California BanCorp CA

Previous wording

Southern California Bancorp is a California corporation incorporated on October 2, 2019, and headquartered in Del Mar, California. On May 15, 2020, we completed a reorganization whereby Bank of Southern California, N.A. became the wholly owned subsidiary of the Company. Bank of Southern California, N.A. has a wholly-owned subsidiary, BCAL OREO1, LLC, which was incorporated on February 14, 2024. BCAL OREO1, LLC is used for holding other real estate owned and other assets acquired by foreclosure. We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The Bank operates under a national charter and is regulated by the Office of Comptroller of the Currency (“OCC”).

Current wording

California BanCorp, formerly know as Southern California Bancorp, is a California corporation incorporated on October 2, 2019, and headquartered in Del Mar, California. On May 15, 2020, we completed a reorganization whereby California Bank of Commerce, N.A., formerly known as Bank of Southern California, N.A., became the wholly owned subsidiary of the Company. California Bank of Commerce, N.A. has a wholly-owned subsidiary, BCAL OREO1, LLC, which was incorporated on February 14, 2024. BCAL OREO1, LLC is used for holding other real estate owned and other assets acquired by foreclosure. We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The Bank operates under a national charter and is regulated by the Office of Comptroller of the Currency (“OCC”).

Previous wording

We are a relationship-focused community bank and we offer a range of financial products and services to individuals, professionals, and small- to medium-sized businesses through our 13 branch offices serving Orange, Los Angeles, San Diego and Ventura counties, as well as the Inland Empire. We keep a steady focus on our solution-driven, relationship-based approach to banking, providing clients accessibility to decision makers and enhancing the value of our services through strong client partnerships. Our lending products consist primarily of construction and land development loans, real estate loans, C&I loans and consumer loans, and we are a Preferred SBA Lender. Our deposit products consist primarily of demand deposit, money market, and certificates of deposit. We also provide treasury management services including online banking, cash vault, sweep accounts and lock box services.

Current wording

We are a relationship-focused community bank and we offer a range of financial products and services to individuals, professionals, and small- to medium-sized businesses through our 14 branch offices serving Southern and Northern California. We keep a steady focus on our solution-driven, relationship-based approach to banking, providing clients accessibility to decision makers and enhancing the value of our services through strong client partnerships. Our lending products consist primarily of construction and land development loans, real estate loans, C&I loans and consumer loans, and we are a Preferred SBA Lender. Our deposit products consist primarily of demand deposit, money market, and certificates of deposit. We also provide treasury management services including online banking, cash vault, sweep accounts and lock box services.

Previous wording

On January 30, 2024, the Company announced the execution of a definitive merger agreement with California BanCorp (NASDAQ: CALB), the holding company for California Bank of Commerce, pursuant to which California BanCorp will merge into Southern California Bancorp in an all-stock merger valued at approximately $233.6 million based on the closing price of Southern California Bancorp on January 29, 2024. Under the terms of the merger agreement, which has been unanimously approved by the boards of directors of Southern California Bancorp and California BanCorp, each outstanding share of California BanCorp common stock will be exchanged for the right to receive 1.590 shares of Southern California Bancorp common stock. As a result of the transaction, Southern California Bancorp shareholders will own approximately 57.1% of the outstanding shares of the combined company and California BanCorp shareholders will own approximately 42.9% of the outstanding shares of the combined company. These amounts are subject to fair value adjustments upon the close of the Merger. The transaction is expected to close in the third quarter of 2024, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and approvals from Southern California Bancorp and California BanCorp shareholders. At March 31, 2024, California BanCorp had total loans of $1.52 billion, total assets of $1.92 billion, total deposits of $1.64 billion, and total equity of $200.7 million.

Current wording

Under the terms of the Agreement and Plan of Merger and Reorganization, each outstanding share of California BanCorp common stock was exchanged for the right to receive 1.590 shares of the Company’s common stock, resulting in the issuance of approximately 13,576,627 shares, with cash (without interest) paid in lieu of fractional shares. At June 30, 2024, California BanCorp had total loans of $1.49 billion, total assets of $1.92 billion, total deposits of $1.64 billion, and total equity of $195.5 million.

Previous wording

Between March 2022 and September 2023, the Federal Reserve raised interest rates eleven times by an aggregate of 525 basis points, to a range between 5.25% and 5.50%, the highest level in 22 years. The rapid rate hiking cycle was in response to an increase in inflation, as measured by the Consumer Price Index, from 1.2% in November 2020 to 9.1% in July 2022, which has since moderated to 3.5% in March 2024. The Federal Reserve paused interest rates increases in September 2023. In its April 2024 statement, the Federal Reserve acknowledged that progress in bringing the inflation rate down to its 2% target was stalling and opted to hold the benchmark interest rate at current levels for longer.

Current wording

Between March 2022 and September 2023, the Federal Reserve raised interest rates eleven times by an aggregate of 525 basis points, to a range between 5.25% and 5.50%, the highest level in 22 years. The rapid rate hiking cycle was in response to an increase in inflation, as measured by the Consumer Price Index, from 1.2% in November 2020 to 9.1% in July 2022, which has since moderated to 3.0% in June 2024. In its July 2024 statement, the Federal Reserve noted the economy is moving closer to the point at which it will be appropriate to reduce the policy rate and Chairman Powell stated a reduction could come as soon as the FOMC meeting in September 2024.

Previous wording

The COVID-19 pandemic has receded, with business activity returning to more normal conditions and concerns regarding a potential recession moderating with full year 2023 increase in GDP reported at 2.5%, slowing to 1.6% in the first quarter of 2024. California’s 2023 GDP increased by 2.8% from 2022 and it is forecast by Moody’s to slow to 2.1% in 2024. High interest rates and broader economic headwinds have put a damper on investment, particularly in the near term for the tech industry, which employs 8% of the state’s workforce, as tech payrolls have trended lower over the past year. Moody’s forecast for the state’s 2024 unemployment rate is 5.1%, up from 4.4% in 2023. Despite the anticipated slowdown in California, it is still considered to have the fifth largest economy in the world.

Current wording

Concerns regarding a potential recession have moderated with full year U.S. 2023 GDP reported at 2.5%, slowing to 1.3% in the first quarter of 2024 and rebounding to an advance estimate of 2.8% for the second quarter of 2024, with Moody’s full-year 2024 GDP forecast at 2.4%. California’s 2023 GDP increased by 2.1% from 2022 and it is forecast by Moody’s to increase by 2.1% in 2024; however, it slowed to 1.2% in the first quarter of 2024 and is forecast by Comerica Bank to decrease to 1.1% mid-year before rebounding to 1.5% in the fourth quarter of 2024. Despite the anticipated slowdown in California, it is still considered to have the fifth largest economy in the world. High interest rates and broader economic headwinds have put a damper on investment, particularly in the near term for the tech industry, which employs 8% of the state’s workforce, as tech payrolls have trended lower over the past year. The U.S. Bureau of Labor Statistics reports California’s June 2024 unemployment rate at 5.2%, down slightly from 5.3% in previous quarters.

Previous wording

The rapid rise in interest rates between 2022 and 2023 resulted in an industry-wide reduction in the fair value of many banks’ securities portfolios, pressuring their liquidity. The subsequent bank runs led to the failure of several financial institutions beginning in March of 2023, among other events, fostered a state of volatility and uncertainty with respect to the health of the U.S. banking system, particularly around liquidity, uninsured deposits and customer concentrations. The situation is stabilizing due to strong actions taken by federal regulators in attempts to calm the markets.

Current wording

The rapid rise in interest rates between 2022 and 2023 resulted in an industry-wide reduction in the fair value of many banks’ securities portfolios, pressuring their liquidity. The subsequent bank runs led to the failure of several financial institutions beginning in March of 2023 and the distress at New York Community Bank in early 2024, fostering a state of volatility and uncertainty with respect to the health of the U.S. banking system, particularly around liquidity, uninsured deposits and customer concentrations. The situation has stabilized due to strong actions taken by federal regulators in attempts to calm the markets.

Previous wording

We have a strong consolidated balance sheet with diversified deposit and loan portfolios, and with very little sector or individual customer concentration, other than our CRE concentration. Our relationship-based banking model is founded on strong, ongoing relationships with our commercial clients, which represent a broad variety of industries. The recent uncertainty in the banking industry has provided us with an opportunity to attract new clients that have concerns about the banks they have been doing business with, based on the above events. We have no meaningful exposure to cryptocurrency or venture capital business models, our accumulated other comprehensive loss on our available-for-sale debt securities is manageable, and our capital position is strong. However, in an abundance of caution, we proactively responded to these events by reaching out to our customers and explaining what differentiates us from the recently failed banks. We also have elected to vigorously defend our deposit base in the face of increasing competition and deposit costs.

Current wording

We have a strong consolidated balance sheet with diversified deposit and loan portfolios, with very little sector or individual customer concentration, other than our CRE concentration. Our relationship-based banking model is founded on strong, ongoing relationships with our commercial clients, which represent a broad variety of industries. The recent uncertainty in the banking industry has provided us with an opportunity to attract new clients that have concerns about the banks they have been doing business with, based on the above events. We have no meaningful exposure to cryptocurrency or venture capital business models, our accumulated other comprehensive loss on our available-for-sale debt securities is manageable, and our capital position is strong. However, in an abundance of caution, we proactively responded to these events by reaching out to our customers and explaining what differentiates us from the recently failed banks. We also have elected to vigorously defend our deposit base in the face of increasing competition and deposit costs by increasing the rates we pay on interest-bearing deposits.

Previous wording

We have a highly skilled and experienced lending production team and credit administration team. Given our concentration in commercial real estate secured loans, we mitigate that risk through comprehensive underwriting policies, semi-annual loan level reviews, close monitoring of self-established industry and geographical and collateral type limits, periodic stress testing and continuous portfolio risk management reporting. Per the regulatory definition of commercial real estate, at March 31, 2024, our concentration of such loans represented 506% of our total risk-based capital. In addition, at March 31, 2024, total loans secured by commercial real estate under construction and land development represented 82% of our total risk-based capital. The non-performing assets for these segments per the regulatory definition of commercial real estate loans at March 31, 2024 were $19.3 million and there were no charge-offs during the three months ended March 31, 2024.

Current wording

We have a highly skilled and experienced lending production team and credit administration team. Given our concentration in commercial real estate secured loans, we mitigate that risk through comprehensive underwriting policies, semi-annual loan level reviews, close monitoring of self-established industry and geographical and collateral type limits, periodic stress testing and continuous portfolio risk management reporting. Per the regulatory definition of commercial real estate, at June 30, 2024, our concentration of such loans represented 498% of our total risk-based capital. In addition, at June 30, 2024, total loans secured by commercial real estate under construction and land development represented 69% of our total risk-based capital. The non-performing loans for these segments per the regulatory definition of commercial real estate loans at June 30, 2024 were $4.7 million and there were $1.5 million charge-offs during the six months ended June 30, 2024. Our only OREO from a collateral-dependent commercial real estate loan was sold with a $4.8 million pre-tax loss recognized in the second quarter of 2024.

Previous wording

Given the nature of our commercial banking business, approximately 43% of our total deposits exceeded the FDIC deposit insurance limits at March 31, 2024. However, we offer our deposit customers access to the Insured Cash Sweep (“ICS Product”), which allows us to divide customers’ deposits that exceed the FDIC insurance limits into smaller amounts, below the FDIC insurance limits, and place those deposits in other participating FDIC insured institutions with the convenience of managing all deposit accounts through our Bank. Our total deposits in the ICS Product decreased to $245.3 million, or 13% of total deposits at March 31, 2024, compared to $274.1 million, or 14% of total deposits at December 31, 2023. In the third quarter of 2023, we appointed new leadership to oversee our Bank-wide deposit and treasury operations and continue to focus on defending our deposit base while managing our deposit costs.

Current wording

Given the nature of our commercial banking business, approximately 44% of our total deposits exceeded the FDIC deposit insurance limits at June 30, 2024. However, we offer our deposit customers access to the Insured Cash Sweep (“ICS Product”), which allows us to divide customers’ deposits that exceed the FDIC insurance limits into smaller amounts, below the FDIC insurance limits, and place those deposits in other participating FDIC insured institutions with the convenience of managing all deposit accounts through our Bank. Our total deposits in the ICS Product decreased to $239.8 million, or 12% of total deposits at June 30, 2024, compared to $274.1 million, or 14% of total deposits at December 31, 2023.

Previous wording

We have a small investment portfolio of high-quality securities. In 2022, we deployed our excess cash by purchasing held-to-maturity debt securities that are not marked to market, which means there is no unrealized loss recorded through the accumulated other comprehensive loss if their market value is impacted by changes in interest rates. We continue to reposition our debt securities mix to protect us from an unpredictable interest rate environment. At March 31, 2024, the amortized cost of our held-to-maturity debt securities was $53.5 million, or approximately 2.3% of total assets. The fair value of our available-for-sale debt securities was $127.0 million, or approximately 5.5% of total assets. The increases in the 10-Year Treasury Bond to nearly 5% resulted in higher net unrealized losses on our debt securities. At March 31, 2024, our accumulated other comprehensive loss, net of taxes, increased to $6.1 million, compared to $4.5 million at December 31, 2023. If we realized all of our unrealized losses on both held-to-maturity and available-for-sale debt securities, our losses, net of taxes would be $9.0 million at March 31, 2024. The results of our stress testing on our debt security portfolio at March 31, 2024, illustrated that our losses, net of taxes on both held-to-maturity and available-for-sale debt securities would increase to $39.4 million at 300 basis point rate shock scenario. If we realized all of these unrealized losses, the Bank would continue to exceed all regulatory capital requirements necessary to be considered well capitalized.

Current wording

We have a small investment portfolio of high-quality securities. In 2022, we deployed our excess cash by purchasing held-to-maturity debt securities that are not marked to market, which means there is no unrealized loss recorded through the accumulated other comprehensive loss if their market value is impacted by changes in interest rates. We continue to reposition our debt securities mix to protect us from an unpredictable interest rate environment. At June 30, 2024, the amortized cost of our held-to-maturity debt securities was $53.4 million, or approximately 2.3% of total assets. The fair value of our available-for-sale debt securities was $123.7 million, or approximately 5.4% of total assets. The increases in the 10-Year Treasury Bond to nearly 5% in the second quarter, resulted in a higher net unrealized losses on our debt securities at June 30, 2024, but the 10-Year Treasury Bond has decreased to a lower 4% range in July 2024. At June 30, 2024, our accumulated other comprehensive loss, net of taxes, increased to $6.5 million, compared to $4.5 million at December 31, 2023. If we realized all of our unrealized losses on both held-to-maturity and available-for-sale debt securities, our losses, net of taxes would be $10.0 million at June 30, 2024. The results of our stress testing on our debt security portfolio at June 30, 2024, illustrated that our losses, net of taxes on both held-to-maturity and available-for-sale debt securities would increase to $40.0 million at 300 basis point rate shock scenario. If we realized all of these unrealized losses, the Bank would continue to exceed all regulatory capital requirements necessary to be considered well capitalized.

Previous wording

•Total cash and cash equivalents of approximately $86.5 million, compared to $86.8 million.

Current wording

•Total cash and cash equivalents of approximately $104.7 million, compared to $86.8 million.

Previous wording

•Total liquidity ratio of approximately 11.0%, compared to 11.1%.

Current wording

•Total liquidity ratio of approximately 12.0%, compared to 11.1%.

Previous wording

•Unpledged, liquid securities at fair value were approximately $127.0 million, compared to $130.0 million.

Current wording

•Unpledged, liquid securities at fair value were approximately $123.7 million, compared to $130.0 million.

Previous wording

•Available borrowing capacity from the Federal Home Loan Bank (“FHLB”) secured lines of credit of approximately $395.3 million, compared to $339.2 million. At March 31, 2024, we had overnight FHLB borrowings of $27.0 million.

Current wording

•Available borrowing capacity from the Federal Home Loan Bank (“FHLB”) secured lines of credit of approximately $377.8 million, compared to $339.2 million. At June 30, 2024, we had overnight FHLB borrowings of $25.0 million.

Previous wording

•Available borrowing capacity from the Federal Reserve Discount Window program was approximately $125.4 million, compared to $141.6 million. There were no outstanding borrowings under this program at March 31, 2024.

Current wording

•Available borrowing capacity from the Federal Reserve Discount Window program was approximately $139.5 million, compared to $141.6 million. There were no outstanding borrowings under this program at June 30, 2024.

Previous wording

•Total available borrowing capacity was approximately $595.7 million at March 31, 2024, compared to $555.8 million.

Current wording

•Total available borrowing capacity was approximately $592.3 million at June 30, 2024, compared to $555.8 million.

Previous wording

•Total available liquidity was approximately $809.2 million at March 31, 2024.

Current wording

•Total available liquidity was approximately $820.7 million at June 30, 2024.

Previous wording

Net income for the three months ended March 31, 2024 was $4.9 million, or $0.26 per diluted share, compared to $4.4 million or $0.24 per diluted share in the prior quarter. The $523 thousand increase in net income from the prior quarter was primarily due to a $1.5 million increase in noninterest income, a $1.2 million decrease in the (reversal of) provision for credit losses, and a $358 thousand decrease in noninterest expense, partially offset by a $2.1 million decrease in net interest income. Pre-tax, pre-provision income for the three months ended March 31, 2024 was $6.9 million, a decrease of $192 thousand, or 2.7% compared to pre-tax, pre-provision income of $7.1 million for the three months ended December 31, 2023.

Current wording

Net income for the three months ended June 30, 2024 was $190 thousand, or $0.01 per diluted share, compared to net income of $4.9 million or $0.26 per diluted share in the prior quarter. The $4.7 million decrease in net income from the prior quarter was primarily due to a $4.0 million increase in noninterest expense, a $3.2 million increase in the provision for credit losses, and a $244 thousand decrease in noninterest income, partially offset by a $513 thousand increase in net interest income and a $2.2 million decrease in income taxes. Pre-tax, pre-provision income for the three months ended June 30, 2024 was $3.2 million, a decrease of $3.8 million, or 54.2% compared to pre-tax, pre-provision income of $6.9 million for the three months ended March 31, 2024.

Previous wording

(1)Total loans are net of deferred loan origination fees/costs and discounts/premiums, and include average balances of loans held for sale and nonperforming loans. Interest income includes accretion of net deferred loan fees and net purchased discounts of $604 thousand, $501 thousand and $532 thousand for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, respectively.

Current wording

(1)Total loans are net of deferred loan origination fees/costs and discounts/premiums, and include average balances of loans held for sale and nonperforming loans. Interest income includes accretion of net deferred loan fees and net purchased discounts of $386 thousand, $604 thousand and $390 thousand for the three months ended June 30, 2024, March 31, 2024, and June 30, 2023, respectively.

Previous wording

(3)Average noninterest-bearing deposits represent 34.35%, 36.76% and 46.69% of average total deposits for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, respectively.

Current wording

(3)Average noninterest-bearing deposits represent 34.05%, 34.35% and 41.27% of average total deposits for the three months ended June 30, 2024, March 31, 2024, and June 30, 2023, respectively.

Previous wording

During the three months ended March 31, 2024, total interest income decreased by $1.3 million to $31.3 million, comprised primarily of a $1.4 million decrease in loan interest income and a $96 thousand decrease in interest and dividend income from other financial institutions and other interest-earning assets, partially offset by a $175 thousand increase in total debt securities income. The decrease in interest income was due to a number of factors: one fewer day in the current quarter than prior quarter, a lower average total loan balance from organic loan growth, a decrease in yield on total average interest-earning assets, a change in the interest-earning asset mix, and the reversal of an aforementioned nonaccrual loan's interest income of $168 thousand. Average total interest-earning assets decreased $38.0 million, the result of a $45.1 million decrease in total average loans, a $2.3 million decrease in average deposits in other financial institutions, partially offset by an $8.6 million increase in average total debt securities, a $763 thousand increase in average Fed funds sold/resale agreements, and a $18 thousand increase in average restricted stock investments and other bank stock. The increase in interest expense during the three months ended March 31, 2024 was primarily due to a $854 thousand increase in interest expense on interest-bearing deposits, the result of a $23.2 million increase in average interest-bearing deposits, coupled with a 26 basis point increase in interest-bearing deposit costs, partially offset by a $94 thousand decrease in interest expense on Federal Home Loan Bank (FHLB) borrowings, the result of a $5.8 million decrease in average FHLB borrowings.

Current wording

Net interest income for the second quarter of 2024 was $21.0 million, compared with $20.5 million in the prior quarter. The increase in net interest income was primarily due to a $585 thousand increase in total interest and dividend income, offset by a $72 thousand increase in total interest expense in the second quarter of 2024 as compared to the prior quarter. During the second quarter of 2024, loan interest income increased $473 thousand, total debt securities income increased $16 thousand, and interest and dividend income from other financial institutions decreased $96 thousand. The increase in interest income was due to a number of factors, including a higher average yield across most interest-earning asset categories and changes in the interest-earning asset mix, partially offset by lower average balances of loans and debt securities. Additionally, the previous quarter included the reversal of a nonaccrual loan's interest income of $168 thousand for which there was no similar activity in the current quarter. Average total interest-earning assets decreased $26.1 million, the result of a $26.4 million decrease in average total loans, a $6.6 million decrease in average deposits in other financial institutions, and a $3.0 million decrease in average total debt securities, partially offset by a $9.3 million increase in average Fed funds sold/resale agreements and a $679 thousand increase in average restricted stock investments and other bank stock. The increase in interest expense for the second quarter of 2024 was primarily due to a $393 thousand increase in interest expense on interest-bearing deposits, the result of a $10.3 million increase in average interest-bearing deposits, coupled with a 9 basis point increase in average interest-bearing deposit costs, partially offset by a $321 thousand decrease in interest expense on Federal Home Loan Bank ("FHLB") borrowings, the result of a $23.2 million decrease in average FHLB borrowings in the second quarter of 2024.

Previous wording

Net interest margin for the three months ended March 31, 2024 was 3.80%, compared with 4.05% in the prior quarter. The decrease was primarily related to a 22 basis point increase in the cost of funds, coupled with a 6 basis point decrease in the total average interest-earning assets yield. The yield on total average earning assets during the three months ended March 31, 2024 was 5.79%, compared with 5.85% in the prior quarter. The yield on total average loans during the three months ended March 31, 2024 was 6.02%, a decrease of 6 basis points from 6.08% in the prior quarter. The yield on average total loans during the three months ended March 31, 2024 included the impact of the reversal of a nonaccrual loan's interest income of $168 thousand, which decreased the overall loan yield by 4 basis points. There was no significant reversal of interest income in the prior quarter.

Current wording

Net interest margin for the second quarter of 2024 was 3.94%, compared with 3.80% in the prior quarter. The increase was primarily related to an 18 basis point increase in the total interest-earning assets yield, partially offset by a 4 basis point increase in the cost of funds. The yield on total average earning assets in the second quarter of 2024 was 5.97%, compared with 5.79% in the prior quarter. The yield on average total loans in the second quarter of 2024 was 6.21%, an increase of 19 basis points from 6.02% in the prior quarter. The yield on average total loans in the prior quarter included the reversal of nonaccrual loan interest, which decreased the overall loan yield by 4 basis points in the first quarter of 2024. There was no significant reversal of interest income in the second quarter of 2024.

Previous wording

Net interest income for the three months ended March 31, 2024 was $20.5 million, compared to $24.9 million for the three months ended March 31, 2023. The $4.4 million decrease in net interest income was due to higher average balances and costs of interest-bearing liabilities, partially offset by higher average balances and yields on interest-earning assets.

Current wording

Net interest income for the three months ended June 30, 2024 was $21.0 million, compared to $23.4 million for the three months ended June 30, 2023. The $2.4 million decrease in net interest income was due to higher average balances and costs of interest-bearing liabilities, partially offset by higher yields on interest-earning assets.

Previous wording

Net interest margin for the three months ended March 31, 2024 was 3.80%, compared with 4.71% for the same 2023 period. The 91 basis point decrease was primarily related to a 129 basis point increase in the cost of funds, partially offset by a 26 basis point increase in the total average interest-earning assets yield resulting from higher market interest rates and a change in our average interest-earning asset mix. The yield on total average earning assets during the three months ended March 31, 2024 was 5.79%, compared with 5.53% for the same 2023 period. The yield on average loans during the three months ended March 31, 2024 was 6.02%, an increase of 24 basis points from 5.78% for the same 2023 period.

Current wording

Net interest margin for the three months ended June 30, 2024 was 3.94%, compared with 4.36% for the same 2023 period. The 42 basis point decrease was primarily related to an 83 basis point increase in the cost of funds, partially offset by a 33 basis point increase in the total average interest-earning assets yield resulting from higher market interest rates and a change in our average interest-earning asset mix. The yield on total average earning assets during the three months ended June 30, 2024 was 5.97%, compared with 5.64% for the same 2023 period. The yield on average loans during the three months ended June 30, 2024 was 6.21%, an increase of 30 basis points from 5.91% for the same 2023 period.

Previous wording

During the three months ended March 31, 2024, total interest income increased $2.1 million, comprised of a $1.6 million increase in total loan interest income, and a $301 thousand increase in total debt securities income, coupled with a $189 thousand increase interest and dividend income from other financial institutions and other interest-earning assets. The increase in interest income was due to a number of factors: higher average loans from organic loan growth; a change in the interest-earning asset mix; and increases in yields on interest-earning assets resulting from increases in the target Fed fund rates. Average interest-earning assets increased $26.9 million, resulting primarily from a $15.0 million increase in average total loans, a $16.4 million increase in average deposits in other financial institutions, a $9.4 million increase in total average debt securities, and a $1.5 million increase in average restricted stock investments and other bank stock, partially offset by a $15.5 million decrease in average Fed fund sold/resale agreements.

Current wording

During the three months ended June 30, 2024, total interest income increased $1.6 million, comprised of a $1.1 million increase in total loan interest income, and a $246 thousand increase in total debt securities income, coupled with a $273 thousand increase interest and dividend income from other financial institutions and other interest-earning assets. The increase in interest income was due to a number of factors: a change in the interest-earning asset mix; and increases in yields on interest-earning assets resulting from increases in the target Fed fund rates. The increase in interest income was primarily due to a 33 basis point increase in yield on the interest-earning assets for the three months ended June 30, 2024 compared to the same 2023 period. Average interest-earning assets decreased $9.1 million, resulting primarily from a $17.2 million decrease in average total loans, partially offset by a $4.6 million increase in average deposits in other financial institutions, a $1.0 million increase in total average debt securities, a $1.1 million increase in average restricted stock investments and other bank stock, and a $1.4 million increase in average Fed fund sold/resale agreements.

Previous wording

During the three months ended March 31, 2024, total interest expense increased by $6.5 million to $10.8 million, comprised primarily of a $5.9 million increase in interest on interest-bearing deposits due to repricing deposits in the higher interest rate environment and peer bank deposit competition, coupled with the increase in average interest-bearing liabilities balances between periods.

Current wording

During the three months ended June 30, 2024, total interest expense increased by $4.0 million to $10.8 million, comprised primarily of a $3.9 million increase in interest on interest-bearing deposits due to repricing deposits in the higher interest rate environment and peer bank deposit competition, coupled with an increase in average interest-bearing liabilities balances between periods.

Previous wording

Average total borrowings increased $36.3 million to $68.5 million for the three months ended March 31, 2024 resulting from a $36.2 million increase in average FHLB advances. The average cost of total borrowings was 5.75% for the three months ended March 31, 2024, a 21 basis point increase from 5.54% for the same 2023 period.

Current wording

Average total borrowings increased $4.7 million to $45.3 million for the three months ended June 30, 2024 resulting from a $4.6 million increase in average FHLB advances. The average cost of total borrowings was 5.84% for the three months ended June 30, 2024, an 18 basis point increase from 5.66% for the same 2023 period.

Previous wording

Average total borrowings decreased $5.8 million to $68.5 million for the three months ended March 31, 2024 resulting primarily from a decrease of $5.8 million in average FHLB advances. The average cost of total borrowings was 5.75% for the three months ended March 31, 2024, a 2 basis point increase from 5.73% in the prior quarter.

Current wording

Average total borrowings increased $20.5 million to $56.9 million for the six months ended June 30, 2024 resulting primarily from a $20.4 million increase in average FHLB advances. The average cost of total borrowings was 5.79% for the six months ended June 30, 2024, an 18 basis points increase from 5.61% for the same 2023 period.

Previous wording

We recorded a reversal of credit losses of $331 thousand for the three months ended March 31, 2024, compared to a provision for credit losses of $824 thousand in the prior quarter. The reversal of provision for credit losses included a $17 thousand negative provision for unfunded loan commitments primarily due to the impact of lower unfunded loan commitments. Total unfunded loan commitments decreased $22.4 million to $388.4 million at March 31, 2024 from $410.8 million at December 31, 2023. The reversal of credit losses for the loans held for investments for the three months ended March 31, 2024 was $314 thousand, a decrease of $1.4 million from $1.1 million in the prior quarter. The decrease was driven primarily by decreases in net charge-offs, loans held for investment and substandard accruing loans, coupled with changes in the portfolio mix, and a change in our reasonable and supportable forecast, primarily related to the economic outlook for California and a change in historical prepayment and curtailment rates analysis, partially offset by an increase in special mention loans. We continue to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and we believe it is appropriately provisioned for the current environment.

Current wording

We recorded a provision for credit losses of $2.9 million for the three months ended June 30, 2024, compared to a reversal of credit losses of $331 thousand in the prior quarter. The provision for credit losses for the three months ended June 30, 2024 included a $3.0 million provision for credit losses on loans held for investment, partially offset by a $97 thousand reversal of credit provision for unfunded loan commitments primarily due to the impact of lower unfunded loan commitments. Total unfunded loan commitments decreased $16.9 million to $371.5 million at June 30, 2024 from $388.4 million at March 31, 2024. The provision for credit losses for the loans held for investment for the three months ended June 30, 2024 was $3.0 million, an increase of $3.3 million from a reversal of credit losses of $314 thousand in the prior quarter. The increase was driven primarily by increases in net charge-offs, and substandard accruing loans, coupled with changes in the portfolio mix, and a change in our reasonable and supportable forecast, primarily related to the economic outlook for California, partially offset by decreases in special mention loans and loans held for investment. We continue to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believe it is appropriately provisioned for the current environment.

Previous wording

Total noninterest income during the three months ended March 31, 2024 was $1.4 million, an increase of $1.5 million compared to total noninterest loss of $102 thousand in the prior quarter. During the three months ended March 31, 2024, we recorded a gain on sale of loans of $415 thousand, at an average premium of 6.56%, on the sale of $6.3 million in SBA 7(a) loans, compared to no gain on SBA 7(a) loan sales in the prior quarter. In the prior quarter, we recorded a loss on sale of available-for-sale debt securities of $1.0 million in order to redeploy the proceeds into higher-yielding available-for-sale debt securities, for which there was no comparable transaction during the three months ended March 31, 2024.

Current wording

Total noninterest income during the three months ended June 30, 2024 was $1.2 million, a decrease of $244 thousand compared to total noninterest income of $1.4 million in the prior quarter. During the three months ended June 30, 2024, there were no gains on sale of SBA loans, compared to a gain on sale of loans of $415 thousand, at an average premium of 6.56%, on the sale of $6.3 million in SBA 7(a) loans in the prior quarter.

Previous wording

Total noninterest income during the three months ended March 31, 2024 was $1.4 million, a decrease of $157 thousand compared to total noninterest income of $1.6 million for the same 2023 period. The decrease was due primarily to lower gain on sale of loans, partially offset by higher deposit-related fees, and higher other charges and fees.

Current wording

Total noninterest income during the three months ended June 30, 2024 was $1.2 million, an increase of $73 thousand compared to total noninterest income of $1.1 million for the same 2023 period. The increase was due primarily to higher deposit-related fees and higher other charges and fees, partially offset by lower gain on sale of loans.

Previous wording

Service charges and fees on deposit accounts was $362 thousand, an increase of $100 thousand, compared to $262 thousand for the same 2023 period. The increase was primarily due to higher analysis charges for certain deposit accounts.

Current wording

Service charges and fees on deposit accounts was $378 thousand, an increase of $45 thousand, compared to $333 thousand for the same 2023 period. The increase was primarily due to higher analysis charges for certain deposit accounts.

Previous wording

Other charges and fees during the three months ended March 31, 2024 was $139 thousand, an increase of $114 thousand compared to $25 thousand for the same 2023 period. The increase was due primarily to a higher OREO income in the current quarter. There was no OREO income for the same 2023 period.

Current wording

Other charges and fees during the three months ended June 30, 2024 was $359 thousand, an increase of $223 thousand compared to $136 thousand for the same 2023 period. The increase was due primarily to a higher income on equity investments and higher OREO income in the current quarter. There was no OREO income for the same 2023 period.

Previous wording

Gain on sale of loans was $415 thousand during the three months ended March 31, 2024, compared to a gain of $808 thousand for the same 2023 period. The $393 thousand decrease was primarily due to lower average premium on sales of SBA 7(a) loans during the three months ended March 31, 2024. There were six SBA 7(a) loan sales during the three months ended March 31, 2024, compared to seven SBA loans sold with a net carrying value of $9.9 million, resulting in a gain of $797 thousand, at an average premium of 8.04% and one non-SBA loan with a net carrying value of $39 thousand, resulting in a gain of $11 thousand during the three months ended March 31, 2023.

Current wording

Gain on sale of loans was $415 thousand during the six months ended June 30, 2024, compared to $885 thousand for the same 2023 period. The $470 thousand decrease was primarily due to fewer SBA 7(a) loan sales during the six months ended June 30, 2024. During the six months ended June 30, 2024, loan sales related to six SBA loans with a net carrying value of $6.3 million, resulted in a gain of $415 thousand, at an average premium of 6.56% and two non-SBA loans with a net carrying value of $455 thousand, resulting in no gain or loss. In the same 2023 period, we sold nine SBA 7(a) loans with a net carrying value of $10.9 million, resulting in a gain on sale of $874 thousand at an average premium of 8.01%, and one non-SBA loan with a net carrying value of $39 thousand, resulting in a gain of $11 thousand.

Previous wording

Merger and related expenses were $549 thousand during the three months ended March 31, 2024 related to the recently announced merger with California BanCorp, which is expected to be completed later this year. There were no merger and related expenses in the prior quarter.

Current wording

Merger and related expenses were $491 thousand during the three months ended June 30, 2024 related to the recently completed merger with California BanCorp, which closed on July 31, 2024. There were $549 thousand in merger and related expenses in the prior quarter.

Previous wording

Our efficiency ratio for the three months ended March 31, 2024 was 68.4%, compared to 68.3% for the three months ended December 31, 2023. Excluding the merger and related expenses of $549 thousand, the efficiency ratio for the three months ended March 31, 2024 would have been 65.9%.

Current wording

Our efficiency ratio (non-GAAP) for the three months ended June 30, 2024 was 85.7%, compared to 68.4% for the three months ended March 31, 2024. Excluding the loss on sale of OREO, the efficiency ratio (non-GAAP) for the second quarter of 2024 would have been 64.1%. Excluding the merger and related expenses of $491 thousand, the efficiency ratio (non-GAAP) for the three months ended June 30, 2024 would have been 83.5%.

Previous wording

Total noninterest expense during the three months ended March 31, 2024 was $15.0 million, a decrease of $38 thousand compared with total noninterest expense of $15.0 million for the same 2023 period. The decrease was primarily due to decreases in salaries and employee benefits, legal, audit and professional costs, partially offset by increases in merger and related expenses, and other expenses.

Current wording

Total noninterest expense during the three months ended June 30, 2024 was $19.0 million, an increase of $4.4 million compared with total noninterest expense of $14.6 million for the same 2023 period. The increase was primarily due to increase in merger and related expenses, other real estate owned expenses, and other expenses, partially offset by decreases in salaries and employee benefits, legal, audit and professional costs.

Previous wording

units of $632 thousand recorded during the three months ended March 31, 2023. There were no accelerated stock compensation related expenses for the three months ended March 31, 2024.

Current wording

Salaries and employee benefits were $8.8 million during the three months ended June 30, 2024, compared to $9.7 million for the same 2023 period. The $898 thousand decrease in salaries and benefits was driven primarily by a decrease in salary and employee benefits from reduced staffing levels and lower incentive accruals, partially offset by a decrease in the deferred loan origination costs resulting from decline in loan growth during the three months ended June 30, 2024. There were no accelerated stock compensation related expenses for the three months ended June 30, 2024 and 2023.

Previous wording

Legal, audit and professional expenses were $516 thousand during the three months ended March 31, 2024, compared to $785 thousand for the same 2023 period. The $269 thousand decrease was due primarily to a decrease in legal expenses related to the higher legal expenses associated with preparation for the Company's listing to Nasdaq during the three months ended March 31, 2023.

Current wording

Legal, audit and professional expenses were $557 thousand during the three months ended June 30, 2024, compared to $667 thousand for the same 2023 period. The $110 thousand decrease was due primarily to the higher costs associated with completion of the Company's listing to Nasdaq during the three months ended June 30, 2023.

Previous wording

There were $549 thousand merger and related expenses during the three months ended March 31, 2024, related to the recently announced merger with California BanCorp, which is expected to be completed later this year. There were no merger and related expenses during the three months ended March 31, 2023.

Current wording

There were $491 thousand merger and related expenses during the three months ended June 30, 2024, related to the recently completed merger with California BanCorp, which closed on July 31, 2024. There were no merger and related expenses during the three months ended June 30, 2023.