California BanCorp
CONSOLIDATED FINANCIAL STATEMENTS
1300 Clay Street, Suite 500
Oakland, CA 94612
AS OF DECEMBER 31, 2017 AND 2016
AND FOR THE YEARS THEN ENDED
RETURN SERVICE REQUESTED
AND
INDEPENDENT AUDITOR'S REPORT
Crowe Horwath LLP
Independent Member Crowe Horwath International
INDEPENDENT AUDITOR’S REPORT
The Shareholders and Board of Directors
California BanCorp
Oakland, California
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of California BanCorp, which
comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated
statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the
years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation, and maintenance of internal control relevant to the preparation and
fair presentation of the consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to
the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of California BanCorp as of December 31, 2017 and 2016, and the results
of its operations and its cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
San Francisco, California
March 23, 2018
Crowe Horwath LLP
California BanCorp
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
ASSETS
Cash and due from banks
Interest bearing deposits in banks
2017
2016
$
20,991,112
64,961,569
$
10,489,633
76,928,001
Total cash and cash equivalents
85,952,681
87,417,634
Investment securities (Note 3)
Available-for-sale, at estimated fair value
Loans, less allowance for loan losses of $9,300,000 in
2017 and $7,525,000 in 2016 (Notes 4, 5, 10 and 11)
Premises and equipment, net (Note 6)
Bank owned life insurance (BOLI)
Deferred income taxes, net
Core Deposit Intangible (Note 7)
Goodwill (Note 7)
Accrued interest receivable and other assets
13,001,878
15,561,837
723,464,904
2,885,534
16,433,095
4,537,656
446,774
7,350,465
12,397,436
619,984,453
2,574,870
15,987,184
6,152,143
502,621
7,350,465
9,311,371
Total assets
$
866,470,423
$
764,842,578
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing
Interest bearing (Note 8)
Total deposits
FHLB Advances (Note 10)
Long-term debt (Note 10)
Subordinated debt, $5,000,000 face amount
(less unamortized debt issuance cost of $57,144 and
$74,316, at December 31, 2017 and 2016, respectively) (Note 10)
Accrued interest payable and other liabilities (Note 15)
Total liabilities
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 12 and 13):
Preferred Stock – no par value: 10,000,000 shares authorized,
no shares outstanding (Note 17)
Common stock - no par value; 40,000,000 shares
authorized; 6,416,295 and 5,871,752 issued and
outstanding in 2017 and 2016, respectively
Retained earnings
Accumulated other comprehensive income (loss),
net of taxes (Note 3)
$
314,516,053
445,857,359
$
284,674,085
365,372,728
760,373,412
650,046,813
-
11,000,000
29,000,000
-
4,942,856
5,411,488
4,925,684
4,300,428
781,727,756
688,272,925
-
-
76,935,565
7,804,361
68,750,160
7,820,983
2,741
(1,490)
Total shareholders' equity
84,742,667
76,569,653
Total liabilities and shareholders' equity
$
866,470,423
$
764,842,578
The accompanying notes are an integral part of these consolidated financial statements.
2
California BanCorp
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2017 and 2016
Interest income:
Interest and fees on loans
Interest on investment securities
Interest on interest bearing deposits in banks
Total interest income
Interest expense:
Interest on deposits (Note 8)
Interest on borrowings and subordinated debt (Note 10)
Total interest expense
Net interest income before provision for loan
losses
Provision for loan losses (Note 5)
Net interest income after provision for
loan losses
Non-interest income:
Service charges and other fees
Net gains on sales of loans
Net losses on sales of investment securities (Note 3)
Earnings on BOLI
Other
2017
2016
$
33,771,736 $
275,310
645,603
28,588,884
316,178
343,795
34,692,649
29,248,857
2,440,905
718,411
1,426,591
672,422
3,159,316
2,099,013
31,533,333
27,149,844
2,393,165
1,403,151
29,140,168
25,746,693
1,983,913
258,879
-
434,123
414,511
1,737,488
311,176
(2,050)
452,736
558,569
Total non-interest income
3,091,426
3,057,919
Non-interest expenses:
Salaries and employee benefits (Notes 4 and 15)
Occupancy and equipment (Notes 6 and 11)
Holding company formation and merger related
Other (Note 16)
Total non-interest expenses
12,342,860
2,458,132
269,774
5,874,508
12,164,221
2,323,840
376,858
5,524,284
20,945,274
20,389,203
Income before provision for income taxes
11,286,319
8,415,409
Provision for income taxes (Note 9)
Net Income
Preferred stock dividend
Income to common shareholders
Earnings per common share:
Basic
Diluted
5,658,901
3,222,472
5,627,418
5,192,937
-
(151,861)
5,627,418 $
5,041,076
0.89 $
0.85 $
0.84
0.80
$
$
$
Weighted average number of common shares outstanding – basic
6,298,971
6,023,563
Weighted average number of common shares outstanding – diluted
6,642,508
6,294,885
The accompanying notes are an integral part of these consolidated financial statements
3
California BanCorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2017 and 2016
2017
2016
Net Income
$
5,627,418 $
5,192,937
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale investment securities:
Unrealized holding gains (losses) arising during year
Reclassification adjustment for losses included in net income
Tax effect
Total other comprehensive income (loss)
7,175
-
(64,057)
2,050
(2,944)
25,422
4,231
(36,585)
Total comprehensive income
$
5,631,649 $
5,156,352
The accompanying notes are an integral part of these consolidated financial statements.
4
California BanCorp
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2017 and 2016
Preferred Stock – Series C
Common Stock
Shares
Amount
Shares
Amount
Retained
Earnings
Accum-
ulated
Other
Compre-
hensive
Income
(Loss)
Total
Share-
holders'
Equity
Balance, December 31, 2015
11,000 $ 10,949,443
5,537,837 $64,123,095 $ 2,830,463 $
35,095 $ 77,938,096
Share-based compensation
expense (Note 12)
Preferred stock dividends (Note 17)
-
-
-
-
Preferred stock redemption (Note 17)
(11,000) (10,949,443)
-
-
-
182,557
-
-
-
(151,860)
(50,557)
Issuance of common stock (Note 13)
Net income
Stock options exercised
Stock grants issued and related
compensation expense
Other comprehensive loss
-
-
-
-
-
Balance, December 31, 2016
- $
Share-based compensation
expense (Note 12)
Cash paid in lieu of fractional shares (Note 13)
Net income
Stock options exercised
Stock dividend declared on
August 7, 2017 (Note 13)
Stock grants issued and related
compensation expense
Other comprehensive income
-
-
-
-
-
-
-
Balance, December 31, 2017
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
182,557
(151,860)
(11,000,000)
3,981,762
5,192,937
291,141
171,605
(36,585)
(36,585)
296,297
3,981,762
-
-
-
5,192,937
25,000
291,141
12,618
171,605
-
-
-
-
-
5,871,752 $68,750,160 $ 7,820,983 $
(1,490) $ 76,569,653
-
-
-
226,048
-
-
-
(1,982)
5,627,418
-
-
-
226,048
(1,982)
5,627,418
228,963
2,089,055
-
-
2,089,055
303,407
5,642,058
(5,642,058)
12,173
228,244
-
-
-
-
-
-
-
228,244
4,231
4,231
6,416,295 $76,935,565 $ 7,804,361 $
2,741 $ 84,742,667
The accompanying notes are an integral part of these consolidated financial statements.
5
California BanCorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017 and 2016
Cash flows from operating activities:
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Deferred tax provision
Depreciation
Deferred loan origination costs, net
Net accretion on discount of purchased loans
Amortization of premiums on investment securities, net
Share-based compensation expense, net
Increase in cash surrender value of life insurance
Discounts on retained portion of sold loans, net of accretion
Loss on sale of investment securities, net
Gain on sale of loans, net
Amortization of deposit intangible
Increase in accrued interest receivable and other assets
Increase in accrued interest payable and other liabilities
2017
2016
$
5,627,418 $
5,192,937
2,393,165
1,615,359
736,869
(700,977)
(425,724)
65,256
454,292
(434,113)
48,969
-
(258,879)
55,847
(1,039,720)
1,128,225
1,403,151
145,793
210,577
(884,565)
(680,690)
112,087
354,162
(454,812)
252,935
2,050
(311,176)
55,847
716,435
487,498
Net cash provided by operating activities
9,265,987
6,602,229
Cash flows from investing activities:
Proceeds from sales of
available-for-sale investment securities
Proceeds from calls and maturities of
available-for-sale investment securities
Proceeds from principal payments on
available-for-sale investment securities
Net increase in loans
Proceeds from sale of loans
Purchase of low income tax credit investments
Purchases of premises and equipment
Purchase of bank-owned life insurance policies
Purchase of Federal Home Loan Bank stock
-
-
10,146,259
2,800,000
2,501,878
(109,393,040)
4,856,035
(1,689,654)
(1,047,533)
(11,798)
(360,500)
3,102,278
(111,914,087)
4,646,588
(2,069,343)
(434,794)
(30,082)
(205,448)
Net cash used in investing activities
(105,144,612)
(93,958,629)
Cash flows from financing activities:
Net increase in demand, interest bearing and
savings deposits
Net increase in time deposits
Repayment of FHLB Advances
Redemption of preferred stock
Proceeds from issuance of senior notes
Proceeds from issuance of subordinated debt, net
Proceeds from exercised stock options
Payment of dividends on preferred stock
Cash paid in lieu of fraction shares
Issuance of common stock, net of offering costs
103,347,341
6,979,258
(29,000,000)
-
11,000,000
-
2,089,055
-
(1,982)
-
98,056,485
9,806,447
-
(11,000,000)
-
4,925,684
291,141
(151,860)
-
3,981,762
(Continued)
6
California BanCorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, 2017 and 2016
Net cash provided by financing activities
94,413,672
105,909,659
Increase in cash and cash equivalents
(1,464,953)
18,553,259
Cash and cash equivalents at beginning of year
87,417,634
68,864,375
Cash and cash equivalents at end of year
$
85,952,681 $
87,417,634
2017
2016
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
$
3,227,082 $
2,140,000
2,021,694
1,752,000
The accompanying notes are an integral part of these consolidated financial statements.
7
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
California BanCorp (the “Company”) was approved as a state chartered corporation on
August 31, 2017. The Company, whose common stock is traded on the OTCQX under
the ticker symbol, “CALB” and is headquartered in Oakland, California, was formed to
acquire 100% of the voting equity of California Bank of Commerce (the “Bank”) and
commenced operation as a small bank holding company on August 31, 2017. This
transaction was treated as an internal reorganization as all shareholders of the Bank
became shareholders of the Company. The reorganization represented an exchange of
shares between entities under common control, and, as a result, assets and liabilities of
the Bank were recognized at their carrying amounts in the accounts of the Company.
Subsequent to the reorganization, the Bank continued its operations as previously
conducted, but as a wholly-owned subsidiary, collectively known as the “Company”. The
Company has no operations other than ownership of the Bank.
The Bank was approved as a state-chartered non-member bank on March 23, 2007, and
commenced operations on July 17, 2007. The Bank is subject to regulation by the
California Department of Business Oversight (the "CDBO") and the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank is headquartered in Lafayette, California
and provides products and services to customers who are predominately small to
middle-market businesses, professionals and not-for-profit organizations located in
Contra Costa, Alameda, Santa Clara and surrounding counties.
Since the holding company reorganization was completed in 2017, the consolidated
financial statements and related footnotes as of and for the year ended December 31,
2016, reflect only the financial condition and results of operations of the Bank.
On December 31, 2015, the Company completed its merger with Pan Pacific Bank
(“PPB”) with branch banking offices in Fremont and San Jose, California. The
acquisition complements
the
Company’s market presence in the San Francisco South Bay region.
the Company’s expansion strategy and enhances
Basis of Presentation
The consolidated financial statements include the accounting and reporting policies of
the Company conform with accounting principles generally accepted in the United States
of America and prevailing practices within the banking industry. All significant
intercompany transactions have been eliminated. The Company has no significant
business activities other than its investment in the Bank.
Principles of Consolidation
The consolidated financial statements include California BanCorp and its wholly owned
subsidiary, California Bank of Commerce, collectively referred to as the Company.
Intercompany transactions and balances are eliminated in consolidation.
8
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Certain Reclassifications
Certain items in the consolidated financial statements for the years ended December 31,
2016 were reclassified to conform to the 2017 presentation. These reclassifications did
not affect previously reported net income or shareholders’ equity.
Subsequent Events
Management has reviewed all events occurring from December 31, 2017 through
March 23, 2018 the date the consolidated financial statements were available to be
issued.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to
make estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, cash and cash equivalents consist of
cash and due from banks, interest bearing deposits in banks with original maturities of
90 days or less and Federal funds sold. Generally, Federal funds are sold for one day
periods. Cash flows from loans, deposits and other borrowings are presented on a net
basis.
Investment Securities
Investment securities are classified into the following categories:
Available-for-sale securities, reported at fair value, with unrealized gains and
losses excluded from earnings and reported, net of taxes, as accumulated
other comprehensive income (loss) within shareholders' equity.
Held-to-maturity securities, which management has the positive intent and
ability to hold, reported at amortized cost, adjusted for the accretion of
discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the time of
purchase. Subsequent transfers between categories are accounted for at fair value.
9
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
Gains and losses on the sale of investment securities are computed using the specific
identification method. Interest earned on investment securities is reported in interest
income, net of applicable adjustments for accretion of discounts and amortization of
premiums using the level yield method adjusted for changes in principal prepayment
speeds.
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 and 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, in addition to 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.
Investment in 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 is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on the ultimate recovery of par value.
At December 31, 2017 and 2016, the Company’s investment in FHLB stock totaled
$2,731,200 and $2,370,700, respectively, and is included on the balance sheet in
accrued interest receivable and other assets. Cash dividends are reported as non-
interest income.
10
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Other Bank Stocks
Independent Bankers Financial Corporation
The Independent Bankers Financial Corporation (the “IBFC”), the holding company for
The Independent Banker’s Bank, provides services exclusively to banks. At both
December 31, 2017 and 2016, the Company’s investment in IBFC stock totaled $88,242.
The investment is carried at cost and is included on the balance sheet in accrued
interest receivable and other assets.
Pacific Coast Bankers’ Bancshares
The Pacific Coast Bankers’ Bancshares (“PCBB”), the holding company for The Pacific
Coast Banker’s Bank, provides services exclusively to banks. At both December 31,
2017 and 2016, the Company’s investment in PCBB stock totaled $380,000. The
investment is carried at cost and is included on the balance sheet in accrued interest
receivable and other assets. Cash dividends are reported as non-interest 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.
Loans
Loans that management has the intent and ability to hold for the foreseeable future, or
until maturity or payoff, are reported at the principal balances outstanding, net of
deferred fees and costs, purchase premiums and discounts and the allowance for loan
losses. Loans transferred from loans held for sale are carried at the lower of principal
balance or market value at the date of transfer adjusted for accretion of discounts.
Interest is accrued daily based upon outstanding loan balances. However, when, in the
opinion of management, loans are considered to be impaired and the future collectability
of interest and principal is in serious doubt, loans are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but unpaid is charged
against income. Payments received are applied to reduce principal to the extent
necessary to ensure collection. Subsequent payments on these loans, or payments
received on nonaccrual loans for which the ultimate collectability of principal is not in
doubt, are applied first to earned but unpaid interest and then to principal.
11
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
Generally, loans are restored to accrual status when the obligation is brought current
and has performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectability of the total contractual principal and interest is no
longer in doubt. The policy for placing loans on nonaccrual status, recording payments
received on nonaccrual loans, resuming the accrual of interest and determining past due
or delinquency status, does not differ by portfolio segment or class of financing
receivable.
An impaired loan is measured based on the present value of expected future cash flows
discounted at the loan's effective rate or, as a practical matter, at the loan's observable
market price or the fair value of collateral less estimated costs to sell if the loan is
collateral dependent. A loan is collateral dependent if the repayment of the loan is
expected to be provided solely by the underlying collateral. All loans are evaluated and
considered impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due (including both principal and
interest) in accordance with the contractual terms of the loan agreement. The policy for
accounting for impaired loans, recognizing interest on impaired loans and recording
payments on impaired loans is generally the same as that described above for
nonaccrual loans, and does not differ by portfolio segment or class of financing
receivable.
Substantially all loan origination fees, commitment fees, direct loan origination costs and
purchase premiums and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized to interest income over the contractual term of the
loan. The unamortized balances of deferred fees and costs and purchase premiums
and discounts are reported as a component of net loans.
The Company services loans that have been participated with other financial institutions
totaling approximately $57,600,000 and $42,671,000, respectively, as of December 31,
2017 and 2016. The participated balances of these loans were sold without recourse
and are not included on the Company's balance sheet.
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable credit losses in the Company's
loan portfolio that have been incurred as of the balance-sheet date. The allowance is
established through a provision for loan losses which is charged to expense. Additions
to the allowance are expected to maintain the adequacy of the total allowance after
credit losses and loan growth. Credit exposures determined to be uncollectible are
charged against the allowance. Cash received on previously charged off amounts is
recorded as a recovery to the allowance. The policy for charging off loans and recording
recoveries does not differ by portfolio segment or class of financing receivable. The
overall allowance consists of two primary components, specific reserves related to
individually identify impaired loans and general reserves for losses related to loans that
are collectively evaluated for impairment.
12
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company
for economic or legal reasons related to the debtor's financial difficulties grants a
concession to the debtor that it would not otherwise consider. Restructured workout
loans typically present an elevated level of credit risk as the borrowers are not able to
perform according to the original contractual terms. Loans that are reported as TDRs
are considered impaired and measured for impairment as described above.
The determination of the general reserve for loans that are collectively evaluated for
impairment is based on estimates made by management, to include, but not limited to,
consideration of historical losses by portfolio segment for the trailing four quarters, the
loan risk rating, internal asset classifications, and qualitative factors to include economic
trends in the Company's service areas, industry experience and trends, geographic
concentrations, estimated collateral values, the Company's underwriting policies, the
character of the loan portfolio, and probable losses inherent in the portfolio taken as a
whole.
The Company maintains a separate allowance for each portfolio segment (loan type).
These portfolio segments include commercial & industrial, real estate - construction &
land, real estate - other, real estate - home equity lines of credit (“HELOC”) and
installment & other. The allowance for loan losses attributable to each portfolio
segment, which includes both impaired loans and loans that are not impaired, is
combined to determine the Company's overall allowance, which is included on the
balance sheet.
The Company assigns a risk rating to all loans and periodically, but not less than
annually, performs reviews of all such loans to identify credit risks and to assess the
overall collectability of the portfolio. These risk ratings are also subject to examination
by independent specialists engaged by the Company and the Company's regulators.
During these internal reviews, management monitors and analyzes the financial
condition of borrowers and guarantors, trends in the industries in which borrowers
operate and the fair values of collateral securing these loans. These credit quality
indicators are used to assign a risk rating to each individual loan. The risk ratings can
be grouped into five major categories, defined as follows:
13
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Pass – A pass loan is a strong credit with no existing or known potential
weaknesses deserving of management's close attention.
Special Mention – A special mention loan has potential weaknesses that
deserve management's close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan
or in the Company's credit position at some future date. Special Mention loans
are not adversely classified and do not expose the Company to sufficient risk to
warrant adverse classification.
Substandard – A substandard loan is not adequately protected by the current
sound worth and paying capacity of the borrower or the value of the collateral
pledged, if any. Loans classified as substandard have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. Well defined
weaknesses include a project's lack of marketability, inadequate cash flow or
collateral support, failure to complete construction on time or the project's failure
to fulfill economic expectations. They are characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those
classified as 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.
Loss – Loans classified as loss are considered uncollectible and charged off
immediately.
The general reserve component of the allowance for loan losses also consists of reserve
factors that are based on management's assessment of the following for each portfolio
segment: (1) risk ratings, (2) historical losses of the Company or its peers for the trailing
four quarters and (3) other qualitative factors. These reserve factors are inherently
subjective and are driven by the repayment risk associated with each portfolio segment
described below.
14
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Commercial & Industrial – Commercial loans generally possess a lower
inherent risk of loss than real estate portfolio segments because these loans are
generally underwritten to existing cash flows of operating businesses. Debt
coverage is provided by business cash flows and economic trends influenced by
unemployment rates and other key economic indicators are closely correlated to
the credit quality of these loans.
Real Estate - Construction & Land – Real estate construction loans (including
land and development loans) generally possess a higher inherent risk of loss
than other real estate portfolio segments. A major risk arises from the necessity
to complete projects within specified cost and time lines. Trends in the
construction industry significantly impact the credit quality of these loans, as
demand drives construction activity. In addition, trends in real estate values
significantly impact the credit quality of these loans, as property values determine
the economic viability of construction projects.
Real Estate - Other – Real estate mortgage loans generally possess a higher
inherent risk of loss than other real estate portfolio segments, except land and
construction loans. Adverse economic developments or an overbuilt market
impact commercial real estate projects and may result in troubled loans. Trends
in vacancy rates of commercial and residential properties impact the credit
quality of these loans. High vacancy rates reduce operating revenues and the
ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate - HELOC – The degree of risk in residential real estate lending
depends primarily on the loan amount in relation to collateral value, the interest
rate and the borrower's ability to repay in an orderly fashion. These loans
generally possess a lower inherent risk of loss than other real estate portfolio
segments. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans.
Weak economic trends indicate that the borrowers' capacity to repay their
obligations may be deteriorating.
15
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Installment & Other – An installment loan portfolio is usually comprised of a
number of small loans scheduled to be amortized over a specific period. Most
installment loans are made directly for consumer purchases, but business loans
granted for the purchase of heavy equipment or industrial vehicles may also be
included. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans.
Weak economic trends indicate that the borrowers' capacity to repay their
obligations may be deteriorating. SBA loans, guaranteed by U.S. Small Business
Administration, are included in the “Other” category. The Company may choose
to sell the conditional guarantee SBA loans which receives a premium at the time
of the sale. The Company retained unguaranteed portion of the SBA loans.
Loans in the “Other” category also include overdrafts on deposit accounts which
are inconsequential.
Although management believes the allowance to be adequate, ultimate losses may vary
from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the
allowance, including consideration of the relative risks in the portfolio, current economic
conditions and other factors. If the Board of Directors and management determine that
changes are warranted based on those reviews, the allowance is adjusted. In addition,
the Bank's primary regulators, the FDIC and CDBO, as an integral part of their
examination process, review the adequacy of the allowance. These regulatory agencies
may require additions to the allowance based on their judgment about information
available at the time of their examinations.
Acquired Loans
The Company acquired loans as a result of its acquisition of Pan Pacific Bank on
December 31, 2015. Acquired loans are recorded at their estimated fair values at
acquisition date, factoring in credit losses expected to be incurred over the life of the
loan. Accordingly, an allowance for loan losses is not carried over or recorded for
acquired loans as of the acquisition date.
The entire fair value discount accreted to interest income using an effective interest rate
method for term loans, and on a straight line basis to interest income for revolving lines,
as the timing and amount of cash flows under revolving lines are not predictable.
Subsequent to acquisition, if the probable and estimable credit losses for non-purchased
credit impaired loans exceed the amount of the remaining unaccreted discount, the
excess is established as an allowance for loan losses.
16
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Purchased Credit Impaired Loans
The Company acquired one loan in its merger with PPB that had evidence of credit
quality deterioration subsequent to its origination and for which it was probable, at
acquisition, that the Company would be unable to collect all contractually required
payments (PCI loan). These loans are evaluated on an individual basis. Management
has applied significant subjective judgment in determining which loans are PCI loans.
Evidence of credit quality deterioration as of the purchase date may include data such as
past due and nonaccrual status, risk grades and recent loan-to-value percentages.
Revolving credit agreements (e.g., home equity lines of credit and revolving commercial
loans) where the borrower had revolving privileges at acquisition date are not considered
PCI loans because the timing and amount of cash flows cannot be reasonably
estimated. This loan was paid off in full during 2016.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments.
Management estimates anticipated
losses using historical data and utilization
assumptions. The allowance for off-balance-sheet commitments is included in accrued
interest payable and other liabilities on the balance sheet, and totaled $150,000 and
$120,000 at December 31, 2017 and 2016, respectively.
Other Real Estate Owned
Other real estate owned (“OREO”) 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 property after acquiring them, it includes this amount
in other non-interest income. If the Company records any write-downs or there are any
operating expense of such properties after acquiring them, it includes this amount in other
non-interest expense.
At December 31, 2017 and 2016, the Company did not have any OREO.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets
has been surrendered. Control over transferred assets is deemed surrendered when
(1) the assets have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before
their maturity.
17
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales and Servicing of Government Guaranteed Loans
Included in the portfolio are loans which, in general, are 70 to 90 percent guaranteed by
either the U.S. Department of Agriculture (the “USDA”) or the Small Business
Administration (the "SBA"). The guaranteed portion of these loans may be sold to a third
party, with the Company retaining the unguaranteed portion. The Company generally
receives a premium in excess of the adjusted carrying value of the loan at the time of
sale. The Company may be required to refund a portion of the sales premium if the
borrower defaults or the loan prepays within ninety days of the settlement date.
However, none of the premiums the Company had received were subject to these
recourse provisions as of December 31, 2017 and 2016. There were no USDA and
SBA loans held for sale at December 31, 2017 and 2016. The guaranteed portion of
USDA and SBA loans sold, totaling approximately $16,068,000 and $17,587,000 were
being serviced for others at December 31, 2017 and 2016, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of loans which are
sold with servicing rights retained are recognized as separate assets or liabilities.
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. Fair values are
estimated using discounted cash flows based on current market interest rates. For
purposes of measuring impairment, servicing assets are stratified based on note rate
and term. The amount of impairment recognized is the amount by which the servicing
assets for a stratum exceed their fair value. Servicing assets totaling approximately
$167,000 and $119,000 associated with loans previously sold which were included in
accrued interest receivable and other assets at December 31, 2017 and 2016,
respectively.
In addition, assets (accounted for as interest-only (IO) strips) are recorded at the fair
value of the difference between note rates and rates paid to purchasers (the interest
spread) and contractual servicing fees, if applicable. IO strips are carried at fair value
with gains or losses recorded as a component of shareholders' equity, similar to
available-for-sale investment securities. At December 31, 2017 and 2016 no IO strips
were recorded.
The Company's investment in the loan is allocated between the retained portion of the
loan, the servicing asset, the IO strip, and the sold portion of the loan based on their
relative fair values on the date the loan is sold. The gain on the sold portion of the loan
is recognized as income at the time of sale. The carrying value of the retained portion of
the loan is discounted based on the estimated yield of a comparable non-guaranteed
loan. Significant future prepayments of these loans will result in the recognition of
additional amortization of related servicing assets and an adjustment to the carrying
value of related IO strips.
18
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is determined 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.
Certain operating leases contain scheduled and specified rent increases or incentives in
the form of tenant improvement allowances or credits. The scheduled rent increases are
recognized on a straight-line basis over the lease term as an increase in the amount of
rental expense recognized each period. Lease incentives are capitalized at the
inception of the lease and amortized on a straight-line basis over the lease term as a
reduction of rental expense. Amounts accrued in excess of amounts paid related to the
scheduled rent increases and the unamortized deferred credits are included in accrued
interest payable and other liabilities on the balance sheet.
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.
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 liabilities assumed is recorded as
goodwill.
Goodwill and Other Intangible Assets
Goodwill resulted from the acquisition of PPB on December 31, 2015, and represents
the excess of the purchase price over the fair value of acquired tangible asset and
liabilities and identifiable intangible assets. Goodwill acquired in a purchase business
combination and determined to have an indefinite useful life is not amortized, but tested
for impairment at least annually or more frequently if events and circumstance exist that
indicate a goodwill impairment test should be performed. The Company has selected
December 31 as the date to perform the annual impairment test. The Company has one
reporting unit to which all the goodwill is assigned. Goodwill is the only intangible asset
with an indefinite life on the Company’s balance sheet.
19
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Other Intangible Assets (Continued)
Intangible assets with definite useful lives are amortized over their estimated lives to
their estimated residual values. Intangible assets with definite useful lives consisted of
core deposit intangible assets from the PPB acquisition. The core deposit intangible
assets is being amortized on a straight line method over ten years.
Borrowings
The Bank issued subordinated debt during the second quarter of 2016. The
subordinated debt was recorded net of related issuance costs of $86,578. The discount
is being accreted to interest expense on a straight-line basis using a 5 year life.
The Company issued senior notes during the second quarter of 2017. The issuance
costs for the senior notes were insignificant and were expensed in 2017.
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.
Accounting for Uncertainty in Income Taxes
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 uncertainly 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 recognition threshold are
measured as the largest amount of the tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing authority.
20
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Uncertainty in Income Taxes (Continued)
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.
Stock Dividends
Stock dividends in excess of 20% requires no accounting entry because they are
accounted for as stock splits by restating the shares outstanding in all prior presented to
give effect to the shares issued in the split. Stock dividends for 20% or less are reported
by transferring the fair value, as of the ex-dividend date, of the stock issued from
retained earnings to common stock. Fractional share amounts are paid in cash with a
reduction in retained earnings.
On August 7, 2017, the Company declared a 5% stock dividend that was payable on
August 31, 2017 to shareholders of record as of the close of trading on August 18, 2017,
with cash paid for any fractional shares. As a result of the stock dividend, the Company’s
issued and outstanding common shares increased from 6,112,888 common shares to
6,416,295 common shares. In addition, the Company paid $1,982 for fractional common
shares on August 31, 2017. This transaction was recorded as of August 31, 2017 and
resulted in an increase in common stock and a corresponding decrease of retained
earnings in the amount of $5,642,057.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing net
income by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock, such as stock options, result in the issuance of
common stock which share in the earnings of the Company. The treasury stock method
is applied to determine the dilutive effect of stock options and restricted stock in
computing diluted earnings per share. There were 745,650 and 897,316 stock options
outstanding at December 31, 2017 and 2016, respectively. Adjusted for stock dividend,
there were 897,316 stock options from 854,587 stock options at December 31, 2016.
There were 22,325 and 207,900 anti-dilutive stock options outstanding at December 31,
2017 and 2016, respectively that were excluded from the calculation of EPS. Adjusted
for stock dividend, there were 207,900 anti-dilutive stock options outstanding from
198,000 anti-dilutive stock options at December 31, 2016.
21
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-Based Compensation
The share-based compensation plan is designed to attract and retain employees and
directors. The amount, frequency, and terms of share-based awards may vary based on
competitive practices, the Company's operating results and government regulations.
New shares are issued upon option exercise or restricted share grants. The Plan does
not provide for the settlement of awards in cash.
For options, the Plan requires that the option price may not be less than the fair market
value of the stock at the date the option is granted, and that the stock must be paid in full
at the time the option is exercised.
Restricted stock awards are grants of shares of common stock that are subject to
forfeiture until specific conditions or goals are met. Conditions may be based on
continuing employment or achieving specified performance goals. During the period of
restriction, participants holding restricted stock may have full voting and dividend rights.
The restrictions lapse in accordance with a schedule or with other conditions determined
by the Board of Directors.
The Company recognizes share-based compensation expense for the fair value of all
stock options and restricted stock that are ultimately expected to vest as the requisite
service is rendered and considering the probability of any performance criteria being
achieved.
Management estimates the fair value of each option award as of the date of grant using
a Black-Scholes-Merton option pricing formula. Expected volatility is based on historical
volatility of similar entities over a preceding period commensurate with the expected
term of the option because the Company's common stock has been publicly traded for a
shorter period than the expected term for the options. The “simplified” method described
in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 110 is used
to determine the expected term of option awards. The risk-free rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Expected dividend yield was not considered in the option pricing formula since the
Company has not paid common stock dividends and has no current plans to do so in the
future. The fair value of restricted stock awards is based on the value of the underlying
shares at the date of the grant. Management makes estimates regarding pre-vesting
forfeitures that will impact total compensation expense recognized under the Plan.
22
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
Comprehensive income is a more inclusive financial reporting methodology that includes
disclosure of other comprehensive income or loss that historically has not been
recognized in the calculation of net income. Sources of other comprehensive income or
loss include unrealized gains and losses on available-for-sale investment securities.
Total comprehensive income and components of other comprehensive income, or loss,
are presented in the statement of comprehensive 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 a separate note. 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.
New Accounting Standards
In May 2014, the FASB issued guidance on Revenue from Contracts with Customers.
The guidance supersedes and replaces nearly all existing revenue recognition guidance,
including
industry-specific guidance, establishes a new control based revenue
recognition model, changes the basis for deciding when revenue is recognized over time
or at a point in time, provides new and more detailed guidance on specific topics and
expands and improves disclosures about revenue. In addition, this amendment
specifies the accounting for some costs to obtain or to fulfill a contract with a customer.
This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016. This guidance was deferred in Revenue from
Contracts with Customers (Topic 606).
In August 2015, the FASB issued guidance on Revenue from Contracts with Customers
(Topic 606). The guidance deferred the effective date of the above-mentioned guidance
on Revenue from Contracts with Customers. This guidance is effective for public
business entities for fiscal year beginning after December 15, 2017, including interim
periods within those fiscal years. The Company adopted the revenue recognition
guidance on January 1, 2018 using the modified retrospective approach. A significant
amount of the Company’s revenues are derived from interest income on financial assets,
which are excluded from the scope of the amended guidance. The Company has not
identified any significant change in the timing of revenue recognition and disclosure
requirement on the consolidated financial statements.
23
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards (Continued)
In January 2016, the FASB issued guidance on Recognition and Measurement of
Financial Assets and Financial Liabilities. The guidance intend to improve the
recognition and measurement of financial instrument. The update intends to enhance
the reporting model for financial instruments to provide users of financial instruments
with more decision-useful information and addresses certain aspects of the recognition,
measurement, presentation, and disclosure of financial instruments. This guidance is
effective for all entities that hold financial assets and liabilities for fiscal year beginning
after December 15, 2017. This guidance will primarily impact the Company’s disclosure
of the fair value of loans, which will be required to be calculated using exit price
methodology. The Company is currently evaluating the impact of this new accounting
standard and does not expect adoption of this standard to have a material impact on the
Company’s consolidated financial statements.
In February 2016, the FASB issued guidance on Accounting for Leases. The guidance
clarifies the recognition of a right-to-use asset and lease liability on the statement of
financial position for those leases previously classified as operating leases under the old
guidance. The update maintains two classification of leases: Finance Leases (which
lease
replaces capital
commencement are met, the lease would be classify as a finance lease. This guidance
is effective for public business entities for fiscal year beginning after December 15, 2018,
including interim periods within those fiscal years. The Company is currently evaluating
the impact of this new accounting standard does not expect adoption of this standard to
have a material impact on the consolidated financial statements.
leases) and Operating Leases.
If certain criteria at
In March 2016, the FASB issued guidance on Compensation – Stock Compensation:
Improvements to Employee Share-Based Payment Accounting. The guidance was
issued to simplifying the accounting for share-based payment award transactions
including (a) income tax consequences; (b) classification of awards as either equity or
liabilities; (c) classification on the statement of cash flows; and (d) policy election to
estimate the number of awards that are expected to vest or account for forfeitures when
they occur. This guidance is effective for public entities for fiscal years beginning after
December 15, 2016. The amount of the impact on the effective tax rate will be
determined by the number of stock options exercised and the stock price of the
Company when the stock options are exercised. The Company has recorded excess tax
benefits in its income tax expense in the income statement. Prospectively, excess tax
benefits will be reported as operating activities in the statement of cash flow. The
Company has adopted this new accounting standard in 2017 and as a result has
recorded excess tax benefits totaling $407,452 as part of tax expense. The Company
continues to estimate forfeitures at grant date and at each reporting period, rather than
as incurred.
24
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards (Continued)
In June 2016, the FASB issued guidance on Financial Instruments – Credit Losses. The
guidance is to replace the incurred loss model with an expected loss model, which is
referred to as the current expected credit loss (CECL) model. The CECL model is
applicable to the measurement of credit losses on financial assets measured at
amortized cost, including loan receivables, held-to maturity debt securities, and
reinsurance receivables. It also applies to off-balance sheet credit exposures not
accounted for as insurance (loan commitments, standby letters of credit, financial
guarantees, and other similar instruments) and net investments in leases recognized by
a lessor. This guidance will not have a significant impact to the Company’s debt
securities and purchased credit impaired assets. This guidance is effective for the
Company for the fiscal year beginning after December 15, 2020. The Company is
currently evaluating the impact of this new accounting standard on the consolidated
financial statements.
In August 2016, the FASB issued guidance on Statement of Cash Flow – Classification
of Certain Cash Receipts and Cash Payments. The guidance address the diversity in
how certain cash receipt and cash payments are presented and classified in the
statement of cash flows. This guidance is effective for public business entities for fiscal
year beginning after December 15, 2017, and including interim period within fiscal year
beginning on January 1, 2018. The Company is currently evaluating the impact of this
new accounting standard on the consolidated financial statements and does not expect
adoption of this standard to have material impact on the Company’s consolidated
financial statements.
In November 2016, the FASB issued guidance on Statement of Cash Flow – Restricted
Cash. The guidance amended existing guidance to require that a statement of cash
flows explain the change during the period in the total of cash, cash equivalents, and
restricted cash. Therefore, amounts generally described as restricted cash should be
included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. This guidance is
effective for public entities for fiscal year beginning after December 15, 2017, and
including interim period within those fiscal period. The Company is currently evaluating
the impact of this new accounting standard and does not expect adoption of this
standard to have material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued guidance on Business Combinations – Clarifying the
Definition of a Business. The guidance clarify the definition of a business with the
objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or business. This
guidance is effective for all entities for fiscal year beginning after December 15, 2017
and including interim period within those fiscal period. The Company is currently
evaluating the impact of this new accounting standard and does not expect adoption of
this standard to have material impact on the consolidated financial statements.
25
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards (Continued)
In January 2017, the FASB issued guidance on Intangibles – Goodwill and Other –
Simplifying the Test of Goodwill Impairment. The guidance simplifies the subsequent
measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The
amendment requires an entity to perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount and recognizing
an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that
reporting unit. This guidance is effective for all entities for fiscal year beginning after
December 15, 2019. Early adoption is permitted for interim for annual goodwill
impairment test performed on testing date after January 1, 2017. The Company has
adopted this new accounting standard and it did not have a material impact to the
consolidated financial statements.
In March 2017, the FASB issued guidance on Receivables—Nonrefundable Fees and
Other Costs - Premium Amortization on Purchased Callable Debt Securities. The
guidance will require the premium on callable debt securities to be amortized to the
earliest call date. The amortization period for callable debt securities purchased at a
discount would not be impacted. This guidance is effective for public entities for fiscal
year beginning after December 15, 2018, and including interim period within those fiscal
period. The Company is currently evaluating the impact of this new accounting standard
and does not expect adoption of this standard to have material impact on the
consolidated financial statements.
In February 2018, the FASB issued guidance on Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income. The guidance permits a company to
reclassify the income tax effects of the Tax Cuts and Job Act of 2017 from accumulative
other comprehensive income to retained earnings. This guidance is effective for public
entities for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company is currently evaluating the impact of this new
accounting standard and does not expect adoption of this standard to have material
impact on the consolidated financial statements.
26
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
2.
FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels,
based on the markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. Valuations within these levels are based
upon:
Level 1 – Quoted market prices for identical instruments traded in active exchange
markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable or can be corroborated
by observable market data.
Level 3 – Model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect the Company's
estimates of assumptions that market participants would use on pricing the asset or
liability. Valuation techniques include management judgment and estimation which may
be significant.
Management monitors the availability of observable market data to assess the
appropriate classification of financial instruments within the fair value hierarchy.
Changes in economic conditions or model-based valuation techniques may require the
transfer of financial instruments from one fair value level to another. In such instances,
the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the
nature of the financial instrument and size of the transfer relative to total assets, total
liabilities or total earnings.
27
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
2.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments
The carrying amounts and estimated
fair values of
December 31, 2017 and December 31, 2016 are as follows:
financial
instruments, at
Carrying Amount
Level 1
Fair Value Measurements at
December 31, 2017 Using:
Level 3
Level 2
Total
-
-
N/A
N/A
N/A
-
-
-
N/A
N/A
N/A
-
Financial assets
Cash and cash equivalents
Securities available-for-sale
Loans, net
FHLB stock
IBFC stock
PCBB stock
13,001,878
723,464,904
2,731,200
88,242
380,000
$ 85,952,681 $ 85,952,681 $
- $
13,001,878
-
N/A
N/A
N/A
- $ 85,952,681
13,001,878
-
733,815,000
733,815,000
N/A
N/A
N/A
N/A
N/A
N/A
Accrued interest receivable
2,624,201
59,959
2,564,242
2,624,201
Financial liabilities
Deposits
Long-term debt
Subordinated debt
Accrued interest payable
$ 760,373,412 $ 664,240,000 $ 95,956,000 $
11,000,000
4,942,856
115,036
-
-
-
-
-
53,838
11,072,000
4,986,000
61,198
- $ 760,197,000
11,072,000
4,986,000
115,036
Carrying Amount
Level 1
Fair Value Measurements at
December 31, 2016 Using:
Level 3
Level 2
Total
Financial assets
Cash and cash equivalents
Securities available-for-sale
Loans, net
FHLB stock
IBFC stock
PCBB stock
15,561,837
619,984,453
2,370,700
88,242
380,000
$ 87,417,634 $ 87,417,634 $
- $
15,561,837
-
N/A
N/A
N/A
- $ 87,417,634
15,561,837
-
621,325,000
621,325,000
N/A
N/A
N/A
N/A
N/A
N/A
Accrued interest receivable
2,138,182
46,816
2,091,366
2,138,182
Financial liabilities
Deposits
FHLB Advances
Subordinated debt
Accrued interest payable
$ 650,046,813 $ 560,673,000 $ 88,969,000 $
29,000,000
4,925,684
101,193
-
-
-
29,026,000
-
12,264
- $ 649,642,000
29,026,000
-
4,942,000
4,942,000
101,193
88,929
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.
28
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
2.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
The methods and assumptions used to estimate fair values are described as follows:
Cash and Cash Equivalents – The carrying amounts of cash and short-term instruments
approximate fair values and are classified as Level 1.
Investment Securities – Since quoted prices are generally not available for identical
securities, fair values are calculated based on market prices of similar securities on
similar dates, resulting in Level 2 classification.
FHLB, IBFC, PCBB Stocks – It is not practical to determine the fair value of these
correspondent bank stocks due to restrictions placed on their transferability.
Loans – Fair values of loans are estimated as follows: For variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on
carrying values resulting in Level 3 classification. Fair values for other loans are
estimated using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality resulting in Level
3 classification. The fair value of impaired loans with specific allocations of the
allowance for loan losses 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. Non-real estate collateral may be valued using an appraisal, net book value per
the borrower’s financial statements, or aging reports, adjusted or discounted based on
management’s historical knowledge, changes in market conditions from the time of the
valuation, and management’s expertise and knowledge of the client and client’s
business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on
a quarterly basis for additional impairment and adjusted accordingly. The methods
utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposits – The fair values disclosed for demand deposits (e.g., interest and non-interest
checking, passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e., their
carrying amount) resulting in Level 1 classification. The carrying amounts of variable rate
and fixed-term money market accounts approximate their fair values at the reporting
date resulting in Level 1 classification. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flows calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly maturities on
time deposits resulting in Level 2 classification.
29
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
2.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
FHLB Advances – 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 2 classification.
Senior Notes – Fair values for senior notes are estimated using a discounted cash flow
calculation based on current rates for similar types of debt which may be unobservable,
and considering recent trading activity of similar instruments in market which can be
inactive and accordingly are classified within in Level 3 classification.
Subordinated Debt – Fair values for subordinated debt are estimated using discounted
cash flow calculation based on current rates for similar types of debt which may be
unobservable, and considering recent trading activity of similar instruments in market
which can be inactive and accordingly are classified within in Level 3 classification.
Accrued Interest Receivable – The carrying amounts of accrued interest receivable
approximate fair value resulting in a Level 2 classification for accrued interest receivable
on investment securities and a Level 3 classification for accrued interest receivable on
loans since investment securities are generally classified using Level 2 inputs and loans
are generally classified using Level 3 inputs.
Accrued Interest Payable – The carrying amounts of accrued interest payable
approximate fair value resulting in a Level 2 classification, since accrued interest
payable is from deposits that are generally classified using Level 2 inputs.
Off Balance Sheet Instruments – Fair values for off-balance sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of commitments is not material.
30
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
2.
FAIR VALUE MEASUREMENTS (Continued)
Assets Recorded at Fair Value
The following tables present information about the Company's assets and liabilities
measured at fair value on a recurring and nonrecurring basis:
Recurring Basis
The Company is required or permitted to record the following assets at fair value on a
recurring basis.
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2017
Available-for-sale investment securities
Debt securities:
Mortgage-backed securities - residential
Corporate bonds
$ 10,493,487 $
2,508,390
- $ 10,493,487 $
-
2,508,390
Total assets measured at fair
value on a recurring basis
$ 13,001,877 $
- $ 13,001,877 $
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2016
Available-for-sale investment securities
Debt securities:
Mortgage-backed securities - residential
Corporate bonds
$ 13,058,717 $
2,503,120
- $ 13,058,717 $
-
2,503,120
Total assets measured at fair
value on a recurring basis
$ 15,561,837 $
- $ 15,561,837 $
-
-
-
-
-
-
Fair values for available-for-sale investment securities are based on quoted market
prices for exact or similar securities. During the years ended December 31, 2017 and
2016, there were no significant transfers in or out of Levels 1 and 2 and there were no
changes in the valuation techniques used.
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. There were no assets or liabilities measured at fair value on a non-recurring basis
as of December 31, 2017 and 2016.
31
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
3.
INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair value of securities available-
for-sale at December 31, 2017 and 2016 and the corresponding amounts of gross
unrealized gains and losses:
Available-for-Sale
December 31, 2017
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Mortgage-backed securities -
residential
Corporate bonds
$ 10,493,904 $
2,503,326
14,835 $
5,064
(15,251) $ 10,493,488
2,508,390
-
Total available-for-sale
$ 12,997,230 $
19,899 $
(15,251) $ 13,001,878
Available-for-Sale
December 31, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Mortgage-backed securities -
residential
Corporate bonds
$ 13,058,982 $
2,505,382
32,214 $
2,118
(32,479) $ 13,058,717
2,503,120
(4,380)
Total available-for-sale
$ 15,564,364 $
34,332 $
(36,859) $ 15,561,837
Net unrealized gains on available-for-sale investment securities totaling $4,648 were
recorded, net of $1,906 in deferred tax assets, as accumulated other comprehensive
income within shareholders' equity at December 31, 2017. Net unrealized holding gains
arising during the year ended December 31, 2017 totaled $7,175.
Net unrealized loss on available-for-sale investment securities totaling $2,527 were
recorded, net of $1,037 in deferred tax assets, as accumulated other comprehensive
loss within shareholders' equity at December 31, 2016. Net unrealized holding losses
arising during the year ended December 31, 2016 totaled $64,057.
There were no available-for-sale investment securities which matured during the year
ended December 31, 2017. There were no available-for-sale investment securities that
were called during the year ended December 31, 2017 and 2016. There were no
proceeds from the sale of available-for-sale investment securities for the year ended
December 31, 2017.
There were two available-for-sale investment securities which matured during the year
ended December 31, 2016 totaling $2,800,000. Proceeds and gross realized loss from
the sale of available-for-sale investment securities for the year ended December 31,
2016 totaled $10,146,259 and $2,050, respectively.
32
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
3. INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of debt securities as of December 31, 2017 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. Securities not due at a single maturity date are shown separately.
Available-for-sale
Within one year
One to five years
Five to ten years
Mortgage-backed securities not due
at a single maturity date
Total
Amortized
Cost
Fair
Value
$
- $
2,503,326
-
-
2,508,390
-
10,493,904
10,493,487
$ 12,997,230 $ 13,001,877
At December 31, 2017, investment securities with amortized costs totaling $7,371,354
and estimated fair values totaling $7,377,387 were pledged to secure borrowing
arrangements in place with the Wells Fargo Bank. (See Note 10)
At December 31, 2016, investment securities with amortized costs totaling $9,082,463
and estimated fair values totaling $9,067,002 were pledged to secure borrowing
arrangements in place with the Wells Fargo Bank. (See Note 10)
At December 31, 2017, the Company’s investment security portfolio consisted of 15
securities, five of which were in an unrealized loss position at year end. All of the
securities in a loss position were Mortgage-Backed-Securities. Management believes
that changes in the market value of its Mortgage-Backed-Securities and corporate
securities since purchase are primarily attributable to changes in interest rates and
relative illiquidity and not credit quality. Because the Company has the ability and intent
to hold those investments until a recovery of fair value, which may be at maturity, the
Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2017.
At year-end 2016, there were no holdings of securities of any one issuer, other than the
U.S. Government Agencies, in an amount greater than 2.0% of shareholder’s equity.
33
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
3. INVESTMENT SECURITIES (Continued)
The following table summarizes securities with unrealized losses at December 31, 2017
and December 31, 2016, aggregated by major security type and length of time in a
continuous unrealized loss position:
December 31, 2017
Mortgage-backed
securities - residential
Total available-for-sale
December 31, 2016
Available-for-sale
Mortgage-backed
securities - residential
Corporate bonds
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
$
4,286,175 $
15,251 $
4,286,175 $
15,251 $
- $
- $
- $ 4,286,175 $
15,251
- $ 4,286,175 $
15,251
$
5,854,224 $
32,479 $
- $
-
-
1,499,020
- $ 5,854,224 $
1,499,020
4,380
32,479
4,380
Total available-for-sale
$
5,854,224 $
32,479 $ 1,499,020 $
4,380 $ 7,353,244 $
36,859
4.
LOANS
Outstanding loans are summarized below:
Commercial & Industrial
Real estate - Construction & Land
Real Estate - Other
Real Estate - HELOC
Installment and Other
Deferred loan origination costs, net
Allowance for loan losses
December 31,
2017
2016
$ 329,030,432 $ 253,619,468
31,908,291
324,894,759
4,218,442
10,741,635
41,264,748
344,817,073
3,618,113
11,206,703
729,937,069
625,382,595
2,827,835
(9,300,000)
2,126,858
(7,525,000)
$ 723,464,904 $ 619,984,453
Salaries and employee benefits totaling $4,679,873 and $4,055,022 were deferred as
loan origination costs for the years ended December 31, 2017 and 2016, respectively.
Loans with carrying values totaling approximately $396,043,952 were pledged to secure
borrowing arrangements at December 31, 2017 (see Note 10).
34
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
5.
ALLOWANCE FOR LOAN LOSSES
The following table shows the changes in and allocation of the allowance for loan losses
for the years ended December 31, 2017 and 2016 by portfolio segment, as well as the
balances of the allowance for loan losses and loans by portfolio segment and
impairment methodology:
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Allowance for Loan Losses
December 31, 2017
Balance at beginning of year
$ 4,045,894 $
590,880 $ 2,826,058 $
44,487 $
17,681 $ 7,525,000
Provision for loan losses
2,252,006
178,839
(46,613)
(2,410)
11,343
2,393,165
Loans charged-off
(826,137)
-
-
-
150,000
-
-
-
-
(826,137)
207,972
57,972
Recoveries of loans
previously charged-off
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 5,529,735 $
769,719 $ 2,929,445 $
42,077 $
29,024 $ 9,300,000
$
46,225 $
- $
- $
- $
- $
46,225
$ 5,483,510 $
769,719 $ 2,929,445 $
42,077 $
29,024 $ 9,253,775
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Loans – December 31, 2017
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$329,030,432 $ 41,264,748 $344,817,073 $ 3,618,113 $ 11,206,703 $729,937,069
$ 4,809,411 $
- $
- $
- $
- $ 4,809,411
$324,221,021 $ 41,264,748 $344,817,073 $ 3,618,113 $ 11,206,703 $725,127,658
35
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Allowance for Loan Losses
December 31, 2016
Balance at beginning of year
$ 3,736,622 $
139,433 $ 1,949,471 $
42,388 $
7,086 $ 5,875,000
Provision for loan losses
62,423
451,447
876,587
2,099
10,595
1,403,151
Loans charged-off
-
246,849
-
-
-
-
-
-
-
-
-
246,849
Recoveries of loans
previously charged-off
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans – December 31, 2016
$ 4,045,894 $
590,880 $ 2,826,058 $
44,487 $
17,681 $ 7,525,000
$
2,000 $
- $
- $
- $
- $
2,000
$ 4,043,894 $
590,880 $ 2,826,058 $
44,487 $
17,681 $ 7,523,000
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Ending balance
$ 253,619,468 $ 31,908,291 $ 324,894,759 $ 4,218,442 $ 10,741,635 $ 625,382,595
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 1,939,507 $
- $ 1,504,243 $
- $
- $ 3,443,750
$ 251,679,961 $ 31,908,291 $ 323,390,516 $ 4,218,442 $ 10,741,635 $621,938,845
36
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows the loan portfolio allocated by management's internal risk
ratings at December 31, 2017:
Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
HELOC
& Land
Installment
& Other
Total
Grade:
Pass
Special Mention
Substandard
$ 318,972,321 $ 41,264,748 $ 341,423,391 $
3,825,998
6,232,113
-
-
1,841,555
1,552,127
3,618,113 $ 11,206,703 $ 716,485,276
5,667,553
7,784,240
-
-
-
-
Total
$ 329,030,432 $ 41,264,748 $ 344,817,073 $
3,618,113 $ 10,206,703 $ 729,937,069
The following table shows the loan portfolio allocated by management's internal risk
ratings at December 31, 2016:
Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
HELOC
& Land
Installment
& Other
Total
Grade:
Pass
Special Mention
Substandard
$ 250,025,459 $ 30,405,969 $ 322,758,447 $
2,579,074
1,014,935
-
1,502,322
632,069
1,504,243
4,218,442 $ 10,741,635 $ 618,149,952
3,211,143
4,021,500
-
-
-
-
Total
$ 253,619,468 $ 31,908,291 $ 324,894,759 $
4,218,442 $ 10,741,635 $ 625,382,595
The following table shows an aging analysis of the loan portfolio by the time past due at
December 31, 2017:
30-89 Days
90 Days and
Past Due Still Accruing
Nonaccrual
Total
Past Due
Current
Total
Commercial & Industrial
Real Estate - Construction
$
- $
- $
483,885 $
483,885 $328,546,547 $329,030,432
& Land
Real Estate - Other
Real Estate - HELOC
Installment & Other
-
734,735
-
-
-
-
-
-
-
-
-
-
-
734,735
-
-
41,264,748 41,264,748
344,082,338 344,817,073
3,618,113
11,206,703 11,206,703
3,618,113
Total
$
734,735 $
- $
483,885 $ 1,218,620 $728,718,449 $729,937,069
37
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
5. ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows an aging analysis of the loan portfolio by the time past due at
December 31, 2016:
30-89 Days
90 Days and
Past Due Still Accruing
Nonaccrual
Total
Past Due
Current
Total
Commercial & Industrial
Real Estate - Construction
$
& Land
Real Estate - Other
Real Estate - HELOC
Installment & Other
- $
$
- $
- $ 253,619,468 $253,619,468
-
-
-
-
-
-
-
-
-
739,878
-
-
-
739,878
-
-
31,908,291 31,908,291
324,154,881 324,894,759
4,218,442
10,741,635 10,741,635
4,218,442
Total
$
- $
- $
739,878 $
739,878 $ 624,642,717 $625,382,595
Impaired Loans
The following table shows information related to impaired loans at and for the year
ended December 31, 2017:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial & Industrial
$ 4,173,907 $ 4,173,907 $
17,725 $ 4,164,037 $
233,612
With an allowance recorded:
Commercial & Industrial
Total:
Commercial & Industrial
$
635,504 $
635,504 $
28,500 $
642,349 $
34,192
$ 4,809,411 $ 4,809,411 $
46,225 $ 4,806,386 $
267,804
The following table shows information related to impaired loans at and for the year
ended December 31, 2016:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial & Industrial
Real Estate - Other
$ 1,289,571 $ 1,289,571 $
1,504,243
1,746,777
- $ 1,450,178 $
-
1,534,921
82,085
39,724
With an allowance recorded:
Commercial & Industrial
Total:
Commercial & Industrial
Real Estate - Other
$
649,935 $
649,935 $
2,000 $
656,239 $
35,027
$ 1,939,506 $ 1,939,506 $
2,000 $ 2,106,417 $
1,504,243
1,746,777
-
1,534,921
117,112
39,724
38
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Interest forgone on nonaccrual loans totaled $28,445 and $92,533 for the years ended
December 31, 2017 and 2016, respectively. There was no interest recognized on a
cash-basis on impaired loans for the years ended December 31, 2017 and 2016.
The recorded investment in impaired loans in the tables above excludes accrued interest
receivable and net deferred loan origination costs due to their immateriality.
Troubled Debt Restructurings
At December 31, 2017, the Company had a recorded investment of $1,877,681 and had
allocated specific reserves totaling $46,225 related to loans with terms that had been
modified in troubled debt restructurings. At December 31, 2016, the Company had a
recorded investment of $2,158,561 and had allocated specific reserves totaling $2,000
related to loans with terms that had been modified in troubled debt restructurings. The
Company has no commitment as of December 31, 2017 to customers with outstanding
loans that are classified as troubled debt restructurings.
During the year ending December 31, 2017 and 2016, the terms of certain loans were
modified as troubled debt restructurings. The modification of the terms of such loans
included either a reduction of the stated interest rate of the loan, an extension of the
maturity date at a stated rate of interest lower than the current market rate for new debt
with similar risk, or a combination thereof.
During the year ending December 31, 2017 one modifications involved a 5 month
extension of the maturity date. During the year ending December 31, 2016 each of the
three modifications involved a 14 month extension of the maturity date.
The following table presents loans by class modified as troubled debt restructurings that
occurred during the years ending December 31, 2017 and 2016:
2017
Troubled Debt Restructurings:
Commercial & industrial
2016
Troubled Debt Restructurings:
Commercial & industrial
Number
of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
1
$
725,464
$
725,464
3
$
1,022,469
$
1,022,469
39
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Troubled Debt Restructurings (Continued)
The 2017 troubled debt restructurings described above increased the allowance for loan
losses by $15,725. The 2016 troubled debt restructurings described above increased
the allowance for loan losses by $2,000.
There were no loans modified as troubled debt restructurings for which there was a
payment default within twelve months following the modification during the year ending
December 31, 2017 and 2016.
A loan is considered to be in payment default once it is 90 days contractually past due
under the modified terms.
Purchased Credit Impaired Loans
The Company evaluated loans acquired in its merger with PPB in accordance with
accounting guidance related to loans acquired with deteriorated credit quality (PCI
loans). Acquired loans are considered PCI loans if there is evidence of deterioration of
credit quality since origination and it is probable, at the acquisition date, that the
Company will be unable to collect all contractually required payments receivable. At
December 31, 2015, the Company determined one loan to be a PCI loan with an
estimated fair value of $572,480. The contractual cash flows of this loan totaled
$721,092 and the expected cash flows totaled $598,383, resulting in an accretable
difference of $25,903 and a nonaccretable difference of $122,709. There was no
allowance for loan losses on this loan, as it was recorded at its estimated fair value as of
December 31, 2015. During the third quarter of 2016, this PCI loan was paid off.
40
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
6.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
2017
2016
Furniture, fixtures and equipment
Leasehold improvements
$
3,260,073 $
3,024,318
2,898,861
2,337,997
Less accumulated depreciation
and amortization
6,284,391
5,236,858
(3,398,857)
(2,661,988)
$
2,885,534 $
2,574,870
Depreciation and amortization included in occupancy and equipment expense totaled
$736,869 and $210,577, respectively, for 2017 and 2016.
7.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
At December 31, 2017 and 2016, the Company’s goodwill totaled $7,350,465 for both
years.
The Company analyzes its goodwill for impairment on an annual basis and between
annual tests in certain circumstances such as upon material adverse changes in legal,
business, regulatory and economic factors. Impairment exists when a reporting unit’s
carrying value of goodwill exceeds its fair value, which is determined through a
qualitative assessment.
If the qualitative assessment indicates it is more likely than not that the fair value of
equity of a reporting unit is less than book value, than a quantitative two-step impairment
test is required. Step 1 includes the determination of the carrying value of the
Company’s single reporting unit, including the existing goodwill and intangible assets,
and estimating the fair value of the reporting unit. If the carrying amount of a reporting
unit exceeds its fair value, the Company is required to perform a second step to the
impairment test. Step 2 requires that the implied fair value of the reporting unit goodwill
be compared to the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess.
41
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
7.
GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Goodwill (Continued)
At December 31, 2017, the Company’s reporting unit had positive equity and
management determined there was no need for an impairment analysis because based
on the qualitative analysis performed, the Company determined that it is more likely than
not that the fair value of the reporting unit exceeded its reported book value of equity at
December 31, 2017. As such, no impairment was indicated and no further testing was
required.
Other Intangible Assets
The core deposit intangible (“CDI”) is evaluated for impairment if events and
circumstances indicate a possible impairment. The CDI is amortized on a straight line
over an estimated life of 10 years.
CDI amortization expensed total $55,847 in both 2016 and 2017, respectively. The
following table provides the estimated future amortization expense of core deposit
intangibles:
Year Ending
December 31,
2018
2019
2020
2021
2022
2023 and after
Total
$
55,847
55,847
55,847
55,847
55,847
167,539
$
446,774
Impairment testing of the intangible assets is performed at the individual asset level.
The Company's intangibles are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If such
events or changes in circumstances are identified, an impairment loss is recognized only
if the carrying amount of the intangible asset is not recoverable and exceeds its fair
value. If an impairment loss exists, the carrying amount of the intangible asset is
adjusted to a new cost basis. The new cost basis is then amortized over the remaining
useful life of the asset.
Based on its assessment, the Company did not identify any events or changes in
circumstances indicating that such intangible assets may not be recoverable at
December 31, 2017 or 2016.
42
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
8.
INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $250,000 or more
Other time
December 31,
2017
2016
$ 42,162,809 $ 47,834,583
283,438,202 200,757,716
27,406,298
45,322,133
44,051,998
23,902,959
46,569,407
49,783,982
$ 445,857,359 $ 365,372,728
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
2018
2019
2020
2021
$ 84,804,810
10,488,965
902,481
157,133
$ 96,353,389
Interest expense recognized on
December 31, 2017 and 2016 consisted of the following:
interest-bearing deposits
for
the years ended
Savings
Money market
Interest-bearing demand accounts
Time, $250,000 or more
Other time
Year Ended December 31,
2017
2016
$
197,325 $
1,413,497
17,349
441,940
370,794
179,743
852,127
15,105
327,084
52,532
$
2,440,905 $
1,426,591
43
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
9.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2017 and 2016
consisted of the following:
2017
Federal
State
Total
Current
Change in Federal Income Tax Rate
Deferred
$
3,088,495 $
1,748,207
(182,162)
955,047 $
-
49,314
4,043,542
1,748,207
(132,848)
Provision for income taxes
$
4,654,540 $
1,004,361 $
5,658,901
2016
Current
Deferred
Federal
State
Total
$
2,083,312 $
241,313
993,367 $
(95,520)
3,076,679
145,793
Provision for income taxes
$
2,324,625 $
897,847 $
3,222,472
The Company's reported amount of income tax expense differs from federal statutory
rates in 2017 and 2016 due principally to California franchise taxes, merger expenses
and the revaluation of deferred taxes reflected in tax from continuing operations due to
enactment of the 2017 federal tax reform. The effective tax rate differs from the Federal
statutory rate for the years ended December 31, 2017 and 2016 are as follow.
December 31,
2017
2016
34.0%
Statutory Federal income tax rate
State income taxes, net of Federal tax benefit
5.9
Low income housing credits, net of investment losses 0.4
-1.3
Earnings from bank owned life insurance
0.0
-3.6
15.5
-0.8
Deferred tax asset revaluation
Other, net
Merger expenses
Equity compensation
7.0
-2.0
-1.8
0.3
0.0
0.0
0.8
34.0%
Effective tax rate
50.1% 38.3%
44
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
9.
INCOME TAXES (Continued)
The Company’s 2017 results included the impact of the enactment of the Tax Cuts and
Jobs Act, which was signed into law on December 22, 2017. The law includes
significant changes to the U.S. corporate tax system, including a Federal corporate rate
reduction from 34% to 21% effective December 22, 2017 for years beginning after
December 31, 2017. As a result, the Company was required to re-measure, through
income tax expense from continuing operations, its deferred tax assets and liabilities
using the enacted tax rate at which it was expected to be recovered. The re-
measurement of the net deferred tax asset resulted in additional income tax expense of
approximately $1,748,000.
Deferred tax assets (liabilities) consisted of the following:
Deferred tax assets:
Allowance for loan losses
State deferred tax asset
Accrued expenses
Organization costs
Share-based compensation
Deferred compensation
Net operating loss carryforward
Loan discounts
Unrealized loss on available-for-sale
investment securities
Other
December 31,
2017
2016
$
1,780,619 $
1,545,465
499,355
161,226
107,840
140,122
1,291,246
260,082
1,930,539
1,483,014
768,598
241,911
303,352
191,567
2,308,108
644,305
976
163,755
860
212,166
Total deferred tax assets
5,950,686
8,084,420
Deferred tax liabilities:
Deferred loan origination costs
Unrealized gain on available-for-sale
investment securities
Core Deposit Intangible
Other
December 31,
2017
2016
(1,099,076)
(1,428,987)
-
(93,823)
(220,131)
-
(170,891)
(332,399)
Total deferred tax liabilities
(1,413,030)
(1,932,277)
Net deferred tax assets
$
4,537,656 $
6,152,143
45
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
9.
INCOME TAXES (Continued)
As a result of the merger with PPB, at December 31, 2015, the Company had
approximately $7,430,071 of net operating loss carryforwards for Federal income tax
purposes which begin to expire in 2026. The Company had approximately $575,742
and $6,801,853 of net operating loss carryforwards for California income tax purposes
which expire in 2018 and 2028 and thereafter, respectively. At December 31, 2017, net
operating loss carryforwards for Federal and California income tax purposes totaled
$6,148,790 and $6,098,067, and begin to expire in 2029, respectively. Pursuant to
Sections 382 of the Internal Revenue Code, annual use of net operating loss
carryforwards may be limited in the event of a change in ownership. Net operating
losses acquired from PPB are subject to Section 382 annual limitations in the amount of
approximately $640,000 per year.
The Company files income tax returns in the U.S Federal, California, and Virginia
jurisdictions. There are currently no pending U.S. Federal or state income tax or non-
U.S. income tax examinations by tax authorities. The Company is subject to tax
examinations by U.S. Federal and state taxing authorities for tax returns filed for the
years ended on or after December 31, 2014 for Federal purposes and December 31,
2013 for California purposes.
The Company is required to determine a valuation allowance if it is more likely than not
that some portion, or all, of the deferred tax asset will not be realized. The Company will
continue to evaluate both positive and negative evidence, including forecasts of future
income, cumulative losses, applicable tax planning strategies, and assessments of
current and future economic and business conditions. As of December 31, 2017 and
2016, there were no unrecognized tax benefits or interest and penalties accrued by the
Company.
10.
BORROWING ARRANGEMENTS
Under agreements with several correspondent banks, the Company can borrow up to
$58,000,000. In a separate agreement, the Company can borrow up to $10,000,000 or
the total market value of securities pledged to a correspondent bank under a repurchase
agreement. At December 31, 2017 and 2016, there were no investment securities
pledged to the correspondent bank under this agreement. There were no borrowings
outstanding under these arrangements at December 31, 2017 and 2016.
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 December 31, 2017,
amounts pledged and available borrowing capacity under such limits were approximately
$230,632,000 and $163,734,000, respectively. There were no borrowings outstanding
under this arrangement as of December 31, 2017 and 2016.
46
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
10.
BORROWING ARRANGEMENTS (Continued)
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
credit limit varies according to its total assets and the amount and composition of the
loan portfolio pledged as collateral. At December 31, 2017, amounts pledged and
available borrowing capacity under such limits were approximately $165,412,000 and
$101,487,000, respectively.
At December 31, 2016, there were $29,000,000 in borrowings outstanding under this
arrangement at fixed interest rates ranging from 1.11% to 1.16%, which were paid off at
maturity on February 7, 2017. The weighted average interest rate on these borrowings
was 1.13% at December 31, 2016.
The Company issued $5,000,000 in subordinated debt on April 15, 2016. The
subordinated debt has a fixed interest rate of 5.875% for the first 5 years. After the fifth
year, the interest rate changes to a variable rate of Prime plus 2.00%. The subordinated
debt was recorded net of related issuance costs of $86,578. On December 31, 2017
and 2016, the balances were $4,942,856 and $4,925,684, net of issuance cost,
respectively.
The Company issued $11,000,000 in senior notes on June 30, 2017. The senior notes
are secured by the Company’s investment in the Bank. The senior notes consist of a
$1,000,000 revolving line of credit with an interest rate of 4.650% for a one year term.
The second senior note, in the amount of $10,000,000 with an interest rate of 4.650%,
has a term of three years. Principal payments on the senior note of $10,000,000 will
begin after the first year. The issuance costs for the senior notes were insignificant.
11.
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company currently operates from six offices including three banking branches in
Lafayette, Fremont and San Jose, California, and three loan production offices in
Oakland, Walnut Creek and San Jose, California.
The Lafayette office lease, dated June, 2007, as amended, had a 90 month initial term
from the date of occupancy in November 2007. The Company has executed several
renewal amendments with a current leased premises of approximately 7,000 square
feet. The current lease term is five years from October 2015 to September 2020 with one
60 month renewal option. This office is leased from an affiliated party. (See Note 14)
47
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
11.
COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (Continued)
The Company leases premises with approximately 15,600 square feet in Oakland,
California for a loan production and administrative office. The lease for the Oakland loan
production and administrative office is for an initial term of seven years, with a 60 month
renewal option. The current term of the lease expires on January 31, 2023. In
September 2017, an amendment was executed adding approximately 4,600 square feet
with the same expiration date on January 31, 2023.
The Company leases premises with approximately 4,000 square feet in San Jose,
California for a loan production office. The lease for the San Jose loan production office
is for an initial term of seven years, with a 60 month renewal option. The current term of
the lease expires on February 1, 2023.
The Company leases premises with approximately 8,500 square feet in Fremont,
California as a branch office. The lease for the Fremont branch office was assumed in
the merger with PPB and had an initial term of ten years, with a 84 month renewal
option. The current term of the lease expires on June 30, 2022.
The Company leases premises with approximately 3,500 square feet in San Jose,
California as a branch office. The lease for the San Jose branch office was assumed in
the merger with PPB and had an initial term of 88 months. The current term of the lease
expires on September 30, 2021.
The Company leases premises with approximately 3,900 square feet in Walnut Creek,
California as a branch office. The lease for the Walnut Creek office is for an initial term of
seven years, with a 60 month renewal option. The current term of the lease expires on
November 1, 2022.
Future minimum lease payments are as follows:
2018
2019
2020
2021
2022
Thereafter
Year Ending
December 31,
$
1,485,628
1,667,185
1,624,934
1,389,988
1,226,030
83,303
$
7,477,068
Rental expense included in occupancy and equipment expense totaled $1,450,495 and
$1,371,168 for the years ended December 31, 2017 and 2016, respectively.
48
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
11.
COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal
course of business in order to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates.
The following financial instruments represent off-balance-sheet credit risk:
December 31,
2017
2016
Commitments to extend credit
Standby letters of credit
$ 280,633,000 $ 283,053,000
4,679,000
$
5,239,000 $
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.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a client to a third party. The credit risk involved in issuing standby letters
of credit is essentially the same as that involved in extending loans to clients. The fair
value of the liability related to these standby letters of credit, which represents the fees
received for issuing the guarantees, was not significant at December 31, 2017 and 2016.
The Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
Commercial loan commitments represent approximately 75% of total commitments and
are generally unsecured or secured by collateral other than real estate and have variable
interest rates. Real estate related loan commitments represent approximately 22% of
total commitments and are generally secured by property with a loan-to-value ratio not to
exceed 75%. The majority of real estate related loan commitments also have variable
interest rates.
49
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
11.
COMMITMENTS AND CONTINGENCIES (Continued)
Significant Concentrations of Credit Risk
The Company grants real estate mortgage, real estate construction, commercial and
installment loans to customers in the Company's geographic service area. Commercial
& industrial loans and real estate loans represented 45% and 47% of total loans,
respectively, at December 31, 2017.
Although management believes such
concentrations to have no more than the normal risk of collectability, a substantial
decline in the economy in general, or a decline in real estate values in the Company's
primary market area in particular, could have an adverse impact on collectability of these
loans. Personal and business income represents the primary source of repayment for a
majority of these loans.
Deposit Concentrations
At December 31, 2017 and 2016, there were no deposit relationships that exceeded 5%
of total deposits.
Contingencies
The Company may be subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of ultimate
liability with respect to such actions will not materially affect the financial position or
results of operations of the Company.
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 December 31, 2017 and 2016, uninsured deposits at financial
institutions were not significant.
50
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
12.
SHARE-BASED COMPENSATION
Share-Based Compensation Plans
The Company declared a 5% stock dividend on August 7, 2017 which increased the
number of shares of outstanding stock options and the number of shares of commons
stock eligible for issuance under the Equity Incentive Plan.
The California BanCorp 2007 Equity Incentive Plan (the “2007 Plan”) permits the
granting of stock options and restricted stock to directors, organizers and employees of
the Company. Grants of options to the organizers during the start-up phase of the
Company and to the Directors are considered non-qualified stock option awards. All
other option grants are considered incentive stock option awards. The 2007 Plan does
not have any shares available for future grant as of December 31, 2016.
The Company has issued the California BanCorp 2014 Equity Incentive Plan (the "2014
Plan"), which was approved by its shareholders and permits the grant of stock options
and restricted stock for up to 404,235 shares of the Company's common stock, of which
114,681 shares were available for future grant at December 31, 2017. The Plan is
designed to attract and retain employees and directors. Adjusted for stock dividend, the
2014 Plan was revised to 404,235 shares from 384,986 shares.
The Company has issued the California BanCorp 2017 Equity Incentive Plan (the "2017
Plan"), which was approved by its shareholders and permits the grant of stock options
and restricted stock for up to 341,250 shares of the Company's common stock, of which
341,250 shares were available for future grant at December 31, 2017. Adjusted for
stock dividend, the 2017 Plan was revised to 341,250 shares from 325,000 shares. The
Plan is designed to attract and retain employees and directors. The amount, frequency,
and terms of share-based awards may vary based on competitive practices, the
Company's operating results and government regulations. New shares are issued upon
option exercise or restricted share grants. Shares may also be granted under the 2017
Plan that vest immediately without restriction. The Plan does not provide for the
settlement of awards in cash.
51
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
12.
SHARE-BASED COMPENSATION (Continued)
Stock Option Awards
For the years ended December 31, 2017 and 2016, the compensation cost recognized
for stock option awards was $226,048 and $182,557, respectively.
A summary of option activity under the 2007 Plan, 2014 Plan and 2017 Plan for the
years ended December 31, 2017 and 2016 is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2016
Granted
Exercised
Forfeited or canceled
Outstanding December 31, 2016
Granted
Exercised
Forfeited or canceled
Outstanding December 31, 2017
Vested or expected to vest
at December 31, 2017
Exercisable at December 31, 2017
840,616
86,100
(26,250)
(3,150)
897,316
90,053
(240,116)
(1,603)
745,650
726,051
537,554
$
$
$
$
$
$
$
$
$
$
$
8.68
11.11
7.36
13.19
9.12
10.46
7.80
13.19
9.70
9.63
8.44
4.59 $
8,984,806
4.74 $
8,796,669
2.96 $
7,148,828
52
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
12.
SHARE-BASED COMPENSATION (Continued)
Stock Option Awards (Continued)
As of December 31, 2017, the unrecognized compensation cost related to non-vested
stock option awards totaled $1,335,828. That cost is expected to be amortized on a
straight-line basis over a weighted average period of 2.89 years and will be adjusted for
subsequent changes in estimated forfeitures. The intrinsic value of options exercised
during the years ended December 31, 2017 and 2016 totaled $2,300,840 and $150,450,
respectively.
The following information relates to stock option grants granted during the years ended
December 31, 2017 and 2016:
Weighted average grant date fair value per share
of options granted
Significant fair value assumptions:
Expected term in years
Expected annual volatility
Expected annual dividend yield
Risk-free interest rate
Stock Awards
2017
2016
$
11.58 $
5.98
6 years
25.09%
0%
1.95%
6 years
33.93%
0%
1.23%
Eleven stock awards totaling 12,173 shares were granted and issued during the year
ended December 31, 2017. These stock awards were fully vested upon grant. The
grant date fair value of these awards was $18.75 per share, or $228,244 which was
recorded as compensation expense for the year ended December 31, 2017.
Eleven stock awards totaling 13,249 shares were granted and issued during the year
ended December 31, 2016. Adjusted for stock dividend, the stock awards was revised
to 13,249 shares from 12,618 shares. These stock awards were fully vested upon grant.
The grant date fair value of these awards was $13.60 per share, or $12.95 after adjusted
for stock dividend, or $171,605 which was recorded as compensation expense for the
year ended December 31, 2016.
53
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
13.
SHAREHOLDERS' EQUITY
Common Stock Offering
On May 17, 2016, the Company issued 296,297 shares of its common stock totaling
$3,981,762, net of issuance costs of $18,238, for general corporate purposes. Adjusted
for stock dividend, the issuance was revised to 311,112 shares from 296,297 shares.
Dividends
Upon declaration by the Board of Directors, all shareholders of record will be entitled to
receive dividends. The California Financial Code restricts the total dividend payment of
any state banking association in any calendar year to the lesser of (1) the Company's
retained earnings or (2) the Company's net income for its last three fiscal years, less
distributions made to shareholders during the same three-year period.
Stock Dividend
On August 7, 2017, the Company declared a 5% stock dividend that was payable on
August 31, 2017 to shareholders of record as of the close of trading on August 18, 2017,
with cash paid for any fractional shares. As a result of the stock dividend, the Company’s
issued 303,407 shares of its common stock. These transactions were recorded as of
August 31, 2017 and resulted in an increase in common stock and a corresponding
decrease of retained earnings in the amount of $5,642,057. In addition, the Company
paid $1,982 for fractional common shares on August 31, 2017.
Disclosure of share and per share data for all periods presented have been retroactively
adjusted to reflect the effect of the stock dividends.
Regulatory Capital
The Company is subject to certain regulatory capital requirements administered by the
FDIC. Failure to meet these minimum capital requirements can initiate certain
mandatory and possibly additional discretionary, actions by regulators
if
undertaken, could have a direct material effect on the Company's consolidated financial
statements.
that,
Under capital adequacy guidelines, the Company must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. These quantitative measures
are established by regulation and require that minimum amounts and ratios of total
capital, Tier 1 capital and common equity Tier 1 (“CET1”) capital to risk-weighted assets
and of Tier 1 capital to average assets be maintained. Capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
54
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
13.
SHAREHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
The final rules implementing Basel Committee on Banking Supervision’s capital
guidelines for U.S. banks (Basel III rules) became effective for the Company on January
1, 2015 with full compliance with all of the requirements being phased in over a multi-
year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the
Company must hold a capital conservation buffer above the adequately capitalized risk-
based ratios. The implementation of the capital conservation buffer began on January 1,
2016 at 0.625% and will be phased in over a four-year period (increasing by 0.625% on
each subsequent January 1, until it reaches 2.5% on January 1, 2019). Thus, when fully
phased-in on January 1, 2019, the Bank will be required to maintain this additional
capital conservation buffer of 2.5% of CET1. At December 31, 2017, the capital
conversion buffer requirement was 1.250%.
The Bank is also subject to additional capital guidelines under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common
equity Tier 1 risk-based ratios as set forth in the table on the following page. As of
December 31, 2017 and 2016, the most recent notification from the FDIC categorized
the Bank as well capitalized under these guidelines. There are no conditions or events
since that notification that management believes have changed the Bank's category.
Management believes that the Bank met all capital adequacy requirements as of
December 31, 2017 and 2016.
55
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
13.
SHAREHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
2017
2016
Amount
Ratio
Amount
Ratio
Common Equity Tier 1 Risk
Based Capital Ratio
California Bank of Commerce
$ 87,234,000
10.09% $ 67,410,000
8.96%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
(including capital conservation buffer)
Leverage Ratio
$ 56,221,000
6.50% $ 48,920,000
6.50%
$ 49,734,000
5.75% $ 38,572,000
5.125%
California Bank of Commerce
$ 87,234,000
9.92% $ 67,410,000
8.78%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
$ 43,974,000
$ 35,179,000
5.00% $ 38,383,000
4.00% $ 30,706,000
5.00%
4.00%
Tier 1 Risk-Based Capital Ratio
California Bank of Commerce
$ 87,234,000
10.09% $ 67,410,000
8.96%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
(including capital conservation buffer)
Total Risk-Based Capital Ratio
$ 69,195,000
8.00% $ 60,210,000
8.00%
$ 62,708,000
7.25% $ 49,861,000 6.625%
California Bank of Commerce
$101,627,000
11.75% $ 79,981,000
10.63%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
(including capital conservation buffer)
$ 86,494,000
10.00% $ 75,262,000
10.00%
$ 80,007,000
9.25% $ 64,913,000
8.625%
56
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
14.
RELATED PARTY TRANSACTIONS
The Company enters into transactions with related parties, including Directors, executive
officers and affiliates.
The following is a summary of the aggregate activity involving related party borrowers
during the years ended December 31, 2017 and 2016:
Balance, January 1, 2016
$
9,572,363
Disbursements
Amounts repaid
Balance, December 31, 2016
Disbursements
Amounts repaid
Balance, December 31, 2017
Undisbursed commitments to related parties,
December 31, 2017
7,075,549
(8,762,311)
7,885,601
7,658,302
(7,934,052)
$
7,609,851
$
11,160,000
At December 31, 2017 and 2016, the Company's deposits from related parties totaled
approximately $35,738,098 and $25,431,000, respectively.
The Company also leases its Lafayette office from a company owned by a member of
the Board of Directors. Rental payments under this agreement totaled $371,123 for the
year ended December 31, 2017 and $370,150 for the year ended December 31, 2016.
15.
EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
In 2007, the Company adopted the California Bank of Commerce Profit Sharing 401(k)
Plan. All full-time employees 21 years of age or older with 3 months of service are
eligible to participate in the 401(k) Plan. Eligible employees may elect to make tax
deferred contributions up to the maximum amount allowed by law. The Company may
make additional contributions to the plan at the discretion of the Board of Directors.
Bank contributions may vest at a rate of 20% annually for all employees. The Company
made a fully vested contribution to the 401(k) Plan for the year ended December 31,
2017 in the amount of $438,982. The Company made a fully vested contribution to the
401(k) Plan for the year ended December 31, 2016 in the amount of $373,000.
57
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
15.
EMPLOYEE BENEFIT PLANS (Continued)
Salary Continuation and Retirement Plan
The Board of Directors approved a salary continuation plan for certain executives during
2007 and 2014. Under the Plan, once executives reach age 65, the Company is
obligated to provide executives with annual benefits after retirement. The estimated
present value of these future benefits is accrued from the effective date of the plan
based on a discount rate of 4.0%.
The expense recognized under this plan for the years ended December 31, 2017 and
2016 totaled $128,815 and $141,672, respectively. Accrued compensation payable
under the salary continuation plan totaled $667,247 and $563,432 at December 31,
2017 and 2016, respectively, and is included in accrued interest payable and other
liabilities on the Company’s balance sheet.
16.
OTHER EXPENSES
Other expenses for the years ended December 31, 2017 and 2016 consisted of the
following:
Outsourced data processing and electronic banking
Director’s stock-based and other compensation
Professional fees
Advertising, promotion and business development
Computer network and internet support
Regulatory fees
Loan processing
Telecommunications
Correspondent bank service charges
Company insurance
Provision for unfunded loan commitments
Other operating expenses
$
2017
2016
857,971 $
734,079
651,643
612,616
597,820
523,677
515,136
300,761
255,433
101,851
30,000
693,521
737,884
689,615
525,242
619,046
860,553
451,808
399,954
209,439
197,643
103,530
-
729,570
Total other expenses
$
5,874,508 $
5,524,284
58
California BanCorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
17.
PREFERRED STOCK
Small Business Lending Fund (“SBLF”)
On September 15, 2011, as part of the Small Business Lending Fund (“SBLF”), the
Company entered into a Small Business Lending Fund Securities Purchase Agreement
(“SBLF Purchase Agreement”) with the United States Department of the Treasury
(“Treasury”). Under the SBLF Purchase Agreement, the Company issued 11,000 shares
of Senior Non-Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred")
to the Treasury. The preferred stock series C shares qualify as Tier 1 capital and will
pay quarterly dividends. The initial and current dividend as of December 31, 2015 was
1%. The dividend rate was fixed at 1% until March 15, 2016. After this date, the
dividend rate increased to 9%.
The Company repurchased 5,500 shares of Series C Preferred stock on April 15, 2016
and 5,500 shares of Series C Preferred stock on May 19, 2016. There was no Series C
Preferred stock outstanding at December 31, 2016.
18.
QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
The Company invests in low income housing investments with gross commitments
(including amounts funded and unfunded) of $8,467,600 and $7,967,000 at December
31, 2017 and 2016, respectively. During 2017, the Company added a new investment
with a commitment balance of $500,000 and had $1,689,654 in capital calls. Total
commitments remaining for future capital call were $2,196,455 and $3,386,109, at
December 31, 2017 and 2016. The investment balances were $4,241,748 and
$3,366,164 at December 31, 2017 and 2016, respectively. These balances are reflected
in the accrued interest receivable and other assets line on the balance sheets.
For the years ended December 31, 2017 and 2016, the Company recognized
amortization expense of $161,710 and $179,100, respectively, which was included
within income tax expense on the statements of income.
For tax purposes, the Company recorded tax credit and other benefits of $1,037,294 and
$770,638 for the years ended December 31, 2017 and 2016, respectively. Amortization
of the low income housing investment totaled $875,585 and $591,538 for the years
ended December 31, 2017 and 2016.
59
California Bank of Commerce * 1300 Clay Street, Suite 500, Oakland, CA 94612 * 510-457-3615
California BanCorp
1300 Clay Street, Suite 500
Oakland, CA 94612
RETURN SERVICE REQUESTED
California BanCorp . 1300 Clay Street, Suite 500, Oakland, CA 94612 . 510-457-3615
californiabankofcommerce.com
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