Southern California Bancorp — Form 10-Q Summary
Note: The provided filing is for Southern California Bancorp (Nasdaq: BCAL), not an entity named California Bancorp. The report covers the quarter and six months ended June 30, 2023, and was filed August 9, 2023. The company operates Bank of Southern California, N.A., a 13-branch community bank serving Southern California.
Business Context and Reporting Period
- The bank provides commercial banking, lending, deposit, treasury-management, and SBA lending services to individuals, professionals, and small- to medium-sized businesses.
- The common stock began trading on the Nasdaq Capital Market on May 11, 2023.
- The company operates in one reportable segment: commercial banking.
- On January 1, 2023, the company adopted CECL accounting under ASU 2016-13, reducing beginning retained earnings by $3.9 million and increasing the allowance for credit losses by $5.5 million before related tax effects.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|
| Net interest income | $23.4 million | $20.9 million | $48.3 million | $38.7 million |
| Net interest margin | 4.36% | 3.87% | 4.54% | 3.64% |
| Net income | $6.7 million | $(0.7) million | $14.9 million | $0.7 million |
| Diluted EPS | $0.36 | $(0.04) | $0.80 | $0.04 |
| Noninterest income | $1.1 million | $1.5 million | $2.7 million | $3.1 million |
| Noninterest expense | $14.6 million | $21.7 million | $29.6 million | $37.3 million |
| Efficiency ratio | 59.6% | 96.6% | 58.1% | 89.0% |
| Return on average assets | 1.18% | (0.13)% | 1.32% | 0.06% |
- Q2 net income declined from $8.2 million in Q1 2023, primarily because net interest income decreased $1.5 million and noninterest income decreased $474 thousand.
- Interest income benefited from higher loan yields and balances, while interest expense increased sharply as deposit pricing rose. Q2 interest expense was $6.8 million versus $648 thousand in the prior-year quarter.
- Q2 included a $15 thousand reversal of credit-loss provision; the first six months included $187 thousand of provision expense, compared with $3.6 million in the prior-year period.
Balance Sheet, Liquidity, and Capital
| Balance-sheet item | June 30, 2023 | December 31, 2022 |
|---|
| Total assets | $2.31 billion | $2.28 billion |
| Loans held for investment | $1.91 billion | $1.90 billion |
| Total deposits | $1.98 billion | $1.93 billion |
| Cash and cash equivalents | $104.6 million | $86.8 million |
| Total borrowings | $32.8 million | $67.8 million |
| Shareholders’ equity | $273.7 million | $260.4 million |
| Loans-to-deposits ratio | 96.6% | 98.7% |
- Six-month operating cash flow was $30.4 million, compared with $4.6 million in the prior-year period. Investing cash flow used $26.2 million, while financing activities provided $13.6 million.
- Total liquidity was approximately $831 million, including $105 million of cash and cash equivalents, $120 million of unpledged liquid securities, $405 million of available FHLB capacity, $142 million of Federal Reserve discount-window availability, and $60 million of unsecured correspondent lines.
- The company had $15 million of FHLB borrowings and no Federal Reserve discount-window or BTFP borrowings at June 30, 2023.
- The bank remained “well capitalized,” with a total risk-based capital ratio of 12.98%, CET1 ratio of 12.05%, and leverage ratio of 11.47%.
Material Changes Versus Comparable Periods
- Net income improved by $7.5 million in Q2 and $14.2 million for the six months versus the corresponding 2022 periods. The improvement primarily reflected higher net interest income, lower credit-loss provision expense, and the absence of the prior-year $6.5 million litigation settlement expense.
- Net interest margin expanded year over year, but declined from 4.71% in Q1 2023 to 4.36% in Q2 as deposit costs increased and noninterest-bearing deposits declined.
- Noninterest expense fell substantially because Q2 2023 had no comparable litigation settlement or merger-related expense. However, six-month salaries and benefits increased partly because of $632 thousand of accelerated stock compensation following vesting of performance-based awards.
- Loans held for investment increased $15.6 million from year-end. Construction and land-development loans rose $36.2 million, while commercial and industrial loans declined $18.8 million.
- Deposits increased $49.0 million, driven by a $190.9 million increase in Insured Cash Sweep deposits and a $77.7 million increase in brokered time deposits, partially offset by a $147.0 million decline in noninterest-bearing demand deposits.
- Available-for-sale securities increased to $119.9 million. The portfolio had $9.4 million of pretax unrealized losses, primarily attributed to interest-rate changes rather than credit deterioration.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects continued sensitivity to Federal Reserve policy, inflation, deposit pricing, economic growth, and credit conditions.
- Management stated that the company had not experienced a material adverse impact from 2023 banking-industry turmoil and considered liquidity, capital, and customer relationships stable.
- Key risks include rising deposit costs, potential deposit attrition, slower loan growth, commercial real estate concentration, construction and land-development exposure, recessionary conditions, credit deterioration, unrealized securities losses, liquidity stress, regulatory changes, cyber risk, and higher deposit-insurance assessments.
- Commercial real estate represented 533% of total risk-based capital, and commercial real estate construction and land-development loans represented 99% of total risk-based capital, creating material concentration risk despite low reported nonperforming assets.
- The allowance for loan losses was $22.5 million, or 1.18% of loans, and total allowance for credit losses, including unfunded commitments, was $24.0 million, or 1.26% of loans. Management used probability-weighted base and downside economic scenarios and increased qualitative reserves for recession and banking-turmoil risks.
- Nonperforming loans were $40 thousand, with no loans past due over 90 days and still accruing interest. Net charge-offs were $22 thousand for the first six months.
- The company authorized repurchases of up to 550,000 shares, approximately 3% of outstanding shares; no shares had been repurchased under the plan through June 30, 2023.
- The company reported no material changes to previously disclosed risk factors, no material litigation contingencies, and effective disclosure controls as of quarter-end.
Investor Verification Checklist
- Confirm the issuer identity, since the supplied filing is for Southern California Bancorp rather than “California Bancorp.”
- Assess the sustainability of earnings as deposit costs rise and the Q2 net interest margin declines.
- Review commercial real estate, construction, and land-development concentrations, including stress-testing assumptions and collateral values.
- Evaluate the adequacy and sensitivity of the CECL allowance, including management’s estimate that a downside scenario could increase the allowance by approximately $2.4 million.
- Monitor uninsured, brokered, and ICS deposits, deposit betas, liquidity capacity, and reliance on pledged collateral.
- Review unrealized securities losses and the potential effect of higher interest rates on tangible equity and regulatory capital.
- Distinguish recurring operating performance from prior-year comparisons affected by a $6.5 million litigation settlement, merger costs, BOLI death-benefit income, and other unusual items.
