		—			488

Total available for sale securities	$	48,868	$	84	$	(1,940	)	$	47,012

Mortgage backed securities	$	61,363	$	—	$	(7,647	)	$	53,716
Government agencies		3,083		—		(627	)		2,456
Corporate bonds		44,420		30		(3,739	)		40,711

Total held to maturity securities	$	108,866	$	30	$	(12,013	)	$	96,883

The Company did not purchase ~~or sell available for sale~~any investment securities during the ~~three~~six months ended ~~March 31, 2019.~~

June 30, 2023. The Company purchased 8 available for sale securities for $36.0 million and 11 held to maturity securities for $42.8 million during the six months ended June 30, 2022. The Company did not sell any investment securities during the six months ended June 30, 2023 and 2022.

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The following table summarizes the scheduled maturities of our available for sale and held to maturity investment securities as of June 30, 2023.


	Available for Sale				Held to Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Less that one year	$	16,711	$	16,404	$	10,523	$	10,547
One to five years		19,887		19,109		20,626		19,927
Five to ten years		—		—		24,178		21,146
Beyond ten years		1,589		1,482		20,692		16,475
Securities not due at a single maturity date		8,524		7,872		30,243		26,042

Total investment securities	$	46,711	$	44,867	$	106,262	$	94,137

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

Management monitors the credit quality of the investment portfolio through the use of credit ratings by major credit agencies and analysis of issuer financial information, if available. Additionally, securities issued by government-sponsored agencies, such as FNMA, FHLMC and SBA, have explicit credit guarantees by the United States Federal Government which protect us from credit losses ~~at March 31, 2020~~on the contractual cash flows of the securities. The following table reflects the amortized cost and fair value of available for sale and held to maturity securities as of June 30, 2023, aggregated by credit quality indicators.


	Available for Sale				Held to Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Aaa	$	29,862	$	28,861	$	11,685	$	9,544
Aa1/Aa2/Aa3		—		—		3,077		2,501
A1/A2		—		—		7,978		6,583
BBB		—		—		1,592		1,213
Not rated		16,849		16,006		81,930		74,296

Total investment securities	$	46,711	$	44,867	$	106,262	$	94,137

Table of Contents

At June 30, 2023 and December 31, ~~2019~~2022, the Company had 55 securities in an unrealized position. The following table summarizes the unrealized losses for those investment securities, at the respective reporting dates, aggregated by major security type and length of time in a continuous unrealized loss position.

   Less Than 12 Months    More Than 12 Months Total
(Dollars in thousands)
   Fair Value    Unrealized
Losses    Fair Value    Unrealized
Losses Fair Value    Unrealized
Losses
At March 31, 2020:

Residential mortgage backed and government securities
   $ —      $ —      $ —      $ —   $ —      $ —
Government agencies
   —      —      —      —   —      —
Corporate bonds
   —      —      6,830    (179 ) 6,830    (179 )










Total available for sale securities
   $ —      $ —      $ 6,830    $ (179 ) $ 6,830    $ (179 )










At December 31, 2019:

Residential mortgage backed and government securities
   $ 481    $ 5    $ —      $ —   $ 481    $ 5
Government agencies
   1,598    —      —      —   1,598    —
Corporate bonds
   —      —      —      —   —      —










Total available for sale securities
   $ 2,079    $ 5    $ —      $ —   $ 2,079    $ 5


	Less Than 12 Months					More Than 12 Months					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
At June 30, 2023:
Mortgage backed securities	$	796	$	(53	)	$	13,009	$	(803	)	$	13,805	$	(856	)
Government agencies		—		—			28,860		(1,001	)		28,860		(1,001	)

Total available for sale securities	$	796	$	(53	)	$	41,869	$	(1,804	)	$	42,665	$	(1,857	)

Mortgage backed securities	$	—	$	—		$	49,487	$	(7,163	)	$	49,487	$	(7,163	)
Government agencies		—		—			2,501		(577	)		2,501		(577	)
Corporate bonds		4,546		(222	)		35,218		(4,197	)		39,764		(4,419	)

Total held to maturity securities	$	4,546	$	(222	)	$	87,206	$	(11,937	)	$	91,752	$	(12,159	)

At December 31, 2022:
Mortgage backed securities	$	10,920	$	(537	)	$	4,347	$	(360	)	$	15,267	$	(897	)
Government agencies		28,765		(1,043	)		—		—			28,765		(1,043	)

Total available for sale securities	$	39,685	$	(1,580	)	$	4,347	$	(360	)	$	44,032	$	(1,940	)

Mortgage backed securities	$	32,271	$	(5,244	)	$	21,445	$	(2,403	)	$	53,716	$	(7,647	)
Government agencies		—		—			2,456		(627	)		2,456		(627	)
Corporate bonds		14,607		(1,143	)		22,880		(2,596	)		37,487		(3,739	)

Total held to maturity securities	$	46,878	$	(6,387	)	$	46,781	$	(5,626	)	$	93,659	$	(12,013	)

At ~~March 31 2020,~~June 30, 2023, management determined that it did not intend to sell any available for sale investment securities with unrealized losses, and it is unlikely that the ~~Company’s investment security portfolio consisted~~Company will be required to sell any of 18those securities ~~two~~with unrealized losses before recovery of ~~which were~~their amortized cost. No allowances for credit losses have been recognized, individually or collectively, on available for sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at ~~quarter end. Both~~June 30, 2023.

The Company measures expected credit losses on held to maturity securities ~~were~~collectively by major security type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions along with reasonable and supportable forecasts. As of June 30, 2023, the Company determined that an allowance for credit losses of $58,000 was required for held to maturity securities. The allowance for credit losses pertained to corporate bonds and was presented as a reduction to the amortized cost of held to maturity securities outstanding.

The following table presents the balance and ~~investment grade ratings.~~

~~Management believes that changes~~activity in the ~~market value since purchase are primarily attributable~~allowance for credit losses on held to ~~changes in interest rates~~maturity securities for the three and ~~relative illiquidity. Because~~six months ended June 30, 2023.


	June 30, 2023
(Dollars in thousands)	Three Months Ended			Six Months Ended
Beginning balance	$	110		$	—
Adoption of new accounting standard		—			110
Provision for credit losses		(52	)		(52	)
Net charge-offs		—			—

Balance at June 31, 2023	$	58		$	58

Table of Contents

On a quarterly basis, the Company ~~does not intend~~utilizes a comprehensive risk assessment which includes a rating methodology (PT Score) to ~~sell~~identify, measure, and ~~unlikely~~monitor risks associated with our held to ~~be required to sell until a~~maturity loan portfolio. The recovery of ~~fair value, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at March 31, 2020.~~

At December 31, 2019, the Company’s investment security portfolio consisted of 21 securities, two of which were in an unrealized loss position at year end. One security was a government agency by the Small Business Administration. One security was Mortgage-Backed-Securities. Management believes that changesprovision for credit losses in the ~~market value~~second quarter of ~~its Mortgage-Backed-Securities since purchase are~~2023 was primarily ~~attributable~~driven by a reduction in the risk of default pertaining to ~~changes~~certain securities in ~~interest rates~~the held to maturity portfolio, and ~~relative illiquidity and not credit quality. Because~~was identified as part of 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 December 31, 2019.

comprehensive quarterly analysis.

3. LOANS AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

Outstanding loans as of ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019~~2022 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).

(Dollars in thousands)
   March 31,
2020    December 31,
2019
Commercial and industrial
   416,308    389,746
Real estate—construction and land
   41,697    42,519
Real estate—other
   496,765    502,929
Real estate—HELOC
   995    982
Installment and other
   13,180    13,476




Total loans, gross
   968,945    949,652
Deferred loan origination costs, net
   2,902    2,555
Allowance for loan losses
   (11,565 )    (11,075 )




Total loans, net
   960,282    941,132


(Dollars in thousands)	June 30, 2023			December 31, 2022
Commercial and industrial	$	622,270		$	634,535
Real estate - other		856,344			848,241
Real estate - construction and land		60,595			63,730
SBA		4,936			7,220
Other		39,486			39,695

Total loans, gross		1,583,631			1,593,421
Deferred loan origination costs, net		1,637			2,040
Allowance for credit losses		(15,722	)		(17,005	)

Total loans, net	$	1,569,546		$	1,578,456

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

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

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

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

Loans not meeting the criteria above that are analyzed individually, as part of ~~March 31, 2020 and December 31, 2019.~~

(Dollars in thousands)
   Commercial
and
Industrial    Real Estate
Construction
and Land    Real Estate
Other    Real Estate
HELOC    Installment
and Other    Total
As of March 31, 2020

Loans individually evaluated for impairment
   $ 5,440    $ —      $ —      $ —      $ 344    $ 5,784
Loans collectively evaluated for impairment
   410,868    41,697    496,765    995    12,836    963,161












Total loans
   $ 416,308    $ 41,697    $ 496,765    $ 995    $ 13,180    $ 968,945












As of December 31, 2019

Loans individually evaluated for impairment
   $ 4,572    $ —      $ 687    $ —      $ 344    $ 5,603
Loans collectively evaluated for impairment
   385,174    42,519    502,242    982    13,132    944,049












Total loans
   $ 389,746    $ 42,519    $ 502,929    $ 982    $ 13,476    $ 949,652

the above described process, are considered to be pass-rated loans.

Table of Contents

The following table reflects the ~~changes~~Company’s recorded investment in loans by credit quality indicators and ~~allocation~~by year of ~~the allowance for loan losses by portfolio segment~~origination as of ~~March 31, 2020 and March 31, 2019.~~

(Dollars in thousands)
   Commercial
and
Industrial    Real Estate
Construction
and Land Real Estate
Other Real Estate
HELOC Installment
and Other Total
Three months ended March 31, 2020

Beginning balance
   $ 6,708    $ 1,022 $ 3,281 $ 6 $ 58 $ 11,075
Provision for loan losses
   1,045    (292 ) (620 ) (1 ) 268 400
Charge-offs
   —      —   —   —   —   —
Recoveries
   90    —   —   —   —   90




Ending balance
   $ 7,843    $ 730 $ 2,661 $ 5 $ 326 $ 11,565




Individually evaluated for impairment
   $ 1,187    $ —   $ —   $ —   $ 110 $ 1,297
Collectively evaluated for impairment
   6,656    730 2,661 5 216 10,268




   $ 7,843    $ 730 $ 2,661 $ 5 $ 326 $ 11,565




Three months ended March 31, 2019

Beginning balance
   $ 5,578 �� $ 1,493 $ 3,703 $ 16 $ 10 $ 10,800
Provision for loan losses
   378    (373 ) 448 (6 ) 134 581
Charge-offs
   —      —   —   —   (137 ) (137 )
Recoveries
   6    —   —   —   —   6




Ending balance
   $ 5,962    $ 1,120 $ 4,151 $ 10 $ 7 $ 11,250




Individually evaluated for impairment
   $ 14    $ —   $ —   $ —   $ —   $ 14
Collectively evaluated for impairment
   5,948    1,120 4,151 10 7 11,236




   $ 5,962    $ 1,120 $ 4,151 $ 10 $ 7 $ 11,250

June 30, 2023.


	Term Loans by Year of Origination
(Dollars in thousands)	2023		2022		2021		Prior		Revolving		Total
Commercial and industrial
Pass	$	28,740	$	131,962	$	65,634	$	94,341	$	217,469	$	538,146
Special mention		898		39,407		5,778		3,217		34,076		83,376
Substandard		—		—		—		748		—		748

Total	$	29,638	$	171,369	$	71,412	$	98,306	$	251,545	$	622,270

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	247	$	247
Real estate - other
Pass	$	13,466	$	198,796	$	212,367	$	314,639	$	91,640	$	830,908
Special mention		697		3,417		8,570		7,986		—		20,670
Substandard		—		—		—		4,766		—		4,766

Total	$	14,163	$	202,213	$	220,937	$	327,391	$	91,640	$	856,344

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - construction and land
Pass	$	2,514	$	12,309	$	44,095	$	—	$	—	$	58,918
Special mention		—		—		—		1,677		—		1,677
Substandard		—		—		—		—		—		—

Total	$	2,514	$	12,309	$	44,095	$	1,677	$	—	$	60,595

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—
SBA
Pass	$	—	$	770	$	104	$	2,988	$	130	$	3,992
Special mention		—		—		—		147		—		147
Substandard		—		—		—		797		—		797

Total	$	—	$	770	$	104	$	3,932	$	130	$	4,936

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—
Other
Pass	$	10	$	1,708	$	—	$	35,005	$	2,763	$	39,486
Special mention		—		—		—		—		—		—
Substandard		—		—		—		—		—		—

Total	$	10	$	1,708	$	—	$	35,005	$	2,763	$	39,486

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—
Total
Pass	$	44,730	$	345,545	$	322,200	$	446,973	$	312,002	$	1,471,450
Special mention		1,595		42,824		14,348		13,027		34,076		105,870
Substandard		—		—		—		6,311		—		6,311

Total	$	46,325	$	388,369	$	336,548	$	466,311	$	346,078	$	1,583,631

Current period gross charge-offs	$	—	$	—	$	—	$	—	$	247	$	247

Table of Contents

The following table reflects the loan portfolio allocated by ~~management’s internal risk ratings at March 31, 2020 and~~the Company’s credit quality indicators as of December 31, ~~2019.~~

(Dollars in thousands)
   Commercial
and
Industrial    Real Estate
Construction
and Land    Real Estate
Other    Real Estate
HELOC    Installment
and Other    Total
As of March 31, 2020

Grade:

Pass
   $ 399,304    $ 39,919    $ 486,959    $ 995    $ 10,584    $ 937,761
Special Mention
   7,254    —      5,188    —      1,495    13,937
Substandard
   9,750    1,778    4,618    —      1,101    17,247












Total
   $ 416,308    $ 41,697    $ 496,765    $ 995    $ 13,180    $ 968,945












As of December 31, 2019

Grade:

Pass
   $ 378,327    $ 40,731    $ 494,314    $ 982    $ 11,382    $ 925,736
Special Mention
   6,894    1,788    7,928    —      1,655    18,265
Substandard
   4,525    —      687    —      439    5,651












Total
   $ 389,746    $ 42,519    $ 502,929    $ 982    $ 13,476    $ 949,652

2022.


(Dollars in thousands)	Commercial and Industrial		Real Estate Other		Real Estate Construction and Land		SBA		Other		Total
As of December 31, 2022:
Grade:
Pass	$	613,395	$	840,993	$	62,031	$	6,132	$	39,695	$	1,562,246
Special Mention		18,157		2,602		—		490		—		21,249
Substandard		2,983		4,646		1,699		598		—		9,926

Total	$	634,535	$	848,241	$	63,730	$	7,220	$	39,695	$	1,593,421

The increase in loans classified as special mention at June 30, 2023 compared to December 31, 2022 was primarily the result of certain commercial contractors incurring construction delays and project slowdowns due to an extended and severe winter season. Additionally, certain other commercial loans were classified as special mention due to heightened monitoring in response to current economic and operating trends.

The following table reflects an aging analysis of the loan portfolio by the time past due at ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019.~~

(Dollars in thousands)
   30 Days    60 Days    90+ Days    Non-Accrual    Current    Total
As of March 31, 2020

Commercial and industrial
   $ —      $ —      $ —      $ 2,306    $ 414,002    $ 416,308
Real estate:

Construction and land
   —      —      —      —      41,697    41,697
Other
   —      —      —      —      496,765    496,765
HELOC
   —      —      —      —      995    995
Installment and other
   —      —      —      344    12,836    13,180












Total loans, gross
   $ —      $ —      $ —      $ 2,650    $ 966,295    $ 968,945












As of December 31, 2019

Commercial and industrial
   $ —      $ 1,440    $ —      $ 2,409    $ 385,897    $ 389,746
Real estate:

Construction and land
   —      —      —      —      42,519    42,519
Other
   —      —      —      —      502,929    502,929
HELOC
   —      —      —      —      982    982
Installment and other
   —      —      —      344    13,132    13,476












Total loans, gross
   $ —      $ 1,440    $ —      $ 2,753    $ 945,459    $ 949,652

2022.


(Dollars in thousands)	30 Days		60 Days		90+ Days		Nonaccrual		Current		Total
As of June 30, 2023:
Commercial and industrial	$	493	$	—	$	—	$	—	$	621,777	$	622,270
Real estate - other		—		—		—		—		856,344		856,344
Real estate - construction and land		—		—		—		—		60,595		60,595
SBA		—		—		—		181		4,755		4,936
Other		—		—		—		—		39,486		39,486

Total loans, gross	$	493	$	—	$	—	$	181	$	1,582,957	$	1,583,631

As of December 31, 2022:
Commercial and industrial	$	—	$	—	$	—	$	1,028	$	633,507	$	634,535
Real estate - other		3,160		—		—		—		845,081		848,241
Real estate - construction and land		—		—		—		—		63,730		63,730
SBA		—		—		—		222		6,998		7,220
Other		—		—		—		—		39,695		39,695

Total loans, gross	$	3,160	$	—	$	—	$	1,250	$	1,589,011	$	1,593,421

Table of Contents

The Company measures expected credit losses on a pooled basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.

As of June 30, 2023 and December 31, 2022, the Company determined that certain loans did not share risk characteristics with other loans in the portfolio and therefore evaluated these loans for expected credit losses/impairment on an individual basis. The loans individually evaluated were classified as nonaccrual and were all collateral dependent. For collateral dependent loans, the Company has adopted the practical expedient under ASC 326 to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. None of the individually evaluated loans required an allowance for credit losses as of the respective reporting dates.

The following table reflects the recorded investment and unpaid principal balance for loans individually evaluated for expected credit losses/impairment as of June 30, 2023 and December 31, 2022 under ASC 326 and the previous accounting standard, respectively.


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment
As of June 30, 2023:
SBA	$	181	$	856	$	202

Total individually evaluated loans	$	181	$	856	$	202

As of December 31, 2022:
Commercial and industrial	$	1,028	$	1,678	$	1,028
SBA		222		896		227

Total individually evaluated loans	$	1,250	$	2,574	$	1,255

The recorded investment in loans individually evaluated for expected credit losses/impairment excludes interest receivable and net deferred origination costs due to their immateriality.

The following table reflects the amortized cost of individually evaluated loans by type of collateral as of June 30, 2023 and December 31, 2022.


(Dollars in thousands)	Residential Property		Business Assets		Total Nonaccrual Loans
As of June 30, 2023:
SBA	$	181	$	—	$	181

Total individually evaluated loans	$	181	$	—	$	181

As of December 31, 2022:
Commercial and industrial	$	—	$	1,028	$	1,028
SBA		222		—		222

Total individually evaluated loans	$	222	$	1,028	$	1,250

Table of Contents

The following table reflects nonaccrual loans and the related allowance for credit losses by portfolio segment as of June 30, 2023 under ASC 326 and nonaccrual loans as of December 31, 2022 under the previous accounting standard, respectively.


							Incurred Loss
	CECL						December 31, 2022
	June 30, 2023						December 31, 2022
(Dollars in thousands)	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
Commercial and industrial	$	—	$	—	$	—	$	1,028
SBA		181		—		181		222

Total individually evaluated loans	$	181	$	—	$	181	$	1,250

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following table reflects information related to ~~impaired~~ loans individually and collectively evaluated for impairment and related allowance for loan losses as of ~~March 31, 2020 and~~ December 31, ~~2019.~~

(Dollars in thousands)
   Recorded
Investment    Unpaid
Principal
Balance    Related
Allowance    Average
Recorded
Investment    Interest
Income
Recognized
As of March 31, 2020

With no related allowance recorded:

Commercial and industrial
   $ 1,677    $ 1,685    $ —      $ 1,728    $ 35
With an allowance recorded:

Commercial and industrial
   $ 3,782    $ 5,682    $ 1,187    $ 5,715    $ 25
Installment and other
   $ 356    $ 631    $ 110    $ 1,925    $ —
Total:

Commercial and industrial
   $ 5,459    $ 7,367    $ 650    $ 7,443    $ 60
Installment and other
   $ 356    $ 631    $ 110    $ 1,925    $ —
As of December 31, 2019

With no related allowance recorded:

Commercial and industrial
   $ 1,847    $ 1,860    $ —      $ 1,282    $ 68
Real estate- other
   $ 689    $ 687    $ —      $ 700    $ 52
Installment and other
   $ 291    $ 294    $ —      $ 1,723    $ —
With an allowance recorded:

Commercial and industrial
   $ 2,725    $ 4,623    $ 600    $ 4,620    $ 56
Installment and other
   $ 41    $ 200    $ 50    $ 203    $ 15
Total:

Commercial and industrial
   $ 4,572    $ 6,483    $ 600    $ 5,902    $ 124
Real estate- other
   $ 689    $ 687    $ —      $ 700    $ 52
Installment and other
   $ 332    $ 494    $ 50    $ 1,926    $ 15

2022.


(Dollars in thousands)	Commercial and Industrial		Real Estate Other		Real Estate Construction and Land		SBA		Other		Total
As of December 31, 2022:
Gross loans:
Loans individually evaluated for impairment	$	1,028	$	—	$	—	$	222	$	—	$	1,250
Loans collectively evaluated for impairment		633,507		848,241		63,730		6,998		39,695		1,592,171

Total gross loans	$	634,535	$	848,241	$	63,730	$	7,220	$	39,695	$	1,593,421

Allowance for loan losses:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment		10,620		5,322		884		132		47		17,005

Total allowance for loan losses	$	10,620	$	5,322	$	884	$	132	$	47	$	17,005

Interest forgone on nonaccrual loans totaled ~~$82,000~~$46,000 and ~~$89,000~~$18,000 for the three months ended ~~March 31, 2020~~June 30, 2023 and ~~2019,~~2022, respectively. Interest forgone on nonaccrual loans totaled $88,000 and $35,000 for the six months ended June 30, 2023 and 2022, respectively. There was

interest recognized on a cash-basis on ~~impaired~~ loans individually evaluated for expected credit losses/impairment during the three and six months ended June 30, 2023 and 2022 under ASC 326 and the previous accounting standard, respectively.

The following tables reflect the changes in, and allocation of, the allowance for credit losses and allowance for loan losses by portfolio segment for the three and six months ended ~~March 31, 2020~~June 30, 2023 and ~~2019, respectively.~~

2022. The ~~recorded investment in impaired loans~~provision for credit losses of $340,000 for the second quarter of 2023 was primarily the result of changes in the ~~tables above excludes accrued~~forecast assumptions utilized in the CECL model. In addition to changes in forecast assumptions, the provision for credit losses of $804,000 for the six months ended June 30, 2023 was impacted by the recognition of net charge-offs of $247,000 during the first quarter of 2023.

Table of Contents


(Dollars in thousands)	Commercial and Industrial			Real Estate Other			Real Estate Construction and Land			SBA			Other			Total
Three months ended June 30, 2023:
Beginning balance	$	10,719		$	2,943		$	743		$	42		$	935		$	15,382
Provision for credit losses		84			27			(6	)		(2	)		237			340
Charge-offs		—			—			—			—			—			—
Recoveries		—			—			—			—			—			—

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

Alowance for credit losses / gross loans		1.74	%		0.35	%		1.22	%		0.81	%		2.97	%		0.99	%
Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Three months ended June 30, 2022:
Beginning balance	$	8,876		$	5,080		$	783		$	283		$	10		$	15,032
Provision for loan losses		650			163			124			(10	)		(2	)		925
Charge-offs		—			—			—			—			—			—
Recoveries		—			—			—			—			—			—

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

Alowance for loan losses / gross loans		1.62	%		0.66	%		1.44	%		2.05	%		0.02	%		1.06	%
Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Six months ended June 30, 2023
Beginning balance	$	10,620		$	5,322		$	884		$	132		$	47		$	17,005
Adoption of new accounting standard		(1,566	)		(1,725	)		1			(91	)		1,541			(1,840	)
Provision for credit losses		1,996			(627	)		(148	)		(1	)		(416	)		804
Charge-offs		(247	)		—			—			—			—			(247	)
Recoveries		—			—			—			—			—			—

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

Alowance for credit losses / gross loans		1.74	%		0.35	%		1.22	%		0.81	%		2.97	%		0.99	%
Net recoveries (charge-offs) / gross loans		-0.04	%		0.00	%		0.00	%		0.00	%		0.00	%		-0.02	%
Six months ended June 30, 2022
Beginning balance	$	8,552		$	4,524		$	681		$	309		$	15		$	14,081
Provision for loan losses		973			719			226			(36	)		(7	)		1,875
Charge-offs		—			—			—			—			—			—
Recoveries		1			—			—			—			—			1

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

Alowance for loan losses / gross loans		1.62	%		0.66	%		1.44	%		2.05	%		0.02	%		1.06	%
Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

Table of Contents

Modifications Made to Borrowers Experiencing Financial Difficulty

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

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

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

~~Trouble Debt Restructurings~~

the allowance for credit losses is adjusted by the same amount.

At ~~March 31, 2020,~~June 30, 2023, the Company had one loan with a recorded investment ~~of $624,000 and had allocated specific reserves totaling $20,000 related to loans~~or commitment with terms that had been modified ~~in troubled debt restructurings. At December 31, 2019,~~due to the ~~Company~~borrower experiencing financial difficulties. This loan had ~~a recorded investment~~no payments that were considered past due as of ~~$722,000~~the reporting date. The following table reflects the type of concession granted and ~~had allocated specific reserves totaling $12,000 related to loans with terms that had been modified in troubled debt restructurings.~~

the financial effect of the modification.


(Dollars in thousands)	Amortized Cost		% of Total Portfolio Segment			Financial Effect
SBA	$	51		0.01	%	Term Extension - extended forbearance expiration from March 31, 2023 to July 1, 2023

Total modified loans	$	51

The Company had no commitments as of March 31, 2020 and December 31, 2019 to customers with outstanding loans that were classified as troubled debt restructurings. There were no new troubled debt restructurings during the three months ended March 31, 2020 and 2019.

~~The Company had no troubled debt restructurings~~loan modifications resulting from a borrower experiencing financial difficulties with a subsequent payment default within twelve months following the modification during the three and six months ended ~~March 31, 2020 and 2019.~~

~~For additional information regarding the impact of COVID-19, see footnote 7~~

June 30, 2023.

4. BORROWING ARRANGEMENTS

The Company has a borrowing arrangement with the Federal Reserve Bank of San Francisco (FRB) under which advances are secured by portions of the Bank’s loan and investment securities portfolios. The Company’s credit limit varies according to the amount and composition of the assets pledged as collateral. At ~~March 31, 2020,~~June 30, 2023, amounts pledged and available borrowing capacity under such limits were approximately ~~$205.1~~$434.4 million and ~~$132.6~~$344.8 million, respectively. At December 31, ~~2019,~~2022, amounts pledged and available borrowing capacity under such limits were approximately ~~$193.7~~$484.1 million and ~~$127.3~~$393.0 million, respectively. ~~There were no borrowings outstanding under this arrangement as of March 31, 2020 and December 31, 2019.~~

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 ~~Bank’s~~Company’s credit limit varies according to its total assets and the amount and composition of the loan portfolio pledged as collateral. At ~~March 31, 2020,~~June 30, 2023, amounts pledged and available borrowing capacity under such limits were approximately ~~$160.0~~$451.3 million and ~~$105.0~~$411.3 million, respectively. At December 31, ~~2019,~~2022, amounts pledged and available borrowing capacity under such limits were approximately ~~$188.8~~$386.1 million and ~~$133.8~~$335.1 million, respectively. In ~~June 2019,~~March 2023, the Company secured a ~~$10.0~~$25.0 million FHLB short term borrowing ~~for two years~~ maturing ~~in June 2021~~on April 3, 2023 at a fixed rate of ~~1.89%~~5.11%.

This FHLB short term borrowing was paid in full at maturity. Also, in March 2023, the Company secured a $50.0 million FHLB short term borrowing maturing on May 1, 2023 at a fixed rate of 5.02%. This FHLB short term borrowing was paid in full at maturity.

Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to ~~$61.0~~$98.0 million. In a separate agreement, the Company can borrow up to $10.0 million or the total market value of securities pledged to a correspondent bank under a repurchase agreement. At March 31, 2020 and December 31, 2019 there were no investment securities pledged to the correspondent bank under this agreement. There were no borrowings outstanding under these arrangements at ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019.~~

2022.

Table of Contents

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

six-month

term at a rate of Prime plus 0.40%. At ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019,~~2022, no borrowings were outstanding under this line of credit.

The Company entered into a ~~three year~~three-year borrowing arrangement with a correspondent ~~back~~bank on ~~March 20,~~April 27, 2020 for $12.0 million. The note is secured by the Company’s investment in the Bank and has a fixed rate of 3.95%.

There were no borrowings outstanding under this arrangement at June 30, 2023 and December 31, 2022.

The Company issued ~~$5.0~~$20.0 million in subordinated debt on ~~April 15, 2016.~~September 30, 2020. The subordinated debt has a fixed interest rate of ~~5.875%~~5.00% for the first 5 ~~years.~~years and a stated maturity of September 30, 2030. After the fifth year, the interest rate changes to a quarterly variable rate ~~of Prime~~equal to then current three-month term SOFR plus ~~2.00%~~0.488%. The subordinated debt was recorded net of related issuance costs of ~~$87,000. On March 31, 2020~~$300,000. At June 30, 2023 and December 31, ~~2019 and 2018,~~2022, the ~~balances were $5.0 million and $5.0~~balance remained at $20.0 million, net of the remaining unamortized issuance ~~cost, respectively.~~

cost.

The Company issued an additional $35.0 million in subordinated debt on August 17, 2021. The subordinated debt has a fixed interest rate of 3.50% for the first 5 years and a stated maturity of September 1, 2031. After the fifth year, the interest rate changes to a quarterly variable rate equal to then current three-month term SOFR plus 0.286%. The subordinated debt was recorded net of related issuance costs of $760,000. At June 30, 2023 and December 31, 2022, the balance remained at $35.0 million, net of the remaining unamortized issuance cost.

5. COMMITMENTS AND CONTINGENT LIABILITIES

Financial Instruments with

Off-Balance

Sheet Risk

The Company is a party to financial instruments with~~off-balance-sheet~~

off-balance

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

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

case-by-case

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

At ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019,~~2022, the Company had outstanding unfunded commitments for loans of approximately ~~$343.0~~$601.7 million and ~~$390.0~~$644.1 million, respectively. ~~Unfunded~~

The outstanding unfunded commitments for loans at June 30, 2023 was comprised of fixed rate commitments of approximately $43.8 million and variable rate commitments of approximately $557.9 million. The following table reflects the interest rate and maturity ranges for the unfunded fixed rate loan ~~commitment reserves totaled $185,000~~commitments as of June 30, 2023.


(Dollars in thousands)	Due in One Year Or Less		Over One Year But Less Than Five Years		Over Five Years		Total
Unfunded fixed rate loan commitments:
Interest rate less than or equal to 4.00%	$	18,141	$	4,203	$	4,369	$	26,713
Interest rate between 4.00% and 5.00%		—		7,437		107		7,544
Interest rate greater than or equal to 5.00%		4,087		2,566		2,871		9,524

Total unfunded fixed rate loan commitments	$	22,228	$	14,206	$	7,347	$	43,781

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The Company records an allowance for credit losses on

off-balance

sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s income statements. The allowance for credit losses on

off-balance

sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for credit losses related to unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets and ~~$185,000~~was $1.9 million and $430,000 at ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019,~~2022, respectively.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2023.


	June 30, 2023
(Dollars in thousands)	Three Months Ended		Six Months Ended
Beginning balance	$	1,721	$	430
Adoption of new accounting standard		—		1,397
Provision for credit losses		156		50

Balance at June 30, 2023	$	1,877	$	1,877

Operating Leases

The Company leases various office premises under long-term operating lease agreements. These leases expire between ~~2020~~2023 and ~~2027,~~2030, with certain leases containing either three, five, or ~~seven year~~seven-year renewal options.

The following table reflects the quantitative information for the Company’s ~~leases.~~

(Dollars in thousands)    March 31,
2020
Operating lease cost (cost resulting form lease payments)
   $ 621
Operating lease – operating cash flows (fixed payments)
   $ 491
Operating lease – ROU assets
   $ 9,867
Operating lease – liabilities
   $ 12,119
Weighted average lease term – operating leases
   4.8 years
Weighted average discount rate – operating leases
   2.58 %

leases for the six months ended, and as of, June 30, 2023.


(Dollars in thousands)	June 30, 2023
Operating lease cost (cost resulting from lease payments)	$	981
Operating lease - operating cash flows (fixed payments)	$	787
Operating lease right-of-use assets (other assets)	$	9,712
Operating lease liabilities (other liabilities)	$	11,348
Weighted average lease term - operating leases		4.5 years
Weighted average discount rate - operating leases		4.55	%

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The following table reflects the minimum commitments under these

non-cancellable

leases, before considering renewal options, as of ~~March 31, 2020.~~

(Dollars in thousands)    March 31,
2020
2020
   $ 1,914
2021
   2,431
2022
   2,441
2023
   1,497
2024
   1,456
Thereafter
   3,291


Total undiscounted cash flows
   13,030
Discount on cash flows
   (911 )


Total lease liability
   $ 12,119

June 30, 2023.


(Dollars in thousands)	June 30, 2023
2023	$	866
2024		2,414
2025		2,486
2026		2,451
2027		1,402
Thereafter		3,140

Total undiscounted cash flows		12,759
Discount on cash flows		(1,411	)

Total lease liability	$	11,348

Rent expense included in premises and equipment expense totaled ~~$622,000~~$493,000 and ~~$389,000~~$486,000 for the three months ended ~~March 31, 2020~~June 30, 2023 and ~~2019,~~2022, respectively.

Rent expense included in premises and equipment expense totaled $981,000 and $983,000 for the six months ended June 30, 2023 and 2022, respectively.

Contingencies

The Company ~~may be subject to~~is involved in legal proceedings ~~and claims which arise in~~arising from normal business activities. Management, based upon the ~~ordinary course~~advice of ~~business. In~~legal counsel, believes the ~~opinion~~ultimate resolution of ~~management, the amount of ultimate liability with respect to such~~all pending legal actions will not ~~materially affect~~have a material effect on the Company’s financial position or results of ~~operations of the Company.~~

~~For additional information regarding the impact of COVID-19, see footnote 7~~

operations.

Correspondent Banking Agreements

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

At ~~March 31, 2020,~~June 30, 2023, uninsured deposits at financial institutions were approximately ~~$4.6~~$2.2 million. At December 31, ~~2019,~~2022, uninsured deposits at financial institutions were approximately ~~$4.0~~$2.9 million.

6. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

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

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

Level 2—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—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.

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

The carrying amounts and estimated fair values of financial instruments at ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019~~2022 are as follows:

   Carrying
Amount    Fair Value Measurements
(Dollars in thousands)
   Level 1    Level 2    Level 3    Total
As of March 31, 2020

Financial assets:

Cash and due from banks
   $ 140,610    $ 140,610    $ —      $ —      $ 140,610
Securities available for sale
   34,344    —      34,344    —      34,344
Loans, net
   960,282    —      —      951,928    951,928
Accrued interest receivable
   3,247    —      109    3,138    3,247
Financial liabilities:

Deposits
   $ 1,028,861    $ 884,043    $ 145,310    $ —      $ 1,029,353
Other borrowings
   22,000    —      —      22,539    22,539
Subordinated debt
   4,981    —      —      5,103    5,103
Accrued interest payable
   376    —      300    76    376
As of December 31, 2019

Financial assets:

Cash and due from banks
   $ 114,342    $ 114,342    $ —      $ —      $ 114,342
Securities available for sale
   28,555    —      28,555    —      28,555
Loans, net
   941,132    —      —      940,944    940,944
Accrued interest receivable
   3,398    —      168    3,230    3,398
Financial liabilities:

Deposits
   $ 988,236    $ 870,495    $ 121,136    $ —      $ 991,631
Other borrowings
   10,000    —      —      10,032    10,032
Subordinated debt
   4,977    —      —      5,112    5,112
Accrued interest payable
   400    —      326    74    400


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

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

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

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

Investment ~~Securities—~~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—~~Stock - It is not practical to determine the fair value of these correspondent bank stocks due to restrictions placed on their transferability.

~~Loans—~~

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Loans - Fair values of loans for ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019~~2022 are estimated on an exit price basis with contractual cash flow, prepayments, discount spreads, credit loss and liquidity premium assumptions. Loans with similar characteristics such as prepayment rates, terms and rate indexed are aggregated for purposes of the calculations.

~~Impaired loans—Impaired~~ Loans are generally classified using Level 3 inputs.

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

~~Deposits—~~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. ~~Fair values of fixed rate~~For time certificates of deposit, ~~are calculation of~~ the estimated remaining cash flows ~~was~~were discounted, based on current rates for similar instruments in market, to ~~the date of the valuation to calculate~~determine the fair value (premium)/discount on the portfolio that applies interest rates currently being offered on certificates for the San Francisco Bay Area to a schedule of aggregated expected monthly maturities on time deposits resulting inand accordingly are classified as Level ~~2 classification.~~

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

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

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

Accrued Interest ~~Receivable—~~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—~~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—~~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~~as well as considering the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

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Assets Recorded at Fair Value on a Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring ~~basis.~~

(Dollars in thousands)
   Fair Value    Level 1    Level 2    Level 3
As of March 31, 2020

Investments available for sale:

Residential mortgage backed and government securities
   $ 24,523    $ —      $ 24,523    $ —
Government agencies
   2,991    —      2,991    —
Corporate bonds
   6,830    —      6,830    —








Total assets measured at fair value on a recurring basis
   $ 34,344    $ —      $ 34,344    $ —








As of December 31, 2019

Investments available for sale:

Residential mortgage backed and government securities
   $ 20,722    $ —      $ 20,722    $ —
Government agencies
   7,833    —      7,833    —
Corporate bonds
   —      —      —      —








Total assets measured at fair value on a recurring basis
   $ 28,555    $ —      $ 28,555    $ —

basis as of June 30, 2023 and December 31, 2022.


(Dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
As of June 30, 2023:
Investments available for sale:
Mortgage backed securities	$	16,006	$	—	$	16,006	$	—
Government agencies		28,861		—		28,861		—

Total assets measured at fair value on a recurring basis	$	44,867	$	—	$	44,867	$	—

As of December 31, 2022:
Investments available for sale:
Mortgage backed securities	$	17,758	$	—	$	17,758	$	—
Government agencies		28,766		—		28,766		—
Corporate bonds		488		—		488		—

Total assets measured at fair value on a recurring basis	$	47,012	$	—	$	47,012	$	—

Fair values for

available-for-sale

investment securities are based on quoted market prices for exact or similar securities. During the periods presented, there were no significant transfers in or out of Levels 1 and 2 and there were no changes in the valuation techniques used.

Additionally, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2023 and December 31, 2022.

Assets Recorded at Fair Value on a

Non-Recurring

Basis

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

non-recurring

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

non-recurring

basis as of ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019.~~

   Carrying
Amount    Fair Value Measurements
(Dollars in thousands)
   Level 1    Level 2    Level 3
As of March 31, 2020

Impaired loans—Commercial
   $ 2,112    $ —      $ —      $ 2,112








Total assets measured at fair value on anon-recurring basis
   $ 2,112    $ —      $ —      $ 2,112








As of December 31, 2019

Impaired loans—Commercial
   $ 3,475    $ —      $ —      $ 3,475








Total assets measured at fair value on anon-recurring basis
   $ 3,475    $ —      $ —      $ 3,475


��

2022.


	Carrying Amount		Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3
As of June 30, 2023:
Individually evaluated loans - SBA	$	181	$	—	$	—	$	181

Total assets measured at fair value on a non-recurring basis	$	181	$	—	$	—	$	181

As of December 31, 2022:
Impaired loans - Commercial	$	1,028	$	—	$	—	$	1,028
Impaired loans - SBA		222		—		—		222

Total assets measured at fair value on a non-recurring basis	$	1,250	$	—	$	—	$	1,250

The fair value of ~~impaired~~individually evaluated loans is based upon independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less selling ~~costs, generally.~~costs. 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~~charged-off~~

charge-off

has been recorded. The unobservable inputs and qualitative information about the unobservable inputs are based on ~~managements’~~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~~individually evaluated loans.

~~7. BUSINESS IMPACT OFCOVID-19~~

~~COVID-19~~

In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. The COVID-19 virus continues to aggressively spread globally and has spread to over 185 countries, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted our operations as of March 31, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it 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.

~~Loan Portfolio~~

~~As a result of the novel coronavirusCOVID-19,~~ the Company has granted payment deferments through the date of this filing on over 400 loans with an aggregate outstanding balance of approximately $365.0 million and aggregate monthly principal and interest payments of approximately $3.7 million. The payment deferments have been granted initially for up to 90 days, and the Company will consider an additional 90 days based on the circumstances on both a macro and micro level at the time.

~~The Company is also participating in the SBA Paycheck Protection Program (PPP). Key Features of the PPP include:~~

~~24-month~~ ~~term~~

~~Interest-rate of 1%, deferred payments for the first6-months~~

The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). No collateral or personal guarantees are required. Neither the government nor lenders will charge any fees.

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

~~Loans are guaranteed by the United States Treasury Department.~~

~~The Company has approved approximately 720 PPP loan applications from new and existing clients, totaling over $370.0 million.~~

~~The Company is not acting as an agent but will be receiving the full fee provided by the SBA for making these types of loans.~~

~~Goodwill~~

~~The company completed an impairment analysis of Goodwill as of March 31, 2020 and has determined there was no impairment.~~

~~As part of the Company’s assessment of goodwill impairment, management considered coronavirusCOVID-19~~ and determined that the significant change in the general economic environment and financial markets represents an interim impairment indicator that will require continued evaluation. As a result, there is a reasonable possibility that goodwill impairment could occur in the near term.

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

The following is a discussion of our financial condition at ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019~~2022 and our results of operations for the three and six months ended ~~March 31, 2020~~June 30, 2023 and ~~2019,~~2022, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form10-K for the year ended December 31, ~~2019~~2022 that was filed with the Securities and Exchange Commission (the “SEC”) on ~~April 14, 2020~~March 24, 2023 (our “Annual Report”) and with the accompanying unaudited notes to consolidated financial statements set forth in this Quarterly Report on Form10-Q for the quarterly period ended ~~March 31, 2020~~June 30, 2023 (this “Report”). Because we conduct all of our material business operations through our bank subsidiary, California Bank of Commerce, the discussion and analysis relates to activities primarily conducted by the Bank.

Forward Looking Statements

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

In addition to the risk of incurring loan losses and provision for ~~loan~~credit losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy, ~~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~~credit 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;~~rates, which may adversely affect our interest margins, net interest income and the value of our investment securities; the risk that we will not be able to manage our liquidity, interest rate or operational risks effectively, in which event our operating results or financial condition could be harmed; risks associated with seeking new client relationships and maintaining existing client relationships; the impacts of inflation; and the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities. ~~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 ~~Quarterly Reports on Form 10-Q that~~filings we ~~file~~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, ~~March 31, 2020.~~June 30, 2023.

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

Overview

California BanCorp (the ~~“Company”~~“Company,” “we” or “us”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”). The Bank ~~conducts its business from its headquarters in Lafayette, California. The Company~~ has 2a full service ~~branches~~branch in California located in Contra Costa County and ~~Santa Clara County and 3~~4 loan production offices in California located in Alameda County, Contra Costa County, Sacramento County, and ~~Sacramento~~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 months ended March 31, 2020 and 2019 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 March 31,
(Dollars in thousands, except per share data)
   2020 2019
Income Statement Data:

Interest income
   $ 12,303 $ 11,494
Interest expense
   2,121 1,657


Net interest income
   10,182 9,837
Provision for credit losses
   400 581


Net interest income after provision for credit losses
   9,782 9,256
Other income
   1,290 863
Other expenses
   10,407 7,615


Income before taxes
   665 2,504
Income taxes
   192 636


Net income
   $ 473 $ 1,868


Per Share Data:

Basic earnings per share
   $ 0.06 $ 0.23
Diluted earnings per share
   $ 0.06 $ 0.23
Performance Measures:

Return on average assets
   0.16 % 0.76 %
Return on average equity
   1.45 % 6.18 %
Net interest margin
   3.80 % 4.26 %
Efficiency ratio
   90.72 % 71.17 %
(Dollars in thousands)
   March 31,
2020 December 31,
2019
Balance Sheet Data:

Assets
   $ 1,207,482 $ 1,152,034
Loans, net
   $ 960,282 $ 941,132
Deposits
   $ 1,028,861 $ 988,236
Shareholders’ equity
   $ 131,193 $ 130,256
Asset Quality Data:

Allowance for loan losses / gross loans
   1.19 % 1.17 %
Allowance for loan losses / nonperforming loans
   436.42 % 402.29 %
Nonperforming assets / total assets
   0.22 % 0.24 %
Nonperforming loans / gross loans
   0.27 % 0.29 %
Capital Adequacy Measures (Bank):

Tier I leverage ratio
   11.36 % 10.44 %
Tier I risk-based capital ratio
   11.33 % 10.38 %
Total risk-based capital ratio
   12.77 % 11.79 %

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, ~~2019,~~2022, included in our Annual Report on Form10-K and in Note 1 to our unaudited financial statements, which are included elsewhere in this Quarterly Report onForm 10-Q.

~~COVID-19~~

~~TheCOVID-19~~ pandemic has caused a substantial disruption to the economy, as well as a heightened level of uncertainty about the scope and longevity of its impact. In response to the pandemic, we have implemented a multi-pronged approach to address the challenges caused by the effects of this pandemic. Our approach includes ensuring the safety of our employees and the communities that we serve and developing new and temporarily revised programs that are responsive to the needs of our loan and deposit customers. As we continue to closely monitor~~COVID-19~~ developments, we remain focused on our ability to navigate these challenging conditions and the underlying strength and stability of our Company. For information regarding the specific business impact to the Company regarding~~COVID-19,~~ ~~see Note 7 of the unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report on Form10-Q.~~

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

Overview

For the three months ended ~~March 31, 2020,~~June 30, 2023 and June 30, 2022, net income was ~~$473,000 compared~~$5.4 million and $4.2 million, respectively, representing an increase of $1.2 million, or 28%. Compared to ~~$1.9 million for~~ the same period last ~~year. The~~year, net interest income after the provision for credit losses increased by $2.9 million, which was offset by a decrease in non-interest income of ~~$1.4 million, or 75%, was primarily attributable to~~$259,000, an increase in ~~operating expenses~~non-interest expense of ~~$2.8 million, or 37%, partially offset by~~$784,000 and an increase in ~~in net interest income of $345,000, or 4%, an increase innon-interest~~ ~~income of $427,000 or 49%, and a reduction of~~the provision for income taxes of ~~$444,000, or 70%.~~$665,000.

Net Interest Income and Margin

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

Net interest income for the three months ended ~~March 31, 2020,~~June 30, 2023, was ~~$10.2~~$18.6 million, an increase of ~~$345,000,~~$2.4 million, or ~~4% over $9.8~~15% from $16.2 million for the same period in ~~2019.~~2022. The increase in net interest income was primarily ~~due~~attributable to ~~growth in average~~the rising interest rate environment combined with a more favorable mix of higher yielding earning assets offset, in part, by ~~lower average yields.~~an increase in the cost of total deposits. Net interest margin increased by 28 basis points to 3.93% for the three months ended June 30, 2023, compared to 3.65% for the three months ended June 30, 2022.

Average total interest-earning assets ~~increased by $140.5 million, or 15% to $1.08~~were $1.90 billion in the ~~first~~second quarter of ~~2020 from $936.9 million~~2023 compared to $1.78 billion for the same period during ~~2019.~~2022. The increase in total interest-earning assets was primarily due to growth of the loan portfolio. For the three months ended March 31, 2020, growth in average deposits outpaced growth in average loans when compared to the same period of 2019 as the Company worked to strengthen liquidity. Average deposit balances for the three months ended March 31, 2020 grew $145.3 million, or 17%, from the quarter ended March 31, 2019, while average loans grew $93.0 million, or 11%, for the same period. As a result, the average loan to deposit ratio for the first quarter of 2020 was 95.2% down from 100.5% for the first quarter of 2019 andJune 30, 2023, the yield on average earning assets ~~decreased 39~~increased 175 basis points to ~~4.59%~~5.73% from ~~4.98%.~~

~~In addition,~~3.98% for the ~~average~~quarter ended June 30, 2022. The yield on total average gross loans in the three months ended ~~March 31, 2020~~June 30, 2023 was ~~4.98%~~5.97%, ~~a decrease~~representing an increase of 19151 basis points compared to ~~5.17%~~4.46% in the same period one year earlier. For the three months ended June 30, 2023 compared to the same period in 2022, the yield on average federal funds sold increased 449 basis points to 5.26% from 0.77%, and the yield on average investment securities increased 121 basis points to 3.83% from 2.62%.

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

Of the ~~$145.3~~$112.6 million increase in average ~~total~~loan balances year over year, average commercial and real estate loans increased by $50.8 million and $85.6 million, respectively, as a result of organic growth. These increases were offset by a decrease in average SBA loans of $21.4 million primarily due to PPP loan forgiveness and a decrease in other loans of $2.4 million.

Of the $132.9 million increase in average interest-bearing deposit balances year over year, ~~$42.9~~$172.4 million was attributable to ~~noninterest-bearing~~time deposits, offset by a decrease in money market and ~~$102.4~~savings accounts of $27.5 million, ~~was attributable to interest-bearing deposits.~~and a decrease in demand accounts of $12.0 million. The cost of interest-bearing deposits was ~~1.28%~~3.11% during the quarter ended ~~March 31, 2020~~June 30, 2023 compared to ~~1.20%~~0.38% in the same quarter one year earlier. In addition, the overall cost of average total deposit balances increased by 7158 basis points to ~~0.80%~~1.78% in the ~~first~~second quarter of ~~2020~~2023 compared to ~~0.73%~~0.20% in the ~~first~~second quarter of ~~2019.~~2022.

~~As a result, the net interest margin decreased by 46 basis points to 3.80% for the three months ended March 31, 2020, compared to 4.26% for the three months ended March 31, 2019.~~

The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the quarters ended ~~March 31, 2020~~June 30, 2023 and ~~2019.~~2022.


	Three months ended March 31,														Three months ended June 30,
(Dollars in thousands)	2020							2019
															2023							2022
	Average Balance		Yields or Rates			Interest Income/ Expense		Average Balance		Yields or Rates			Interest Income/ Expense		Average Balance		Yields or Rates			Interest Income/ Expense		Average Balance		Yields or Rates			Interest Income/ Expense
ASSETS
Interest earning assets:
Loans (1)	$	952,303		4.98	%	$	11,783	$	859,326		5.17	%	$	10,954	$	1,577,529		5.97	%	$	23,476	$	1,464,922		4.46	%	$	16,298
Federal funds sold		96,834		1.37	%		329		34,883		2.43	%		209		170,608		5.26	%		2,238		145,329		0.77	%		280
Investment securities		28,294		2.72	%		191		42,719		3.14	%		331		152,781		3.83	%		1,458		172,766		2.62	%		1,128

Total interest earning assets		1,077,431		4.59	%		12,303		936,928		4.98	%		11,494		1,900,918		5.73	%		27,172		1,783,017		3.98	%		17,706

Noninterest-earning assets:
Cash and due from banks		21,729							17,124							19,207							19,735
All other assets (2)		68,643							41,310							63,752							61,444

TOTAL	$	1,167,803						$	995,362						$	1,983,877						$	1,864,196

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	23,747		0.12	%	$	7	$	26,405		0.09	%	$	6	$	30,346		0.16	%		12	$	42,380		0.08	%	$	8
Money market and savings		476,493		1.19	%		1,412		399,753		1.07	%		1,053		609,200		2.50	%		3,793		636,692		0.37	%		582
Time		124,705		1.85	%		575		96,382		2.04	%		484		326,291		4.53	%		3,688		153,859		0.54	%		206
Other		15,070		3.39	%		127		10,744		4.30	%		114		90,188		4.59	%		1,033		119,970		2.30	%		687

Total interest-bearing liabilities		640,015		1.33	%		2,121		533,284		1.26	%		1,657		1,056,025		3.24	%		8,526		952,901		0.62	%		1,483

Noninterest-bearing liabilities:
Demand deposits		375,039							332,114							718,171							734,481
Accrued expenses and other liabilities		21,406							7,298							26,441							19,139
Shareholders’ equity		131,343							122,666							183,240							157,675

TOTAL	$	1,167,803						$	995,362						$	1,983,877						$	1,864,196


Net interest income and margin (3)				3.80	%	$	10,182				4.26	%	$	9,837				3.93	%	$	18,646				3.65	%	$	16,223

(1)

Nonperforming loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of net deferred loan ~~costs, net of deferred loan~~(costs) fees of ~~$294,000~~$(175,000) and ~~$386,000,~~$83,000, respectively.

(2)	Other noninterest-earning assets includes the allowance for credit losses of ~~$11.1~~$15.4 million and ~~$11.0~~$15.0 million, respectively.

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

The following table shows the effect of the interest differential of volume and rate changes for the quarters ended ~~March 31, 2020~~June 30, 2023 and ~~2019.~~2022. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.


	Three Months Ended June 30,
	2023 vs. 2022
	Increase (Decrease) Due to
	Change in:
	Average			Average		Net
(Dollars in thousands)	Volume			Rate		Change
Interest income:
Loans	$	1,676		$	5,502	$	7,178
Federal funds sold		332			1,626		1,958
Investment securities		(191	)		521		330
Interest expense:
Deposits
Demand		(5	)		9		4
Money market and savings		(171	)		3,382		3,211
Time		1,949			1,533		3,482
Other borrowings		(341	)		687		346

Net interest income	$	385		$	2,038	$	2,423

   Three Months Ended March, 31
2020 vs. 2019
   Increase (Decrease) Due to
Change in:
(Dollars in thousands)
   Average
Volume    Average
Rate    Net
Change
Interest income:

Loans
   $ 1,022    $ (193 )    $ 829
Federal funds sold
   218    (98 )    120
Investment securities
   (98 )    (42 )    (140 )
Interest expense:

Deposits

Demand
   (1 )    2    1
Money market and savings
   225    134    359
Time
   136    (45 )    91
Other borrowings
   37    (24 )    13






Net interest income
   $ 745    $ (400 )    $ 345

Interest Income

Interest income increased by ~~$809,000~~$9.5 million in the ~~first~~second quarter of ~~2020~~2023 compared to the same period of ~~2019,~~2022, primarily due to ~~volume growth in average earning assets, and in particular~~ 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 ~~increase in interest~~prime rate at June 30, 2023 and June 30, 2022 was 8.25% and 4.75%, respectively. Interest earned on our loan portfolio of ~~$829,000~~$23.5 million in the ~~first~~second quarter of ~~2020~~2023 represented an increase of $7.2 million, or 44%, compared to $16.3 million for the ~~first~~second quarter of ~~2019 was comprised~~2022.

Additionally, the Company benefited from a more favorable mix of ~~$1.0~~other earning assets. Interest earned on federal funds sold of $2.2 million ~~attributable~~for the three months ended June 30, 2023 compared to ~~an approximate $93.0 million increase in average loans outstanding, offset by approximately $193,000 attributable to~~$280,000 for the ~~decrease~~same period in the ~~yield~~prior year. Interest earned on ~~loans~~investment securities of $1.5 million for the three months ended June 30, 2023 compared to ~~4.98% from 5.17%.~~$1.1 million for the three months ended June 30, 2022.

Interest Expense

Interest expense increased by ~~$464,000~~$7.1 million in the ~~first~~second quarter of ~~2020~~2023 compared to the same period of ~~2019,~~2022, primarily due to the effect of increased rates paid on interest-bearing deposits and ~~the overall growth in the volume~~other borrowings, combined with a higher level of ~~average~~ interest-bearing ~~deposits and borrowings to fund earning asset growth.~~deposits. The average rate paid on interest-bearing liabilities in the ~~first~~second quarter of ~~2020~~2023 compared to the same period one year earlier increased 7262 basis ~~points~~point to ~~1.33%~~3.24% from ~~1.26%~~0.62%.

Provision for Credit Losses

~~We made provisions~~The provision for ~~loan~~credit losses of ~~$400,000 and $581,000~~$444,000 for the three months ended ~~March~~June 30, 2023 was comprised of $340,000 pertaining to the ACL on loans and $156,000 pertaining to the ACL for unfunded loan commitments, partially offset by a release of reserves pertaining to the ACL for held to maturity securities of $52,000.

The provision for credit losses on loans of $444,000 for the second quarter of 2023 compared to a provision for loan losses of $925,000 for the second quarter of 2022. The Company had no loan charge-offs or recoveries during the second quarters of 2023 and 2022. The allowance for credit losses on loans as a percentage of outstanding loans was 0.99% at June 30, 2023 and 1.07% at December 31, ~~2020~~2022. On January 1, 2023, the Company adopted the current expected losses (CECL) accounting standard (ASC 326). The Company’s allowance for credit losses on loans was 0.95% upon adoption of the standard on January 1, 2023.

Non-interest Income

The following table reflects the major components of the Company’s non-interest income for the three months ended June 30, 2023 and ~~2019,~~2022.


	Three Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2023		2022		Amount			Percent
Service charges and other fees	$	867	$	1,134	$	(267	)		-24	%
Gain on sale of loans		—		—		—			0	%
Earnings on BOLI		177		165		12			7	%
Other		91		95		(4	)		-4	%

Total non-interest income	$	1,135	$	1,394	$	(259	)		-19	%

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

Non-interest Expense

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


	Three Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2023		2022		Amount			Percent
Salaries and benefits	$	7,831	$	7,146	$	685			10	%
Premises and equipment		1,168		1,267		(99	)		-8	%
Professional fees		470		547		(77	)		-14	%
Data processing		701		599		102			17	%
Other		1,433		1,260		173			14	%

Total non-interest expense	$	11,603	$	10,819	$	784			7	%

Non-interest expense was $11.6 million and $10.8 million for the three months ended June 30, 2023 and 2022, respectively. ~~We recorded~~Excluding capitalized loan origination costs, non-interest expense for the second quarter of 2023 was $12.3 million compared to $11.9 million for the second quarter of 2022, representing an increase of $405,000, or 3%. The increase in non-interest expense, excluding capitalized origination costs, from the second quarter of 2022 was primarily due to an increase in salaries and benefits related to investments to support the continued growth of the business.

For the three months ended June 30, 2023 and 2022, the Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 58.66% and 61.41%, respectively.

Provision for Income Taxes

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

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

Overview

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

Net Interest Income and Margin

Net interest income for the six months ended June 30, 2023, was $37.4 million, an increase of $6.7 million, or 22% from $30.7 million for the same period in 2022. The increase in net interest income was primarily attributable to the rising interest rate environment combined with a more favorable mix of higher yielding earning assets offset, in part, by an increase in the cost of total deposits. Net interest margin increased by 56 basis points to 3.98% for the six months ended June 30, 2023, compared to 3.42% for the six months ended June 30, 2022.

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

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

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

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

The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the six months ended June 30, 2023 and 2022.


	Six months ended June 30,
	2023							2022
	Average Balance		Yields or Rates			Interest Income/ Expense		Average Balance		Yields or Rates			Interest Income/ Expense
ASSETS
Interest earning assets:
Loans (1)	$	1,579,917		5.86	%	$	45,948	$	1,418,314		4.43	%	$	31,184
Federal funds sold		163,812		4.92	%		3,998		244,809		0.34	%		416
Investment securities		153,719		3.63	%		2,765		151,324		2.71	%		2,030

Total interest earning assets		1,897,448		5.60	%		52,711		1,814,447		3.74	%		33,630

Noninterest-earning assets:
Cash and due from banks		18,656							19,244
All other assets (2)		63,003							62,500

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

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand	$	32,179		0.12	%		19	$	40,300		0.09	%		17
Money market and savings		617,885		2.25	%		6,897		679,662		0.37	%		1,247
Time		318,313		4.18	%		6,599		151,588		0.45	%		338
Other		80,701		4.48	%		1,793		110,370		2.34	%		1,279

Total interest-bearing liabilities		1,049,078		2.94	%		15,308		981,920		0.59	%		2,881

Noninterest-bearing liabilities:
Demand deposits		723,548							737,928
Accrued expenses and other liabilities		26,383							20,724
Shareholders’ equity		180,098							155,619

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

Net interest income and margin (3)				3.98	%	$	37,403				3.42	%	$	30,749

(1)	Nonperforming loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of net deferred loan (costs) fees of $(401,000) and $402,000, respectively.

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

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

The following table shows the effect of the interest differential of volume and rate changes for the six months ended June 30, 2023 and 2022. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.


	Six Months Ended June 30,
	2023 vs. 2022
	Increase (Decrease) Due to
	Change in:
	Average			Average		Net
(Dollars in thousands)	Volume			Rate		Change
Interest income:
Loans	$	4,700		$	10,064	$	14,764
Federal funds sold		(1,977	)		5,559		3,582
Investment securities		43			692		735
Interest expense:
Deposits
Demand		(5	)		7		2
Money market and savings		(690	)		6,340		5,650
Time		3,456			2,805		6,261
Other borrowings		(659	)		1,173		514

Net interest income	$	664		$	5,990	$	6,654

Interest Income

Interest income increased by $19.1 million for the six months ended June 30, 2023 compared to the same period of 2022, primarily due to an increase in the prime rate which generated higher yields on our loan portfolio combined with PPP loans that were forgiven by the SBA being replaced with higher yielding commercial and real estate other loans, partially offset by a decrease in amortization of net fees collected on PPP loans. The prime rate at June 30, 2023 and June 30, 2022 was 8.25% and 4.75%, respectively. The average prime rate for the six months ended June 30, 2023 and 2022 was 7.92% and 3.62%, respectively. Interest earned on our loan portfolio of $45.9 million for the six months ended June 30, 2023 represented an increase of $14.7 million, or 47%, compared to $31.2 million for the same period in 2022.

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

Interest Expense

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

Provision for Credit Losses

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

The provision for credit losses on loans of $802,000 for the six months ended June 30, 2023 compared to a provision for loan losses of $1.9 million for the same period in the prior year. The Company had net loan charge-offs of $247,000 and net loan recoveries of ~~$90,000 in~~$1,000 during the first ~~quarter of 2020 compared to net charge-offs of $131,000 during the same period of 2019.~~half 2023 and 2022, respectively. The allowance for ~~loan loss~~credit losses on loans as a ~~percent~~percentage of outstanding loans was ~~1.19%~~0.99% at ~~March~~June 30, 2023 and 1.07% at December 31, ~~2020 and 1.27% at March 31, 2019.~~2022. On January 1, 2023, the Company adopted the current expected losses (CECL) accounting standard (ASC 326). The ~~decrease in~~Company’s allowance for credit losses on loans was 0.95% upon adoption of the ~~reserve percentage reflects the impact of enhancements to our qualitative methodology and highercharge-off~~ ~~activity in 2019. See further discussion in “Financial Condition – Allowance for Loan Losses”~~standard on January 1, 2023.

2535

Noninterest Income

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


	Three Months Ended March 31,				Increase (Decrease)						Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2020		2019		Amount			Percent			2023		2022		Amount			Percent
Service charges and other fees	$	970	$	625	$	345			55	%	$	1,730	$	2,023	$	(293	)		-14	%
Gain on sale of SBA loans		—		23		(23	)		-100	%		—		1,393		(1,393	)		100	%
Earnings on BOLI		153		105		48			46	%		349		330		19			6	%
Other		167		110		57			52	%		163		182		(19	)		-10	%

Total noninterest income	$	1,290	$	863	$	427			49	%
Total non-interest income											$	2,242	$	3,928	$	(1,686	)		-43	%

Noninterest income ~~grew~~decreased by ~~$427,000~~$1.7 million, or ~~49% in~~43%, for the ~~first quarter of 2020,~~six months ended June 30, 2023, compared to the ~~first quarter~~six months ended of ~~2019.~~2022. The ~~increase~~decrease was primarily attributable to ~~growth~~a gain of $1.4 million recognized on the sale of a portion of our solar loan portfolio in the prior year and a decrease of $293,000 pertaining to service charges and other ~~fees related to growth in noninterest-bearing deposits and loans as well as an increase in earnings from bank-owned life insurance and other miscellaneous income.~~fees.

Noninterest Expense

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


	Three Months Ended March 31,				Increase (Decrease)						Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2020		2019		Amount			Percent			2023		2022		Amount			Percent
Salaries and benefits	$	6,477	$	4,515	$	1,962			43	%	$	15,707	$	14,239	$	1,468			10	%
Premises and equipment		1,139		745		394			53	%		2,348		2,569		(221	)		-9	%
Professional fees		955		358		597			167	%		920		1,139		(219	)		-19	%
Data processing		526		419		107			26	%		1,309		1,207		102			8	%
Other		1,310		1,578		(268	)		-17	%		3,162		2,581		581			23	%

Total noninterest expense	$	10,407	$	7,615	$	2,792			37	%
Total non-interest expense											$	23,446	$	21,735	$	1,711			8	%

~~During~~Non-interest expense was $23.4 million and $21.7 million for the ~~three~~six months ended ~~March 31, 2020,~~June 30, 2023 and 2022, respectively. Excluding capitalized loan origination costs, non-interest ~~expenses increased by $2.8 million or 37% to $10.4~~ expense for the six months ended June 30, 2023 was $24.8 million compared to ~~$7.6~~$23.8 million infor the ~~same period~~six months ended June 30, 2022, representing an increase of ~~2019. Of this increase, $2.0~~$1.0 million, ~~was in net salaries~~or 4%.

Salaries and benefits ~~expense.~~for the six months ended June 30, 2023 were $15.7 million, representing an increase of $1.5 million, or 10%, compared to $14.2 million for the six months ended June 30, 2022. The increase in salaries and benefits expense was primarily ~~the result of hiring key executive~~due to an increase in salaries and ~~staff positions~~benefits related to investments to support the ~~Company’s expansion initiatives and~~ continued growth ~~as well as approximately $400,000 due to severance benefits related to~~of the ~~departure of an executive.~~business combined with a reduction in capitalized loan origination costs.

~~Operating expenses for~~For the ~~three~~six months ended ~~March 31, 2020 also included increases in professional~~June 30, 2023 and ~~legal fees related to implementation of FDICIA and SEC compliance controls and processes as well as the registration of~~2022, the Company’s ~~common shares~~efficiency ratio, the ratio of ~~$597,000; occupancy~~non-interest expense to revenues, was 59.14% and ~~equipment from the expansion of facilities of $394,000; and data processing costs related to enhancement of treasury management systems of $107,000.~~62.68%, respectively.

Provision for Income Taxes

Income tax expense was ~~$192,000~~$4.5 million and $3.2 million for the ~~first quarter of 2020 which compared to $636,000 for the same period one year earlier.~~six months ended June 30, 2023 and 2022. The effective tax rates for those time periods were ~~28.9%~~29.3% and ~~25.4%~~28.5%, respectively.

2636

Financial Condition:

Overview

Total assets of the Company were ~~$1.21~~$2.01 billion as of ~~March 31, 2020~~June 30, 2023 compared to ~~$1.15~~$2.04 billion as of December 31, ~~2019.~~2022. The ~~increase~~decrease in total assets ~~was driven by an increase in both the loan portfolio and federal funds sold. Growth in assets~~from year-end was primarily ~~funded by~~due to slower loan growth inand decreased liquidity related to the seasonal outflow of deposits ~~and~~that occurs at the beginning of the year for many of our business clients combined with a reduction in other borrowings.

Loan Portfolio

Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances ~~increased~~decreased by ~~$19.3~~$9.8 million, or 2%1%, from December 31, ~~2019~~2022 to ~~March 31, 2020.~~ June 30, 2023 primarily due to a reduction in the commercial and industrial, construction and land, SBA and other loan portfolios, partially offset by an increase in real estate other loans due to organic growth.

The loan portfolio at ~~March 31, 2020~~June 30, 2023 was comprised of approximately ~~43%~~39% of commercial and industrial loans compared to ~~41%~~40% at December 31, ~~2019.~~2022. In addition, commercial real estate loans comprised ~~55%~~58% of our loans at ~~March 31, 2020 compared to~~June 30, 2023 and 57% at December 31, ~~2019. A substantial percentage of the commercial real estate loans are considered owner-occupied loans.~~2022. Our loans are generated by our relationship managers and executives. Our senior management is actively involved in the lending, underwriting, and collateral valuation processes. Higher dollar loans or loan commitments are also approved through a bank loan committee comprised of executives and outside board members.

The following table reflects the composition of the Company’s loan portfolio and ~~their~~the percentage ~~distribution.~~distribution at June 30, 2023 and December 31, 2022.


(Dollars in thousands)	March 31, 2020			December 31, 2019			June 30, 2023			December 31, 2022
Commercial and industrial		416,308			389,746		$	622,270		$	634,535
Real estate - other								856,344			848,241
Real estate - construction and land		41,697			42,519			60,595			63,730
Real estate - other		496,765			502,929
Real estate - HELOC		995			982
Installment and other		13,180			13,476
SBA								4,936			7,220
Other								39,486			39,695

Total loans, gross		968,945			949,652			1,583,631			1,593,421
Deferred loan origination costs, net		2,902			2,555			1,637			2,040
Allowance for loan losses		(11,565	)		(11,075	)
Allowance for credit losses								(15,722	)		(17,005	)

Total loans, net		960,282			941,132		$	1,569,546		$	1,578,456

Commercial and industrial		43	%		41	%		39	%		40	%
Real estate - other								54	%		53	%
Real estate - construction and land		4	%		4	%		4	%		4	%
Real estate - other		51	%		53	%
Real estate - HELOC		0	%		0	%
Installment and other		1	%		1	%
SBA								1	%		1	%
Other								2	%		2	%

Total loans, gross		100	%		100	%		100	%		100	%

The following table shows the maturity distribution for total loans outstanding as of ~~March 31, 2020.~~June 30, 2023. The maturity distribution is grouped by remaining scheduled principal payments that are due within one year, after one but within five years, after five years but within fifteen years, or after ~~five~~fifteen years. The principal balances of loans are indicated by both fixed and variable rate categories.


	Due in One Year Or Less		Over One Year But Less Than Five Years		Over Five Years		Total		Loans With
(Dollars in thousands)	Due in One Year Or Less		Over One Year But Less Than Five Years		Over Five Years		Total		Fixed Rates (1)		Variable Rates		Due in One Year Or Less		Over One Year But Less Than Five Years		Over Five Years But Less Than Fifteen Years		Over Fifteen Years		Total
Commercial and industrial	$	169,586	$	86,299	$	160,423	$	416,308	$	225,607	$	190,701	$	196,178	$	310,765	$	115,327	$	—	$	622,270
Real estate - other														49,770		395,070		400,078		11,426		856,344
Real estate - construction and land		27,976		5,262		8,459		41,697		8,485		33,212		50,543		9,032		1,020		—		60,595
Real estate - other		16,818		98,608		381,339		496,765		203,905		292,860
Real estate - HELOC		—		500		495		995		—		995
Installment and other		967		1,558		10,655		13,180		295		12,885
SBA														461		888		2,768		819		4,936
Other														2,811		1,879		—		34,796		39,486

Total loans, gross	$	215,347	$	192,227	$	561,371	$	968,945	$	438,292	$	530,653	$	299,763	$	717,634	$	519,193	$	47,041	$	1,583,631


	Loans With
(Dollars in thousands)	Fixed Rates (1)		Variable Rates		Total
Commercial and industrial	$	175,481	$	446,789	$	622,270
Real estate - other		570,935		285,409		856,344
Real estate - construction and land		3,584		57,011		60,595
SBA		402		4,534		4,936
Other		36,665		2,821		39,486

Total loans, gross	$	787,067	$	796,564	$	1,583,631

(1)	Excludes variable rate loans on floors

Nonperforming Assets

Nonperforming assets are comprised of loans on nonaccrual status, loans 90 days or more past due and still accruing interest, and other real estate owned. We had no ~~loans 90 days or more past due and still accruing interest and no~~ other real estate owned at ~~March 31, 2020.~~June 30, 2023. A loan is placed on nonaccrual status if there is concern that principal and interest may not be fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is both well secured and in process of legal collection. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are returned to accrual status when they are brought current with respect to principal and interest payments and future payments are reasonably assured. ~~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 following table presents information regarding the Company’s nonperforming and ~~restructured loans.~~modified loans as of June 30, 2023 and December 31, 2022.


(Dollars in thousands)	March 31, 2020		December 31, 2019		June 30, 2023			December 31, 2022
Nonaccrual loans	$	2,650	$	2,753	$	181		$	1,250
Loans over 90 days past due and still accruing		—		—		—			—

Total nonperforming loans		2,650		2,753		181			1,250
Foreclosed assets		—		—		—			—

Total nonperforming assets	$	2,650	$	2,753	$	181		$	1,250

Performing TDR’s	$	624	$	646
Modified loans					$	51		$	—

Nonperforming loans / gross loans						0.01	%		0.08	%
Allowance for credit losses / nonperforming loans						8686.19	%		1360.40	%

Allowance for ~~Loan~~Credit Losses

Effective January 1, 2023, the Company adopted the Current Expected Credit Losses (CECL) Methodology for estimating the allowance for credit losses. Our allowance for ~~loan~~credit losses is maintained at a level management believes is adequate to account for ~~probable incurred~~expected 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~~credit losses. Loans, or portions of loans, deemed to be uncollectible are charged against the allowance. Recoveries of previouslycharged-off amounts are credited to our allowance for ~~loan~~credit losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed excessive for the risks inherent in the portfolio. The allowance for ~~loan~~credit losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends.

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


																		Commercial						Real Estate
																		and			Real Estate			Construction
(Dollars in thousands)	Commercial and Industrial		Real Estate Construction and Land			Real Estate Other			Real Estate HELOC			Installment and Other			Total			Industrial			Other			and Land			SBA			Other			Total
Three months ended March 31, 2020
Three months ended June 30, 2023:
Beginning balance																		$	10,719		$	2,943		$	743		$	42		$	935		$	15,382
Provision for credit losses																			84			27			(6	)		(2	)		237			340
Charge-offs																			—			—			—			—			—			—
Recoveries																			—			—			—			—			—			—

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

Alowance for credit losses / gross loans																			1.74	%		0.35	%		1.22	%		0.81	%		2.97	%		0.99	%
Net recoveries (charge-offs) / gross loans																			0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Three months ended June 30, 2022:
Beginning balance	$	6,708	$	1,022		$	3,281		$	6		$	58		$	11,075		$	8,876		$	5,080		$	783		$	283		$	10		$	15,032
Provision for loan losses		1,045		(292	)		(620	)		(1	)		268			400			650			163			124			(10	)		(2	)		925
Charge-offs		—		—			—			—			—			—			—			—			—			—			—			—
Recoveries		90		—			—			—			—			90			—			—			—			—			—			—

Ending balance	$	7,843	$	730		$	2,661		$	5		$	326		$	11,565		$	9,526		$	5,243		$	907		$	273		$	8		$	15,957

Three months ended March 31, 2019
Beginning balance	$	5,578	$	1,493		$	3,703		$	16		$	10		$	10,800
Provision for loan losses		378		(373	)		448			(6	)		134			581
Charge-offs		—		—			—			—			(137	)		(137	)
Recoveries		6		—			—			—			—			6

Ending balance	$	5,962	$	1,120		$	4,151		$	10		$	7		$	11,250

Alowance for loan losses / gross loans																			1.62	%		0.66	%		1.44	%		2.05	%		0.02	%		1.06	%
Net recoveries (charge-offs) / gross loans																			0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

Our provision of $400,000 for the quarter ended March 31, 2020 reflects an increase to qualitative assessments from the potential impact of the COVID-19 pandemic as well as modest loan growth, offset by improvements in other qualitative assessments. As of March 31, 2020, our most direct potential exposure to the Covid-19 environment related to our dental practice acquisition loans, which are part of commercial loans, and we believe our actions to offer payment deferments and government guaranteed loans provides significant mitigation of risk in that segment. In addition, our assessment broadly anticipates that the most severe and direct impacts from the Covid-19 environment would manifest in consumer credit card and installment portfolios; segments of commercial loans related to consumer services; and real estate in heavily impacted segments such as retail strip malls, hospitality and restaurants. The provision reflects a heavier allocation toward commercial and installment loans due to Covid-19 and less toward real estate segments.


	Commercial						Real Estate
	and			Real Estate			Construction
(Dollars in thousands)	Industrial			Other			and Land			SBA			Other			Total
Six months ended June 30, 2023
Beginning balance	$	10,620		$	5,322		$	884		$	132		$	47		$	17,005
Adoption of new accounting standard		(1,566	)		(1,725	)		1			(91	)		1,541			(1,840	)
Provision for credit losses		1,996			(627	)		(148	)		(1	)		(416	)		804
Charge-offs		(247	)		—			—			—			—			(247	)
Recoveries		—			—			—			—			—			—

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

Alowance for credit losses / gross loans		1.74	%		0.35	%		1.22	%		0.81	%		2.97	%		0.99	%
Net recoveries (charge-offs) / gross loans		-0.04	%		0.00	%		0.00	%		0.00	%		0.00	%		-0.02	%
Six months ended June 30, 2022
Beginning balance	$	8,552		$	4,524		$	681		$	309		$	15		$	14,081
Provision for loan losses		973			719			226			(36	)		(7	)		1,875
Charge-offs		—			—			—			—			—			—
Recoveries		1			—			—			—			—			1

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

Alowance for loan losses / gross loans		1.62	%		0.66	%		1.44	%		2.05	%		0.02	%		1.06	%
Net recoveries (charge-offs) / gross loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

Investment Portfolio

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

~~At March 31, 2020~~During the first quarter of 2022, the Company re-designated certain securities previously classified as available for sale to the held to maturity classification. The re-designated securities consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, ~~2019, we had noheld-to-maturity~~ ~~investments.~~2022. At the time of re-designation the securities included $281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.

Our investments provide a source of liquidity as they can be pledged to support borrowed funds or can be liquidated to generate cash proceeds. The investment portfolio is also a significant resource to us in managing interest rate risk, as the maturity and interest rate characteristics of this asset class can be readily changed to match changes in the loan and deposit portfolios. The majority of our~~available-for-sale~~ investment portfolio is comprised of ~~mortgage-backed~~mortgage backed securities, ~~(MBSs) that are either issued or guaranteed by U.S.~~ government ~~agencies or government-sponsored enterprises (GSEs).~~agency securities, and corporate bonds.

The following table reflects the amortized cost and fair market values for the total portfolio for each of the categories of investments in our securities portfolio as of ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019.~~2022.


			Gross		Gross
			Unrealized /		Unrealized /			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At June 30, 2023:
Mortgage backed securities	$	16,849	$	13	$	(856	)	$	16,006
Government agencies		29,862		—		(1,001	)		28,861

Total available for sale securities	$	46,711	$	13	$	(1,857	)	$	44,867

Mortgage backed securities	$	59,002	$	34	$	(7,163	)	$	51,873
Government agencies		3,077		—		(577	)		2,500
Corporate bonds		44,183		—		(4,419	)		39,764

Total held to maturity securities, net	$	106,262	$	34	$	(12,159	)	$	94,137

At December 31, 2022:
Mortgage backed securities	$	18,629	$	26	$	(897	)	$	17,758
Government agencies		29,809		—		(1,043	)		28,766
Corporate bonds		430		58		—			488

Total available for sale securities	$	48,868	$	84	$	(1,940	)	$	47,012

Mortgage backed securities	$	61,363	$	—	$	(7,647	)	$	53,716
Government agencies		3,083		—		(627	)		2,456
Corporate bonds		44,420		30		(3,739	)		40,711

Total held to maturity securities	$	108,866	$	30	$	(12,013	)	$	96,883

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

(Dollars in thousands)
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Estimated
Fair
Value
At March 31, 2020:

Residential mortgage backed and government securities
   $ 23,763    $ 760    $ —      $ 24,523
Government agencies
   2,987    4    —      2,991
Corporate bonds
   7,009    —      (179 )    6,830








Total available for sale securities
   $ 33,759    $ 764    $ (179 )    $ 34,344








At December 31, 2019:

Residential mortgage backed and government securities
   $ 20,291    $ 436    $ (5 )    $ 20,722
Government agencies
   7,824    9    —      7,833
Corporate bonds
   —      —      —      —








Total available for sale securities
   $ 28,115    $ 445    $ (5 )    $ 28,555

Deposits

Our deposits are generated through core customer relationships, related predominantly to business relationships. Many of our business customers maintain high levels of liquid balances in their demand deposit accounts and use the Bank’s treasury management services. At June 30, 2023, approximately 95% of commercial relationships held deposits at the Bank, primarily in operating accounts, and there were no significant industry concentrations. Additionally, at June 30, 2023 insured deposits represented 60% of the total deposit portfolio and uninsured deposits represented 40% of the total deposit portfolio.

At ~~March 31, 2020,~~June 30, 2023, approximately ~~39%~~43% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits at ~~March 31, 2020~~June 30, 2023 were held in interest-bearing demand, savings and money market accounts and time deposits. ~~More than 47%~~Approximately 38% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at ~~March 31, 2020,~~June 30, 2023, which provide our customers with interest and liquidity. Time deposits comprised the remaining ~~14%~~19% of our deposits at ~~March 31, 2020.~~June 30, 2023.

Information concerning average balances and rates paid on deposits by deposit type for the past two fiscal years is contained in the Distribution, Yield and Rate Analysis of Net Income table located in the previous section titled “Results of Operations—Net Interest Income and Net Interest Margin”.

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			Balance		% of Total
At March 31, 2020:
At June 30, 2023:
Demand noninterest-bearing	$	403,248		39	%	$	742,160		43	%
Demand interest-bearing		21,083		2	%		29,324		2	%
Money market and savings		459,712		45	%		633,620		36	%
Time		144,818		14	%		333,192		19	%

Total deposits	$	1,028,861		100	%	$	1,738,296		100	%

At December 31, 2019:
At December 31, 2022:
Demand noninterest-bearing	$	387,267		39	%	$	811,671		45	%
Demand interest-bearing		25,178		3	%		37,815		2	%
Money market and savings		455,436		46	%		671,016		38	%
Time		120,355		12	%		271,238		15	%

Total deposits	$	988,236		100	%	$	1,791,740		100	%

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


(Dollars in thousands)	June 30, 2023		December 31, 2022
3 months or less	$	16,054	$	33,344
Over 3 months through 6 months		18,766		10,254
Over 6 months through 12 months		255		—
Over 12 months		—		—

Total uninsured time deposits	$	35,075	$	43,598

Liquidity

Our primary source of funding is deposits from our core banking relationships. ~~The~~However, the majority of the Bank’s deposits are transaction accounts or money market accounts that are payable on demand. AAdditionally, a small number of customers represent a large portion of the Bank’s deposits, as evidenced by the fact that approximately ~~20.0%~~17% of deposits were represented by the 10 largest depositors ~~as of March~~at both June 30, 2023 and December 31, ~~2020.~~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 significanton-balance sheet andoff-balance liquidity sources, including a marketable securities portfolio, the ability to supplement core deposits with brokered time deposits and/or utilization of the Certificate of Deposit Account Registry Service (CDARS) Network, and borrowing capacity through various secured and unsecured sources. Our borrowing capacity include lines of credit with the FRB, FHLB, and correspondent banks that enable us to borrow funds as described in Note 4 to the consolidated financial statements included in Item 1 of this Report.

Capital Resources

We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities andoff-balance sheet items as calculated under regulatory accounting policies. As of ~~March 31, 2020~~June 30, 2023 and December 31, ~~2019,~~2022, we were in compliance with all applicable regulatory capital requirements, including the capital conservation buffer, and the ~~Bank qualified as~~Bank’s capital ratios exceeded the minimums necessary to be considered ‘‘well-capitalized’’ for purposes of the FDIC’s prompt corrective action regulations. At ~~March 31, 2020,~~June 30, 2023, the capital conservation buffer was ~~2.50%~~4.46%.

At ~~March 31, 2020,~~June 30, 2023, the Bank had a Tier 1 ~~risk based~~risk-based capital ratio of ~~11.33%~~11.56%, a total capital to risk-weighted assets ratio of ~~12.77%~~12.46%, and a leverage ratio of ~~11.36%~~11.42%. At December 31, ~~2019,~~2022, the Bank had a Tier 1 ~~risk based~~risk-based capital ratio of ~~10.38%~~10.54%, a total capital to risk-weighted assets ratio of ~~11.79%~~11.40%, and a leverage ratio of ~~10.44%~~10.23%. ~~During the first quarter of 2020, the Company entered into a borrowing arrangement for $12.0 million, the proceeds of which were infused into the Bank to support Tier 1 capital.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of ~~March 31, 2020~~June 30, 2023 of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ~~not~~ effective ~~because of the identified material weakness regarding the precision of review in SEC filings and financial reporting,~~ as of the end of the fiscal quarter covered by this Form 10-Q.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness we identified relates to the need for improved precision in the review of aspects of our SEC filings and financial reporting. Specifically, we did not have effective processes and procedures in place (1) to formally document management’s review of our financial statements and footnotes included in our SEC filings to ensure timeliness and accuracy of filings; (2) to consistently use checklists regarding Generally Accepted Accounting Principles and SEC disclosure requirements as part of the SEC filing process to ensure that required disclosures are complete and accurate; (3) to identify subsequent events during an open subsequent period necessary to ensure proper disclosure; and (4) to develop, maintain and review on a regular basis a listing of related parties, as defined by SEC Regulation S-K. While this deficiency did not result in a restatement of any previously reported interim consolidated financial statements, our management concluded there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements may not be prevented or detected on a timely basis. The material weakness was initially identified during the preparation of our financial statements for the year ended December 31, 2019. Management is in the process of planning its remediation of this weakness, which is expected to primarily include the development and implementation of formalized procedures and controls. The remediation of this material weakness is therefore ongoing and may necessitate implementation of additional measures. The material weakness will only be considered remediated when these controls have been performing as designed for a sufficient period of time.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, such controls.

3143

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~~We disclosed certain risks and uncertainties that ~~were disclosed in Item 1A,~~we face under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2022, which we filed with the SEC on ~~April 14, 2020.~~March 24, 2023. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2022 Form 10-K.

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

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

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

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

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

None

Item 3. Defaults ~~Upon~~upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits


Exhibit Number		Description of Exhibit

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

3.2		Amended and Restated Bylaws of California ~~BanCorp~~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		~~Executive Supplemental Compensation Agreement by~~Amended and ~~between California Bank of Commerce and Thomas A. Sa~~Restated 2017 Equity Incentive Plan (incorporated by reference to ~~Exhibit 10.15~~Appendix A to the Company’s ~~Registration~~Definitive Proxy Statement on ~~Form 10~~Schedule 14A filed ~~with the Commission~~ on ~~March 4, 2020)~~April 20, 2023)

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

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

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

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

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

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

Signatures

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


		California BanCorp

Dated: ~~May 15, 2020~~August 10, 2023	By:	/s/ Steven E. Shelton
		Steven E. Shelton
	~~President and~~	Chief Executive Officer
		(Principal Executive Officer)

Dated: ~~May 15, 2020~~August 10, 2023	By:	/s/ Thomas A. Sa
		Thomas A. Sa
	~~Executive Vice~~	President and Chief Financial Officer
	~~Chief Financial Officer~~
	(Principal Financial and Accounting Officer)

3346


									Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Common Stock						Retained Earnings
	Shares			Amount			Retained Earnings
Balance at December 31, 2018		7,993,908		$	104,561		$	16,517	$	1	$	121,079
Stock awards issued and related compensation expense		12,638			172			—		—		172
Stock options exercised		40,008			372			—		—		372
Net income		—			—			1,868		—		1,868
Other comprehensive income		—			—			—		166		166

Balance at March 31, 2019		8,046,554		$	105,105		$	18,385	$	167	$	123,657

Balance at December 31, 2019		8,092,966		$	106,427		$	23,518	$	311	$	130,256
Stock awards issued and related compensation expense		25,215			413			—		—		413
Shares withheld to pay taxes on stock based compensation		(7,550	)		(133	)		—		—		(133	)
Stock options exercised		11,217			83			—		—		83
Net income		—			—			473		—		473
Other comprehensive income		—			—			—		101		101

Balance at March 31, 2020		8,121,848		$	106,790		$	23,991	$	412	$	131,193


	Three months ended
(Dollars in thousands, except per share data)	2020		2019
Net income available to common shareholders	$	473	$	1,868

Weighted average basic common shares outstanding		8,103,248		8,020,456
Add: dilutive potential common shares		66,650		82,087

Weighted average diluted common shares outstanding		8,169,898		8,102,543

Basic earnings per share	$	0.06	$	0.23

Diluted earnings per share	$	0.06	$	0.23


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
At March 31, 2020:
Residential mortgage backed and government securities	$	23,763	$	760	$	—		$	24,523
Government agencies		2,987		4		—			2,991
Corporate bonds		7,009		—		(179	)		6,830

Total available for sale securities	$	33,759	$	764	$	(179	)	$	34,344

At December 31, 2019:
Residential mortgage backed and government securities	$	20,291	$	436	$	(5	)	$	20,722
Government agencies		7,824		9		—			7,833
Corporate bonds		—		—		—			—

Total available for sale securities	$	28,115	$	445	$	(5	)	$	28,555


(Dollars in thousands)	March 31, 2020
Operating lease cost (cost resulting form lease payments)	$	621
Operating lease – operating cash flows (fixed payments)	$	491
Operating lease – ROU assets	$	9,867
Operating lease – liabilities	$	12,119
Weighted average lease term – operating leases		4.8 years
Weighted average discount rate – operating leases		2.58	%


	Three Months Ended March, 31 2020 vs. 2019
	Increase (Decrease) Due to Change in:
(Dollars in thousands)	Average Volume			Average Rate			Net Change
Interest income:
Loans	$	1,022		$	(193	)	$	829
Federal funds sold		218			(98	)		120
Investment securities		(98	)		(42	)		(140	)

Interest expense:
Deposits
Demand		(1	)		2			1
Money market and savings		225			134			359
Time		136			(45	)		91
Other borrowings		37			(24	)		13

Net interest income	$	745		$	(400	)	$	345


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
At March 31, 2020:
Residential mortgage backed and government securities	$	23,763	$	760	$	—		$	24,523
Government agencies		2,987		4		—			2,991
Corporate bonds		7,009		—		(179	)		6,830

Total available for sale securities	$	33,759	$	764	$	(179	)	$	34,344

At December 31, 2019:
Residential mortgage backed and government securities	$	20,291	$	436	$	(5	)	$	20,722
Government agencies		7,824		9		—			7,833
Corporate bonds		—		—		—			—

Total available for sale securities	$	28,115	$	445	$	(5	)	$	28,555

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company