Filing Overview
Registrant: Southern California Bancorp (Nasdaq: BCAL), not California BanCorp (Nasdaq: CALB). The filing covers the unaudited quarter ended March 31, 2024 and was filed May 8, 2024. The company operates through Bank of Southern California, N.A., a relationship-focused community bank with 13 branches serving Southern California and the Inland Empire.
Business Context and Reporting Period
The company provides commercial banking services to individuals, professionals, and small- to medium-sized businesses. Its loan portfolio is concentrated in commercial real estate, construction and land development, and commercial and industrial lending.
On January 30, 2024, Southern California Bancorp announced an all-stock merger agreement with California BanCorp. The transaction was valued at approximately $233.6 million at announcement, with California BanCorp shareholders to receive 1.590 shares of Southern California Bancorp for each share held. Closing was expected in the third quarter of 2024, subject to regulatory and shareholder approvals.
Financial Performance and Key Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total interest and dividend income | $31.3 million | $29.2 million | +$2.1 million |
| Net interest income | $20.5 million | $24.9 million | -$4.4 million |
| Net interest margin | 3.80% | 4.71% | -91 basis points |
| Noninterest income | $1.4 million | $1.6 million | -$157 thousand |
| Noninterest expense | $15.0 million | $15.0 million | Essentially unchanged |
| Net income | $4.9 million | $8.2 million | -$3.3 million |
| Diluted EPS | $0.26 | $0.44 | -$0.18 |
| Return on average assets | 0.86% | 1.46% | Down |
| Return on average common equity | 6.85% | 12.72% | Down |
Interest expense rose to $10.8 million from $4.3 million as deposit and borrowing costs increased. The average cost of deposits rose to 2.05% from 0.80%, while the average cost of funds increased to 2.17% from 0.88%. The decline in net interest margin was primarily caused by higher funding costs, which more than offset higher loan and earning-asset yields.
The company recorded a $331 thousand reversal of credit losses, compared with a $202 thousand provision in Q1 2023. Noninterest expense included $549 thousand of merger-related costs. Excluding those costs, the efficiency ratio was 65.9%, compared with the reported 68.4%.
Balance Sheet, Cash Flow, Debt and Liquidity
| Metric | March 31, 2024 | December 31, 2023 |
|---|---|---|
| Total assets | $2.29 billion | $2.36 billion |
| Loans held for investment | $1.88 billion | $1.96 billion |
| Deposits | $1.93 billion | $1.94 billion |
| Borrowings | $44.9 million | $102.9 million |
| Shareholders’ equity | $292.5 million | $288.2 million |
| Cash and cash equivalents | $86.5 million | $86.8 million |
| Loans-to-deposits ratio | 97.7% | 101.1% |
- Operating cash flow was $8.1 million, compared with $18.3 million in Q1 2023.
- Investing cash flow was $62.5 million, primarily reflecting a $61.6 million net repayment or funding reduction in loans.
- Financing cash flow was negative $70.8 million, driven mainly by a $58.0 million repayment of Federal Home Loan Bank advances and a $13.0 million decrease in deposits.
- Total available liquidity was approximately $809.2 million, including $395.3 million of available FHLB capacity, $125.4 million of Federal Reserve discount-window capacity, and $75.0 million of unsecured correspondent-bank lines.
- Outstanding debt consisted of $27.0 million of FHLB advances and $17.9 million of subordinated notes. The subordinated notes carry a fixed 5.50% rate through March 2025 and then convert to a floating SOFR-based rate.
Asset Quality and Capital
- The allowance for loan losses was $22.3 million, or 1.18% of loans, compared with $22.6 million, or 1.15%, at year-end 2023. The total allowance for credit losses, including unfunded commitments, was $23.2 million.
- Special mention loans increased materially to $39.6 million from $3.0 million. Substandard loans declined to $11.3 million from $19.5 million.
- Nonaccrual loans declined to $6.2 million from $13.0 million, but other real estate owned increased to $13.1 million following foreclosure on three multifamily properties. Total nonperforming assets rose to $19.3 million, or 0.84% of assets, from $13.0 million, or 0.55%.
- Real estate-secured loans represented 85% of total loans. Commercial real estate loans represented approximately 54.4% of the loan portfolio and 506% of total risk-based capital under the regulatory definition.
- The Bank remained well capitalized. At March 31, 2024, total risk-based capital was 14.12%, CET1 capital was 13.14%, and Tier 1 leverage capital was 12.03%.
Material Changes Versus Prior Comparable Period
- Net income decreased 40% year over year, primarily because net interest income fell 18% as funding costs increased substantially.
- Average noninterest-bearing deposits declined to $661.3 million from $915.2 million, while average interest-bearing deposits increased to $1.26 billion from $1.04 billion.
- Loans held for investment declined $74.2 million during the quarter, primarily due to $98.3 million of payoffs and a $13.0 million transfer to OREO, partly offset by $28.9 million of originations and $8.0 million of net advances.
- Credit migration worsened in the special mention category, and OREO increased by $13.1 million, although nonaccrual loans declined after the larger multifamily loan was transferred to OREO.
- Available-for-sale securities generated an after-tax accumulated other comprehensive loss of $6.1 million at quarter-end, compared with $4.5 million at year-end, reflecting higher interest rates and market-value declines.
- Q1 2024 included $549 thousand of merger-related expenses; Q1 2023 included $632 thousand of accelerated stock-based compensation expense that did not recur.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects the California BanCorp merger to close in the third quarter of 2024, subject to customary conditions, and recognizes that regulatory approvals, shareholder approvals, integration, deposit retention, transaction costs, and timing could affect the outcome.
Management cited persistent interest-rate, inflation, deposit-competition, liquidity, and economic risks. The company expects continued pressure from elevated deposit costs and notes that approximately 43% of deposits exceeded FDIC insurance limits at quarter-end, although the company offers Insured Cash Sweep products.
Management’s credit-loss estimate used probability-weighted base and downside economic scenarios. A hypothetical 100% weighting to the downside scenario would have increased the allowance by approximately $3.4 million. The company’s largest ongoing risk is its concentration in commercial real estate, including office, multifamily, construction, and land-development lending. Management also highlighted risks from higher rates, declining property values, recessionary conditions, deposit outflows, liquidity stress, cybersecurity, regulatory changes, and merger execution.
The company reported no material litigation exposure, no material changes to previously disclosed risk factors, effective disclosure controls, and no defaults on senior securities.
Important Facts for Investors to Verify
- Confirm the identity of the issuer: this filing is for Southern California Bancorp, not California BanCorp.
- Track the status, regulatory approvals, shareholder approvals, consideration, dilution, and expected closing date of the California BanCorp merger.
- Monitor net interest margin and deposit pricing, particularly the decline in noninterest-bearing deposits and the 2.05% average cost of deposits.
- Review the sharp increase in special mention loans and the rise in OREO and total nonperforming assets.
- Assess commercial real estate concentration, office and multifamily exposure, collateral values, and sensitivity of the allowance for credit losses to downside economic scenarios.
- Evaluate the impact of unrealized securities losses on tangible equity and liquidity under higher-rate stress scenarios.
- Verify the sustainability of reported liquidity, including pledged collateral, FHLB availability, discount-window capacity, and deposit retention.
- Distinguish GAAP results from management’s non-GAAP adjusted measures, including adjusted pre-tax pre-provision income and adjusted efficiency ratios.