Southern California Bancorp Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. The source filing is for Southern California Bancorp and Bank of Southern California, N.A.; it does not appear to be a California Bancorp filing or a standalone 2023 fourth-quarter report.
Business Context
Southern California Bancorp is a California bank holding company whose wholly owned subsidiary operates a relationship-focused commercial bank serving small- and medium-sized businesses, professionals and individuals through 13 branches in Southern California and the Inland Empire. Primary lending activities include commercial real estate, construction and land development, commercial and industrial, SBA and consumer loans. The common stock began trading on Nasdaq under the symbol BCAL in May 2023.
Financial Performance and Position
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $94.1 million | $87.8 million | +7.2% |
| Provision for credit losses | $0.9 million | $6.0 million | -$5.0 million |
| Noninterest income | $3.4 million | $3.7 million | -$0.3 million |
| Noninterest expense | $59.7 million | $63.5 million | -$3.8 million |
| Net income | $25.9 million | $16.1 million | +60.8% |
| Diluted EPS | $1.39 | $0.88 | +58.0% |
| Net interest margin | 4.33% | 4.06% | +27 basis points |
| Return on average assets | 1.12% | 0.70% | +42 basis points |
| Return on average equity | 9.48% | 6.44% | +304 basis points |
| Efficiency ratio | 61.3% | 69.5% | Improved |
| Cash flow from operating activities | $33.1 million | $13.4 million | +$19.8 million |
At December 31, 2023, total assets were $2.36 billion, total loans including loans held for sale were $1.96 billion, deposits were $1.94 billion, and shareholders’ equity was $288.2 million. Loans held for investment increased 3.1% to $1.96 billion, while deposits increased 0.6% to $1.94 billion. The loans-to-deposits ratio was 101.1%.
Deposit funding became more expensive: the average cost of deposits increased to 1.37% from 0.23%, while average noninterest-bearing deposits declined to $801.9 million from $1.01 billion. Total borrowings were $102.9 million, including $85.0 million of FHLB advances and $17.9 million of subordinated notes.
Liquidity remained supported by $86.8 million of cash and cash equivalents, a 11.1% total liquidity ratio, $339.2 million of available FHLB capacity, $141.6 million of Federal Reserve discount-window capacity and $75.0 million of unsecured correspondent-bank lines. Total available liquidity was approximately $772.6 million.
The Bank remained well capitalized. At year-end, total risk-based capital was 13.51%, Tier 1 risk-based capital was 12.61%, CET1 capital was 12.61% and the leverage ratio was 11.65%.
Material Changes Versus 2022
- Net income increased primarily because of higher net interest income, lower credit-loss provision and lower noninterest expense.
- Net interest income benefited from higher loan yields and interest rates, but the cost of interest-bearing deposits rose substantially and noninterest-bearing deposits declined.
- Noninterest expense fell largely because 2022 included $5.5 million of litigation settlements and $1.2 million of merger-related expenses. These items did not recur in 2023.
- Noninterest income declined modestly because of lower SBA loan-sale gains and lower bank-owned life insurance income. The Company sold nine SBA 7(a) loans in 2023 versus 17 in 2022.
- The allowance for loan losses increased to $22.6 million from $17.1 million, and total allowance for credit losses increased to $23.5 million from $18.4 million.
- The Company adopted CECL on January 1, 2023, recording a $3.9 million net reduction to beginning retained earnings and a $5.5 million gross increase in credit-loss reserves.
- Nonperforming loans increased sharply to $13.0 million from $41 thousand, primarily due to one multifamily loan. A $1.3 million partial charge-off was recorded after updated collateral appraisals.
- Accumulated other comprehensive loss improved to $4.5 million from $6.4 million, although the securities portfolio still contained material unrealized losses.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to continue emphasizing organic commercial-bank growth while remaining opportunistic regarding acquisitions. Management stated that the 2023 banking-industry turmoil had not caused a material impact on the Company’s financial condition, customer base, liquidity, capital position or risk profile.
The principal risk is concentration in commercial real estate. CRE loans represented approximately 529.5% of total risk-based capital for regulatory concentration purposes, and construction and land-development loans represented 84.0% of total risk-based capital. Real-estate-secured loans represented approximately 83% of total loans. Management highlighted the potential effects of higher interest rates, declining property values, refinancing pressure, weaker borrower cash flows and deposit competition.
Approximately 42% of deposits exceeded FDIC insurance limits at year-end, although $274.1 million was placed through the Insured Cash Sweep program. Brokered time deposits were $107.8 million, or 5.5% of total deposits.
The Company reported $3.2 million of gross unrealized losses on held-to-maturity securities and $7.1 million on available-for-sale securities. Management attributed the losses primarily to interest-rate changes rather than credit deterioration. A modeled immediate 300-basis-point rate increase would reduce projected 12-month net interest income by approximately 0.4%, while a 300-basis-point decrease would reduce it by approximately 6.0%; these are model estimates, not guidance.
On January 30, 2024, the Company announced an all-stock merger with California BanCorp, parent of California Bank of Commerce. The transaction was valued at approximately $233.6 million based on the January 29 closing price. California BanCorp shareholders would receive 1.590 Southern California Bancorp shares per share, with anticipated ownership of approximately 42.9% of the combined company. Closing was expected in the third quarter of 2024, subject to regulatory and shareholder approvals. Certain termination circumstances could require a $9.3 million fee.
The filing states that no material cybersecurity incidents were identified during 2023, that legal proceedings were not expected to have a material adverse effect, and that goodwill was not impaired. The Company has not paid cash dividends and stated that it does not presently intend to begin paying dividends in the foreseeable future.
Most Important Facts to Verify
- Confirm the requested issuer: the supplied filing is Southern California Bancorp, ticker BCAL, not California Bancorp.
- Monitor the $13.0 million multifamily nonaccrual loan, collateral resolution and any additional charge-offs or provisions.
- Assess commercial real estate concentration, particularly office and multifamily exposure, loan-to-value levels and refinancing maturities.
- Track deposit stability, deposit pricing, uninsured deposits, brokered deposits and the loans-to-deposits ratio.
- Reconcile the reported liquidity sources with outstanding FHLB borrowings and pledged collateral.
- Evaluate sensitivity to interest-rate changes, including the securities portfolio’s unrealized losses and deposit beta assumptions.
- Verify regulatory approvals, shareholder approvals, transaction costs, termination provisions and integration risks for the proposed California BanCorp merger.
- Review the impact of CECL model assumptions and management’s disclosed sensitivity of approximately $3.4 million of additional ACL under a fully weighted downside scenario.