Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and consolidated results of operations should be read in conjunction with our consolidated financial statements and related notes. Historical consolidated results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or consolidated results of operations for any future periods. We are a bank holding company and we conduct all our material business operations through the Bank. As a result, the discussion and analysis below primarily relate to activities conducted at the Bank level.
Overview
California BanCorp, formerly known 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").
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 the state of 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. In addition, we are a participant in the Certificate of Deposit Account Registry Service ("CDARS"), IntraFi Network Insured Cash Sweep ("ICS"), and Reich & Tang Deposit Solutions ("R&T") networks. We receive an equal dollar amount of deposits ("reciprocal deposits") from other participating banks in exchange for the deposits we place into the networks to fully qualify large customer deposits for FDIC insurance. We also provide treasury management services including online banking, cash vault, sweep accounts and lock box services.
Recent Developments
Merger with the former California BanCorp ("CALB")
On July 31, 2024, we completed its all-stock merger with CALB on the terms set forth in the Agreement and Plan of Merger and Reorganization, dated January 30, 2024, by and between us and CALB. At July 31, 2024, CALB had total loans of $1.43 billion, total assets of $1.91 billion, and total deposits of $1.64 billion. Immediately following the merger of CALB with and into the Company, California Bank of Commerce, a California state-chartered bank and wholly-owned subsidiary of CALB, merged with and into the Bank. Effective with these mergers, the corporate names of Southern California Bancorp and Bank of Southern California, N.A. were changed to California BanCorp and California Bank of Commerce, N.A., respectively. The merger expands the Company's footprint into Northern California and provides an opportunity for building scale and increasing market share through complementary business models with a strong deposit base. The combined company retained all banking offices of both banks, adding CALB's one full-service bank branch and its four loan production offices in Northern California to the Bank's 13 full-service bank branches located throughout the Southern California region for a total of 14 Bank branches.
Under the terms of the Agreement and Plan of Merger and Reorganization, each outstanding share of CALB common stock was exchanged for the right to receive 1.590 shares of the Company's common stock, resulting in the net issuance of approximately 13,579,454 shares, with cash (without interest) paid in lieu of fractional shares and repurchase of shares for settlement of accelerated restricted stock units. Refer to Note 2 - Business Combinationsof the Notes to Consolidated Financial Statements included in Item 8 of this annual report for more information regarding business combinations and related activity.
Southern California Wildfires
Early in the first quarter of 2025, several neighborhoods adjacent to Los Angeles were engulfed by wildfires fed by unusually strong Santa Ana winds. The Palisades and Eaton fires were the most damaging of these wildfires, destroying an estimated 12,000 structures between them. We are working with all our constituents to provide assistance during this difficult period, supporting clients and employees affected by the fires, as well as donating money to relief funds and providing volunteer assistance to them. The fires are expected to have a minimal impact on our loan portfolio.
Impact of Changes in Federal Fund Interest Rate on the Economy and Banking Industry
Between March 2022 and September 2023, the Federal Reserve raised interest rates 11 times by an aggregate of 525 basis points, to a range between 5.25% and 5.50%, the highest level in 22 years, in response to an increase in inflation that saw the Consumer Price Index rise to 9.1% in July 2022, which has since moderated to 3.0% in February 2025. At its September 2024 meeting, the Federal Reserve reduced the federal funds interest rate by 50 basis points, followed by two additional 25 basis point reductions in November and December 2024, for a total decrease of 100 basis points in 2024, ending the year in a range of 4.25% to 4.50%.
Concerns regarding a potential recession have moderated with the full year advance estimate for 2024 U.S. GDP reported at 2.8%, slowing to 2.3% in the fourth quarter of 2024, with Moody's full-year baseline 2025 GDP growth forecast estimate at 2.3%. California's 2024 GDP increased by 3.4% from 2023 and is forecast by Moody's to decrease to 1.6% in 2025. Despite the anticipated slowdown in California, it is still considered to have the fifth largest economy in the world; however, higher 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 and further layoffs are expected. The U.S. Bureau of Labor Statistics reports California's December 2024 unemployment rate at 5.5%; it has been in a range between 5.0% and 5.5% since September 2023.
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, coupled with the Federal Reserve's initiation of reductions to the federal funds interest rate.
In remarks deliveredat the 2025 U.S. Monetary Policy Forum in New York City Fed Chairman Jerome Powell said that the U.S. economy remains in a good place. However, policymakers are holding steady as they wait for greater clarity on the effects of the Trump administration's numerous policy changes on the economy; officials are carefully monitoring the effects of the new administration's policy changes in regard to trade, immigration, fiscal policy, and regulation. Uncertainty around such changes and their likely economic impacts remains high. The Chairman believes that the Fed doesn't need to move quickly to adjust policy in response yet, but the net effect of these policy changes will matter for the economy and the path of monetary policy. They may also impact financial institutions.
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 business banking model is founded on strong, ongoing relationships with our commercial clients, which represent a broad variety of industries. 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.
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 December 31, 2024, our concentration of such loans represented 459% of our total risk-based capital. In addition, at December 31, 2024, total loans secured by commercial real estate under construction and land development represented 46% of our total risk-based capital. The non-performing loans for these segments per the regulatory definition of commercial real estate loans at December 31, 2024 were $18.6 million and there were $2.5 million in net charge-offs during the year ended December 31, 2024. At December 31, 2024, our only OREO, carried at $4.1 million,was from a multifamily nonaccrual loan we foreclosed in 2024.
Given the nature of our commercial banking business, approximately 46% of our total deposits exceeded the FDIC deposit insurance limits at December 31, 2024. However, we offer our deposit customers access to the Certificate of Deposit Account Registry Service ("CDARS"), IntraFi Network Insured Cash Sweep ("ICS"), and Reich & Tang Deposit Solutions ("R&T") networks. We receive an equal dollar amount of reciprocal deposits from other participating banks in exchange for the deposits we place into the networks to fully qualify large customer deposits for FDIC insurance. These reciprocal deposits allow 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. These reciprocal deposits are not required to be treated as brokered deposits up to the lesser of 20% of the Bank's total liabilities or $5 billion. Our total reciprocal deposits increased to $754.4 million, representing 22.2% of total deposits and 21.8% of Bank's total liabilities at December 31, 2024, compared to $274.1 million, or 14% of total deposits at December 31, 2023. The excess over 20% increased our wholesale funding to total assets ratio and net non core funding dependence ratio. These two ratios are within the Bank's internal policy limit. In connection with the Merger, the Company acquired $442.7 million in fair value of reciprocal deposits, which included $98.4 million in ICS, $306.6 million in R&T and $37.7 in CDARS.
At December 31, 2024, our liquidity position remained strong, with the following financial balances (unaudited), compared to December 31, 2023:
•Total cash and cash equivalents of approximately $388.2 million, compared to $86.8 million.
•Total liquidity ratio of approximately 15.7%, compared to 11.1%.
•Unpledged, liquid securities at fair value were approximately $129.4 million, compared to $130.0 million.
•Available borrowing capacity from the Federal Home Loan Bank ("FHLB") secured lines of credit of approximately $753.9 million, compared to $339.2 million. At December 31, 2024, there were no overnight FHLB borrowings.
•Available borrowing capacity from the Federal Reserve Discount Window program was approximately $318.5 million, compared to $141.6 million. There were no outstanding borrowings under this program at December 31, 2024.
•Available borrowing capacity from four unsecured credit lines from correspondent banks totaling $90.5 million, compared to three unsecured credit lines from correspondent banks totaling $75.0 million. There were no outstanding borrowings on these lines at December 31, 2024.
•Total available borrowing capacity was approximately $1.16 billion at December 31, 2024, compared to $555.8 million.
•Total available liquidity was approximately $1.68 billion at December 31, 2024, compared to $772.6 million at December 31, 2023.
We continue to monitor macroeconomic variables related to increasing interest rates, inflation, and concerns regarding an economic downturn and its potential effects on our business, customers, employees, communities and markets. The following challenges could have an impact on our business, consolidated financial condition or near- or longer-term consolidated results of operations:
•Slower loan growth and declining deposits;
•Difficulty retaining and attracting deposit relationships;
•Credit quality deterioration of our loan portfolio resulting in additional provision for credit losses and charge-offs;
•Margin pressure in response to potential further rate cuts by the Federal Reserve;
•Merger cost savings being less than anticipated;
•Liquidity stresses to maintain sufficient levels of high-quality liquid assets and access to borrowing lines.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America ("GAAP") and conform to general practices within the financial services industry, the most significant of which are described in Note 1 - Basis of Presentation and Summary of Significant Accounting Policiesof the Notes to Consolidated Financial Statements included in Item 8 of this annual report.
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. While we base these estimates, assumptions and judgments on historical experience, current information available and other factors deemed to be relevant, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.
Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. The following is a discussion of these critical accounting policies and significant estimates that require us to make complex and subjective judgments.
On January 1, 2023, we adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments(Topic 326), which replaces the incurred loss impairment methodology with a methodology that reflects current expected credit losses ("CECL") and requires consideration of historical experience, current conditions and reasonable and supportable forecasts to estimate expected credit losses for financial assets held at the reporting date. The measurement of expected credit losses under the CECL is applicable to financial assets measured at amortized cost, including loans, held-to-maturity debt securities
and off-balance sheet credit exposures. ASU 2016-13 also requires credit losses on available-for-sale debt securities be measured through an allowance for credit losses. If the measurement indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses ("ACL") is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. In addition, ASU 2016-13 modifies the other-than-temporary impairment ("OTTI") model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. We elected to account for accrued interest receivable separately from the amortized cost of loans and investment securities. We elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital over a three-year transition period.
Concurrent with the adoption of ASU 2016-13, we adopted ASU 2022-02, Financial Instruments-Credit Losses(Topic 326) Troubled Debt Restructurings ("TDR") and Vintage Disclosures, which eliminated TDR accounting prospectively for all loan modifications occurring on or after January 1, 2023 and added additional disclosure requirements for current period gross charge-offs by year of origination. It also prescribes guidance for reporting modifications for certain loan re-financings and restructurings made to borrowers experiencing financial difficulty. Loans that were considered a TDR prior to the adoption of ASU 2022-02 will continue to be accounted for under the superseded TDR accounting guidance until the loan is paid off, liquidated, or subsequently modified.
Please also see Significant Accounting Polices under Note 1 - Basis of Presentation and Summary of Significant Accounting Policiesof the Notes to Consolidated Financial Statements included in Item 8 of this annual report for additional information.
Allowance for Credit Losses - Loans
The ACL on loans is our estimate of expected lifetime credit losses for our loans held for investment at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio. The ACL consists of: (i) a specific allowance established for current expected credit losses on loans individually evaluated, (ii) a quantitative allowance for current expected credit losses based on the portfolio and expected economic conditions over a reasonable and supportable forecast period that reverts back to long-term trends to cover the expected life of the loan, (iii) a qualitative allowance including management's judgment to capture factors and trends that are not adequately reflected in the quantitative allowance, and (iv) the ACL for off-balance sheet credit exposure for unfunded loan commitments (described in Allowance for Credit Losses - Off-Balance Sheet Credit Exposure).
The ACL on loans held for investment represents the portion of the loans' amortized cost basis that we do not expect to collect due to anticipated credit losses over the loans' contractual life. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. Provision for credit losses for loans held for investment is included in provision for credit losses in the consolidated statements of income. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Subsequent recoveries, if any, are credited to the ACL. Credit losses are not estimated for accrued interest receivable, as interest that is deemed uncollectible is written off through interest income.
Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. Pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually. We measure the ACL on loans using a discounted cash flow
methodology, which utilizes pool-level assumptions and cash flow projections on an individual loan basis, which is then aggregated at the portfolio segment level and supplemented by a qualitative reserve that is applied to each portfolio segment level.
The Company's loan portfolio consists of the following segments, based on regulatory call codes and related risk ratings:
•Construction and land development
•Real estate
◦1-4 family residential
◦Multifamily residential
◦Commercial real estate and other
•Commercial and industrial
•Consumer
Construction and land development loans are typically adjustable rate residential and commercial construction loans to builders, developers and consumers, with terms generally limited to 12 to 36 months. These loans generally require payment in full upon the sale or refinance of the property. Construction and development loans generally carry a higher degree of risk because repayment depends on the ultimate completion of the project and usually on the subsequent sale or refinance of the property, unless the project is user-owned, which would then convert to a conventional term loan. Specific material risks may include (i) unforeseen delays in the building of the project, (ii) cost overruns or inadequate contingency reserves, (iii) poor management of construction process, (iv) inferior or improper construction techniques, (v) changes in the economic environment during the construction period, (vi) a downturn in the real estate market, (vii) rising interest rates which may impact the sale of the property and its price, and (viii) failure to sell or stabilize completed projects in a timely manner. The Company attempts to reduce risks associated with construction and land development loans by obtaining personal guarantees and by keeping the maximum loan-to-value ("LTV") ratio at or below 75%, depending on the project type. Many of the construction and land development loans include interest reserves built into the loan commitment. For owner-occupied commercial construction loans, periodic cash payments for interest are required from the borrower's cash flow.
Real estate loans are secured by single family residential properties (one to four units), multifamily residential properties (five or more units), owner-occupied commercial real estate ("CRE"), and non-owner occupied CRE. Real estate loans are subject to the same general risks as other loans and may also be impacted by changing demographics, collateral maintenance, and product supply and demand. Rising interest rates, as well as other factors arising after a loan has been made, could negatively affect not only property values but also a borrower's cash flow, creditworthiness, and ability to repay the loan. Increasing interest rates can impact real estate values as rising rates generally cause a similar movement in capitalization rates which can cause real estate collateral values to decline. The Company usually obtains a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. The Company does not underwrite closed-end term consumer loans secured by a borrower's residence. Junior liens may be considered in connection with a consumer home equity line of credit ("HELOC"), or as additional collateral support for SBA and other business loans.
The Company's commercial and industrial ("C&I") loans are generally made to businesses located in the California and surrounding communities. These loans are made to finance operations, to provide working capital, or for specific purposes such as to finance the purchase of assets or equipment or to finance accounts receivable and inventory. The Company's C&I loans may be secured (other than by real estate) or unsecured. They may take the form of single payment, installment, or lines of credit. These are generally based on the financial strength and integrity of the borrower and guarantor(s) and generally (with some exceptions) are collateralized by short-term assets such as accounts receivable, inventory,
equipment, or a borrower's other business assets. Commercial term loans are typically made to provide working capital to finance the acquisition of fixed assets, refinance short-term debt originally used to purchase fixed assets or, in rare cases, to finance the purchase of businesses.
Consumer loans consist of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Also included in our consumer loan portfolio are consumer solar panel loans that were acquired as part of the merger with CALB. They consist of residential solar panel loans to consumers with an average individual term ranging from 10 to 20 years and are primarily collateralized by the related equipment. The remaining average term ranges from 6 to 23 years. Consumer loans are underwritten based on the borrower's income, current debt level, past credit history, and the availability and value of collateral. Consumer rates are both fixed and variable, with negotiable terms. The Company's installment loans typically amortize over periods up to 5 years. Although the Company typically requires monthly payments of interest and a portion of the principal on its loan products, the Company will offer consumer loans with a single maturity date when a specific source of repayment is available. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.
Our ACL model incorporates assumptions for prepayment/curtailment rates, probability of default ("PD"), and loss given default ("LGD") to project each loan's cash flow throughout its entire life cycle. An initial reserve amount is determined based on the difference between the amortized cost basis of each loan and the present value of all future cash flows. The initial reserve amount is then aggregated at the loan segment level to derive the segment level quantitative loss rates. For prepayment and curtailment rate, the Company utilized Abrigo's benchmark since the adoption on January 1, 2023 through the second quarter of 2023 and switched to the Company's own historical prepayment and curtailment experience beginning in the third quarter of 2023. Quarterly PD is forecasted using a regression model that incorporates certain economic variables as inputs. The LGD is derived from PD using the Frye-Jacobs index provided by our third-party model provider. Reasonable and supportable forecasts are used to predict current and future economic conditions. Management elected to use a four quarter reasonable and supportable forecast period followed by an eight quarter straight-line reversion period. After twelve quarters of forecast plus reversion period, the PD is assumed to remain unchanged for the remaining life of the loan.
We use numerous key macroeconomic variables within the economic forecast scenarios from Moody's Analytics. These economic forecast scenarios are based on past events, current conditions, and the likelihood of future events occurring. These scenarios include a baseline forecast which represents their best estimate of future economic activity. Moody's Analytics also provides nine alternative scenarios, including five direct variations of the baseline scenario and four more extensive departures from their baseline forecast, including a slower growth, a stagflation, a next cycle recession and a low oil price scenario. Management recognizes the non-linearity of credit losses relative to economic performance and believes the use of multiple probability-weighted economic scenarios is appropriate in estimating credit losses over the forecast period. This approach is based on certain assumptions. The first assumption is that no single forecast of the economy, however detailed or complex, is completely accurate over a reasonable forecast timeframe and is subject to revisions over time. By considering multiple scenarios, management believes some of the uncertainty associated with a single scenario approach can be mitigated. Management periodically evaluates economic scenarios, determines whether to utilize multiple probability-weighted scenarios in our ACL model, and, if multiple scenarios are utilized, evaluates and determines the weighting for each scenario used in our ACL model, and thus the scenarios and weightings of each scenario may change in future periods. Economic scenarios as well as assumptions within those scenarios can vary based on changes in current and expected economic conditions.
The ACL process involves subjective and complex judgments and is reflective of significant uncertainties that could potentially result in materially different results under different assumptions and
conditions. In addition to the aforementioned quantitative model, management periodically considers the need for qualitative adjustments to the ACL. Such qualitative adjustments may be related to and include, but are not limited to, factors such as: differences in segment-specific risk characteristics, periods wherein current conditions and reasonable and supportable forecasts of economic conditions differ from the conditions that existed at the time of the estimated loss calculation, model limitations and management's overall assessment of the adequacy of the ACL. Qualitative risk factors are periodically evaluated by management.
Generally, the measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. Loans that do not share similar risk characteristics are evaluated individually for credit loss and are not included in the evaluation process discussed above. Expected credit losses on all individually evaluated loans are measured, primarily through the evaluation of estimated cash flows expected to be collected, or collateral values measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. We select the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the net realizable value of the collateral. Cash receipts on individually evaluated loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income. Prior to the adoption of ASC Topic 326, individually evaluated loans were referred to as impaired loans. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each loan segment.
Allowance for Credit Losses - Acquired Loans
In accordance with ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), loans purchased or acquired in connection with a business combination are recorded at their acquisition date fair value. Any resulting discount or premium recorded on acquired loans is accreted or amortized into interest income over the remaining life of the loans using the interest method. The ACL related to the acquired loan portfolio is not carried over from the acquiree. Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated ("PCD") loans, or loans with no evidence of credit deterioration ("non-PCD").
PCD loans are those loans or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. For PCD loans, an initial allowance is established on the acquisition date using the same methodology as other loans held for investment and combined with the fair value of the loan to arrive at acquisition date amortized cost. Accordingly, no provision for credit losses is recognized on PCD loans at the acquisition date. Subsequent to the acquisition date, changes to the allowance are recognized in the provision for credit losses. The Company measures ACL for PCD loans using a loss-rate method in conjunction with the PD/LGD framework.
Non-PCD loans are those loans for which there was no evidence of a more-than-insignificant credit deterioration at their acquisition date. Acquired non-PCD loans, together with originated loans held for investment that share similar risk characteristics, are pooled into segments together. Upon the purchase or acquisition of non-PCD loans, the Company measures and records an ACL based on the Company's methodology for determining the ACL for its originated loans held for investment. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance sheet commitments. Beginning January 1, 2023, management estimates anticipated losses using expected loss factors consistent with those used for the ACL methodology for loans described above, and utilization assumptions based on historical experience. Provision for credit losses for off-balance sheet commitments
is included in provision for (reversal of) credit losses in the consolidated statements of operations and added to the allowance for off-balance sheet commitments, which is included in accrued interest payable and other liabilities in the consolidated balance sheets.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting under ASC Topic 805 - Business Combinations. Under the acquisition method, identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination are measured at fair value on the acquisition date. The excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date is recognized as goodwill.
The estimates used to determine the fair values of assets and liabilities acquired in a business combination can be complex and require judgment. For example, we utilize a discounted cash flow approach to measure the fair value of core deposit intangible assets acquired in business combinations. This approach requires us to apply a number of critical estimates that include, but are not limited to, future expected cash flows from depositor relationships, expected "decay" rates, and the determination of discount rates. These critical estimates are difficult to predict and may result in impairment charges in future periods if actual results materially differ from those initially estimated.
Non-GAAP Financial Measures
This filing contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. We believe the presentation of certain non-GAAP financial measures provides information useful to assess our consolidated financial condition and consolidated results of operations and to assist investors in evaluating our consolidated financial results relative to our peers. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors and others with information that we use to manage the business each period. Because not all companies use identical calculations, the presentation of these non-GAAP financial measures may not be comparable to other similarly titled measures used by other companies. These non-GAAP measures should be taken together with the corresponding GAAP measures and should not be considered a substitute of the GAAP measures.
(1)Efficiency ratio is computed by dividing noninterest expense by total net interest income and noninterest income. We measure our success and the productivity of our operations through monitoring of the efficiency ratio. Adjusted noninterest expense is computed by adjusting noninterest expense for merger related expense for the period indicated. Adjusted efficiency ratio is computed by dividing adjusted noninterest expense by total net interest income and noninterest income.
(2)Pre-tax pre-provision income is computed by adding net interest income and noninterest income and subtracting noninterest expense. This non-GAAP financial measure provides a greater understanding of pre-tax profitability before giving effect to credit loss expense. Adjusted pre-tax pre-provision income is computed by adding net interest income and noninterest income and subtracting adjusted noninterest expense.
(3)Adjusted net income is computed by adjusting net income for the tax-effected one-time initial provision for credit losses related to non-PCD loans and unfunded loan commitments and tax-effected merger related expense adjustments for the periods indicated.
(4)Average tangible common equity is computed by subtracting average goodwill and net average intangible assets from average shareholders' equity.
(5)Adjusted return on average assets is computed by dividing annualized adjusted net income by average assets. Adjusted return on average equity is computed by dividing adjusted net income by average shareholders' equity.
(6)Return on average tangible common equity is computed by dividing net income by average tangible common equity. Adjusted return on average tangible common equity is computed by dividing adjusted net income by average tangible common equity.
(7)Tangible common equity and tangible assets are computed by subtracting goodwill and intangible assets, net from total shareholders' equity and total assets, respectively.
(8)Tangible common equity to tangible assets ratio is computed by dividing tangible common equity by tangible assets.
(9)Tangible book value per share is computed by dividing tangible common equity by total common shares outstanding. We consider tangible book value per share a meaningful measure because it suggests what our common shareholders can expect to receive if we are in financial distress and are forced to liquidate our assets at the book value price. Intangible assets like goodwill are not a part of the process since they cannot be sold for cash during liquidation.
We consider average tangible common equity, tangible common equity, and the tangible common equity to tangible asset ratio as useful additional methods to evaluate our capital utilization and adequacy to withstand unexpected market conditions. These ratios differ from the regulatory capital ratios principally in that the numerator excludes goodwill and other intangible assets.
The following tables present a reconciliation of non-GAAP financial measures to GAAP measures for the periods indicated:
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For the Year Ended December 31,
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(dollars in thousands)
|
2024 | 2023 | ||||||||||||
| Efficiency Ratio | ||||||||||||||
| Noninterest expense | $ | 97,791 | $ | 59,746 | ||||||||||
| Less: Merger and related expenses | 16,288 | - | ||||||||||||
| Adjusted noninterest expense | $ | 81,503 | $ | 59,746 | ||||||||||
| Net interest income | 122,984 | 94,138 | ||||||||||||
| Noninterest income | 4,760 | 3,379 | ||||||||||||
| Total net interest income and noninterest income | $ | 127,744 | $ | 97,517 | ||||||||||
| (1) Efficiency ratio (non-GAAP) | 76.6 | % | 61.3 | % | ||||||||||
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(1) Adjusted efficiency ratio (non-GAAP)
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63.8 | % | 61.3 | % | ||||||||||
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Pre-tax Pre-provision Income
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||||||||||||||
| Net interest income | $ | 122,984 | $ | 94,138 | ||||||||||
| Noninterest income | 4,760 | 3,379 | ||||||||||||
| Total net interest income and noninterest income | 127,744 | 97,517 | ||||||||||||
| Less: Noninterest expense | 97,791 | 59,746 | ||||||||||||
| (2) Pre-tax pre-provision income (non-GAAP) | $ | 29,953 | $ | 37,771 | ||||||||||
| Add: Merger and related expenses | 16,288 | - | ||||||||||||
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(2) Adjusted pre-tax pre-provision income (non-GAAP)
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$ | 46,241 | $ | 37,771 | ||||||||||
| Return on Average Assets, Equity, and Tangible Equity | ||||||||||||||
| Net income | $ | 5,433 | $ | 25,910 | ||||||||||
|
Add: After-tax Day1 provision for non PCD loans and unfunded loan commitments (1)
|
14,978 | - | ||||||||||||
|
Add: After-tax merger and related expenses (1)
|
11,988 | - | ||||||||||||
|
(3) Adjusted net income (non-GAAP)
|
$ | 32,399 | $ | 25,910 | ||||||||||
| Average assets | $ | 3,095,916 | $ | 2,306,233 | ||||||||||
| Average shareholders' equity | 379,816 | 273,346 | ||||||||||||
| Less: Average intangible assets | 79,564 | 39,195 | ||||||||||||
|
(4) Average tangible common equity (non-GAAP)
|
$ | 300,252 | $ | 234,151 | ||||||||||
| Return on average assets | 0.18 | % | 1.12 | % | ||||||||||
|
(5) Adjusted return on average assets (non-GAAP)
|
1.05 | % | 1.12 | % | ||||||||||
| Return on average equity | 1.43 | % | 9.48 | % | ||||||||||
|
(5) Adjusted return on average equity (non-GAAP)
|
8.53 | % | 9.48 | % | ||||||||||
|
(6) Return on average tangible common equity (non-GAAP)
|
1.81 | % | 11.07 | % | ||||||||||
|
(6) Adjusted return on average tangible common equity (non-GAAP)
|
10.79 | % | 11.07 | % | ||||||||||
(1)After-tax Day 1 provision for non-PCD loans and unfunded loan commitments and merger and related expenses are presented using a 29.56% tax rate.
| December 31, | ||||||||||||||
| (dollars in thousands, except per share amounts) | 2024 | 2023 | ||||||||||||
| Tangible Common Equity Ratio/Tangible Book Value Per Share | ||||||||||||||
| Shareholders' equity | $ | 511,836 | $ | 288,152 | ||||||||||
| Less: Intangible assets | 134,058 | 38,998 | ||||||||||||
|
(7) Tangible common equity (non-GAAP)
|
$ | 377,778 | $ | 249,154 | ||||||||||
| Total assets | $ | 4,031,654 | $ | 2,360,252 | ||||||||||
| Less: Intangible assets | 134,058 | 38,998 | ||||||||||||
|
(7) Tangible assets (non-GAAP)
|
$ | 3,897,596 | $ | 2,321,254 | ||||||||||
| Equity to asset ratio | 12.70 | % | 12.21 | % | ||||||||||
|
(8) Tangible common equity to tangible asset ratio (non-GAAP)
|
9.69 | % | 10.73 | % | ||||||||||
| Book value per share | $ | 15.86 | $ | 15.69 | ||||||||||
|
(9) Tangible book value per share (non-GAAP)
|
$ | 11.71 | $ | 13.56 | ||||||||||
| Shares outstanding | 32,265,935 | 18,369,115 | ||||||||||||
Financial Highlights
The following table sets forth certain of our financial highlights as of and for each of the years presented. This data should be read in conjunction with our consolidated financial statements and related notes included herein at Item 8 of this annual report.
|
Year Ended December 31,
|
|||||||||||
| ($ in thousands except share and per share data) | 2024 | 2023 | |||||||||
| EARNINGS | |||||||||||
| Net interest income | $ | 122,984 | $ | 94,138 | |||||||
|
Provision for credit losses
|
$ | 21,690 | $ | 915 | |||||||
| Noninterest income | $ | 4,760 | $ | 3,379 | |||||||
| Noninterest expense | $ | 97,791 | $ | 59,746 | |||||||
| Income tax expense | $ | 2,830 | $ | 10,946 | |||||||
| Net income | $ | 5,433 | $ | 25,910 | |||||||
|
Pre-tax pre-provision income (1)
|
$ | 29,953 | $ | 37,771 | |||||||
|
Adjusted pre-tax pre-provision income (1)
|
$ | 46,241 | $ | 37,771 | |||||||
| Diluted earnings per share | $ | 0.22 | $ | 1.39 | |||||||
| Ending shares outstanding | 32,265,935 | 18,369,115 | |||||||||
| PERFORMANCE RATIOS | |||||||||||
| Return on average assets | 0.18 | % | 1.12 | % | |||||||
|
Adjusted return on average assets (1)
|
1.05 | % | 1.12 | % | |||||||
| Return on average common equity | 1.43 | % | 9.48 | % | |||||||
|
Adjusted return on average common equity (1)
|
8.53 | % | 9.48 | % | |||||||
| Yield on loans | 6.55 | % | 5.94 | % | |||||||
| Yield on earning assets | 6.26 | % | 5.69 | % | |||||||
| Cost of deposits | 2.01 | % | 1.37 | % | |||||||
| Cost of funds | 2.12 | % | 1.46 | % | |||||||
| Net interest margin | 4.28 | % | 4.33 | % | |||||||
|
Efficiency ratio (1)
|
76.6 | % | 61.3 | % | |||||||
|
Adjusted efficiency ratio (1)
|
63.8 | % | 61.3 | % | |||||||
| CAPITAL | |||||||||||
|
Tangible equity to tangible assets (1)
|
9.69 | % | 10.73 | % | |||||||
| Book value (BV) per common share | $ | 15.86 | $ | 15.69 | |||||||
|
Tangible BV per common share (1)
|
$ | 11.71 | $ | 13.56 | |||||||
| ASSET QUALITY | |||||||||||
| Allowance for loan losses (ALL) | $ | 50,540 | $ | 22,569 | |||||||
| Reserve for unfunded loan commitments | 3,103 | 933 | |||||||||
| Allowance for credit losses (ACL) | $ | 53,643 | $ | 23,502 | |||||||
|
ALL to nonperforming loans
|
190.5 | % | 173.6 | % | |||||||
| ALL to total loans | 1.61 | % | 1.15 | % | |||||||
|
ACL to total loans
|
1.71 | % | 1.20 | % | |||||||
|
Net charge-offs to average loans held-for-investment
|
(0.11) | % | (0.07) | % | |||||||
|
Year Ended December 31,
|
|||||||||||
| ($ in thousands except share and per share data) | 2024 | 2023 | |||||||||
| 30-89 days past due, excluding nonaccrual loans | $ | 12,082 | $ | 19 | |||||||
| Over 90 days past due, excluding nonaccrual loans | $ | 150 | $ | - | |||||||
| Special mention loans | $ | 69,339 | $ | 2,996 | |||||||
| Special mention loans to total loans held for investment | 2.21 | % | 0.15 | % | |||||||
| Substandard loans | $ | 117,598 | $ | 19,502 | |||||||
| Substandard loans to total loans held for investment | 3.75 | % | 1.00 | % | |||||||
| Nonperforming loans | $ | 26,536 | $ | 13,004 | |||||||
| Other real estate owned | 4,083 | - | |||||||||
|
Nonperforming assets
|
$ | 30,619 | $ | 13,004 | |||||||
| Nonperforming assets to total assets | 0.76 | % | 0.55 | % | |||||||
| END OF PERIOD BALANCES | |||||||||||
| Total loans, including loans held for sale | $ | 3,156,345 | $ | 1,964,791 | |||||||
| Total assets | $ | 4,031,654 | $ | 2,360,252 | |||||||
| Deposits | $ | 3,398,760 | $ | 1,943,556 | |||||||
| Loans to deposits | 92.9 | % | 101.1 | % | |||||||
| Shareholders' equity | $ | 511,836 | $ | 288,152 | |||||||
(1) Refer to Non-GAAP Financial Measures, included in the Management's Discussion and Analysis of Financial Condition and Results of Operations of this annual report.
Results of Operations
Impact of Merger on Earnings
The comparability of our financial information is affected by the merger with CALB. We completed this Merger on July31, 2024. This merger has been accounted for using the acquisition method of accounting and, accordingly, CALB's operating results have been included in the consolidated financial statements for periods beginning after July 31, 2024. Refer to Note 2 - Business Combinationsof the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Dataof this filing for more information regarding business combinations and related activity.
Net Income
Net income for the year ended December 31, 2024 was $5.4 million, or $0.22 per diluted share, compared to net income of $25.9 million, or $1.39 per diluted share in the prior year. The $20.5 million decrease in net income from the prior year was primarily due to a $20.8 million increase in the provision for credit losses, and a $38.0 million increase in noninterest expense, partially offset by a $28.8 million increase in net interest income and a $8.1 million decrease in income taxes. Excluding one-time CECL-related provision for credit losses on acquired non-PCD loans and unfunded loan commitments, and merger related expenses, the Company would have reported net income (non-GAAP) of $32.4 million, or $1.32 per diluted share, for the year ended December 31, 2024. Pre-tax, pre-provision income for the year ended December 31, 2024 was $30.0 million, a decrease of $7.8 million, or 20.7% compared to pre-tax, pre-provision income of $37.8 million for the year ended December 31, 2023.
Net Interest Income and Margin
Net interest income is our primary source of revenue, which is the difference between interest income on loans, debt securities and other investments (collectively, "interest-earning assets") and interest expense on deposits and borrowings (collectively, "interest-bearing liabilities"). Net interest margin represents net interest income expressed as a percentage of interest-earning assets. Net interest income is affected by changes in volume, mix, and rates of interest-earning assets and interest-bearing liabilities, as well as days in a period.
We closely monitor both total net interest income and the net interest margin and seek to maximize net interest income without exposing us to an excessive level of interest rate risk through our asset and liability management policies.
The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs for the years indicated:
| Year Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Average Balance | Income/Expense | Yield/Cost | Average Balance | Income/Expense | Yield/Cost | ||||||||||||||||||||||||||||||
| Assets | ($ in thousands) | ||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
|
Total loans(1)
|
$ | 2,443,127 | $ | 159,960 | 6.55 | % | $ | 1,918,443 | $ | 113,951 | 5.94 | % | |||||||||||||||||||||||
| Taxable debt securities | 136,984 | 5,827 | 4.25 | % | 107,021 | 3,497 | 3.27 | % | |||||||||||||||||||||||||||
|
Tax-exempt debt securities(2)
|
53,721 | 1,223 | 2.88 | % | 65,674 | 1,655 | 3.19 | % | |||||||||||||||||||||||||||
| Deposits in other financial institutions | 171,939 | 8,692 | 5.06 | % | 46,826 | 2,434 | 5.20 | % | |||||||||||||||||||||||||||
| Fed funds sold/resale agreements | 43,990 | 2,319 | 5.27 | % | 18,114 | 923 | 5.10 | % | |||||||||||||||||||||||||||
| Restricted stock investments and other bank stock | 22,137 | 1,777 | 8.03 | % | 15,930 | 1,062 | 6.67 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 2,871,898 | 179,798 | 6.26 | % | 2,172,008 | 123,522 | 5.69 | % | |||||||||||||||||||||||||||
| Total noninterest-earning assets | 224,018 | 134,225 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 3,095,916 | $ | 2,306,233 | |||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Interest-bearing NOW accounts | 492,140 | 10,644 | 2.16 | % | 308,537 | 5,161 | 1.67 | % | |||||||||||||||||||||||||||
| Money market and savings accounts | 910,426 | 26,685 | 2.93 | % | 673,176 | 15,000 | 2.23 | % | |||||||||||||||||||||||||||
| Time deposits | 324,249 | 15,432 | 4.76 | % | 180,219 | 6,704 | 3.72 | % | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,726,815 | 52,761 | 3.06 | % | 1,161,932 | 26,865 | 2.31 | % | |||||||||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||||||||||||||
| FHLB advances | 19,543 | 1,103 | 5.64 | % | 26,390 | 1,434 | 5.43 | % | |||||||||||||||||||||||||||
| Subordinated debt | 39,479 | 2,950 | 7.47 | % | 17,818 | 1,085 | 6.09 | % | |||||||||||||||||||||||||||
| Total borrowings | 59,022 | 4,053 | 6.87 | % | 44,208 | 2,519 | 5.70 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,785,837 | 56,814 | 3.18 | % | 1,206,140 | 29,384 | 2.44 | % | |||||||||||||||||||||||||||
| Noninterest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
|
Noninterest-bearing deposits(3)
|
893,586 | 801,882 | |||||||||||||||||||||||||||||||||
| Other liabilities | 36,677 | 24,865 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 379,816 | 273,346 | |||||||||||||||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 3,095,916 | $ | 2,306,233 | |||||||||||||||||||||||||||||||
| Net interest spread | 3.08 | % | 3.25 | % | |||||||||||||||||||||||||||||||
|
Net interest income and margin(4)
|
$ | 122,984 | 4.28 | % | $ | 94,138 | 4.33 | % | |||||||||||||||||||||||||||
|
Cost of deposits(5)
|
$2,620,401 | $52,761 | 2.01 | % | $1,963,814 | $26,865 | 1.37 | % | |||||||||||||||||||||||||||
|
Cost of funds(6)
|
$2,679,423 | $56,814 | 2.12 | % | $2,008,022 | $29,384 | 1.46 | % | |||||||||||||||||||||||||||
(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 discounts on acquired loans of $12.3 million and $2.0 million for the years ended December 31, 2024 and 2023, respectively.
(2)Tax-exempt debt securities yields are presented on a tax equivalent basis using a 21% tax rate.
(3)Average noninterest-bearing deposits represent 34.10%, and 40.83% of average total deposits for the years ended December 31, 2024 and 2023, respectively.
(4)Net interest income divided by average interest-earning assets.
(5)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of deposits is calculated as total interest expense on deposits divided by average total deposits.
(6)Total funding is the sum of total interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as total interest expense divided by average total funding.
Rate/Volume Analysis
The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to (i) changes in volume multiplied by the prior rate and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
Year Ended December 31, 2024 vs. 2023
|
|||||||||||||||||
| Increase (Decrease) Due to | |||||||||||||||||
| Volume | Rate | Net | |||||||||||||||
| Interest-earning assets: | ($ in thousands) | ||||||||||||||||
| Total loans | $ | 33,564 | $ | 12,445 | $ | 46,009 | |||||||||||
| Taxable debt securities | 1,120 | 1,210 | 2,330 | ||||||||||||||
| Tax-exempt debt securities | (242) | (190) | (432) | ||||||||||||||
| Deposits in other financial institutions | 6,327 | (69) | 6,258 | ||||||||||||||
| Fed fund sold/resale agreements | 1,363 | 33 | 1,396 | ||||||||||||||
| Restricted stock investments and other bank stock | 470 | 245 | 715 | ||||||||||||||
| Total interest-earning assets | 42,602 | 13,674 | 56,276 | ||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||
| Interest-bearing NOW accounts | 3,674 | 1,809 | 5,483 | ||||||||||||||
| Money market and savings accounts | 6,168 | 5,517 | 11,685 | ||||||||||||||
| Time deposits | 6,517 | 2,211 | 8,728 | ||||||||||||||
| Total interest-bearing deposits | 16,359 | 9,537 | 25,896 | ||||||||||||||
| Borrowings: | |||||||||||||||||
| FHLB advances | (385) | 54 | (331) | ||||||||||||||
|
Subordinated debt
|
1,571 | 294 | 1,865 | ||||||||||||||
| Total borrowings | 1,186 | 348 | 1,534 | ||||||||||||||
| Total interest-bearing liabilities | 17,545 | 9,885 | 27,430 | ||||||||||||||
| Net interest income | $ | 25,057 | $ | 3,789 | $ | 28,846 | |||||||||||
Net interest income for the year ended December 31, 2024 was $123.0 million, compared to $94.1 million for the year ended December 31, 2023. The increase was primarily due to a $56.3 million increase in total interest income, partially offset by a $27.4 million increase in total interest expense. The increase in interest income and interest expense primarily relates to increases in total average interest-earning assets and total average interest-bearing liabilities from the Merger during the third quarter of 2024, coupled with an increase in yields on interest-earnings assets and an increase in cost of funds. During the year ended December 31, 2024, total loan interest income increased $46.0 million, of which $10.4 million was related to accretion income from the net purchase accounting discounts on acquired loans, total debt securities income increased $1.9 million, and interest and dividend income from other financial institutions and other interest-earning assets increased $8.4 million. The increase in interest income was primarily driven by the higher average total interest-earning assets and the mix of interest-earning assets added by the Merger and the impact of the accretion and amortization of fair value marks. Average interest-earning assets increased $699.9 million, resulting from a $524.7 million increase in average total loans, an $18.0 million increase in total average debt securities, a $125.1 million increase in average deposits in other financial institutions, and a $25.9 million increase in average Fed funds sold/resale agreements.
During the year ended December 31, 2024, total interest expense increased by $27.4 million to $56.8 million, comprised primarily of a $25.9 million increase in interest expense on average interest-bearing deposits and a $1.5 million increase in interest expense on average total borrowings due to increases related to interest-bearing deposits and subordinated debt acquired from the Merger, coupled with the repricing of interest-bearing deposits in the higher interest rate environment and peer bank deposit competition over the first three quarters of 2024.
Net interest margin for the year ended December 31, 2024 was 4.28%, compared with 4.33% for the year ended December 31, 2023. The decrease was primarily related to a 66 basis point increase in the cost of funds, partially offset by a 57 basis point increase in the total interest-earning assets yield resulting from higher market interest rates and a change in our interest-earning asset mix. The yield on total interest-earning assets during the year ended December 31, 2024 was 6.26%, compared with 5.69% for the year ended December 31, 2023. The yield on average total loans during the year ended December 31, 2024 was 6.55%, a 61 basis point increase from 5.94% for the year ended December 31, 2023. The cost on total interest-bearing liabilities during the year ended December 31, 2024 was 3.18%, a 74 basis point increase from 2.44% for the year ended 2023. Accretion income from the net purchase accounting discounts on acquired loans was $10.4 million and the amortization expense impact on interest expense was $750 thousand, which increased the net interest margin by 34 basis points for the year ended December 31, 2024. Accretion income from the net purchase accounting discounts on acquired loans increased the yield on average total loans by 43 basis points for the year ended December 31, 2024.
Total cost of funds for the year ended December 31, 2024 was 2.12%, an increase of 66 basis points from 1.46% for the year ended December 31, 2023. The increase was primarily driven by a 75 basis point increase in the cost of interest-bearing deposits, coupled with an increase in average interest-bearing deposits. Average noninterest-bearing demand deposits increased $91.7 million to $893.6 million and represented 34.1% of total average deposits for the year ended December 31, 2024, compared with $801.9 million and 40.8%, respectively, for the year ended 2023; average interest-bearing deposits increased $564.9 million to $1.73 billion during the year ended December 31, 2024. The total cost of deposits for the year ended December 31, 2024 was 2.01%, up 64 basis points from 1.37% for the year ended 2023.
Average total borrowings increased $14.8 million to $59.0 million for the year ended December 31, 2024, resulting primarily from a $6.8 million decrease in average FHLB advances and a $21.7 million increase in subordinated debt from the $50.8 million in fair value of subordinated debt acquired in the Merger. The average cost of total borrowings was 6.87% for the year ended December 31, 2024, a 117 basis point increase from 5.70% for the year ended 2023.
Provision for Credit Losses
We recorded a provision for credit losses of $21.7 million for the year ended December 31, 2024, compared to $915 thousand for the year ended 2023. The provision for credit losses for the year ended December 31, 2024 included a $19.5 million provision for credit losses on loans held for investment largely due to the $18.5 million one-time initial provision for credit losses on acquired non-PCD loans, and a $2.2 million provision for credit losses on unfunded loan commitments primarily due to the $2.7 million initial provision for credit losses on unfunded commitments acquired in the Merger and the impact of higher unfunded loan commitments. The provision for credit losses for the year ended December 31, 2023 included a $1.7 million provision for credit losses on loans held for investment, partially offset by a $816 thousand reversal of credit provision for unfunded loan commitments.
Noninterest Income
The following table sets forth the various components of our noninterest income for the years indicated:
| Year Ended December 31, | ||||||||||||||
| (dollars in thousands) | 2024 | 2023 | ||||||||||||
| Service charges and fees on deposit accounts | $ | 2,106 | $ | 1,202 | ||||||||||
| Interchange and ATM income | 1,034 | 744 | ||||||||||||
|
(Loss) gain on sale of loans
|
(672) | 831 | ||||||||||||
| Income from bank-owned life insurance | 1,748 | 946 | ||||||||||||
| Servicing and related income on loans, net | 307 | 240 | ||||||||||||
|
Loss on sale of debt securities
|
- | (974) | ||||||||||||
| Loss on sale and disposal of fixed assets | (19) | - | ||||||||||||
| Other charges and fees | 256 | 390 | ||||||||||||
| Total noninterest income | $ | 4,760 | $ | 3,379 | ||||||||||
Total noninterest income during the year ended December 31, 2024 was $4.8 million, an increase of $1.4 million compared to total noninterest income of $3.4 million for the prior year. The increase was due primarily to increases in deposit-related fees, which include service charges and fees on deposit accounts and interchange and ATM income, bank owned life insurance income, partially offset by a valuation allowance on OREO and lower gains on sale of loans for the year ended December 31, 2024.
Deposit-related fees were $3.1 million during the year ended December 31, 2024, an increase of $1.2 million from $1.9 million for year ended 2023. The increase is attributed to a higher volume of transaction-based accounts and account balances as a result of the Merger; average demand deposit account balances increased to $893.6 million for the year ended December 31, 2024 from $801.9 million for the year ended 2023.
We recorded a loss on sale of loans of $672 thousand during the year ended December 31, 2024, compared to a gain of $831 thousand for the year ended 2023. The $1.5 million decrease was primarily due to a loss of $1.1 million, related to the sale of certain Sponsor Finance loans in the fourth quarter of 2024, coupled with fewer SBA 7(a) loan sales during the year ended December 31, 2024. During the year ended December 31, 2024, we sold six SBA loans with a net carrying value of $6.3 million, resulting in a gain of $415 thousand, at an average premium of 6.56%, offset by thirteen non-SBA loans with a net carrying value of $77.6 million, resulting in a $1.1 million loss. In 2023, 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.
Income from bank-owned life insurance was $1.7 million during the year ended December 31, 2024, compared to $946 thousand for the year ended 2023. The $802 thousand increase between periods primarily driven by the $26.3 million increase in bank-owned life insurance from the Merger and a $368 thousand death benefit income realized for the year ended December 31, 2024. There was no comparable death benefit income realized in 2023.
During the year ended December 31, 2023, we recorded a $974 thousand loss on sale of debt securities; there was no comparable transaction in 2024.
Other charges and fees during the year ended December 31, 2024 were $256 thousand, a decrease of $134 thousand compared to $390 thousand for the year ended 2023. The decrease was due primarily to a $614 thousand valuation allowance on OREO, partially offset by higher loan income and income from equity investments.
Noninterest Expense
The following table sets forth the various components of our noninterest expense for the years indicated:
| Year Ended December 31, | ||||||||||||||
| (dollars in thousands) | 2024 | 2023 | ||||||||||||
| Salaries and employee benefits | $ | 49,845 | $ | 39,249 | ||||||||||
| Occupancy and equipment | 7,242 | 6,231 | ||||||||||||
| Data processing and communications | 5,832 | 4,534 | ||||||||||||
| Legal, audit and professional | 2,559 | 3,211 | ||||||||||||
| Regulatory assessments | 1,714 | 1,508 | ||||||||||||
| Director and shareholder expenses | 1,410 | 849 | ||||||||||||
| Merger and related expenses | 16,288 | - | ||||||||||||
|
Intangible asset amortization
|
1,877 | 389 | ||||||||||||
|
Other real estate owned expenses
|
5,246 | - | ||||||||||||
| Other expenses | 5,778 | 3,775 | ||||||||||||
| Total noninterest expense | $ | 97,791 | $ | 59,746 | ||||||||||
Total noninterest expense for the year ended December 31, 2024 was $97.8 million, an increase of $38.0 million compared with total noninterest expense of $59.7 million for the year ended 2023. The increase was largely due to increases from the Merger, including increases in merger and related expenses, salaries and employee benefits, other real estate owned expenses, intangible asset amortization, and other expenses. Excluding the merger and related expenses, noninterest expense increased $21.8 million to $81.5 million for the year ended December 31, 2024. The increase in most overhead expense categories is due to including CALB's operations since the date of acquisition.
Salaries and employee benefits were $49.8 million during the year ended December 31, 2024, compared to $39.2 million during the prior year. The $10.6 million increase in salaries and benefits was primarily due to growth in headcount from CALB employees retained subsequent to the Merger. The average full-time equivalent ("FTE") employees for the year ended December 31, 2024 was 249 compared to 206 FTE employees for the year ended 2023. The year ended December 31, 2024 salaries and employee benefits also included a $1.3 million one-time stock-based compensation expense associated with non-continuing CALB executives and employees.
Occupancy and equipment expenses were $7.2 million during the year ended December 31, 2024, compared to $6.2 million in the prior year. The $1.0 million increase was due primarily to higher lease and depreciation costs as a result of the Merger.
Merger and related expenses were $16.3 million during the year ended December 31, 2024 and primarily included severance and change in control costs of $6.2 million, financial advisory fees of $5.1 million, information technology expenses of $5.2 million, and legal and other professional costs of $4.5 million. There were no comparable expenses for the year ended 2023.
Intangible asset amortization increased $1.5 million during the year ended December 31, 2024. The increase in core deposit intangible amortization was primarily driven by the additional amortization from the $22.7 million core deposit intangible and $300 thousand trade name intangible acquired in the Merger.
Other real estate expenses were $5.2 million. During the year ended December 31, 2024, the Company soldOREOand recognized a $4.8 millionloss. There was no comparable transaction in the year ended 2023.
Other expenses were $5.8 million during the year ended December 31, 2024, compared to $3.8 million for the year ended 2023. The $2.0 million increase was due primarily to the increases in loan related expenses, customer service related expenses, marketing, advertising and donation expenses, travel expenses, correspondent bank charges and insurance expenses primarily as a result of the Merger.
Our efficiency ratio (non-GAAP) for the year ended December 31, 2024 and 2023 was 76.6% and 61.3%, respectively. Excluding the loss on sale of OREO, the efficiency ratio (non-GAAP) for the year ended December 31, 2024 would have been 72.8%. Excluding the merger and related expenses of $16.3 million, the efficiency ratio (non-GAAP) for the year ended December 31, 2024 would have been 63.8%.
Income Taxes
Income tax expense for the year ended December 31, 2024 was $2.8 million, compared to $10.9 million for the year ended 2023. The effective rate was 34.2% during the year ended December 31, 2024, compared to 29.7% for the year ended 2023. The increase in effective tax rate between periods was primarily due to the impact of the non-tax deductible portion of the merger expenses and the vesting and exercise of equity awards combined with changes in the Company's stock price over time, partially offset by the impact of excess executive compensation.
For additional information, see Note 11 - Income Taxesof the Notes to Consolidated Financial Statements included in Item 8 of this annual report.
Financial Condition
Summary
Total assets at December 31, 2024 were $4.03 billion, an increase of $1.67 billion from $2.36 billion at December 31, 2023. The increase in total assets was primarily related to the $1.86 billion in fair value of total assets acquired in the Merger, which included increases of $1.36 billion in loans held for investment, $42.6 million in debt securities, and $336.3 million in cash and cash equivalents. In addition, the Company recorded preliminary goodwill of $74.0 million related to the Merger in the third quarter of 2024.
Total liabilities were $3.52 billion at December 31, 2024, an increase of $1.45 billion from $2.07 billion at December 31, 2023. The increase in total liabilities was driven by the $1.72 billion in fair
value of total liabilities acquired in the Merger, which included $1.64 billion of deposits and $50.8 million of borrowings.
Shareholders' equity was $511.8 million at December 31, 2024, an increase of $223.7 million from $288.2 million at December 31, 2023. The increase in shareholders' equity was primarily driven by $5.4 million of net income generated for the year ended December 31, 2024, $214.4 million of common stock issued in connection with closing the Merger, $6.2 million related to stock-based compensation activity, partially offset by a $2.2 million increase in net of tax unrealized losses on available-for-sale debt securities during the period.
Debt Securities
Our debt securities portfolio consists of both held-to-maturity and available-for-sale securities aggregating $195.3 million and $183.7 million at December 31, 2024 and 2023, respectively. The $11.6 million increase in debt securities was primarily related to the $42.6 million in debt securities acquired in the Merger, partially offset by paydowns, sales, maturities and calls and valuation changes. Our held-to-maturity debt securities and available-for-sale debt securities represented 1.32% and 3.52%, respectively, of total assets at December 31, 2024, compared to 2.27% and 5.51%, respectively, at December 31, 2023.
During the year ended December 31, 2024, there were no transfers between held-to-maturity and available-for-sale debt securities.
At December 31, 2024 and 2023, debt securities with an amortized cost of $56.2 million and $53.6 million, respectively, were pledged to the Federal Reserve as collateral for secured public deposits and for other purposes as required by law or contract provisions, in addition to collateral securing a line of credit with the Federal Reserve.
Held-to-Maturity Debt Securities
The amortized cost of held-to-maturity debt securities and their approximate fair values at December 31, 2024 and 2023 were as follows:
| (dollars in thousands) | Amortized Cost |
Gross
Unrecognized
Gains
|
Gross
Unrecognized
Losses
|
Estimated Fair Value |
||||||||||||||||||||||
|
December 31, 2024
|
||||||||||||||||||||||||||
| Taxable municipals | $ | 553 | $ | - | $ | (90) | $ | 463 | ||||||||||||||||||
| Tax exempt bank-qualified municipals | 52,727 | - | (5,367) | 47,360 | ||||||||||||||||||||||
| $ | 53,280 | $ | - | $ | (5,457) | $ | 47,823 | |||||||||||||||||||
|
December 31, 2023
|
||||||||||||||||||||||||||
| Taxable municipals | $ | 551 | $ | - | $ | (73) | $ | 478 | ||||||||||||||||||
| Tax exempt bank-qualified municipals | 53,065 | 25 | (3,136) | 49,954 | ||||||||||||||||||||||
| $ | 53,616 | $ | 25 | $ | (3,209) | $ | 50,432 | |||||||||||||||||||
At December 31, 2024, we had 61 held-to-maturity debt securities in a gross unrecognized loss position with an amortized cost basis of $53.3 million with pre-tax unrecognized losses of $5.5 million, compared to 58 held-to-maturity debt securities with an amortized cost basis of $51.5 million with pre-tax unrecognized losses of $3.2 million at December 31, 2023. The effective duration of the held-to-maturity debt securities was 6.52 years and 5.58 years at December 31, 2024 and 2023, respectively. We have the
intent and ability to hold the securities classified as held to maturity until they mature, at which time we will receive full value for the securities.
All held-to-maturity debt securities were municipal securities, and historically have had limited credit loss experience with them. At December 31, 2024 and 2023, the total fair value of taxable municipal and tax exempt bank-qualified municipal securities was $463 thousand and $478 thousand, respectively, and $47.4 million and $50.0 million, respectively. At December 31, 2024 and 2023, the total held-to-maturity debt securities rated AA and above was $44.7 million and $47.0 million, respectively, and rated AA- was $3.2 million and $3.4 million, respectively. Accordingly, we applied a zero credit loss assumption for these securities and no allowance for credit loss was recorded as of December 31, 2024 and 2023.
Available-for-Sale Debt Securities
The amortized cost of available-for-sale debt securities and their approximate fair values at December 31, 2024 and 2023, were as follows:
| (dollars in thousands) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||||||||||||
|
December 31, 2024
|
||||||||||||||||||||||||||
| U.S. government and agency and government sponsored enterprise securities: | ||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 87,930 | $ | 109 | $ | (4,765) | $ | 83,274 | ||||||||||||||||||
| SBA securities | 5,423 | 7 | (97) | 5,333 | ||||||||||||||||||||||
| U.S. Treasury | 12,624 | 17 | (315) | 12,326 | ||||||||||||||||||||||
| U.S. Agency | 2,000 | - | (330) | 1,670 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 41,615 | 11 | (3,963) | 37,663 | ||||||||||||||||||||||
| Taxable municipal | 1,007 | - | (98) | 909 | ||||||||||||||||||||||
| Tax exempt bank-qualified municipals | 830 | - | (4) | 826 | ||||||||||||||||||||||
| $ | 151,429 | $ | 144 | $ | (9,572) | $ | 142,001 | |||||||||||||||||||
|
December 31, 2023
|
||||||||||||||||||||||||||
| U.S. government and agency and government sponsored enterprise securities: | ||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 77,031 | $ | 631 | $ | (3,228) | $ | 74,434 | ||||||||||||||||||
| SBA securities | 5,886 | 5 | (109) | 5,782 | ||||||||||||||||||||||
| U.S. Treasury | 2,760 | - | (343) | 2,417 | ||||||||||||||||||||||
| U.S. Agency | 2,000 | - | (330) | 1,670 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 46,330 | 173 | (3,002) | 43,501 | ||||||||||||||||||||||
| Taxable municipals | 1,528 | - | (107) | 1,421 | ||||||||||||||||||||||
| Tax exempt bank-qualified municipals | 831 | - | (21) | 810 | ||||||||||||||||||||||
| $ | 136,366 | $ | 809 | $ | (7,140) | $ | 130,035 | |||||||||||||||||||
The estimated fair value of available-for-sale debt securities was $142.0 million at December 31, 2024, an increase of $12.0 million, from $130.0 million at December 31, 2023. The increase was primarily due to $42.6 million in debt securities acquired in the Merger and purchases of $2.0 million, partially offset by fair value market adjustments of $3.1 million, sales of $3.4 million, maturities of $10.5 million, and principal reductions and amortization of discounts and premiums aggregating to $15.6 million.
At December 31, 2024, we had 89 available-for-sale debt securities in a gross unrealized loss position with an amortized cost basis and fair value of $124.2 million and $114.6 million, respectively, with pre-tax unrealized losses of $9.6 million, compared to 76 available-for-sale debt securities with an amortized cost basis and fair value of $100.7 million and $93.5 million, respectively with pre-tax unrealized holding losses of $7.1 million at December 31, 2023. The net of tax unrealized loss on available-for-sale debt securities is reflected in accumulated other comprehensive loss. The effective duration of this portfolio was 4.60 years and 5.13 years at December 31, 2024 and 2023, respectively. We do not have the current intent to sell these available-for-sale debt securities with a fair value below amortized cost, and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis. The issuers of these securities have not, to our knowledge,
established any cause for default on these securities. As a result, we expect to recover the entire amortized cost basis of these securities.
When market interest rates increase, bond prices tend to fall and, consequently, the fair value of our securities may also decrease. Increases in longer-term market interest rates during 2023 and into 2024 have resulted in higher net unrealized losses in our debt securities. There may be further net unrealized losses on our debt securities classified as available-for-sale, which would negatively affect our total and tangible shareholders' equity.
We determined that the increase in unrealized losses related to each available-for-sale debt security at December 31, 2024 was primarily attributable to factors other than credit related, including general volatility in market conditions. Our available-for-sale debt securities consisted of U.S. Treasury, U.S. government and agency and government sponsored enterprise securities, and municipals which are issued, guaranteed, or supported by the U.S. government, and historically have had limited credit loss experience. In addition, we reviewed the credit rating of the municipal securities. At December 31, 2024, the total fair value of taxable municipal and tax exempt bank-qualified municipal securities was $909 thousand and $826 thousand, respectively. All of these available-for-sale municipal debt securities rated AA and above totaled $1.7 million. At December 31, 2023, the total fair value of taxable municipal and tax exempt bank-qualified municipal securities was $1.4 million and $810 thousand, respectively. These available-for-sale debt securities rated AA and above totaled $1.4 million and rated A+ totaled $810 thousand at December 31, 2023. Accordingly, we applied a zero credit loss assumption for these securities and no ACL was recorded as of December 31, 2024 and 2023.
The amortized cost, estimated fair value and weighted average yield of held-to-maturity and available-for-sale debt securities as of December 31, 2024 are presented below by contractual maturities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Held-to-Maturity | Available-for-Sale | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Amortized Cost |
Estimated Fair Value |
Weighted Average
Yield (1)
|
Amortized Cost |
Estimated Fair Value |
Weighted Average
Yield (1)
|
||||||||||||||||||||||||||||||||
| Due in one year or less | $ | - | $ | - | - | % | $ | 18,951 | $ | 18,940 | 7.58 | % | ||||||||||||||||||||||||||
| Due after one year through five years | - | - | - | % | 11,455 | 10,417 | 2.50 | % | ||||||||||||||||||||||||||||||
| Due after five years through ten years | 25,442 | 23,232 | 2.18 | % | 15,883 | 14,320 | 3.02 | % | ||||||||||||||||||||||||||||||
| Due after ten years | 27,838 | 24,591 | 2.36 | % | 105,140 | 98,324 | 4.04 | % | ||||||||||||||||||||||||||||||
| $ | 53,280 | $ | 47,823 | 2.27 | % | $ | 151,429 | $ | 142,001 | 4.26 | % | |||||||||||||||||||||||||||
(1)Weighted average yields are computed based on the amortized cost of the individual underlying securities.
The following table presents the amortized cost and weighted average yields using amortized cost of held-to-maturity debt securities as of December 31, 2024, based on the contractual maturity dates:
|
One Year or Less
|
More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Amortized Cost |
Weighted Average
Yield (1)
|
Amortized Cost |
Weighted Average
Yield (1)
|
Amortized Cost |
Weighted Average
Yield (1)
|
Amortized Cost |
Weighted Average
Yield (1)
|
Amortized Cost |
Weighted Average
Yield (1)
|
||||||||||||||||||||||||||||||||||||||||||||||||||
| Held-to-maturity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable municipals | $ | - | - | % | $ | - | - | % | $ | 553 | 2.29 | % | $ | - | - | % | $ | 553 | 2.29 | % | |||||||||||||||||||||||||||||||||||||||
| Tax exempt bank-qualified municipals | - | - | % | - | - | % | 24,889 | 2.18 | % | 27,838 | 2.36 | % | 52,727 | 2.27 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | - | - | % | $ | - | - | % | $ | 25,442 | 2.18 | % | $ | 27,838 | 2.36 | % | $ | 53,280 | 2.27 | % | |||||||||||||||||||||||||||||||||||||||
(1)Weighted average yields are computed based on the amortized cost of the individual underlying securities.
The following table presents the fair value and weighted average yields using amortized cost of available-for-sale debt securities as of December 31, 2024, based on the contractual maturity dates:
|
One Year or Less
|
More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fair Value |
Weighted Average
Yield (1)
|
Fair Value |
Weighted Average
Yield (1)
|
Fair Value |
Weighted Average
Yield (1)
|
Fair Value |
Weighted Average
Yield (1)
|
Fair Value |
Weighted Average
Yield (1)
|
||||||||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government and agency and government sponsored enterprise securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 8,180 | 11.32 | % | $ | 5,725 | 1.90 | % | $ | 7,770 | 2.77 | % | $ | 61,599 | 4.23 | % | $ | 83,274 | 4.63 | % | |||||||||||||||||||||||||||||||||||||||
| SBA securities | - | - | % | 1,800 | 6.22 | % | 2,584 | 4.42 | % | 949 | 5.77 | % | 5,333 | 5.06 | % | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury | 9,934 | 4.92 | % | 2,392 | 0.95 | % | - | - | % | - | - | % | 12,326 | 4.08 | % | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. Agency | - | - | % | - | - | % | 1,670 | 2.05 | % | - | - | % | 1,670 | 2.05 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | - | - | % | - | - | % | 1,887 | 3.58 | % | 35,776 | 3.70 | % | 37,663 | 3.66 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Taxable municipals | - | - | % | 500 | 5.24 | % | 409 | 1.73 | % | - | - | % | 909 | 3.47 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Tax exempt bank-qualified municipals | 826 | 2.50 | % | - | - | % | - | - | % | - | - | % | 826 | 2.50 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 18,940 | 7.58 | % | $ | 10,417 | 2.50 | % | $ | 14,320 | 3.02 | % | $ | 98,324 | 4.04 | % | $ | 142,001 | 4.26 | % | |||||||||||||||||||||||||||||||||||||||
(1)Weighted average yields are computed based on the amortized cost of the individual underlying securities.
Loans Held for Sale
At December 31, 2024, loans held for sale totaled $17.2 million, consisting of $10.3 million SBA 7(a) loans and $6.9 million of C&I loans transferred from loans held for investment, compared to $7.3 million loans held for sale, consisting of only SBA 7(a) loans, at December 31, 2023.
Loans Held for Investment
The composition of our loan held for investment at December 31, was as follows:
| (dollars in thousands) |
December 31, 2024 |
% of
Total Loans
|
December 31, 2023 |
% of
Total Loans
|
||||||||||||||||||||||
| Construction and land development | $ | 227,325 | 7.2 | % | $ | 243,521 | 12.4 | % | ||||||||||||||||||
| Real estate - other: | ||||||||||||||||||||||||||
| 1-4 family residential | 164,401 | 5.2 | % | 143,903 | 7.4 | % | ||||||||||||||||||||
| Multifamily residential | 243,993 | 7.8 | % | 221,247 | 11.3 | % | ||||||||||||||||||||
| Commercial real estate and other | 1,767,727 | 56.3 | % | 1,024,243 | 52.3 | % | ||||||||||||||||||||
|
Commercial and industrial
|
710,970 | 22.7 | % | 320,142 | 16.4 | % | ||||||||||||||||||||
| Consumer | 24,749 | 0.8 | % | 4,386 | 0.2 | % | ||||||||||||||||||||
|
Loans(1)
|
3,139,165 | 100.0 | % | 1,957,442 | 100.0 | % | ||||||||||||||||||||
| Allowance for loan losses | (50,540) | (22,569) | ||||||||||||||||||||||||
| Net loans | $ | 3,088,625 | $ | 1,934,873 | ||||||||||||||||||||||
(1)Loans held for investment includes net unearned fees of $1.8 million and $2.3 million and net unearned discounts of $58.5 million and $1.4 million at December 31, 2024 and 2023, respectively. We recognized $10.4 million and $239 thousand in interest accretion for acquired loans for the years ended December 31, 2024 and 2023.
Total loans held for investment were $3.14 billion, or 77.9% of total assets, at December 31, 2024, an increase of $1.18 billion from $1.96 billion, or 82.9% of total assets, at December 31, 2023. The change during the year ended December 31, 2024, was due primarily to the Merger, which increased loans by $1.36 billion. Additionally, there were originations of $270.7 million and net advances of $72.0 million, offset by transfer to OREO of $17.7 million, partial loan charge-offs of $2.8 million, and payoffs and loan sales of $454.3 million during the year ended December 31, 2024.
Loans secured by real estate, defined as construction and land development loans and real estate - other loans, increased by $770.5 million to $2.40 billion at December 31, 2024 primarily due to the Merger. The increase in loans secured by real estate was primarily driven by a $743.5 million increase in commercial real estate and other loans, a $22.7 million increase in multifamily residential loans, a $20.5 million increase in 1-4 family residential loans, partially offset by a $16.2 million decrease in construction and land development loans.
Commercial and industrial loans were $711.0 million at December 31, 2024, an increase of $390.8 million from $320.1 million at December 31, 2023. The increase in C&I loans during the year ended December 31, 2024 was primarily attributable to loans acquired in the Merger of $495.4 million and originations of $89.3 million, partially offset by loan sales and payoffs of $192.0 million, partial loan charge-offs of $61 thousand, and net paydowns of $1.9 million.
Loan Maturities
The following table sets forth the amounts of gross loans, by maturity, at December 31, 2024:
| (dollars in thousands) | Due in One Year or Less | Due after One Year through Five Years | Due after Five Years through Fifteen Years | Due after Fifteen Years | Total | |||||||||||||||||||||||||||
| Construction and land development | $ | 190,029 | $ | 33,128 | $ | 4,168 | $ | - | $ | 227,325 | ||||||||||||||||||||||
|
Real estate - other:
|
||||||||||||||||||||||||||||||||
| 1-4 family residential | 17,112 | 54,633 | 57,900 | 34,756 | 164,401 | |||||||||||||||||||||||||||
| Multifamily residential | 8,910 | 119,695 | 96,035 | 19,353 | 243,993 | |||||||||||||||||||||||||||
| Commercial real estate and other | 145,226 | 766,004 | 776,127 | 80,370 | 1,767,727 | |||||||||||||||||||||||||||
| Commercial and industrial | 314,200 | 296,942 | 99,825 | 3 | 710,970 | |||||||||||||||||||||||||||
| Consumer | 830 | 1,193 | - | 22,726 | 24,749 | |||||||||||||||||||||||||||
| $ | 676,307 | $ | 1,271,595 | $ | 1,034,055 | $ | 157,208 | $ | 3,139,165 | |||||||||||||||||||||||
The following table sets forth the amounts of gross loans, due after one year, presented by fixed or floating interest rates at December 31, 2024:
| (dollars in thousands) |
Fixed Rate |
Floating Rate |
Total | |||||||||||||||||
| Construction and land development | $ | 21,411 | $ | 15,885 | $ | 37,296 | ||||||||||||||
|
Real estate - other:
|
||||||||||||||||||||
| 1-4 family residential | 47,356 | 99,933 | 147,289 | |||||||||||||||||
| Multifamily residential | 139,424 | 95,659 | 235,083 | |||||||||||||||||
| Commercial real estate and other | 772,131 | 850,370 | 1,622,501 | |||||||||||||||||
| Commercial and industrial | 198,408 | 198,362 | 396,770 | |||||||||||||||||
| Consumer | 23,853 | 66 | 23,919 | |||||||||||||||||
| $ | 1,202,583 | $ | 1,260,275 | $ | 2,462,858 | |||||||||||||||
Loan Concentrations
Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than most residential real estate loans and consumer loans and depend on cash flows from the owner's business or the property to service the debt. Because our loan portfolio, including loans held for sale, contains a number of CRE loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our levels of nonperforming assets. Approximately 56.0% of our total loan portfolio, including loans held for sale, is comprised of commercial real estate loans as of December 31, 2024 as presented below:
| (dollars in thousands) |
December 31, 2024 |
Percentage of CRE Portfolio |
Average Loan Size |
Weighted Average LTV(2)
|
||||||||||||||||||||||
|
Commercial real estate loans(1):
|
||||||||||||||||||||||||||
| Industrial | $ | 527,900 | 29.8 | % | $ | 1,920 | 47 | % | ||||||||||||||||||
| Retail | 281,200 | 15.9 | % | 1,707 | 46 | % | ||||||||||||||||||||
| Office | 277,200 | 15.7 | % | 1,980 | 51 | % | ||||||||||||||||||||
| Other | 181,900 | 10.3 | % | 2,245 | 48 | % | ||||||||||||||||||||
|
Hotel
|
134,200 | 7.6 | % | 9,584 | 44 | % | ||||||||||||||||||||
| Special purpose | 118,500 | 6.7 | % | 2,071 | 38 | % | ||||||||||||||||||||
|
Medical/dental office
|
113,400 | 6.4 | % | 1,040 | 51 | % | ||||||||||||||||||||
| Self storage | 90,800 | 5.1 | % | 6,489 | 45 | % | ||||||||||||||||||||
| Restaurant | 43,900 | 2.5 | % | 1,245 | 45 | % | ||||||||||||||||||||
| Total | $ | 1,769,000 | 100.0 | % | $ | 1,979 | 46 | % | ||||||||||||||||||
(1)CRE loans include owner-occupied CRE and non-owner occupied CRE loans, but exclude farmland loans. Balance includes loans held for sale and loans held for investment.
(2)Weighted average loan-to-value ("LTV") is based on the current loan balance as of December 31, 2024, and collateral value at origination or renewal.
The following table presents the percentages of our CRE loans broken out by occupancy as of December 31, 2024:
| December 31, 2024 | ||||||||||||||||||||||||||
| (dollars in thousands) | Owner Occupied | Non-owner Occupied | ||||||||||||||||||||||||
|
Commercial real estate loans(1):
|
Balance | % of Total | Balance | % of Total | ||||||||||||||||||||||
| Industrial | $ | 307,700 | 48.6 | % | $ | 220,200 | 19.4 | % | ||||||||||||||||||
| Office | 61,900 | 9.8 | % | 215,300 | 19.0 | % | ||||||||||||||||||||
| Retail | 37,800 | 6.0 | % | 243,400 | 21.4 | % | ||||||||||||||||||||
| Special purpose | 74,500 | 11.8 | % | 44,000 | 3.9 | % | ||||||||||||||||||||
|
Medical/dental office
|
66,300 | 10.5 | % | 47,100 | 4.1 | % | ||||||||||||||||||||
| Self storage | - | - | % | 90,800 | 8.0 | % | ||||||||||||||||||||
| Restaurant | 9,600 | 1.5 | % | 34,300 | 3.0 | % | ||||||||||||||||||||
| Other | 75,600 | 11.8 | % | 106,300 | 9.4 | % | ||||||||||||||||||||
|
Hotel
|
- | - | % | 134,200 | 11.8 | % | ||||||||||||||||||||
| Total | $ | 633,400 | 100.0 | % | $ | 1,135,600 | 100.0 | % | ||||||||||||||||||
(1)CRE loans include owner-occupied CRE and non-owner occupied CRE loans, but exclude farmland loans. Balance includes loans held for sale and loans held for investment.
With the increases in remote work over the last few years, rising interest rates and increasing vacancy rates nationwide, commercial real estate loans collateralized by office properties have unique credit risks. We attempt to reduce our credit risk within this portfolio by emphasizing loan-to-value ratios and debt service ratios. The following table presents a summary of the balances and weighted average loan-to-values of office loans and medical/dental office loans within our CRE loan portfolio as of December 31, 2024:
| (dollars in thousands) |
December 31, 2024 |
Weighted
Average LTV(1)
|
||||||||||||
| Office loans: | ||||||||||||||
| Up to $500 | $ | 23,200 | 45 | % | ||||||||||
| More than $500 through $2,000 | 97,900 | 49 | % | |||||||||||
| More than $2,000 through $5,000 | 88,500 | 55 | % | |||||||||||
| More than $5,000 through $10,000 | 61,200 | 55 | % | |||||||||||
| More than $10,000 through $20,000 | 75,000 | 44 | % | |||||||||||
| Greater than $20,000 | 44,800 | 55 | % | |||||||||||
| Total | $ | 390,600 | 50 | % | ||||||||||
(1)Weighted average LTV is based on the current loan balance as of December 31, 2024, and collateral value at origination or renewal.
Delinquent Loans
Early stage delinquencies (accruing loans 30-89 days past due) of $12.1 million at December 31, 2024 increased $12.1 million from prior year end which primarily occurred during the fourth quarter of 2024. The fourth quarter of 2024 increase included a $3.2 million loan that was brought current and two C&I loans totaling $1.5 million that were downgraded to nonaccrual in the first quarter of 2025. The remaining early stage delinquencies were driven by seasonality and a few isolated loans. We had $150 thousand in consumer solar loans that were over 90 days past due that were accruing interest at December 31, 2024. There were no loans over 90 days past due loans and still accruing interest as of December 31, 2023.
A summary of past due loans, loans still accruing and nonaccrual loans as of December 31, 2024 and 2023 follows:
| (dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
Over 90 Days Past Due |
Total Past Due |
Nonaccrual | |||||||||||||||||||||||||||
|
December 31, 2024
|
||||||||||||||||||||||||||||||||
| Construction and land development | $ | 4,104 | $ | - | $ | - | $ | 4,104 | $ | 9,659 | ||||||||||||||||||||||
| Real estate - other: | ||||||||||||||||||||||||||||||||
| 1-4 family residential | 40 | 4,469 | - | 4,509 | 2,895 | |||||||||||||||||||||||||||
| Multifamily residential | - | - | - | - | - | |||||||||||||||||||||||||||
| Commercial real estate and other | 195 | - | - | 195 | 8,915 | |||||||||||||||||||||||||||
| Commercial and industrial | 1,866 | 1,113 | - | 2,979 | 4,917 | |||||||||||||||||||||||||||
| Consumer | 69 | 226 | 150 | 445 | - | |||||||||||||||||||||||||||
| $ | 6,274 | $ | 5,808 | $ | 150 | $ | 12,232 | $ | 26,386 | |||||||||||||||||||||||
| (dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
Over 90 Days Past Due |
Total Past Due |
Nonaccrual | |||||||||||||||||||||||||||
|
December 31, 2023
|
||||||||||||||||||||||||||||||||
| Real estate - other: | ||||||||||||||||||||||||||||||||
| Multifamily residential | $ | - | $ | - | $ | - | $ | - | $ | 13,004 | ||||||||||||||||||||||
| Commercial and industrial | 19 | - | - | 19 | - | |||||||||||||||||||||||||||
| $ | 19 | $ | - | $ | - | $ | 19 | $ | 13,004 | |||||||||||||||||||||||
Total nonaccrual loans increased by $13.4 million during the year ended December 31, 2024 to $26.4 million, which included $13.7 million of nonaccrual PCD loans. The non-acquired nonaccrual loan portfolio decreased $342 thousand primarily due to the downgrades of a construction loan and a 1-4 family residential loan from one relationship and a C&I loan that totaled $12.7 million, partially offset by the transfer of a nonaccrual multifamily loan collateralized by three multifamily properties in Santa Monica, California with a net carrying value of $13.0 million to OREO that was subsequently sold with a $4.8 million loss in 2024. The loans downgraded to nonaccrual during the year ended December 31, 2024 were net of total charge-offs of $2.8 million, which included partial charge-offs of $1.5 million for a substandard multifamily loan that was downgraded to nonaccrual in 2024 and transferred to OREO in the third quarter of 2024, $967 thousand for a substandard nonaccrual construction loan, and $238 thousand for consumer solar loans that were delinquent 120 or more days. The multifamily loan was charged-off during the second quarter of 2024 and was transferred to OREO with a net carrying value after charge-off of $4.7 million in July of 2024. The construction loan was collateralized by a stalled construction project in Los Angeles, California. Based on the Company's internal analysis, which included the review of an updated appraisal, the estimated net collateral value was $9.7 million, which was $967 thousand lower than the subject loan's net carrying value resulting in a partial charge-off in the third quarter of 2024. With pro-active credit administration, we partner with our borrowers to pursue favorable resolutions to minimize net charge-offs or losses to the Company.
The following table presents the risk categories for total loans by class of loans as of December 31, 2024 and December 31, 2023:
| (dollars in thousands) | Pass |
Special Mention |
Substandard | Total | ||||||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
| Construction and land development | $ | 203,484 | $ | 12,431 | $ | 11,410 | $ | 227,325 | ||||||||||||||||||
| Real estate - other: | ||||||||||||||||||||||||||
| 1-4 family residential | 157,037 | - | 7,364 | 164,401 | ||||||||||||||||||||||
| Multifamily residential | 240,207 | 3,786 | - | 243,993 | ||||||||||||||||||||||
| Commercial real estate and other | 1,710,050 | 36,026 | 21,651 | 1,767,727 | ||||||||||||||||||||||
| Commercial and industrial | 617,106 | 17,096 | 76,768 | 710,970 | ||||||||||||||||||||||
| Consumer | 24,344 | - | 405 | 24,749 | ||||||||||||||||||||||
| $ | 2,952,228 | $ | 69,339 | $ | 117,598 | $ | 3,139,165 | |||||||||||||||||||
| (dollars in thousands) | Pass |
Special Mention |
Substandard | Total | ||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
| Construction and land development | $ | 243,429 | $ | - | $ | 92 | $ | 243,521 | ||||||||||||||||||
| Real estate - other: | ||||||||||||||||||||||||||
| 1-4 family residential | 143,903 | - | - | 143,903 | ||||||||||||||||||||||
| Multifamily residential | 208,243 | - | 13,004 | 221,247 | ||||||||||||||||||||||
| Commercial real estate and other | 1,020,076 | 2,996 | 1,171 | 1,024,243 | ||||||||||||||||||||||
| Commercial and industrial | 314,907 | - | 5,235 | 320,142 | ||||||||||||||||||||||
| Consumer | 4,386 | - | - | 4,386 | ||||||||||||||||||||||
| $ | 1,934,944 | $ | 2,996 | $ | 19,502 | $ | 1,957,442 | |||||||||||||||||||
Special mention loans increased by $66.3 million during the year ended December 31, 2024 to $69.3 million, which included $25.5 million of non-PCD loans and $10.1 million of PCD loans acquired in the Merger. The increases in the non-acquired portfolio were due mostly to downgrades in most of the loan categories, offset by payoffs of $3.0 million of CRE loans from the prior year.
Substandard loans increased by $98.1 million during the year ended December 31, 2024 to $117.6 million, which included $11.0 million of non-PCD loans, $55.9 million of accruing PCD loans and $13.7 million of nonaccrual PCD loans acquired in the Merger. The increases in the non-acquired portfolio was due mostly to downgrades totaling $32.4 million, which included nonaccrual construction and land loans of $9.7 million and 1-4 family residential loans of $2.9 million, partially offset by upgrades, paydowns and payoffs totaling $1.9 million and the aforementioned nonaccrual multifamily loan of $13.0 million transferred to OREO during the first quarter of 2024 that was sold in the second quarter of 2024.
There were no loans classified as doubtful or loss loans at December 31, 2024 and 2023.
Loan Modifications
At December 31, 2024, we had six loan modifications with borrowers that are experiencing financial difficulty totaling $24.1 million, of which $2.0 million were past due. These loans included four PCD loans, one non-PCD loan and one non-acquired loan. Refer to Note 4 - Loans and Allowances for Credit Losses - Modified Loans to Borrowers Experiencing Financial Difficultyincluded in Item 8. Financial Statementsof this annual report for more information regarding loan modifications.
The were no modifications or refinancings (including those with borrowers that are experiencing financial difficulty) of loans at December 31, 2023.
Non-performing Assets
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), OREO, and other repossessed assets owned. Nonaccrual loans consist of all loans 90 days or more past due and on loans where, in the opinion of management, there is reasonable doubt as to the collection of principal and interest.
The following table presents a summary of nonperforming assets, along with corresponding nonperforming asset ratios, as of December 31, 2024 and 2023:
| (dollars in thousands) | 2024 | 2023 | ||||||||||||
| Nonaccrual loans: | ||||||||||||||
| Construction and land development | $ | 9,659 | $ | - | ||||||||||
| Real estate - other: | ||||||||||||||
| 1-4 family residential | 2,895 | - | ||||||||||||
| Multifamily residential | - | 13,004 | ||||||||||||
| Commercial real estate and other | 8,915 | - | ||||||||||||
| Commercial and industrial | 4,917 | - | ||||||||||||
| Consumer | - | - | ||||||||||||
| Total nonaccrual loans | 26,386 | 13,004 | ||||||||||||
| Loans past due over 90 days or more and still on accrual | 150 | - | ||||||||||||
| Total nonperforming loans | 26,536 | 13,004 | ||||||||||||
| Other real estate owned | 4,083 | - | ||||||||||||
| Total nonperforming assets | $ | 30,619 | $ | 13,004 | ||||||||||
| Allowance for loan losses to total loans | 1.61 | % | 1.15 | % | ||||||||||
| Nonaccrual loans to total loans | 0.84 | % | 0.66 | % | ||||||||||
|
Allowance for loan losses to nonaccrual loans
|
191.5 | % | 173.6 | % | ||||||||||
| (dollars in thousands) | 2024 | 2023 | ||||||||||||
|
Allowance for loan losses to nonperforming loans
|
190.5 | % | 173.6 | % | ||||||||||
| Nonperforming assets to total assets | 0.76 | % | 0.55 | % | ||||||||||
At December 31, 2024, nonperforming loans increased by $13.4 million to $26.5 million, compared to $13.0 million at December 31, 2023, which included $13.7 million of nonaccrual PCD loans acquired in the Merger. The increase in the non-acquired portfolio was due primarily to the downgrades of a construction loan and a 1-4 family residential loan from one relationship and a C&I loan that totaled $12.7 million, offset by the aforementioned nonaccrual multifamily loan of $13.0 million that was transferred to OREO during the first quarter of 2024. We foreclosed on the nonaccrual multifamily loan with a carrying value of $4.7 million in the second quarter of 2024. The loan was transferred to OREO and we recorded a $614 thousand valuation allowance on this OREO due to a decline in the fair value of the underlying property in the third quarter of 2024.
Allowance for Credit Losses
We adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the CECL adoption included an increase in the ACL of $5.5 million, which included $439 thousand to establish a reserve for unfunded commitments and a $3.9 million decrease to retained earnings to reflect the cumulative effect of the adoption of CECL, with the $1.6 million tax impact portion being recorded as part of the deferred tax asset on our Consolidated Balance Sheet.
Our ACL is an estimate of expected lifetime credit losses for loans held for investment at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio. The ACL consists of: (i) a specific allowance established for CECL on loans individually evaluated, (ii) a quantitative allowance for current expected loan losses based on the portfolio and expected economic conditions over a reasonable and supportable forecast period that reverts back to long-term trends to cover the expected life of the loan, (iii) a qualitative allowance including management judgment to capture factors and trends that are not adequately reflected in the quantitative allowance, and (iv) the ACL for off-balance sheet credit exposure for unfunded loan commitments. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. We measure the ACL using a discounted cash flow methodology, which utilizes pool-level assumptions and cash flow projections on individual loan basis, which then aggregated at the portfolio segment level and supplemented by a qualitative reserve that is applied to each portfolio segment level. Our ACL model incorporates assumptions for our own historical quarterly prepayment and curtailment experience covering the period starting from February 2021 to estimate the ACL, probability of default ("PD"), and LGD to project each loan's cash flow throughout its entire life cycle.
Accrued interest receivable on loans receivable, net, totaled $11.7 million and $6.4 million at December 31, 2024 and 2023, respectively, and is included within accrued interest receivable and other assets in the accompanying consolidated balance sheets. Accrued interest receivable is excluded from the ACL.
The following table presents a summary of the changes in the ACL for the periods indicated:
| Year Ended December 31, 2024 | Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Allowance for Loan Losses
|
Reserve for Unfunded Loan Commitments | Total Allowance for Credit Losses |
Allowance for Loan Losses
|
Reserve for Unfunded Loan Commitments | Total Allowance for Credit Losses | ||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 22,569 | $ | 933 | $ | 23,502 | $ | 17,099 | $ | 1,310 | $ | 18,409 | ||||||||||||||||||||||||||
|
Adoption of ASU No. 2016-13(1)
|
- | - | - | 5,027 | 439 | 5,466 | ||||||||||||||||||||||||||||||||
| Initial allowance for acquired PCD loans | 11,216 | - | 11,216 | - | - | - | ||||||||||||||||||||||||||||||||
|
Provision for (reversal of) credit losses(2)(3)
|
19,520 | 2,170 | 21,690 | 1,731 | (816) | 915 | ||||||||||||||||||||||||||||||||
| Charge-offs | (2,774) | - | (2,774) | (1,303) | - | (1,303) | ||||||||||||||||||||||||||||||||
| Recoveries | 9 | - | 9 | 15 | - | 15 | ||||||||||||||||||||||||||||||||
| Net charge-offs | (2,765) | - | (2,765) | (1,288) | - | (1,288) | ||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 50,540 | $ | 3,103 | $ | 53,643 | $ | 22,569 | $ | 933 | $ | 23,502 | ||||||||||||||||||||||||||
(1)Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2023. As a result of adopting ASU 2016-13, the Company's methodology to compute our ACL is based on a CECL methodology, rather than the previously applied incurred loss methodology.
(2)Includes an initial provision for credit losses for non-PCD loans acquired in the Merger of $18.5 million for the year ended December 31, 2024. There was no similar activity in the comparable 2023 period.
(3)Includes an initial provision for credit losses for unfunded commitments acquired in the Merger of $2.7 million for the year ended December 31, 2024. There was no similar activity in the comparable 2023 period.
The following table presents a summary of the ALL by portfolio segment, along with the corresponding percentage of each segment to total loans as of the periods indicated:
|
December 31, 2024
|
December 31, 2023
|
|||||||||||||||||||||||||
| (dollars in thousands) | Amount | Percent of loans in each category to total loans | Amount | Percent of loans in each category to total loans | ||||||||||||||||||||||
| Construction and land development | $ | 1,953 | 7.2 | % | $ | 2,032 | 12.4 | % | ||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||
| 1-4 family residential | 2,375 | 5.2 | % | 1,195 | 7.4 | % | ||||||||||||||||||||
| Multifamily residential | 1,560 | 7.8 | % | 1,449 | 11.3 | % | ||||||||||||||||||||
| Commercial real estate and other | 25,464 | 56.3 | % | 13,636 | 52.3 | % | ||||||||||||||||||||
| Commercial and industrial | 18,056 | 22.6 | % | 4,242 | 16.4 | % | ||||||||||||||||||||
| Consumer | 1,132 | 0.8 | % | 15 | 0.2 | % | ||||||||||||||||||||
| $ | 50,540 | 100.0 | % | $ | 22,569 | 100.0 | % | |||||||||||||||||||
Since we first adopted CECL in January 2023, and through June 2024, the economic environment has experienced volatility, which has made forecasting future economic outcomes challenging. Among these challenges were the highest levels of inflation seen since the 1970s, a very aggressive rate hiking policy by the Fed and other central banks to combat inflation, turmoil in the banking sector that resulted in several large bank failures early in 2023 and distress at New York Community Bank in early 2024, and significant global geopolitical risks, as well as domestic political risks. On a quarterly basis, we evaluated numerous key macroeconomic variables within the economic forecast scenarios from Moody's Analyticsand determined that it was best to use a combination of these scenarios that would reflect the range of possible outcomes given the volatile economic environment. We also reviewed the underlying assumptions supporting each scenario along with other sources of economic forecasts and meeting
minutes of the Federal Open Market Committee ("FOMC") when determining the scenario weighting. We reduced the probability-weighted forecast from a three-scenario forecast to a two-scenario forecast in September 2023. At December 31, 2024, we used a probability-weighted two-scenario forecast, representing a base-case scenario and one downside scenario, to estimate the ACL. We also updated the scenario weightings and assigned 80% to the base-case scenario and 20% to the downside scenario based on the FOMC lowering the Fed funds rate by 100 basis points during 2024, inflation trending lower, strong recent jobs reports and increasing GDP forecasts suggesting more positive growth in the coming quarters. The use of two weighted scenarios is consistent with the methodology used in our ACL model at December 31, 2023. Refer to Note 4 - Loans and Allowances for Credit Losses - Allowance for Credit Losses - Loansincluded in Item 8. Financial Statementsof this annual report for more information.
The allowance for loan losses ("ALL") was $50.5 million at December 31, 2024, compared to $22.6 million at December 31, 2023. The $28.0 million change in the ALL during the year ended December 31, 2024 was driven by a number of factors, including an increase of $11.2 million related to the initial allowance for credit losses on acquired PCD loans, $18.5 million related to the initial provision for credit losses on acquired non-PCD loans, partially offset by net charge-offs of $2.8 million. Changes in Moody's economic forecasts for California at December 31, 2024 as compared to December 31, 2023 were mixed. California unemployment rate and California gross state product ("GSP") forecasts were slightly revised upward. The California GSP for the construction section and Home Price Index forecasts were both revised downward to reflect the recent price trends. Our updated historical prepayment and curtailment rates analysis reflected a decrease from December 31, 2023 due primarily to the transition from utilizing monthly historical data to quarterly historical data, in order to accommodate legacy CALB loans that make quarterly payments. Changes in the reasonable and supportable forecast, primarily related to the economic outlook for California, coupled with changes in scenario weightings to 80%/20%, for the baseline/downside (S2) scenarios, respectively, compared to December 31, 2023 when the two scenarios were weighted 70% and 30%, respectively, and historical prepayment and curtailment rates analysis decreased the ALL by $163 thousand. Changes in the loans held for investment volume and mix decreased the ALL by $1.3 million. Changes in qualitative risk factors primarily related to the merger decreased the ALL by $604 thousand.
At December 31, 2024, our ratio of ALL to total loans held for investment was 1.61%, an increase from 1.15% at December 31, 2023.
The ACL process involves subjective and complex judgments and is reflective of significant uncertainties that could potentially result in materially different results under different assumptions and conditions. We review the level of the allowance at least quarterly and perform a sensitivity analysis on the significant assumptions utilized in estimating the ACL for collectively evaluated loans. Applying a 100% probability weighting to the downside scenario rather than using the probability-weighted two scenario approach would result in an increase in ACL by approximately $7.2 million, or an additional 23 basis points to the ALL to total loans held for investment ratio. This sensitivity analysis and related impact on the ACL is a hypothetical analysis and is not intended to represent management's judgments or assumptions of qualitative loss factors that were utilized at December 31, 2024.
The following table presents net charge-offs, average loans and net charge-offs as a percentage of average loans for the periods indicated:
|
Year Ended December 31, 2024
|
Year Ended December 31, 2023
|
|||||||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Net
(Charge-off)
Recovery
|
Average Loans |
Net
(Charge-off)
Recovery
Ratio
|
Net
(Charge-off)
Recovery
|
Average Loans |
Net
(Charge-off)
Recovery
Ratio
|
||||||||||||||||||||||||||||||||
| Construction and land development | $ | (967) | $ | 235,192 | (0.41) | % | $ | - | $ | 233,970 | - | % | ||||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | - | 149,365 | 0.00 | % | (12) | 140,833 | (0.01) | % | ||||||||||||||||||||||||||||||
| Multifamily residential | (1,457) | 216,301 | (0.67) | % | (1,267) | 231,403 | (0.55) | % | ||||||||||||||||||||||||||||||
| Commercial real estate and other | (51) | 1,330,677 | - | % | - | 993,177 | - | % | ||||||||||||||||||||||||||||||
| Commercial and industrial | (52) | 500,417 | (0.01) | % | (9) | 316,298 | - | % | ||||||||||||||||||||||||||||||
| Consumer | (238) | 11,175 | (2.13) | % | - | 2,762 | - | % | ||||||||||||||||||||||||||||||
| $ | (2,765) | $ | 2,443,127 | (0.11) | % | $ | (1,288) | $ | 1,918,443 | (0.07) | % | |||||||||||||||||||||||||||
Net charge-offs increased to $2.8 million, or (0.11)% of average loans for the year ended December 31, 2024 from $1.3 million, or (0.07)% of average loans for the year ended December 31, 2023. The increase was primarily due to a $1.5 million charge-off for a nonaccrual multifamily loan, $967 thousand for a construction loan and $238 thousand for consumer solar loans, which are typically charged off no later than 120 days past due.
Allowance for Credit Losses on Off-Balance Sheet Commitments
We also maintain a separate allowance for off-balance sheet commitments, which is included in accrued interest payable and other liabilities in our consolidated balance sheets. Management evaluates the loss exposure for off-balance sheet commitments to extend credit following the same principles used for the ACL, with consideration for experienced utilization rates on client credit lines and the inherently lower risk of unfunded loan commitments relative to disbursed commitments. The allowance for off-balance sheet commitments totaled $3.1 million and $933 thousand at December 31, 2024 and 2023, respectively. The change in the allowance for off-balance sheet commitments between periods was the result of a $2.2 million provision for credit losses on unfunded loan commitments, which included $2.7 million related to unfunded loan commitments acquired in the Merger, and from lower loss rates for the unfunded loan commitment balances at December 31, 2024. Total unfunded loan commitments increased $514.5 million to $925.3 million at December 31, 2024, from $410.8 million at December 31, 2023.
Servicing Asset and Loan Servicing Portfolio
We sell loans in the secondary market and, for certain loans, retain the servicing responsibility. The loans serviced for others were accounted for as sales and are therefore not included in the accompanying consolidated balance sheets. We receive servicing fees ranging from 0.25% to 1.00% for the services provided over the life of the loan; the servicing asset is initially recognized at fair value based on the present value of the estimated future net servicing income, incorporating assumptions that market participants would use in their estimates of fair value. The risks inherent in the SBA servicing asset relates primarily to changes in prepayments that result from shifts in interest rates and a reduction in the estimated future cash flows. The servicing asset activity includes additions from loan sales with servicing retained and acquired servicing rights and reductions from amortization as the serviced loans are repaid and servicing fees are earned. Loans serviced for others totaled $138.0 million and $58.8 million at December 31, 2024 and 2023, respectively. This includes SBA loans serviced for others of $33.2 million and $35.4 million at December 31, 2024 and 2023, respectively, for which there was a related servicing
asset of $344 thousand and $546 thousand, respectively. The fair value of the servicing asset approximated its carrying value at December 31, 2024 and 2023. Consideration for each SBA loan sale includes the cash received and the fair value of the related servicing asset. The significant assumptions used in the valuation of the SBA servicing asset at December 31, 2024 included a weighted average discount rate of 14.3% and a weighted average prepayment speed assumption of 20.5%. The significant assumptions used in the valuation of the SBA servicing asset at December 31, 2023 included a weighted average discount rate of 16.1% and a weighted average prepayment speed assumption of 19.0%.
Goodwill and Intangible Assets
Goodwill totaled $111.8 million and $37.8 million at December 31, 2024 and 2023, respectively. The $74.0 million increase was due to the goodwill recognized upon completion of the Merger during the third quarter of 2024. On an ongoing basis, we qualitatively assess if current events or circumstances warrant the need for an interim quantitative assessment of goodwill impairment. We also monitor fluctuations in our stock prices. During 2024, our stock price and market capitalization decreased due primarily to market volatility related to economic uncertainty and rising political tensions prior to the presidential election. We also note that the trends in our recent financial results were primarily driven by the impact of the Merger and the loss for the third quarter was primarily due to merger related expenses. In early November, our stock price and market capitalization recovered and after assessing these events and circumstances, we determined that it is not likely that the fair value of the reporting unit is less than its carrying amount at December 31, 2024. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes. We performed a qualitative assessment for potential impairment as of December 31, 2024, and as a result of that assessment determined that there has been no impairment to the goodwill.
Intangible assets totaled $22.3 million and $1.2 million at December 31, 2024 and 2023, respectively, and was comprised of the following:
| (dollars in thousands) |
December 31, 2024 |
December 31, 2023 |
||||||||||||
|
Core deposit intangible
|
$ | 22,033 | $ | 1,195 | ||||||||||
|
Trade name
|
238 | - | ||||||||||||
|
Intangible assets, net
|
$ | 22,271 | $ | 1,195 | ||||||||||
The $21.1 million increase in the intangibles assets between periods was the result of the $22.7 million of intangible assets acquired in the Merger, partially offset by amortization during the period. As a result of the Merger, the Company acquired a $22.7 million core deposit intangible and a $300 thousand trade name intangible. At December 31, 2024, the core deposit intangibles had a weighted average remaining amortization period of 9.3 years.
Refer to Note 2 - Business Combinationsand Note 8 - Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8 of this annual report for more information regarding business combinations and related activity.
Deposits
The following table presents the composition of deposits, related percentage of total deposits, and spot rates as of December 31, 2024:
|
December 31, 2024
|
December 31, 2023
|
|||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount |
Percentage of Total Deposits |
Spot
Rate(1)
|
Amount |
Percentage of Total Deposits |
Spot
Rate(1)
|
||||||||||||||||||||||||||||||||
|
Noninterest-bearing demand(2)
|
$ | 1,257,007 | 37.0 | % | - | % | $ | 675,098 | 34.7 | % | - | % | ||||||||||||||||||||||||||
|
Interest-bearing NOW accounts(3)
|
673,589 | 19.8 | % | 1.9 | % | 381,943 | 19.7 | % | 2.1 | % | ||||||||||||||||||||||||||||
|
Money market and savings accounts(4)
|
1,182,927 | 34.8 | % | 2.7 | % | 636,685 | 32.8 | % | 2.9 | % | ||||||||||||||||||||||||||||
|
Time deposits(5)
|
164,101 | 4.8 | % | 4.0 | % | 142,005 | 7.3 | % | 4.5 | % | ||||||||||||||||||||||||||||
| Broker time deposits | 121,136 | 3.6 | % | 4.9 | % | 107,825 | 5.5 | % | 4.6 | % | ||||||||||||||||||||||||||||
| Total deposits | $ | 3,398,760 | 100.0 | % | 1.7 | % | $ | 1,943,556 | 100.0 | % | 1.9 | % | ||||||||||||||||||||||||||
(1)Weighted average interest rates at December 31, 2024 and 2023.
(2)Included reciprocal deposit products of $76.6 million at December 31, 2024. There were no reciprocal deposits at December 31, 2023.
(3)Included reciprocal deposit products of $536.0 million and $265.7 million at December 31, 2024 and 2023, respectively.
(4)Included reciprocal deposit products of $76.5 million and $8.3 million at December 31, 2024 and 2023, respectively.
(5)Included CDARS deposits of $65.4 million at December 31, 2024. There were no CDARS deposits at December 31, 2023.
We offer our depositors access to the Certificate of Deposit Account Registry Service ("CDARS"), IntraFi Network Insured Cash Sweep ("ICS"), and Reich & Tang Deposit Solutions ("R&T") networks. We receive an equal dollar amount of reciprocal deposits from other participating banks in exchange for the deposits we place into the networks to fully qualify large customer deposits for FDIC insurance. These reciprocal deposits are not required to be treated as brokered deposits up to the lesser of 20% of the Bank's total liabilities or $5 billion.
As a result of the Merger, the Company acquired the fair value of $37.7 million in CDARS deposits and $306.6 million in R&T deposits. Our total reciprocal deposits increased to $754.4 million, or 22.2% of total deposits and 21.8% of Bank's total liabilities at December 31, 2024, compared to $274.1 million, or 14.1% of total deposits and 13.32% of Bank's total liabilities at December 31, 2023. The excess over 20% increased our wholesale funding to total assets ratio and net non-core funding dependence ratio. These two ratios are within the Bank's internal policy limit.
Total deposits were $3.40 billion at December 31, 2024, an increase of $1.46 billion from $1.94 billion at December 31, 2023. The increase in total deposits was primarily driven by the $1.64 billion in fair value of deposits acquired in the Merger. During the year ended December 31, 2024, there was a $480.4 million increase in reciprocal deposits, a $505.3 million increase in noninterest-bearing demand deposits, excluding reciprocal deposits, a $13.3 million increase in brokered time deposits, a $478.1 million increase in money market and savings accounts, excluding reciprocal deposits, a $21.4 million increase in interest-bearing NOW accounts, excluding reciprocal deposits, and a $22.1 million increase in time deposits. The Company used excess cash acquired from the Merger to pay off high cost callable and noncallable brokered time deposits totaling $233.4 million during the third and fourth quarters of 2024.
At December 31, 2024, noninterest-bearing demand deposits totaled $1.26 billion and represented 37.0% of total deposits, compared to $675.1 million or 34.7% at December 31, 2023. At December 31, 2024 and 2023, total deposits exceeding FDIC deposit insured limits were $1.56 billion, or 46% of total deposits and $816.6 million, or 42% of total deposits, respectively.
The following table sets forth the average balance of deposit accounts and the weighted average rates paid for the periods indicated:
|
For the Year Ended December 31,
|
||||||||||||||||||||||||||
|
2024
|
2023
|
|||||||||||||||||||||||||
| (dollars in thousands) |
Average
Balance
|
Average Rate Paid |
Average
Balance
|
Average Rate Paid |
||||||||||||||||||||||
| Noninterest-bearing demand | $ | 893,586 | - | % | $ | 801,882 | - | % | ||||||||||||||||||
| Interest-bearing NOW accounts | 492,140 | 2.16 | % | 308,537 | 1.67 | % | ||||||||||||||||||||
| Money market and savings accounts | 910,426 | 2.93 | % | 673,176 | 2.23 | % | ||||||||||||||||||||
| Time deposits | 324,249 | 4.76 | % | 180,219 | 3.72 | % | ||||||||||||||||||||
| Total deposits | $ | 2,620,401 | 2.01 | % | $ | 1,963,814 | 1.37 | % | ||||||||||||||||||
The increase in the weighted average rate on deposits was primarily due to repricing deposits in the higher interest rate environment and peer bank deposit competition during the year ended December 31, 2024. Beginning in March 2022 through September 2023, the Federal Reserve's FOMC raised the target Fed funds rate by 525 basis points. Beginning in September 2024 through December 2024, we aggressively lowered our cost of total interest-bearing deposits when the FOMC reduced the target Fed funds rate three times aggregating 100 basis points.
The following table sets forth the maturities of time deposits at December 31, 2024:
|
December 31, 2024
|
||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Three Months of Less |
Over Three Months through Six Months |
Over Six Months through Twelve Months |
Over Twelve Months |
Total | |||||||||||||||||||||||||||
| Time deposits in amounts of $250,000 or less | $ | 144,628 | $ | 40,740 | $ | 14,660 | $ | 4,615 | $ | 204,643 | ||||||||||||||||||||||
|
Time deposits in amounts over $250,000(1)
|
36,564 | 23,309 | 20,452 | 269 | 80,594 | |||||||||||||||||||||||||||
| Total time deposits | $ | 181,192 | $ | 64,049 | $ | 35,112 | $ | 4,884 | $ | 285,237 | ||||||||||||||||||||||
Borrowings
Total borrowings decreased $33.1 million to $69.7 million at December 31, 2024 from $102.9 million at December 31, 2023. The decrease was attributable to a repayment of $85.0 million in FHLB overnight borrowings, offset by $50.8 million in fair value of borrowing acquired in the Merger (refer to Note 10 - Borrowing Arrangementsof the Notes to Consolidated Financial Statements included in Item 8 of this annual report).
A summary of outstanding borrowings, and related information, as of December 31 follows:
| (dollars in thousands) | 2024 | 2023 | |||||||||
| FHLB Advances | |||||||||||
| Outstanding balance | $ | - | $ | 85,000 | |||||||
| Weighted average interest rate, end of period | - | % | 5.70 | % | |||||||
| Average balance outstanding | $ | 19,543 | $ | 26,390 | |||||||
| Weighted average interest rate during year | 5.64 | % | 5.43 | % | |||||||
| Maximum amount outstanding at any month-end during the year | $ | 70,000 | $ | 85,000 | |||||||
| Subordinated Notes | |||||||||||
| Outstanding balance | $ | 73,000 | $ | 18,000 | |||||||
| (dollars in thousands) | 2024 | 2023 | |||||||||
|
Carrying value(1)
|
$ | 69,725 | $ | 17,865 | |||||||
| Weighted average interest rate, end of period | 4.40 | % | 5.50 | % | |||||||
|
Average balance outstanding(2)
|
$ | 39,479 | $ | 17,818 | |||||||
|
Weighted average interest rate during year(3)
|
7.47 | % | 6.09 | % | |||||||
| Maximum amount outstanding at any month-end during the year | $ | 73,000 | $ | 18,000 | |||||||
(1)Amount includes $40 thousand net unamortized issuance costs and $3.2 million fair value adjustments at December 31, 2024, $135 thousand net unamortized issuance costs and no fair value adjustments at December 31, 2023.
(2)Average balance outstanding includes average net unamortized issuance costs and average fair value adjustments for the periods presented.
(3)Weighted average interest rate includes issuance costs and fair value adjustments for the periods presented.
Shareholders' Equity
Total shareholders' equity was $511.8 million at December 31, 2024, compared to $288.2 million at December 31, 2023. The $223.7 million increase between periods was primarily due to the fair value of common stock issued in the Merger of $214.4 million and $825 thousand related to the acceleration of replacement awards issued for non-continuing CALB directors, executives and employees, net income of $5.4 million, stock-based compensation expense of $6.2 million, and stock options exercised of $950 thousand, partially offset by an increase in net of tax of unrealized losses on debt securities available-for-sale of $2.2 million and the repurchase of shares in settlement of restricted stock units of $2.0 million.
On June 14, 2023, we announced an authorized share repurchase plan, providing for the repurchase of up to 550,000 shares of our outstanding common stock, or approximately 3% of our then outstanding shares. Repurchases under the program may occur from time to time in open market transactions, in privately negotiated transactions, or by other means in accordance with federal securities laws and other restrictions. We intend to fund any repurchases from available working capital and cash provided by operating activities. The timing of repurchases, as well as the number of shares repurchased, will depend on a variety of factors, including price; trading volume; business, economic and general market conditions; and the terms of any Rule 10b5-1 plan adopted by us. The repurchase program has no expiration date and may be suspended, modified, or terminated at any time without prior notice.
There were no shares repurchased under this share repurchase plan during the years ended December 31, 2024 and 2023.
Tangible book value per common share at December 31, 2024 was $11.71, compared with $13.56 at December 31, 2023. The $1.85 decrease in tangible book value per common share during the year ended December 31, 2024 was primarily the result of common shares issued in the business combination and the other comprehensive loss related to changes in unrealized losses, net of taxes on available-for-sale securities, partially offset by the impact of share-based compensation expense and the net income during the year. Tangible book value per common share is also impacted by certain other items, including changes in goodwill, and amortization of intangibles.
Prior to the Merger, the holding company qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, was not subject to consolidated capital rules at the bank holding company level. Beginning in the third quarter of 2024, the holding company became subject to the consolidated capital rules at the bank holding company level. The Company's leverage capital ratio and total risk-based capital ratio were 9.53% and 13.67%, respectively, at December 31, 2024. The Bank's leverage capital ratio and total risk-based capital ratio were 11.15% and 13.55%, respectively, at December 31, 2024.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to meet our cash flow requirements, including inflows and outflows of cash for depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs. Several factors influence our liquidity needs, including depositor and borrower activity, interest rate trends, changes in the economy, maturities, re-pricing and interest rate sensitivity of our debt securities, loan portfolio and deposits. We attempt to maintain a total liquidity ratio (liquid assets, including cash and due from banks, federal funds sold, fully disbursed loans held for sale, investments maturing one year or less, and available-for-sale debt securities not pledged as collateral expressed as a percentage of total deposits and short term debt) above approximately 10.0%. Our total liquidity ratios were 15.7% at December 31, 2024 and 11.1% at December 31, 2023. During the year ended December 31, 2024, we deployed our excess liquidity to repay high cost FHLB overnight advances of $85.0 million and callable and noncallable brokered time deposits totaling $233.4 million during the third and fourth quarters of 2024. For additional information regarding our operating, investing, and financing cash flows, see "Consolidated Statements of Cash Flows"in our audited consolidated financial statements contained in Item 8 of this annual report.
California Bank of Commerce, N.A.
The Bank's primary sources of liquidity are derived from deposits from customers, principal and interest payments on loans and debt securities, FHLB advances and other borrowings. The Bank's primary uses of liquidity include customer withdrawals of deposits, extensions of credit to borrowers, operating expenses, and repayment of FHLB advances and other borrowings. While maturities and scheduled amortization of loans and debt securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.
At December 31, 2024, we had a secured line of credit of $780.9 million from the FHLB, of which $753.9 million was available. This secured borrowing arrangement is collateralized under a blanket lien on qualifying real estate loans and is subject to us providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At December 31, 2024, we had pledged qualifying loans with an unpaid principal balance of $1.41 billion for this line. In addition, at December 31, 2024, we used $27.0 million of our secured FHLB borrowing capacity to have the FHLB issue letters of credit to meet collateral requirements for deposits from the State of California and other public agencies. There were no overnight borrowings at December 31, 2024.
At December 31, 2024, we had credit availability of $318.5 million at the Federal Reserve discount window to the extent of collateral pledged. At December 31, 2024, we had pledged held-to-maturity debt securities with an amortized cost of $53.3 million and qualifying loans with an unpaid principal balance of $379.8 million as collateral through the Borrower-in-Custody ("BIC") program. We also pledged available-for-sale debt securities with an amortized cost of $3.0 million as collateral for secured public deposits and for other purposes as required by law or contract provisions. We had no discount window borrowings at December 31, 2024.
We have four overnight unsecured credit lines from correspondent banks totaling $90.5 million at December 31, 2024. The lines are subject to annual review. There were no outstanding borrowings under these lines at December 31, 2024 and 2023.
California BanCorp
The primary sources of liquidity of the Company, on a stand-alone holding company basis, are derived from dividends from the Bank, borrowings, and its ability to issue debt and raise capital. The Company's primary uses of liquidity are operating expenses and payments of interest and principal on borrowings. At December 31, 2024 and 2023, the cash and due from banks was $4.1 million and $3.6 million, respectively.
We acquired a revolving line of credit with a commitment of $3.0 million, This revolving line of credit's interest rate, due quarterly, was Prime plus 0.40% and had a one-year term that matures in November 2024 and was not renewed.
On May 28, 2020, we issued $18 million of 5.50% Fixed-to-Floating Rate Subordinated Notes Due 2030 (the "Notes"). The Notes which mature March 25, 2030 accrue interest at a fixed rate of 5.50% through the fixed rate period to March 26, 2025, after which interest accrues at a floating rate of 90-day SOFR plus 3.50%, until maturity, unless redeemed early, at our option, after the end of the fixed rate period. Issuance costs of $475 thousand were incurred and are being amortized over the first 5-year fixed term of the Notes; unamortized issuance costs at December 31, 2024 and 2023, were $40 thousand and $135 thousand, respectively. The net unamortized issuance costs are netted against the balance and recorded in the borrowings in the consolidated balance sheets. The amortization expenses are recorded in interest expense on the consolidated statements of income. At December 31, 2024, we were in compliance with all covenants and terms of the Notes.
In connection with the Merger, the Company assumed $20 million in subordinated debt, with a fixed interest rate of 5.00% and a stated maturity of September 30, 2030. Beginning September 30, 2025, the interest rate changes to a quarterly variable rate equal to the then current 90-day SOFR plus 4.88%, until maturity, unless redeemed early, at the Company's option, after the end of the fixed-rate period. The subordinated debt was initially recognized with a fair value discount of $794 thousand. At December 31, 2024, the net unamortized fair value discount was $509 thousand. The net unamortized fair value discount is netted against the balance and recorded in borrowings in the consolidated balance sheets. The amortization of the fair value discount is recorded in interest expense in the consolidated statements of income. At December 31, 2024, the Company was in compliance with all covenants and terms of these notes.
The Company also assumed in the Merger an additional $35 million in subordinated debt, with a fixed interest rate of 3.50% and a stated maturity of September 1, 2031. Beginning August 17, 2026, the interest rate changes to a quarterly variable rate equal to the then current 90-day SOFR plus 2.86%, until maturity, unless redeemed early, at the Company's option, after the end of the fixed-rate period. The subordinated debt was initially recognized with a fair value discount of $3.4 million. At December 31, 2024, the net unamortized fair value discount was $2.7 million. The net unamortized fair value discount is netted against the balance and recorded in borrowings in the consolidated balance sheets. The amortization of the fair value discount is recorded in interest expense in the consolidated statements of income. At December 31, 2024, the Company was in compliance with all covenants and terms of these notes.
At December 31, 2024, consolidated cash and cash equivalents totaled $388.2 million, an increase of $301.4 million from $86.8 million at December 31, 2023. The increase in cash and cash equivalents is the result of $50.3 million in net cash provided by operating cash flows, $524.7 million net cash provided by investing cash flows, partially offset by $273.6 million of net cash flows used in financing cash flows.
Our operating cash flows are comprised of net income, adjusted for certain non-cash transactions, including but not limited to, depreciation and amortization, provision for credit losses, loans originated for sale and related gains and proceeds from sales, stock-based compensation, and amortization of net deferred loan costs and premiums. Net cash flows from operating cash flows were $50.3 million for the year ended December 31, 2024, compared to $33.1 million for the same 2023 period. The $17.2 million increase was primarily due to a $4.8 million increase in loss on sale of OREO, a $20.8 million increase in provision of credit losses primarily related to the initial allowance for credit losses on acquired loans and unfunded commitments from the Merger, and a $22.9 million increase in other items, net, partially offset by a decrease in net income generated during the year ended December 31, 2024, a $10.3 million decrease in accretion of net discount and deferred loan fees, and a $2.2 million decrease in net cash provided by sales of loans held for sale, net of originations.
Our investing cash flows are primarily comprised of cash inflows and outflows from our debt securities and loan portfolios, net cash acquired in business combinations, as applicable, and to a lesser extent, purchases of stock investments, purchases and proceeds from bank-owned life insurance, and capital expenditures. Net cash provided by investing activities was $524.7 million for the year ended December 31, 2024, compared to net cash used in investing activities of $78.9 million for 2023. The $603.6 million increase in cash provided by investing activities was primarily due to the impact of the Merger and resulting cash acquired of $336.3 million, a decrease in net loan fundings of $217.7 million and a decrease in net investment securities purchased of $41.5 million, coupled with proceeds from the sale of other real estate owned of $8.3 million.
Our financing cash flows are primarily comprised of inflows and outflows of deposits, borrowing activity, proceeds from the issuance of common shares, and to a lesser extent, repurchases of common shares and cash flows from share-based compensation arrangements. Net cash used in financing activities was $273.6 million for the year ended December 31, 2024, compared to net cash provided by financing activities of $45.9 million for the same 2023 period. The $319.4 million decrease in financing cash flows was primarily due to a $199.2 million net decrease in deposit cash flows, offset by a $120.0 million increase in net repayment activity on overnight FHLB advances.
We believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements as of December 31, 2024.
Commitments and Contractual Obligations
The following table presents information regarding our outstanding commitments and contractual obligations as of December 31, 2024:
| (Dollars in thousands) |
One Year
or Less
|
Over One Year to Three Years
|
Over Three Years to Five Years |
More than Five Years | Total | |||||||||||||||||||||||||||
| Commitments to extend credit | $ | 637,920 | $ | 205,197 | $ | 27,855 | $ | 54,104 | $ | 925,076 | ||||||||||||||||||||||
| Letters of credit issued to customers | 14,876 | 1,240 | 31 | - | 16,147 | |||||||||||||||||||||||||||
| Total commitments | $ | 652,796 | $ | 206,437 | $ | 27,886 | $ | 54,104 | $ | 941,223 | ||||||||||||||||||||||
| Subordinated notes | - | - | - | 73,000 | 73,000 | |||||||||||||||||||||||||||
| Certificates of deposit | 280,353 | 4,632 | 252 | - | 285,237 | |||||||||||||||||||||||||||
| Lease obligations | 5,109 | 8,556 | 4,882 | 2,439 | 20,986 | |||||||||||||||||||||||||||
| Total contractual obligations | $ | 285,462 | $ | 13,188 | $ | 5,134 | $ | 75,439 | $ | 379,223 | ||||||||||||||||||||||
At December 31, 2024 and 2023, we also had unfunded commitments of $5.9 million and $3.2 million, respectively, for investments in other equity investments.
Capital Resources
Maintaining adequate capital is always an important objective of the Company. Abundant and high quality capital helps weather economic downturns and market volatility, protect depositors' funds, and support growth, such as expanding operations or making acquisitions. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. We are authorized to issue 50,000,000 shares of common stock of which 32,265,935 have been issued as of December 31, 2024. We are also authorized to issue 50,000,000 shares of preferred stock, of which none has been issued as of December 31, 2024. On June 14, 2023, we announced an authorized share repurchase plan, providing for the repurchase of up to 550,000 shares of our outstanding common stock, or approximately 3% of our then outstanding shares.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements.Prior to the Merger with CALB during the third quarter of 2024, the holding company qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, was not subject to consolidated capital rules at the bank holding company level. Beginning in the third quarter of 2024, the Company became subject to the consolidated capital rules at the bank holding company level.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the holding company and the Bank must meet specific capital guidelines that involve quantitative measures of their respective assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. These capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The holding company and Bank also elected to exclude the effects of credit loss accounting under CECL from the common equity Tier 1 capital ratio for a three-year transitional period.
A holding company and bank considered to be "adequately capitalized" is required to maintain a minimum total capital ratio of 8.0%, a minimum Tier 1 capital ratio of 6.0%, a minimum common equity Tier 1 capital ratio of 4.5%, and a minimum leverage ratio of 4.0%. Banks considered to be "well capitalized" must maintain a minimum total capital ratio of 10.0%, a minimum Tier 1 capital ratio of 8.0%, a minimum common equity Tier 1 capital ratio of 6.5%, and a minimum leverage ratio of 5.0%.
Basel III, the comprehensive regulatory capital rules for U.S. banking organizations, requires all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the capital conservation buffer increased by 0.625% to its fully phased-in 2.5%, such that the common equity Tier 1, Tier 1 and total capital ratio minimums inclusive of the capital conservation buffers were 7.0%, 8.5%, and 10.5% at December 31, 2024. At December 31, 2024, the Company and the Bank were in compliance with the capital conservation buffer requirements. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios as set forth in the table below.
As of December 31, 2024, the Company's and the Bank's regulatory capital ratios exceeded the regulatory capital requirements to be considered "well capitalized" under the regulatory framework for prompt corrective action ("PCA"). As of December 31, 2023, the Bank's regulatory capital ratios exceeded the regulatory capital requirements to be considered "well capitalized" under the regulatory
framework for PCA. Management believes, as of December 31, 2024 and December 31, 2023, that the Company and the Bank met all capital adequacy requirements to which each is subject.
To be categorized as well-capitalized, the Company and the Bank must maintain minimum ratios as set forth in the table below.
The following table also sets forth the Bank's actual capital amounts and ratios:
| Amount of Capital Required | |||||||||||||||||||||||||||||||||||
| To be | To be Well- | ||||||||||||||||||||||||||||||||||
| Adequately | Capitalized under | ||||||||||||||||||||||||||||||||||
| Actual | Capitalized | PCA Provisions | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||
|
As of December 31, 2024:
|
|||||||||||||||||||||||||||||||||||
| California BanCorp: | |||||||||||||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 496,912 | 13.67 | % | $ | 290,897 | 8.0 | % | N/A | N/A | |||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | $ | 385,354 | 10.60 | % | $ | 218,173 | 6.0 | % | N/A | N/A | |||||||||||||||||||||||||
| CET1 Capital (to Risk-Weighted Assets) | $ | 385,354 | 10.60 | % | $ | 163,630 | 4.5 | % | N/A | N/A | |||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | $ | 385,354 | 9.53 | % | $ | 161,710 | 4.0 | % | N/A | N/A | |||||||||||||||||||||||||
|
California Bank of Commerce, N.A.:
|
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| Total Capital (to Risk-Weighted Assets) | $ | 492,433 | 13.55 | % | $ | 290,753 | 8.0 | % | $ | 363,441 | 10.0 | % | |||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 450,600 | 12.40 | % | 218,065 | 6.0 | % | 290,753 | 8.0 | % | ||||||||||||||||||||||||||
| CET1 Capital (to Risk-Weighted Assets) | 450,600 | 12.40 | % | 163,548 | 4.5 | % | 236,237 | 6.5 | % | ||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | 450,600 | 11.15 | % | 161,689 | 4.0 | % | 202,111 | 5.0 | % | ||||||||||||||||||||||||||
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As of December 31, 2023:
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California Bank of Commerce, N.A.:
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| Total Capital (to Risk-Weighted Assets) | $ | 289,743 | 13.51 | % | $ | 171,575 | 8.0 | % | $ | 214,469 | 10.0 | % | |||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 270,341 | 12.61 | % | 128,681 | 6.0 | % | 171,575 | 8.0 | % | ||||||||||||||||||||||||||
| CET1 Capital (to Risk-Weighted Assets) | 270,341 | 12.61 | % | 96,511 | 4.5 | % | 139,405 | 6.5 | % | ||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | 270,341 | 11.65 | % | 92,818 | 4.0 | % | 116,022 | 5.0 | % | ||||||||||||||||||||||||||
Refer to Note 16 - Regulatory Matters of the Notes to Consolidated Financial Statements included in Item 8 of this annual report for more information regarding regulatory capital.
Dividend Restrictions
The primary source of funds for the Company is dividends from the Bank. Under federal law, the Bank may not declare a dividend in excess of its undivided profits and, absent the approval of the OCC, the Bank's primary banking regulator, if the total amount of dividends declared by the Bank in any calendar year exceeds the total of the Bank's retained net income of that current period, year to date, combined with its retained net income for the preceding two years. The Bank also is prohibited from declaring or paying any dividend if, after making the dividend, the Bank would be considered "undercapitalized" (as defined by reference to other OCC regulations). Federal bank regulatory agencies have authority to prohibit banking institutions from paying dividends if those agencies determine that, based on the financial condition of the bank, such payment will constitute an unsafe or unsound practice.
During the year ended December 31, 2024, there were no dividends paid by the Bank to the Company. The Bank paid dividends to the Company of $2.0 million during the year ended December 31, 2023.
The Federal Reserve limits the amount of dividends that bank holding companies may pay on common stock to income available over the past year, and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. It is also the Federal Reserve's policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policies.
During the years ended December 31, 2024 and 2023, there were no dividends declared to shareholders by the Company.
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