Southern California Bancorp — Q1 2023 Form 10-Q Summary
Reporting period: Three months ended March 31, 2023. The filing identifies the registrant as Southern California Bancorp, parent of Bank of Southern California, N.A.; this differs from the request metadata naming California Bancorp. The company operated 13 branches in Southern California and began trading on Nasdaq under BCAL on May 11, 2023.
Financial Performance and Position
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Net interest income | $24.9 million | $17.8 million in Q1 2022 |
| Provision for credit losses | $202 thousand | $1.85 million in Q1 2022 |
| Noninterest income | $1.57 million | $1.60 million in Q1 2022 |
| Noninterest expense | $15.0 million | $15.6 million in Q1 2022 |
| Net income | $8.22 million | $1.45 million in Q1 2022 |
| Diluted EPS | $0.44 | $0.08 in Q1 2022 |
| Net interest margin | 4.71% | 3.40% in Q1 2022 |
| Return on average assets | 1.46% | 0.26% in Q1 2022 |
| Efficiency ratio | 56.8% | 80.2% in Q1 2022 |
| Net cash provided by operating activities | $18.3 million | $3.4 million used in Q1 2022 |
- Total assets were $2.29 billion, up $8.1 million from December 31, 2022.
- Loans held for investment were $1.89 billion, down $3.8 million from year-end. Real-estate-secured loans represented 83% of total loans.
- Deposits increased $54.0 million to $1.99 billion. Noninterest-bearing demand deposits declined to $882.0 million, or 44.4% of deposits.
- Cash and cash equivalents were $102.1 million, compared with $86.8 million at year-end.
- Borrowings declined $50.0 million to $17.8 million, consisting primarily of subordinated notes; no FHLB or Federal Reserve borrowings were outstanding at quarter-end.
- Shareholders’ equity was $267.5 million. Tangible common equity to tangible assets was 10.13%, and tangible book value per share was $12.49.
- The Bank remained well capitalized, with total risk-based capital of 12.61%, CET1 capital of 11.68%, and Tier 1 leverage capital of 11.15%.
Material Changes Versus Prior Periods
- Net income increased $6.8 million year over year, primarily from higher net interest income and lower credit-loss provisions. Compared with Q4 2022, net income decreased $250 thousand.
- Net interest income increased $7.1 million year over year as average loan balances and asset yields rose. The average loan yield increased to 5.78% from 4.70%.
- Funding costs increased materially: the cost of deposits rose to 0.80% from 0.08% year over year, while the cost of funds rose to 0.88% from 0.14%.
- Gain on sale of loans increased to $808 thousand from $49 thousand, driven by sales of seven SBA loans with a net carrying value of $9.9 million and gains of $797 thousand.
- Noninterest expense declined year over year because merger-related and core-system conversion costs were absent, partially offset by higher legal, professional, regulatory, and stock-based compensation costs.
- The company adopted CECL on January 1, 2023. The adoption increased the allowance for loan losses by $5.0 million, increased the reserve for unfunded commitments by $439 thousand, and reduced beginning retained earnings by $3.9 million after tax.
- The allowance for credit losses rose to $24.1 million from $18.4 million at year-end, while the allowance for loan losses increased to 1.18% of loans from 0.90%.
Liquidity, Outlook, Risks, and Unusual Items
- Management reported a total liquidity ratio of 11.4%, above its approximate 10% target. Available capacity included $453.2 million under FHLB secured lines, $109.8 million through the Federal Reserve discount window, and $75.0 million through unsecured correspondent lines.
- Approximately 50% of deposits exceeded FDIC insurance limits at March 31, 2023. Insured Cash Sweep deposits increased to $140.3 million, or 7% of deposits, from $65.5 million at year-end.
- Management stated that recent banking-industry turmoil had not materially affected its financial condition, operations, customer base, liquidity, capital position, or risk profile. However, it identified risks from deposit competition, liquidity pressure, margin compression, higher interest rates, recession, and credit deterioration.
- Commercial real estate exposure was significant: regulatory-definition CRE loans represented 537% of total risk-based capital, and construction and land-development loans represented 95% of total risk-based capital.
- Available-for-sale securities had a $7.1 million pretax unrealized loss at quarter-end, reflected primarily in accumulated other comprehensive loss. Management attributed the losses to interest-rate and market factors rather than credit deterioration and recorded no securities credit-loss allowance.
- A stress test indicated that net-of-tax unrealized losses on held-to-maturity and available-for-sale securities could reach $27.9 million under a 300-basis-point rate shock; management stated the Bank would remain well capitalized if those losses were realized.
- Management used probability-weighted base and downside economic scenarios for CECL. Applying a 100% weighting to the first downside scenario would have increased the ACL by approximately $3 million; this was presented as a sensitivity analysis, not management’s selected assumption.
- Performance-based restricted stock units totaling 275,171 shares vested in March 2023, producing $632 thousand of accelerated stock-based compensation expense.
- On June 14, 2023, the company authorized repurchases of up to 550,000 shares, approximately 3% of outstanding shares. This subsequent event was not in effect during the quarter.
Important Facts for Investors to Verify
- Confirm the registrant identity and relationship between Southern California Bancorp, Bank of Southern California, N.A., and the company identified in the request metadata.
- Monitor deposit mix, uninsured deposits, brokered time deposits, and the continued availability of liquidity facilities.
- Assess concentration risk in commercial real estate and construction lending, including sensitivity to higher rates and weaker Southern California real estate conditions.
- Track CECL assumptions, qualitative reserves, loan downgrades, charge-offs, and any increase in nonperforming assets.
- Evaluate the effect of deposit-rate competition on net interest margin and earnings.
- Review the potential effect of unrealized securities losses and interest-rate shocks on tangible equity and regulatory capital.
- Verify execution and funding of the June 2023 share repurchase authorization and any subsequent changes in capital management.