Southern California Bancorp Reports Record Net Income of $6.9 Million and EPS of $0.38 for the Third Quarter Of 2022

Southern California Bancorp (“us,” “we,” “our,” or the “Company”) (OTC Pink: BCAL), the holding company for Bank of Southern California, N.A. (the “Bank”), today announced its consolidated financial results for the third quarter of 2022.

Southern California Bancorp reported record net income of $6.9 million for the third quarter of 2022, or $0.38 per diluted share, compared to a net loss of $736 thousand, or $0.04 per diluted share in the second quarter of 2022.

Third Quarter 2022 Highlights

• Net income of $6.9 million, up $7.7 million from the prior quarter
• Total loan interest income increased $3.0 million, or 14.84%, over the prior quarter
• Pre-tax, pre-provision income (non-GAAP) of $10.7 million, compared to $608 thousand in the prior quarter
• Provision for loan losses of $1.3 million commensurate with strong loan growth; the provision was $1.7 million in the prior quarter
• Net interest margin of 4.32%, compared with 3.87% in the prior quarter; average yield on non-Paycheck Protection Program ("non-PPP") loans of 5.09% compared with 4.70% in the prior quarter
• Total assets of $2.31 billion were flat from June 30, 2022, and up $50.5 million or 2.2% from December 31, 2021
• Total organic non-PPP loans, including loans held for sale, increased to $1.85 billion, up $77.2 million or 4.37% from June 30, 2022, and up $399.0 million or 27.6%, from December 31, 2021
• Total deposits of $2.02 billion were relatively flat from June 30, 2022, and up $47.0 million or 2.4%, from December 31, 2021
• Noninterest-bearing demand deposits were $993.2 million, representing 49.2% of total deposits, down $63.6 million from June 30, 2022, and up $6.3 million from December 31, 2021
• Cost of deposits was 0.25%, up from 0.07% in the prior quarter
• Nonperforming assets to total assets ratio of 0.002%, compared to 0.03% and 0.04% at June 30, 2022 and December 31, 2021, respectively
• Tangible book value per common share ("TBV") (non-GAAP) of $11.75 at September 30, 2022, up $0.16 from $11.59 in the prior quarter
• Continued status as “well-capitalized,” the highest regulatory capital category

“I’m pleased to report we achieved the highest quarterly net income in the history of the Bank of $6.9 million, or $0.38 per diluted share for the third quarter," said David Rainer, Chairman and CEO of Southern California Bancorp and Bank of Southern California. “Financial results for the quarter included the final loss settlement related to recent litigation, which net of insurance recoveries, was $5.3 million¹. In the third quarter we also recorded nonrecurring expenses of $1.2 million, including a $768 thousand loss on the sale of an industrial building that came with the acquisition of Bank of Santa Clarita last year, some residual M&A expenses, as well as legal expenses of $292 thousand related to the recent litigation settlement. Our third quarter performance reflects the traction we are getting on our strategy to become the premier relationship-banking franchise for small to mid-size businesses in Southern California. We believe with the nonrecurring costs incurred during the expansion of our footprint, the acquisition of Bank of Santa Clarita, the conversion of our core operating system and the settlement of litigation all behind us, we are now well positioned.

“Over the first three quarters of 2022, we deployed our excess liquidity by growing our total loans by $344.5 million and increasing our investment securities portfolio by $123 million, which in conjunction with Fed funds rate increases this year, helped increase our third quarter 2022 net interest margin to 4.32%, up from 3.87% in the prior quarter.

“Deposit growth was relatively flat for the third quarter of 2022, while our cost of deposits grew to 25 basis points, up from 7 basis points in the prior quarter, as we adjusted interest rates for customers of our relationship-based business banking model to keep us competitive with our peers and allow us to attract new relationships. That said, our noninterest bearing deposits represented 49.2% of our total deposits at September 30, 2022.

“While there is presently some uncertainty about interest rates and the direction of the U.S. economy, we continue to believe the Southern California market for small to mid-sized business banking offers a significant opportunity for a responsive, relationship-based business banking franchise like ours, and we will continue to execute and grow that model.”

Third Quarter Operating Results

Net Income

Net income for the third quarter of 2022 was $6.9 million, or $0.38 per diluted share, compared to a net loss of $736 thousand, or $0.04 per diluted share in the second quarter of 2022. The adjusted net income (non-GAAP) for the third quarter was $6.2 million, or $0.34 per diluted share, compared to adjusted net income of $4.2 million, or $0.23 per diluted share in the second quarter of 2022.

Net Interest Income and Net Interest Margin

Net interest income for the third quarter of 2022 was $23.8 million, compared to $20.9 million in the prior quarter. The increase was primarily due to a $3.8 million increase in total interest income, partially offset by a $929 thousand increase in total interest expense. During the third quarter of 2022, loan interest income increased $3.0 million, debt securities income increased $318 thousand, and interest and dividend income from other financial institutions increased $501 thousand. The increase in interest income was due to a number of factors: higher average non-PPP loans from organic loan growth, a change in the interest-earning asset mix, and increases in the target Fed funds rate. Average interest earning assets increased $14.4 million, resulting from a $102.2 million increase in average non-PPP loans, a $39.5 million increase in average Fed funds sold/resale agreements, and a $27.0 million increase in average debt securities, partially offset by a $150.0 million decrease in average lower yielding deposits in other financial institutions, and a $4.3 million decrease in average PPP loans. The increase in interest expense for the third quarter of 2022 was primarily due to a $889 thousand increase in interest expense on money market and saving accounts.

Net interest margin for the third quarter of 2022 was 4.32%, compared with 3.87% in the prior quarter. The increase was primarily related to a 61 basis point increase in the total interest-earning assets yield resulting from higher market interest rates and a change in the Bank's interest-earning asset mix, partially offset by an 18 basis point increase in the cost of funds. The yield on total earning assets in the third quarter of 2022 was 4.60%, compared with 3.99% in the prior quarter. The yield on average loans in the third quarter of 2022 was 5.09%, an increase of 35 basis points from 4.74% in the prior quarter.

Cost of funds for the third quarter of 2022 was 31 basis points, an increase from 13 basis points in the prior quarter. The increase was the net result of an increase in the cost of interest-bearing deposits from 14 basis points to 51 basis points, coupled with a decrease in average noninterest-bearing deposits. Average noninterest-bearing demand deposits decreased $41.0 million to $1.01 billion and represented 49.8% of total average deposits for the third quarter of 2022, compared with $1.05 billion and 52.1%, respectively, for the prior quarter. The total cost of deposits in the third quarter of 2022 was 25 basis points, up from 7 basis points in the prior quarter.

Average total borrowings decreased $2.2 million to $17.7 million for the third quarter of 2022 resulting from the early extinguishment of trust preferred securities ("TruPS"). The average cost of total borrowings was 6.06% for the third quarter of 2022, down from 6.08% in the prior quarter.

Provision for Loan Losses

The Company recorded a loan loss provision of $1.3 million in the third quarter of 2022, primarily related to strong organic loan growth. In the second quarter of 2022, the Company recorded a loan loss provision of $1.7 million. The Company’s management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn and believes it is appropriately provisioned for the current environment.

Noninterest Income

Total noninterest income in the third quarter of 2022 was $358 thousand, a decrease of $1.2 million compared to total noninterest income of $1.5 million in the second quarter of 2022. The decrease was due primarily to a $768 thousand loss on sale of a building and related fixed assets and a $527 thousand decrease in gain on sale of loans in the third quarter.

The Company recorded a $768 thousand loss on sale of a building and related fixed assets in the third quarter of 2022, these assets were acquired in the acquisition of Bank of Santa Clarita in 2021; there was no comparable transaction in the second quarter of 2022. The $527 thousand decrease in gain on sale of loans was primarily due to a lower volume of SBA 7A loan sales in the third quarter of 2022. Total loans sold during the third quarter of 2022 was $3.7 million, resulting in a gain on sale of $240 thousand, compared to total loans sold of $11.0 million in the second quarter, resulting in a gain on sale of $767 thousand.

Noninterest Expense

Total noninterest expense for the third quarter of 2022 was $13.4 million, a decrease of $8.4 million compared with total noninterest expense of $21.9 million in the prior quarter. The decrease was primarily due to a net decrease in the loss contingency expense for the litigation settlements and various nonrecurring expenses incurred in the prior quarter, which included an impairment charge related to the right-of-use asset associated with a Company lease, and a loss on the early extinguishment of the TruPS. Also contributing to the decrease in noninterest expense in the third quarter of 2022 was a decrease in salaries and employee benefits, merger and related expenses, partially offset by an increase in legal, audit and professional expense.

The $483 thousand decrease in salaries and benefits was due primarily to a decrease in average headcount, coupled with lower employer taxes in the third quarter of 2022. The $427 thousand decrease in merger and related expenses was due primarily to the completion of the core system conversion for the legacy bank in March 2022 and Bank of Santa Clarita in April 2022. Legal, audit and professional fees increased $277 thousand, primarily due to a $180 thousand increase in legal fees related to the recent settlement of litigation.

The $122 thousand decrease in occupancy and equipment expenses was due primarily to a $136 thousand pre-tax impairment charge taken in the second quarter of 2022 for the right-of-use asset, for which there was no corresponding transaction in the third quarter. Other expenses decreased $244 thousand in the third quarter, as the Company recorded $347 thousand related to a loss on an early extinguishment of debt acquired from CalWest Bancorp in the second quarter of 2022, for which there was no corresponding transaction in the third quarter, which was partially offset by a higher provision for unfunded loan commitments of $114 thousand in the third quarter of 2022. Total unfunded loan commitments increased $77.1 million to $577.4 million at September 30, 2022 from $500.3 million at June 30, 2022.

Efficiency ratio for the third quarter of 2022 was 55.54%, compared to 97.29% in the prior quarter. Adjusted efficiency ratio was 60.03%, compared to 65.93% in the prior quarter.

Income Tax

In the third quarter of 2022, the Company’s income tax expense was $2.5 million, compared with an income tax benefit of $306 thousand in the second quarter of 2022. The effective rate was 26.6% for the third quarter of 2022 and 29.4% for the second quarter of 2022. The effective tax rate for 2022 is expected to be approximately 27%.

Balance Sheet

Assets

Total assets at September 30, 2022 were $2.31 billion, relatively flat from June 30, 2022, and an increase of $50.5 million or 2.2% from December 31, 2021. The decrease in total assets from the prior quarter was primarily related to an $84.2 million decrease in cash and cash equivalents, largely offset by a $76.7 million increase in total loans.

The increase in total assets from December 31, 2021, was primarily related to a $344.5 million increase in total loans, a $69.0 million increase in available-for-sale debt securities, and a $54.0 million increase in held-to-maturity securities, partially offset by a $422.8 million decrease in cash and cash equivalents.

Loans

Total loans held for investment were $1.84 billion at September 30, 2022, compared to $1.77 billion and $1.50 billion at June 30, 2022 and December 31, 2021, respectively. In the third quarter of 2022, the Company's loans held for investment, excluding PPP loans, had net organic growth of $73.6 million or 4.2%, net of total loan principal payoffs of approximately $65.3 million, resulting in non-PPP loans held for investment balance of $1.84 billion at September 30, 2022. Total loans secured by real estate increased by $64.0 million, construction and land development loans increased by $28.6 million and commercial and industrial loans decreased by $19.6 million. The Company had $5.5 million in SBA 7A loans held for sale at September 30, 2022, compared with $1.9 million at June 30, 2022; most of the loans are expected to be sold in the secondary market in the fourth quarter of 2022.

In the first nine months of 2022, the Company’s loans held for investment, excluding PPP loans, had net organic growth of $393.5 million, or 27.2%, net of total loan principal payoffs of approximately $300.2 million. Total loans secured by real estate increased by $263.0 million, and construction and land development loans increased by $100.2 million. Total commercial and industrial loans decreased by $27.8 million, as $54.4 million in PPP loans received SBA forgiveness or pay downs.

Deposits

Total deposits at September 30, 2022 were $2.02 billion, relatively flat from June 30, 2022 and an increase of $47.0 million from December 31, 2021. Noninterest-bearing demand deposits at September 30, 2022 were $993.2 million, or 49.2% of total deposits, compared to $1.06 billion and $986.9 million, or 52.1% and 50.0% of total deposits at June 30, 2022 and December 31, 2021, respectively.

Asset Quality

Total non-performing assets decreased to $48 thousand or 0.002% of total assets at September 30, 2022, compared with $655 thousand or 0.03%, and $809 thousand or 0.04% of total assets at June 30, 2022 and December 31, 2021, respectively. The decrease in the third quarter of 2022 was due primarily to payoffs of $558 thousand and paydowns of $49 thousand. The decrease from December 31, 2021, was due primarily to $799 thousand from payoffs, note sale and charge-offs.

The Company had no loans over 90 days past due that were accruing interest at September 30, 2022. For the nine-month period ended September 30, 2022, the Company recorded net charge-offs of $21 thousand.

Loan delinquencies (30-89 days past due) totaled $69 thousand at September 30, 2022, compared to $459 thousand and $1.0 million at June 30, 2022 and December 31, 2021, respectively.

The allowance for loan losses (“ALLL”) was $16.4 million at September 30, 2022, compared to $15.1 million and $11.7 million at June 30, 2022, and December 31, 2021, respectively. The ALLL to total loans was 0.89% at September 30, 2022, compared to 0.85% and 0.77% at June 30, 2022, and December 31, 2021, respectively. The ALLL to total loans, excluding PPP loans was 0.89%, 0.86% and 0.81% at September 30, 2022, June 30, 2022, and December 31, 2021, respectively. The net carrying value of acquired loans totaled $293.4 million and included a remaining net discount of $1.8 million at September 30, 2022. This discount is currently available to absorb losses on the acquired loans and represented 0.62% of the net carrying value of acquired loans and 0.10% of total gross loans held for investment.

Capital

Tangible book value per common share at September 30, 2022, was $11.75, compared with $11.59 and $11.73 at June 30, 2022 and December 31, 2021, respectively. Tangible book value was impacted in the second and third quarters by increases in the other comprehensive loss related to unrealized losses, net of taxes on available-for-sale securities, the balance of which was $8.3 million at September 30, 2022, $4.5 million at June 30, 2022, and $38 thousand at December 31, 2021.

The Bank’s leverage capital ratio and total risk-based capital ratio were 10.14% and 11.77%, respectively, at September 30, 2022.

1. The Company accrued $6.5 million related to the settlement in the second quarter of 2022.

ABOUT BANK OF SOUTHERN CALIFORNIA AND SOUTHERN CALIFORNIA BANCORP

Southern California Bancorp (OTC Pink: BCAL) is a registered bank holding company headquartered in San Diego, California. Bank of Southern California, N.A., a national banking association chartered under the laws of the United States and regulated by the Office of Comptroller of the Currency, is a wholly owned subsidiary of Southern California Bancorp. Established in 2001 and headquartered in San Diego, California, Bank of Southern California, N.A. offers a range of financial products and services to individuals, professionals, and small- to medium-sized businesses through its 13 branch offices serving San Diego, Orange, Los Angeles, and Ventura counties, as well as the Inland Empire. The Bank's solutions-driven, relationship-based approach to banking provides accessibility to decision makers and enhances value through strong partnerships with its clients. Additional information is available at www.banksocal.com.

Southern California Bancorp’s common stock is traded on the OTC Markets Group Inc. Pink Open Market under the symbol “BCAL.” For more information, please visit banksocal.com or call (844) BNK-SOCAL.

NON-GAAP FINANCIAL MEASURES

This press release contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's results of operations and financial condition and to enhance investors' overall understanding of such results of operations and financial condition, permit investors to effectively analyze financial trends of our business activities, and enhance comparability with peers across the financial services sector. These non-GAAP financial measures are not a substitute for GAAP measures and should be read in conjunction with the Company's GAAP financial information. A reconciliation of GAAP financial measures to non-GAAP financial measures is included in the accompanying financial tables.

FORWARD-LOOKING STATEMENTS

In addition to historical information, certain matters set forth herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to management’s beliefs, projections and assumptions concerning future results and events. Forward-looking statements include descriptions of management’s plans or objectives for future operations, products or services, and forecasts of Southern California Bancorp’s revenues, earnings, litigation expenses, or other measures of economic performance. As well, forward-looking statements may relate to future outlook and anticipated events. These forward-looking statements involve risks and uncertainties, based on the beliefs and assumptions of management and on the information available to management at the time that such forward-looking statements were made and can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words or phrases such as “aim,” “can,” "may," "could," "predict," "should," "will," "would," "believe," "anticipate," "estimate," "expect," “hope,” "intend," "plan," “potential," “project,” "will likely result," "continue," "seek," “shall,” “possible,” "projection," “optimistic,” and "outlook," and variations of these words and similar expressions or the negative version of those words or phrases.

Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. Many factors could cause actual results to differ materially from those contemplated by these forward-looking statements. Except to the extent required by applicable law or regulation, Southern California Bancorp does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law.

(1) Non-GAAP measure. See – GAAP to Non-GAAP reconciliation.

(1) Non-GAAP measure. See – GAAP to Non-GAAP reconciliation.

(1) Average noninterest-bearing deposits represent 49.80%, 52.12% and 48.37% of average total deposits for the three months ended September 30, 2022, June 30, 2022 and September 30, 2021.