Business Context and Reporting Period
The filing is Southern California Bancorp’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company is a California bank holding company for Bank of Southern California, N.A., operating 13 branches serving Southern California. Its activities are concentrated in commercial banking, including commercial real estate, construction and land development, commercial and industrial, SBA, consumer and deposit services.
Note: the request identifies California Bancorp, but the filing names Southern California Bancorp and trades under Nasdaq symbol BCAL.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $23.3 million | $23.8 million | $71.6 million | $62.5 million |
| Net income | $6.6 million | $6.9 million | $21.5 million | $7.6 million |
| Diluted EPS | $0.35 | $0.38 | $1.15 | $0.42 |
| Net interest margin | 4.23% | 4.32% | 4.43% | 3.87% |
| Return on average assets | 1.12% | 1.18% | 1.25% | 0.44% |
| Efficiency ratio | 61.4% | 54.5% | 59.2% | 76.4% |
- Balance sheet: Total assets were $2.31 billion, up $29.7 million from December 31, 2022. Loans held for investment were $1.93 billion, up $32.8 million, while net loans were $1.91 billion.
- Deposits and borrowings: Deposits were $1.98 billion, up $52.0 million from year-end. Borrowings declined to $25.8 million from $67.8 million.
- Liquidity: Cash and cash equivalents were $95.1 million. Management reported total available liquidity of approximately $863.8 million, including $430.6 million of available FHLB capacity, $151.2 million of Federal Reserve discount-window capacity and $75.0 million of unsecured correspondent lines.
- Cash flow: Nine-month operating cash flow was $41.5 million versus $4.2 million in the prior-year period. Investing cash outflow was $42.7 million versus $471.7 million, and financing cash inflow was $9.5 million versus $44.7 million.
- Credit loss allowance: The allowance for loan losses was $22.7 million, or 1.18% of loans, compared with $17.1 million, or 0.90%, at December 31, 2022. Including unfunded commitments, total ACL was $23.9 million.
- Capital: The Bank remained well capitalized, with a total risk-based capital ratio of 13.28%, CET1 ratio of 12.36% and leverage ratio of 11.69% at September 30, 2023.
Material Changes Versus Comparable Periods
- Q3 net income decreased $0.4 million, or approximately 5%, year over year, primarily because higher deposit funding costs reduced net interest income and noninterest expense increased.
- Nine-month net income increased $13.9 million, or approximately 181%, primarily due to higher net interest income, substantially lower credit-loss expense and the absence of significant 2022 litigation and merger-related charges.
- Nine-month net interest income increased $9.1 million, or approximately 15%, as average loan balances and earning-asset yields increased. This benefit was partly offset by a $16.5 million increase in interest expense, driven by higher deposit rates and greater interest-bearing deposit balances.
- Q3 net interest margin declined to 4.23% from 4.36% in Q2 2023 and 4.32% in Q3 2022. The primary pressure was higher funding and deposit costs.
- Noninterest expense increased 12% year over year in Q3, including higher salaries, employee benefits, data processing and other costs. Nine-month noninterest expense decreased 12% because the 2022 period included $5.5 million of litigation settlements and $1.2 million of merger-related expenses.
- The company adopted CECL on January 1, 2023, recording a $5.0 million increase in the loan allowance and a $0.4 million increase in the unfunded-commitment reserve, partially offset by deferred tax effects and reducing beginning retained earnings by $3.9 million.
- Nonperforming loans increased to $14.3 million from $41 thousand at year-end, due primarily to one multifamily loan placed on nonaccrual status. Management stated that collateral value, net of estimated selling costs, supported the carrying amount at quarter-end.
Outlook, Commentary, Risks and Unusual Items
- Management reported that the banking-industry turmoil had not materially affected the company’s financial condition, customer base, liquidity, capital position or risk profile. It continues to monitor deposit competition, interest rates, inflation and potential economic deterioration.
- Commercial real estate is a significant concentration: real estate-secured loans represented 84% of total loans, and commercial real estate loans represented approximately 52.6% of the total loan portfolio. Commercial real estate concentration was reported at 531% of risk-based capital under the regulatory definition.
- Approximately 43% of deposits exceeded FDIC insurance limits at September 30, 2023. The company expanded Insured Cash Sweep deposits to $252.7 million, or 12.7% of total deposits, from $65.5 million, or 3.4%, at year-end.
- Available-for-sale securities had $13.1 million of pre-tax unrealized losses, or $9.2 million after tax, reflected in accumulated other comprehensive loss. Management attributed the losses primarily to higher interest rates rather than credit deterioration and stated it did not intend or expect to sell the securities before recovery.
- Management’s stress testing indicated that realizing all securities losses would produce an estimated $15.2 million after-tax loss, increasing to $37.1 million in a 300-basis-point rate-shock scenario; the Bank would nevertheless remain above well-capitalized regulatory thresholds under the stated analysis.
- The CECL model used a 70% baseline and 30% downside economic scenario weighting. Management estimated that applying a 100% downside weighting would increase ACL by approximately $3.4 million.
- Q3 included a $54 thousand loss related to an SBA guaranty denial. Core deposit intangible analysis resulted in $38 thousand of accelerated amortization. No comparable 2022 litigation settlement, fixed-asset disposal loss or merger expense occurred in Q3 2023.
- The company authorized repurchases of up to 550,000 shares, but made no repurchases during the quarter. No dividends were declared, and the Bank paid no dividends to the holding company.
- Key risks include deposit attrition and rising funding costs, liquidity pressures, interest-rate volatility, unrealized securities losses, commercial real estate and construction exposure, credit deterioration, economic weakness, regulatory changes, cybersecurity and operational risks.
Important Facts for Investors to Verify
- Confirm the issuer identity: the filing is for Southern California Bancorp, not an entity named California Bancorp.
- Monitor the $14.3 million multifamily nonaccrual loan, receiver process and collateral resolution.
- Assess commercial real estate and construction concentrations, particularly office exposure and sensitivity to property values, occupancy and refinancing conditions.
- Track the migration from noninterest-bearing to interest-bearing and brokered deposits, deposit pricing and the resulting effect on net interest margin.
- Review liquidity availability, collateral requirements and the company’s ability to access FHLB, Federal Reserve and correspondent-bank facilities during stress.
- Evaluate the sustainability of earnings excluding 2022 litigation and merger-related comparability effects, as well as the impact of rising compensation and technology costs.
- Reassess ACL adequacy under alternative economic scenarios, including the filing’s estimated $3.4 million downside sensitivity.
- Monitor accumulated other comprehensive losses and capital ratios if interest rates remain elevated or securities must be sold.