10-Q 1 d355286d10q.htm 10-Q 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OR THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
001-39242
 
 
CALIFORNIA BANCORP
(Exact name of registrant as specified in its charter)
 
 
 
California
  
82-1751097
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
1300 Clay Street, Suite 500
Oakland, California 94612
(Address of principal executive offices)
(510)
457-3737
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, No Par Value
  
CALB
  
NASDAQ Global Select Market
(Title of class)
  
(Trading Symbol)
  
(Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  ☒    NO  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☐    Accelerated filer   ☐
Non-accelerated
filer		   ☐    Smaller reporting company   ☒
     Emerging growth company   ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).     YES  ☐    NO  ☒
Number of shares outstanding of the registrant’s common stock as of May 1, 2023: 8,358,070
 
 
 

CALIFORNIA BANCORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2023

 

         Page  

Part I - Financial Information

   

Item 1.

   Financial Statements      3  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      39  

Item 4.

   Controls and Procedures      39  

Part II - Other Information

   

Item 1.

   Legal Proceedings      40  

Item 1A.

   Risk Factors      40  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      40  

Item 3.

   Defaults Upon Senior Securities      40  

Item 4.

   Mine Safety Disclosures      40  

Item 5.

   Other Information      41  

Item 6.

   Exhibits      41  

Signatures

        42  

 

2

http://fasb.org/us-gaap/2022#InterestReceivableAndOtherAssetshttp://fasb.org/us-gaap/2022#OperatingLeaseLiability
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollar amounts in thousands)
 
    
March 31,
    
December 31,
  
    
2023
    
2022
  
ASSETS:
                 
Cash and due from banks
    $ 15,121     $ 16,686  
Federal funds sold
      198,804       215,696  
    
 
 
    
 
 
  
Total cash and cash equivalents
      213,925       232,382  
Investment securities:
                 
Available for sale, at fair value
      46,240       47,012  
Held to maturity, at amortized cost, net of allowance for credit losses of $110 and $0 at March 31, 2023 and December 31, 2022, respectively
      107,529       108,866  
    
 
 
    
 
 
  
Total investment securities
      153,769       155,878  
Loans, net of allowance for credit losses of $15,382 and $17,005 at March 31, 2023 and December 31, 2022, respectively
      1,603,646       1,578,456  
Premises and equipment, net
      2,848       3,072  
Bank owned life insurance (BOLI)
      25,334       25,127  
Goodwill and other intangible assets
      7,462       7,472  
Accrued interest receivable and other assets
      43,790       39,828  
    
 
 
    
 
 
  
Total assets
    $ 2,050,774     $ 2,042,215  
    
 
 
    
 
 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY:
                 
Deposits
                 
Non-interest
bearing
    $ 740,650     $ 811,671  
Interest bearing
      976,960       980,069  
    
 
 
    
 
 
  
Total deposits
      1,717,610       1,791,740  
Other borrowings
      75,000       —    
Junior subordinated debt securities
      54,186       54,152  
Accrued interest payable and other liabilities
      25,417       24,069  
    
 
 
    
 
 
  
Total liabilities
      1,872,213       1,869,961  
Commitments and Contingencies (Note 5)
                 
Shareholders’ equity
                 
Common stock, no par value; 40,000,000 shares authorized; 8,355,378 and 8,332,479 issued and outstanding at March 31, 2023 and December 31, 2022, respectively
      111,609       111,257  
Retained earnings
      68,082       62,297  
Accumulated other comprehensive loss, net of taxes
      (1,130 )      (1,300 ) 
    
 
 
    
 
 
  
Total shareholders’ equity
      178,561       172,254  
    
 
 
    
 
 
  
Total liabilities and shareholders’ equity
    $ 2,050,774     $ 2,042,215  
    
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
3
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
                 
    
Three Months Ended
  
    
March 31,
  
    
2023
     
2022
  
Interest income
                  
Loans
    $ 22,472      $ 14,886  
Federal funds sold
      1,760        136  
Investment securities
      1,307        902  
    
 
 
     
 
 
  
Total interest income
      25,539        15,924  
Interest expense
                  
Deposits
      6,022        806  
Borrowings and subordinated debt
      760        592  
    
 
 
     
 
 
  
Total interest expense
      6,782        1,398  
Net interest income
      18,757        14,526  
Provision for credit losses
      358        950  
    
 
 
     
 
 
  
Net interest income after provision for credit losses
      18,399        13,576  
Non-interest
income
                  
Service charges and other fees
      863        889  
Gain on the sale of loans
      —          1,393  
Other
      244        252  
    
 
 
     
 
 
  
Total
non-interest
income
      1,107        2,534  
Non-interest
expense
                  
Salaries and benefits
      7,876        7,093  
Premises and equipment
      1,180        1,302  
Professional fees
      450        592  
Data processing
      608        608  
Other
      1,729        1,321  
    
 
 
     
 
 
  
Total
non-interest
expense
      11,843        10,916  
Income before provision for income taxes
      7,663        5,194  
Provision for income taxes
      2,212        1,521  
    
 
 
     
 
 
  
Net income
    $ 5,451      $ 3,673  
    
 
 
     
 
 
  
Earnings per common share
                  
Basic
    $ 0.65      $ 0.44  
    
 
 
     
 
 
  
Diluted
    $ 0.64      $ 0.44  
    
 
 
     
 
 
  
Average common shares outstanding
      8,339,080        8,276,761  
    
 
 
     
 
 
  
Average common and equivalent shares outstanding
      8,492,067        8,392,802  
    
 
 
     
 
 
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
4
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
    
Three Months Ended
  
    
March 31,
  
    
2023
    
2022
  
Net Income
    $ 5,451     $ 3,673  
Other comprehensive income (loss)
                 
Unrealized gains (losses) on securities available for sale, net
      326       (5 ) 
Unrealized losses on securities transferred from available for sale to held to maturity, net
      —         (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
      2       2  
Tax effect
      (97 )     86  
    
 
 
    
 
 
  
Total other comprehensive income (loss)
      170       (198 ) 
    
 
 
    
 
 
  
Total comprehensive income
    $ 5,621     $ 3,475  
    
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
5
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)
 
                        Accumulated        
                        Other        
                        Comprehensive     Total  
     Common Stock     Retained      Income     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  
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
 
                        Accumulated        
                        Other        
                        Comprehensive     Total  
     Common Stock     Retained      Income     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  
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
6
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
 
    
Three Months Ended
March 31,
  
    
2023
    
2022
  
Cash flows from operating activities:
                 
Net income
    $ 5,451     $ 3,673  
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
                 
Provision for credit losses
      358       950  
Provision for deferred taxes
      1,987       1,128  
Depreciation
      251       387  
Deferred loan costs, net
      276       (735 ) 
Stock based compensation, net
      346       321  
Increase in cash surrender value of life insurance
      (173 )      (166 ) 
Discount on retained portion of sold loans, net
      (9 )      (9 ) 
Gain on sale of loans
      —         (1,393 ) 
(Decrease) increase in accrued interest receivable and other assets
      (7,346 )      605  
(Increase) decrease in accrued interest payable and other liabilities
      1,581       (5,223 ) 
    
 
 
    
 
 
  
Net cash provided by (used for) operating activities
      2,722       (462 ) 
    
 
 
    
 
 
  
Cash flows from investing activities:
                 
Purchase of investment securities
      —         (75,023 ) 
Proceeds from principal payments on investment securities
      2,081       6,056  
Proceeds from sale of loans
      —         37,271  
Net increase in loans
      (23,842 )      (59,693 ) 
Capital calls on low income tax credit investments
      (234 )      (191 ) 
Purchase of premises and equipment
      (26 )      (29 ) 
Purchase of bank-owned life insurance policies
      (34 )      (36 ) 
    
 
 
    
 
 
  
Net cash used for investing activities
      (22,055 )      (91,645 ) 
    
 
 
    
 
 
  
Cash flows from financing activities:
                 
Net decrease in customer deposits
      (74,130 )      (79,616 ) 
Paydown of long term borrowing, net
      —         (24,221 ) 
Proceeds from short term and overnight borrowings, net
      75,000       (50,000 ) 
Proceeds from exercised stock options, net
      6       21  
    
 
 
    
 
 
  
Net cash provided by (used for) financing activities
      876       (153,816 ) 
    
 
 
    
 
 
  
Decrease in cash and cash equivalents
      (18,457 )      (245,923 ) 
Cash and cash equivalents, beginning of period
      232,382       470,456  
    
 
 
    
 
 
  
Cash and cash equivalents, end of period
    $  213,925     $ 224,533  
    
 
 
    
 
 
  
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
    $ 6,095     $ 2,023  
Income taxes
    $ —       $ —    
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
7
CALIFORNIA BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Organization
California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”), which offers a broad range of commercial banking services to closely held businesses and professionals located throughout Northern California. The Bank has a full service branch located in Contra Costa County and 4 loan production offices located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form
10-Q
and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2022, and the notes thereto, included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.
The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2023.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Actual results may differ from those estimates used in the Consolidated Financial Statements and related notes. Material estimates that are particularly susceptible to significant changes in the near term include estimates relating to: the determination of the allowance for credit losses; certain assets and liabilities carried at fair value; and accounting for income taxes.
Reclassifications
Certain prior balances in the unaudited consolidated financial statements may have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.
Subsequent Events
Management has reviewed all events through the date the unaudited consolidated financial statements were filed with the SEC and concluded that no event required any adjustment to the balances presented.
 
8
Goodwill
Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value (“Step Zero”).
The Company completed an interim impairment analysis of goodwill as of March 31, 2023 and determined there was no impairment.
Earnings Per Share (“EPS”)
Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the period. In determining the weighted average number of shares outstanding, vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method.
 
     Three months ended  
     March 31,  
(Dollars in thousands, except per share data)
    2023      2022  
Net income available to common shareholders
    $ 5,451      $ 3,673  
Weighted average basic common shares outstanding
      8,339,080        8,276,761  
Add: dilutive potential common shares
      152,987        116,041  
    
 
 
     
 
 
  
Weighted average diluted common shares outstanding
      8,492,067        8,392,802  
Basic earnings per share
    $ 0.65      $ 0.44  
    
 
 
     
 
 
  
Diluted earnings per share
    $ 0.64      $ 0.44  
    
 
 
     
 
 
  
Adoption of New Accounting Standards and Related Accounting Policies
On January 1, 2023, the Company adopted
ASU
2022-02,
 Financial Instruments—Credit Losses (Topic 326)
. 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 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 methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for 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 and
held-to-maturity
debt securities, and 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”).
 
9
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 include accrued interest, which management elected to exclude for the estimate of expected credit losses. The ACL on loans is increased by the provision for credit losses on loans, which is charged against current period operating results, and decreased by reversals of credit loss provisions as well as loan charge-offs, net of recoveries.
Management’s determination of the ACL on loans is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. Loans with similar risk characteristics are collectively assessed within pools (or segments).
The discounted cash flow (“DCF”) method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows for each individual loan and discounting them back to their present value using the loan’s contractual interest rate, which is adjusted for any net deferred fees, costs, premiums, or discounts existing at the loan’s origination or acquisition date (also referred to as the effective interest rate). The DCF method also considers factors such as loan term, prepayment or curtailment assumptions, and other relevant economic factors that could affect future cash flows. By discounting the cash flows, the method incorporates the time value of money and reflects the credit risk inherent in the loan.
The Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following
one-year
period. The Company considers economic forecasts of national gross domestic product, unemployment rates from the Federal Open Market Committee, and the House Price Index to inform the model for loss estimation. Historical loss rates used in the quantitative model were derived using both the Bank’s and peer bank data obtained from publicly-available sources.
Additionally, management considers qualitative and environmental factors that are likely to cause estimated credit losses within the Company’s existing portfolio to differ from historical loss (or peer) experience. Qualitative and environmental factors may include: consideration in trends of delinquencies, nonaccrual loans, and
charged-off
loans; trends in underlying collateral; effects in changes of lending policy and underwriting; regional and local economic trends; and conditions and concentrations of credit.
 
  •  
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 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.
 
10
  •  
Allowance for Credit Losses on Available for Sale Securities
For available for sale securities in an unrealized loss position, the Company initially assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost is written down to fair value through income. For available for sale securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists an allowance for credit losses is recorded, through a charge to the provision to credit losses, to the extent that the fair value is less than the amortized cost basis. Accrued interest receivable on available for sale securities is excluded from the estimate of credit losses. The Company did not have any available for sale securities that required an ACL at March 31, 2023.
 
  •  
Allowance for Credit Losses on Held to Maturity Securities
The Company measures expected credit losses on held to maturity investment securities on a collective basis by major security type. Accrued interest receivable on held to maturity investment securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Changes in the ACL for held to maturity securities are recorded through the provision for credit losses in the consolidated statements of income.
2. INVESTMENT SECURITIES
The following table summarizes the amortized cost and estimated fair value of securities available for sale and held to maturity at March 31, 2023 and December 31, 2022.
 
                                                                                                     
           
Gross
     
Gross
         
           
Unrealized /
     
Unrealized /
     
Estimated
  
    
Amortized
     
Unrecognized
     
Unrecognized
     
Fair
  
(Dollars in thousands)
   
Cost
     
Gains
     
Losses
     
Value
  
At March 31 2023:
                                    
Mortgage backed securities
   
$
17,504
 
   
$
29
 
   
$
(792
) 
   
$
16,741
 
Government agencies
   
 
29,835
 
   
 
—  
 
   
 
(819
) 
   
 
29,016
 
Corporate bonds
   
 
431
 
   
 
52
 
   
 
—  
 
   
 
483
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total available for sale securities
   
$
47,770
 
   
$
81
 
   
$
(1,611
) 
   
$
46,240
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Mortgage backed securities
   
$
60,305
 
   
$
—  
 
   
$
(6,924
) 
   
$
53,381
 
Government agencies
   
 
2,995
 
   
 
—  
 
   
 
(451
) 
   
 
2,544
 
Corporate bonds
   
 
44,229
 
   
 
52
 
   
 
(3,679
) 
   
 
40,602
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total held to maturity securities
   
$
107,529
 
   
$
52
 
   
$
(11,054
) 
   
$
96,527
 
    
 
 
     
 
 
     
 
 
     
 
 
  
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
 
    
 
 
     
 
 
     
 
 
     
 
 
  
 
11
The Company adopted ASC 326 on January 1, 2023. At the time of adoption, the Company had no available for sale securities that required an allowance for credit losses under ASC 326, and had held to maturity securities that required an allowance for credit losses of $110,000. The allowance for credit losses pertained primarily to corporate bonds and was presented as a reduction to held to maturity securities outstanding. During the first quarter of 2023, there were no charge-offs or recoveries of securities and no additional provision for credit losses was required.
At March 31, 2023, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments, nor did the Company have any securities held to maturity that were classified as
non-accrual.
The Company did not purchase any investment securities during the three months ended March 31, 2023. The Company purchased 7 available for sale securities for $34.2 million and 10 held to maturity securities for $40.8 million during the three months ended March 31, 2022. The Company did not sell any investment securities during the three months ended March 31, 2023 and 2022.
During the first quarter of 2022, the Company
re-designated
certain securities previously classified as available for sale to the held to maturity classification. The securities
re-designated
consisted of mortgage backed securities and government agencies with a total carrying value of $49.9 million at December 31, 2021. At the time of re-designation the securities included $281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.
Net unrealized losses on available for sale investment securities totaling $1.5 million were recorded, net of deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at March 31, 2023. Net unrealized gains on available for sale investment securities totaling $1.9 million were recorded, net of deferred tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2022.
The following table summarizes unrealized losses for investment securities at March 31, 2023 and December 31, 2022 aggregated by major security type and length of time in a continuous unrealized loss position. Investment securities at March 31, 2023 reflect the disclosure requirements required by the Company’s adoption of ASC 326, and investment securities at December 31, 2022 are presented based upon prior accounting standards.
 
                                                                                                                                           
   
Less Than 12 Months
    
More Than 12 Months
    
Total
  
         
Unrealized
          
Unrealized
          
Unrealized
  
(Dollars in thousands)
  
Fair Value
    
Losses
    
Fair Value
    
Losses
    
Fair Value
    
Losses
  
At March 31, 2023:
                                                
Mortgage backed securities
  
$
3,643
 
  
$
(178
) 
  
$
10,727
 
  
$
(614
) 
  
$
14,370
    
$
(792
) 
Government agencies
  
 
19,376
 
  
 
(526
) 
  
 
9,640
 
  
 
(293
) 
  
 
29,016
 
  
 
(819
) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total available for sale securities
  
$
23,019
 
  
$
(704
) 
  
$
20,367
 
  
$
(907
) 
  
$
43,386
 
  
$
(1,611
) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
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, 2023 the Company’s investment security portfolio consisted of 60 securities, 54 of which were in an unrealized loss position. At December 31, 2022 the Company’s investment security portfolio consisted of 60 securities, 55 of which were in an unrealized loss position. Management believes that changes in the market value since purchase are primarily attributable to changes in interest rates and relative illiquidity. Because the Company does not intend to sell and is unlikely to be required to sell until a recovery of fair value, which may be at maturity, the Company determined that there was no expected credit loss at March 31, 2023 and did not consider any investments to be other-than-temporarily impaired at December 31, 2022.
 
12
The following table summarizes the scheduled maturities of the Company’s investment securities as of March 31, 2023.
 
                                                                                             
    
Available for Sale
     
Held to Maturity
  
    
Amortized
     
Fair
     
Amortized
     
Fair
  
(Dollars in thousands)
   
Cost
     
Value
     
Cost
     
Value
  
Less that one year
   
$
7,481
 
   
$
7,342
 
   
$
10,763
 
   
$
10,640
 
One to five years
   
 
29,199
 
   
 
28,413
 
   
 
12,736
 
   
 
12,170
 
Five to ten years
   
 
—  
 
   
 
—  
 
   
 
32,033
 
   
 
29,651
 
Beyond ten years
   
 
2,073
 
   
 
2,047
 
   
 
20,924
 
   
 
16,886
 
Securities not due at a single maturity date
   
 
9,017
 
   
 
8,438
 
   
 
31,073
 
   
 
27,180
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total investment securities
   
$
47,770
 
   
$
46,240
 
   
$
107,529
 
   
$
96,527
 
    
 
 
     
 
 
     
 
 
     
 
 
  
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. As such, mortgage backed securities and government agencies are not included in the maturity categories above and instead are shown separately as securities not due at a single maturity date.
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans as of March 31, 2023 and December 31, 2022 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).
 
                                               
(Dollars in thousands)
   
March 31,

2023
     
December 31,

2022
  
Commercial and industrial
   
$
656,519
 
   
 
634,535
 
Real estate - other
   
 
853,431
 
   
 
848,241
 
Real estate - construction and land
   
 
63,928
 
   
 
63,730
 
SBA
   
 
5,610
 
   
 
7,220
 
Other
   
 
37,775
 
   
 
39,695
 
    
 
 
     
 
 
  
Total loans, gross
   
 
1,617,263
 
   
 
1,593,421
 
Deferred loan origination costs, net
   
 
1,765
 
   
 
2,040
 
Allowance for credit losses
   
 
(15,382
) 
   
 
(17,005
) 
    
 
 
     
 
 
  
Total loans, net
   
$
1,603,646
 
   
 
1,578,456
 
    
 
 
     
 
 
  
The Company categorizes its loan portfolio into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:
Special Mention: A Special Mention credit has potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard: Substandard credits are assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
 
13
Doubtful: A Doubtful credit has all the weaknesses inherent in Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually, as part of the above described process, are considered to be pass-rated loans.
 
14
The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of March 31, 2023.
 
     Term Loans by Year of Origination                
(Dollars in thousands)
    2023      2022      2021      Prior      Revolving      Total  
Commercial and industrial
                                                      
Pass
    $ 20,500      $ 161,989      $ 69,687      $ 115,077      $ 255,353      $ 622,606  
Special mention
      —          13,806        4,655        933        12,806        32,200  
Substandard
      —          —          —          1,552        161        1,713  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 20,500      $ 175,795      $ 74,342      $ 117,562      $ 268,320      $ 656,519  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Current period gross charge-offs
    $ —        $ —        $ —        $ —        $ 247      $ 247  
Real estate - other
                                                      
Pass
    $ 10,938      $ 203,241      $ 217,300      $ 321,426      $ 87,591      $ 840,496  
Special mention
      —          —          3,190        5,116        —          8,306  
Substandard
      —          —          —          4,629        —          4,629  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 10,938      $ 203,241      $ 220,490      $ 331,171      $ 87,591      $ 853,431  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Current period gross charge-offs
    $ —        $ —        $ —        $ —        $ —        $ —    
Real estate - construction and land
                                                      
Pass
    $ —        $ 10,074      $ 46,207      $ 5,958      $ —        $ 62,239  
Special mention
      —          —          —          —          —          —    
Substandard
      —          —          —          1,689        —          1,689  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ —        $ 10,074      $ 46,207      $ 7,647      $ —        $ 63,928  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Current period gross charge-offs
    $ —        $ —        $ —        $ —        $ —        $ —    
SBA
                                                      
Pass
    $ —        $ 782      $ 317      $ 3,339      $ 111      $ 4,549  
Special mention
      —          —          —          478        —          478  
Substandard
      —          —          —          583        —          583  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ —        $ 782      $ 317      $ 4,400      $ 111      $ 5,610  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Current period gross charge-offs
    $ —        $ —        $ —        $ —        $ —        $ —    
Other
                                                      
Pass
    $ —        $ 1,797      $ —        $ 35,855      $ 83      $ 37,735  
Special mention
      —          40        —          —          —          40  
Substandard
      —          —          —          —          —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ —        $ 1,837      $ —        $ 35,855      $ 83      $ 37,775  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Current period gross charge-offs
    $ —        $ —        $ —        $ —        $ —        $ —    
Total
  
  
  
  
  
  
Pass
  
$
31,438
 
  
$
377,883
 
  
$
333,511
 
  
$
481,655
 
  
$
343,138
 
  
$
1,567,625
 
Special mention
  
 
—  
 
  
 
13,846
 
  
 
7,845
 
  
 
6,527
 
  
 
12,806
 
  
 
41,024
 
Substandard
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
8,453
 
  
 
161
 
  
 
8,614
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
31,438
 
  
$
391,729
 
  
$
341,356
 
  
$
496,635
 
  
$
356,105
 
  
$
1,617,263
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Current period gross charge-offs
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
247
 
  
$
247
 
 
15
The following table reflects the loan portfolio allocated by the Company’s credit quality indicators as of December 31, 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 following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2023 and December 31, 2022.
 
(Dollars in thousands)
    30 Days      60 Days      90+ Days     
Non-Accrual
      Current      Total  
As of March 31, 2023:
                                                      
Commercial and industrial
    $ 344      $ 161      $ 20      $ —        $ 655,994      $ 656,519  
Real estate - other
      5,122        —          —          —          848,309        853,431  
Real estate - construction and land
      —          —          —          —          63,928        63,928  
SBA
      40        —          —          222        5,348        5,610  
Other
      —          —          —          —          37,775        37,775  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total loans, gross
    $ 5,506      $ 161      $ 20      $ 222      $ 1,611,354      $ 1,617,263  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
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  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
16
The Company measures expected credit losses on a pooled basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.
As of March 31, 2023 and December 31, 2022, the Company determined that certain loans did not share risk characteristics with other loans in the portfolio and therefore evaluated these loans for expected credit losses/impairment on an individual basis.
 
The loans individually evaluated were classified as nonaccrual and were collateral dependent. The following table reflects the evaluation methodology applied to gross loans by portfolio segment and the related allowance for credit losses as of March 31, 2023 and allowance for loan losses as of December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
 

(Dollars in thousands)
    Commercial
and
Industrial		      Real Estate
Other		      Real Estate
Construction
and Land		      SBA      Other      Total  
As of March 31, 2023:
                                                      
Gross loans:
                                                      
Loans individually evaluated for expected credit loss
    $ —        $ —        $ —        $ 222      $ —        $ 222  
Loans collectively evaluated for expected credit loss
      656,519        853,431        63,928        5,388        37,775        1,617,041  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total gross loans
    $ 656,519      $ 853,431      $ 63,928      $ 5,610      $ 37,775      $ 1,617,263  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Allowance for credit losses:
                                                      
Loans individually evaluated for expected credit loss
    $ —        $ —        $ —        $ —        $ —        $ —    
Loans collectively evaluated for expected credit loss
      10,719        2,943        743        42        935        15,382  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total allowance for credit losses
    $ 10,719      $ 2,943      $ 743      $ 42      $ 935      $ 15,382  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
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  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
17
The following table reflects information related to loans individually evaluated for expected credit losses/impairment as of March 31, 2023 and December 31, 2022 under ASC 326 and the previous accounting standard, respectively.
 
(Dollars in thousands)
    Recorded
Investment		      Unpaid
Principal
Balance		      Related
Allowance		      Average
Recorded
Investment		      Interest
Income
Recognized		  
As of March 31, 2023:
                                             
With no related allowance recorded:
                                             
SBA
    $ 222      $ 896      $ —        $ 222      $ —    
With an allowance recorded:
                                             
SBA
    $ —        $ —        $ —        $ —        $ —    
Total:
                                             
SBA
    $ 222      $ 896      $ —        $ 222      $ —    
As of December 31, 2022:
                                             
With no related allowance recorded:
                                             
Commercial and industrial
    $ 1,028      $  1,678      $ —        $ 1,028      $ —    
SBA
    $ 222      $ 896      $ —        $ 227      $ 4  
With an allowance recorded:
                                             
Commercial and industrial
    $ —        $ —        $ —        $ —        $ —    
SBA
    $ —        $ —        $ —        $ —        $ —    
Total:
                                             
Commercial and industrial
    $ 1,028      $ 1,678      $ —        $ 1,028      $ —    
SBA
    $ 222      $ 896      $ —        $ 227      $ 4  
The recorded investment in loans individually evaluated for expected credit losses/impairment in the table above excludes interest receivable and net deferred origination costs due to their immateriality.
 
18
The following tables reflect the changes in, and allocation of, the allowance for credit losses and allowance for loan losses by portfolio segment for the three months ended March 31, 2023 and 2022 under ASC 326 and the previous accounting standard, respectively.
 
(Dollars in thousands)
    Commercial
and
Industrial		     Real Estate
Other		     Real Estate
Construction
and Land		     SBA     Other     Total  
Three months ended March 31, 2023:
                                                 
Beginning balance
    $ 10,620     $ 5,322     $ 884     $ 132     $ 47     $ 17,005  
Adoption of new accounting standard
      (1,566 )      (1,725 )      1       (