| Summary of Significant Accounting Policies | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”), which offers a broad range of commercial banking services to closely held businesses and professionals located throughout Northern California. The Bank has a full service branch located in Contra Costa County and 4 loan production offices located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County. The Company’s common stock trades on the Nasdaq Global Select marketplace under the symbol CALB. Basis of Presentation The consolidated financial statements are prepared in accordance with accounting policies and standards generally accepted in the United States of America (GAAP), as well as prevailing practices within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, California Bank of Commerce. All intercompany accounts have been eliminated. The Company has no significant business activities other than its investment in the Bank. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates used in the Consolidated Financial Statements and related notes. Material estimates that are particularly susceptible to significant changes in the near term relate to: the determination of the allowance for loan losses; certain assets and liabilities carried at fair value; and accounting for income taxes. Reclassifications Certain prior balances in the consolidated financial statements have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or shareholders’ equity. Subsequent Events Management has reviewed all events through the date these consolidated financial statements were filed with the SEC and concluded that no event required any adjustment to the balances presented. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks, amounts held at the Federal Reserve Bank, and Federal funds sold. The Company is required to maintain reserves against certain of the deposit accounts with the Federal Reserve Bank. Federal funds are generally sold and purchased for one-day Investment Securities Investment securities are classified into the following categories:
• Available-for-sale
• Held-to-maturity Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts are amortized, or accreted, over the life of the related security as an adjustment to income using the level yield method adjusted for changes in principal prepayment speeds. Realized gains and losses on the sale of investment securities are reported in non-interest An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, and the reasons underlying the decline to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. Loans Receivable Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances net of unamortized deferred origination fees and costs, any unamortized premiums or discounts on purchased or acquired loans, and the allowance for loan losses. Loans acquired through a portfolio purchase, or through a business combination, are recorded at their fair value on the date of acquisition. Credit discounts or premiums are included in the determination of fair value; therefore, an allowance for loan losses is not required or recorded on the date of acquisition. Should the Company’s methodology for determining the allowance for loan losses indicate that any credit discount is no longer sufficient to cover probable losses inherent in the acquired loans, an appropriate increase to the allowance for loan losses will be established through a charge to the provision for loan losses. During the year ended December 31, 2022, the Company purchased commercial loans totaling $56.4 million, net of credit discounts. These loans were repaid by the borrowers prior to year-end. Interest on loans, including purchased or acquired loans, is accrued on the unpaid principal balance and is credited to income using the effective yield interest method. Deferred origination fees and costs, and the accretion (amortization) of any discount (premium) related to acquired loans, are amortized over the contractual life of the loan through interest income as an adjustment to the effective loan yield. Allowance for Loan Losses Credit risk is inherent in the business of extending loans to borrowers. Due to this risk, the Company must maintain an allowance for loan losses that management believes is adequate to absorb estimated probable losses on existing loans that may become uncollectible. This reserve is established through a provision for loan losses that is recorded to expense. Loans are charged against the reserve when management believes with certainty that the loan balance will not be collectible. Any cash received on previously charged-off re-evaluates The allowance for loan losses consists of specific and general reserves. The specific reserve relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and also classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the fair value of the collateral (less costs to sell) if the loan is collateral dependent, or on the present value of expected future cash flows or values that are observable on the secondary market if the loan is not collateral dependent. The general reserve relates to all non-impaired Accrued Interest Receivable on Loans Interest receivable is only accrued if deemed collectible. It is the Company’s policy to place a loan on non-accrual non-accrual, non-accrual Loan Commitments and Related Financial Instruments In the ordinary course of business, the Company is party to financial instruments with off-balance Loan Sales and Servicing The Company has the ability to hold for sale the conditionally guaranteed portion of certain loans that are guaranteed by the Small Business Administration (“SBA loans”). At the time that the Company deems a loan to be held for sale, it is carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. At December 31, 2022 and 2021, the Company did not have any loans held for sale. Gains or losses on SBA loans held for sale are recognized upon completion of the sale, based on the difference between the selling price and the carrying value of the related loan sold. SBA loans are generally sold with loan servicing retained by the Company. Servicing assets or liabilities are initially recorded at fair value and are subsequently amortized in proportion to, and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Impairment is determined by stratifying the servicing rights based on interest rates and terms. The amount of the impairment recognized is the amount by which the servicing assets for a stratum exceed their fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. As of December 31, 2022 and 2021, the Company had servicing assets of $221,000 and $248,000, respectively. Premises and Equipment The Company’s premises and equipment are carried at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated or amortized using the straight-line method over the estimated useful lives of the related assets. The useful lives of furniture, fixtures and equipment are estimated to be 3 to 5 years. Leasehold improvements are amortized over the lesser of the respective lease term (including renewal periods that are reasonably assured) or their useful lives, which are generally 7 to 14 years. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Leases At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, the Company recognizes on 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 Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank of San Francisco, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank (the “FHLB”). The investment, which is reported in other assets, is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. No impairment has been recorded to date. Both cash and stock dividends from the FHLB are reported as income. Bank Owned Life Insurance The Company has purchased life insurance policies on certain current and former executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Low Income Housing Tax Credits The Company accounts for low income housing tax credits and the related qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). As the Company disburses cash to satisfy capital calls, other assets are increased. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method. The Company had investments in low income housing tax credits with gross commitments (including amounts funded and unfunded) of $13.6 million at December 31, 2022 and 2021. During 2022 and 2021, the Company did not add any new investments and had $669,000 and $614,000 in capital calls throughout the year, respectively. The investment balances outstanding were $6.2 million and $7.4 million at December 31, 2022 and 2021, respectively, and are reflected in other assets on the consolidated balance sheet. Total commitments remaining for future capital calls were $1.0 million and $1.7 million, at December 31, 2022 and 2021, respectively and are reflected in other liabilities on the consolidated balance sheet. For the years ended December 31, 2022 and 2021, the Company recognized tax benefits of $208,000 and $207,000, respectively, which were included within income tax expense on the statements of income. For tax purposes, the Company recorded tax credit and other benefits of $361,000 and $1.4 million, for the years ended December 31, 2022 and 2021, respectively. The Company recorded low income housing credit investment amortization of $1.2 million for both of the years ended December 31, 2022 and 2021. Other Real Estate Owned Other real estate owned consist of properties acquired through foreclosure. The Company values these properties at fair value less estimated costs to sell at the time it acquires them, which establishes the new cost basis. After it acquires them, the Company carries such properties at the lower of cost or fair value less estimated selling costs. If the Company records any income from the properties after acquiring them, it includes this amount in other non-interest non-interest Business Combinations The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. The Company utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and the liabilities assumed is recorded as goodwill. Goodwill and Other Intangibles Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill determined to have an indefinite useful life is not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized in the amount of the excess, and the carrying value of the goodwill is reduced accordingly. The Company’s goodwill resulted from the acquisition of Pan Pacific Bank in 2015, and is the only intangible asset with an indefinite life on the consolidated balance sheet. Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value (“Step Zero”). The Company completed an impairment analysis of goodwill as of December 31, 2022 and determined there was no impairment. Other intangible assets consist of a core deposit intangible asset resulting from the 2015 acquisition. Core deposit intangible assets are initially measured at fair value and then amortized over their estimated useful life, in this case ten years on a straight-line basis. The Company considers the remaining useful life of its core deposit intangible asset each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining life were to change, the carrying amount is amortized prospectively over the revised remaining useful life. The Company has not revised its estimate of the useful life of its core deposit intangible asset for the years ended December 31, 2022 and 2021. As of December 31, 2022 the Company’s core deposit intangible asset was valued at $122,000 with a remaining useful life of 4 years. Assuming no events or circumstances require a revision to the remaining useful life, the future amortization of the Company’s core deposit intangible asset will be approximately $41,000 per year through 2025. Income Taxes Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence, management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers all tax positions recognized in its consolidated financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the statement of income. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Share-Based Compensation The Company issues awards of equity instruments, such as stock options and restricted stock units, to employees and certain non-employee 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. Anti-dilutive shares are not included in the calculation of diluted earnings per share.
For the Years Ended
(Dollars in thousands, except per share data) 2022 2021
Net income available to common shareholders $ 21,108 $ 13,368
Weighted average basic common shares outstanding 8,306,282 8,222,749
Add: dilutive potential common shares 98,035 70,193
Weighted average diluted common shares outstanding 8,404,317 8,292,942
Basic earnings per share $ 2.54 $ 1.63
Diluted earnings per share $ 2.51 $ 1.61
Related Party Transactions Principal stockholders, directors, and executive officers of the Company, their immediate family members, and companies they control or own more than a 10% interest in, are considered to be related parties. In the ordinary course of business, the Company engages in various related party transactions, including extending credit and bank service transactions. All related party transactions are subject to review and approval pursuant to the Company’s Related Party Transaction policy. Federal banking regulations require that any extension of credit to insiders and their related interests not be offered on terms more favorable than would be offered to non-related
For the Years Ended
(Dollars in thousands, except per share data) 2022 2021
Balance, beginning $ 25,759 $ 4,915
New loans — 26,100
Advances — 4,425
Repayments and other (415 ) (9,681 )
Balance, ending $ 25,344 $ 25,759
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December 31, 2022 and 2021. The interest income associated with these loans was $970,000 and $609,000 for the years ended December 31, 2022 and 2021, respectively. Loan commitments outstanding with related parties were $10.0 million at both December 31, 2022 and 2021, respectively. The Company also accepts deposits from related parties, which totaled $58.3 million and $36.4 million at December 31, 2022 and 2021, respectively. The interest expense associated with these deposits was $1.3 million and $273,000 for the years ended December 31, 2022 and 2021, respectively. Adoption of New Accounting Standards In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) 310-40, Receivables—Troubled 326-20, Financial In December 2019, the FASB issued ASU 2019-12, 2019-12 In June 2016, the FASB issued ASU 2016-13, 2016-13 off-balance-sheet held-to-maturity Additionally, ASU 2016-13 2016-13 2016-13 The Company has selected a software vendor for implementation, sourced and tested required data from the Company’s loan systems, tested data feeds to the model, contracted for and received results from independent third parties of model validation of the CECL model and process, determined appropriate segmentations of its portfolio, and selected a preliminary forecast period for reasonable and supportable forecasts. The Company has generated, and continues to evaluate, model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2022 due to the fact the Company elected to delay implementation of the CECL process as allowed by FASB. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loan and held-to-maturity held-to-maturity |
