1. NATURE OF OPERATIONS Organization California BanCorp (the Company, or we), a California corporation headquartered in Oakland, California, is the bank holding company for its wholly-owned subsidiary California Bank of Commerce (the Bank). The Bank has 2 full service branches in California located in Contra Costa County and Santa Clara County and 4 loan production offices in California located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders equity and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2019, and the notes thereto, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the SEC), under the Securities and Exchange Act of 1934, as amended (the Exchange Act). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2020. The Companys accounting and reporting policies conform to GAAP and to general practices within the banking industry. Subsequent Events Management has reviewed all events through the date the unaudited consolidated financial statements were filed with the SEC. See Note 7 to the unaudited consolidated financial statements for additional information regarding the COVID-19 pandemic. Use of Estimates Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The estimates utilized to determine the appropriate allowance for loan losses at September 30, 2020 may be materially different from actual results due to the COVID-19 pandemic. See Note 7 to the unaudited consolidated financial statements for additional information regarding the COVID-19 pandemic. Reclassifications Certain prior balances in the unaudited consolidated financial statements may have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or shareholders equity. Specifically, we have modified how we disclose our loan segments to be purpose-based versus collateral-based (as previously disclosed) so that there is more transparency to our SBA loan portfolio which now consists largely of Paycheck Protection Program loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). As a result, prior balances for both the current and prior year in the unaudited consolidated statements have been reclassified. These reclassifications had no effect on current or prior year net income, shareholders equity, total gross loan balances, or the overall balance of the allowance for credit losses. Earnings Per Share (EPS) Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the period. In determining the weighted average number of shares outstanding, vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method. Three months ended September 30, Nine months ended September 30, (Dollars in thousands, except per share data) 2020 2019 2020 2019 Net income available to common shareholders $ 495 $ 2,004 $ 2,518 $ 6,422 Weighted average basic common shares outstanding 8,141,807 8,051,729 8,124,387 8,040,196 Add: dilutive potential common shares 27,527 83,608 35,134 80,180 Weighted average diluted common shares outstanding 8,169,334 8,135,337 8,159,521 8,120,376 Basic earnings per share $ 0.06 $ 0.25 $ 0.31 $ 0.80 Diluted earnings per share $ 0.06 $ 0.25 $ 0.31 $ 0.79 New Financial Accounting Standards In December 2019, the Financial Accounting Standards Board (FASB) issued Simplifying the Accounting for Income Taxes (Topic 740) (ASU 2019-12) removing certain exceptions to the general principles in Accounting Standards Codification (ASC) 740 and clarifying and amending existing guidance to provide for more consistent application. ASU 2019-12 will become effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Companys operating results or financial condition. In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326). The guidance is to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. In October of 2019, the FASB approved a proposal to defer implementation of the CECL model by smaller reporting companies to January 1, 2023. The Company currently qualifies for this deferral and has elected to defer adoption but has also taken steps to effect implementation of the guidance including: (1) forming a CECL Committee; (2) engaging a third party vendor to develop models and model assumptions; (3) established initial framework for portfolio segmentation for application of the models; and (4) received preliminary results for consideration and evaluation. The Company will continue to calibrate and validate its approach during the period of deferral.