PR Newswire
SANTA CRUZ, Calif., July 25, 2023
SANTA CRUZ, Calif., July 25, 2023 /PRNewswire/ -- Santa Cruz County Bank (the "Bank", OTCQX: SCZC), with assets of $1.75 billion, is a top-rated community bank headquartered in Santa Cruz County. Today, the Bank announced unaudited earnings for the quarter ended June 30, 2023. Net income for the Bank for the second quarter of 2023 was $8.3 million, an increase of 31% from $6.4 million over the second quarter in the prior year and down 6% from $8.9 million in the prior quarter. Basic and diluted earnings per share in the second quarter of 2023 both improved over the prior year comparative quarter by $0.24. Basic and diluted earnings per share in the second quarter of 2023 decreased over the prior quarter by $0.06 and $0.07, respectively. Decreases from the prior quarter primarily reflected pressure from the rising cost of funds.
Net income for the first half of 2023 was $17.2 million, an increase of 46% from $11.7 million over the first half of the prior year. Basic and diluted earnings per share in the first half of 2023 both improved over 2022 by $0.66.
Santa Cruz County Bank President and CEO Krista Snelling commented, "For the second quarter, the Bank's gross loans (excluding PPP) once again set a quarterly record. Our return on average assets of 1.94% and net interest margin of 4.93% remain strong, despite market interest rate pressure which drove the Bank's cost of funds higher by 40 basis points during the second quarter to 78 basis points. We remain focused on balancing profitability with credit quality and enterprise risk management while providing an exceptional and efficient client experience.
As the result of the ongoing strength of the Bank and its financial performance, in June we were again listed in American Banker Magazine's Top 200 Community Banks & Thrifts in the United States, based upon 3-year return on average equity for institutions under $2 billion in assets."
Financial Highlights
Performance highlights as of and for the quarter ended June 30, 2023, included the following:
- Quarterly net income of $8.3 million increased 31% from $6.4 million in the second quarter ended June 30, 2022, and down 6% from $8.9 million in the prior quarter. Net income for first half of 2023 was $17.2 million, an increase of 46% from $11.7 million over the first half of the prior year.
- Our liquidity position remains healthy, as our primary liquidity ratio (cash and equivalents, deposits held in other banks and unpledged available-for-sale ("AFS") securities as a percentage of total assets) was 15.3% and 16.1% at June 30 and March 31, 2023, respectively.
- Deposits totaled $1.47 billion at June 30, 2023, an increase of $5.4 million or 0.4%, compared to March 31, 2023. Relationship deposits, i.e. deposits gathered outside of wholesale channels, increased $18.5 million compared to March 31, 2023. Total uninsured deposits, excluding collateralized deposits, represent approximately 43% of total deposits at both June 30 and March 31, 2023.
- Total assets of $1.75 billion as of June 30, 2023, increased $19.0 million or 1%, compared to $1.73 billion as of March 31, 2023, and decreased $14.5 million or 1% compared to $1.76 billion as of June 30, 2022.
- Record gross loans (excluding PPP) of $1.34 billion, an increase of $21.7 million or 2%, compared to March 31, 2023, and an increase of $144.5 million or 12%, compared to June 30, 2022. The Bank continues to capitalize on lending opportunities in both the core Santa Cruz market and its expanded markets with a strong mix of loans serving our business community and the development of multifamily housing.
- Nonaccrual loans totaled $8.0 million, or 0.60% of gross loans, as of June 30, 2023, compared to $2.6 million, or 0.20% of total loans as of March 31, 2023. The increase during the second quarter is primarily due to the addition of a $6.5 million commercial real estate loan that is well-secured by a medical office facility and is in the process of collection without loss expected.
- Current Expected Credit Loss ("CECL") methodology was adopted January 1, 2023. The allowance for credit losses, which is based on estimating credit losses for the life of the loans in the portfolio, totaled $24.8 million, or 1.85% of total loans. In addition, the allowance on unfunded credit commitments, presented as part of other liabilities, increased $550 thousand in the second quarter of 2023 due to two significant multi-year construction commitments made during the quarter.
- Provision for credit losses, including funded and unfunded credit commitments, was $486 thousand in the second quarter, compared to $315 thousand for the first quarter of 2023 and $622 thousand for the same period in 2022. The provision was driven by growth in the portfolio, particularly the large credit commitments mentioned above.
- Net interest margin was 4.93% in the second quarter of 2023, compared to 5.08% in the prior quarter and 3.90% for the corresponding quarter in 2022. Net interest margin was 5.01% in the first half of 2023, compared to 3.83% in the first half of 2022. The Bank's large proportion of adjustable-rate loans benefited from the rising prime index rate. However, the Bank experienced the pressure from the rising cost of funds, particularly in 2023 following the failures of several high-profile banks who operated much differently than Santa Cruz County Bank. While the cause of failure was idiosyncratic in nature to those banks' business models, such failures accelerated a trend of bank depositors shifting to deposit networks for increased FDIC insurance coverage and to higher yielding investment opportunities, increasing funding pressure across the banking industry.
- For the quarters ended June 30, 2023 and March 31, 2023, return on average assets was 1.94% and 2.08%, respectively, and the return on average tangible equity was 18.42% and 20.90%, respectively. For the first half of 2023, return on average assets was 2.01%, compared to 1.39% in the first half of 2022; and return on average equity was 16.96%, compared to 12.70% in the first half of 2022.
- The efficiency ratio was 41.52% for the second quarter of 2023, as compared to 39.78% in the prior quarter and 44.48% in the second quarter of 2022. The efficiency ratio was 40.64% and 46.15% for the first half of 2023 and 2022, respectively.
- All capital ratios were above regulatory requirements for a well-capitalized institution with a total risk-based capital ratio of 14.57% at June 30, 2023 compared to 14.71% at March 31, 2023. Tangible common equity to tangible asset ratio increased from 10.39% at March 31, 2023 to 10.51% at June 30, 2023.
- Tangible book value per share increased to $21.54 at June 30, 2023 from $20.91 at March 31, 2023 and $18.45 at June 30, 2022.
Liquidity Position
Our liquidity position remains strong, as our primary liquidity ratio (cash and equivalents, deposits held in other banks and unpledged available-for-sale ("AFS") securities as a percentage of total assets) was 15.3% at June 30, 2023, compared to 16.1% at March 31, 2023. As of June 30, 2023, on-balance sheet liquidity including cash and equivalents, deposits held in other banks and unpledged available-for-sale securities totaled $267.4 million. This, combined with available borrowing capacity of $381.2 million, exceeded uninsured and uncollateralized deposits of $626.1 million, with a coverage ratio greater than 104%. SBA loans held for sale of $34.4 million at June 30, 2023 also provides additional liquidity.
U.S. Treasury bonds, securities issued by U.S. Government sponsored agencies and SBA accounted for 76%, 16% and 4% of the investment portfolio as of June 30, 2023, respectively, and thus presented minimal credit or liquidity risk. The investment portfolio of $288.9 million at June 30, 2023 has an average life of 2.8 years, and the Bank expects to receive principal, in full, when the investments mature. Net unrealized losses on AFS securities totaled $21.6 million ($15.2 million after-tax). Held-to-maturity securities totaled $8.7 million at June 30, 2023 with an insignificant amount of unrealized losses.
As of quarter-end, the Bank had no borrowings outstanding from the Federal Reserve's discount window or its new Bank Term Funding Program. Available secured borrowing capacity with the Federal Home Loan Bank of San Francisco totaled $301.2 million and $48 million overnight borrowing was outstanding as of June 30, 2023, compared to $43.5 million at March 31, 2023.
Quarterly Earnings
Quarterly net income of $8.3 million increased 31% from $6.4 million in the second quarter ended June 30, 2022, and down $561 thousand or 6% from $8.9 million in the prior quarter. The decline from prior quarter reflected the pressure from rising interest expenses, which increased $1.5 million compared to the prior quarter due to the higher interest rate environment and intense competition for deposits, partially offset by $1.1 million higher interest income on loans. In addition, as mentioned earlier, provision for credit losses increased $171 thousand this quarter compared to the last quarter.
Net income for the first half of 2023 was $17.2 million, an increase of 46% from $11.7 million over the first half of the prior year due to rising rates, despite a diminishing amount of PPP loan fee recognition.
Interest Income / Interest Expense and Net Interest Margin
Net interest income of $20.2 million in the second quarter of 2023 improved over the same quarter last year by $4.3 million, or 27%, primarily due to the rise in market interest rates benefiting our loan interest income and to a lesser degree, the organic loan growth during 2023 and 2022, partially offset by higher cost of funds. A decrease of $557 thousand from $20.8 million for the quarter ended March 31, 2023, is primarily due to higher cost of funds in the second quarter, partially offset by the benefit of higher prime rate on loan yields. The Bank's cost of funds increased 40 basis points from the first quarter of 2023 of 0.38%, and 68 basis points from 0.10% in the second quarter of 2022 to 0.78% in the second quarter of 2023.
For the second quarter of 2023, net interest margin was 4.93%, compared to 5.08% in the first quarter and 3.90% for the corresponding quarter in 2022. The decrease from the prior quarter reflected that rising cost of funds outpaced the benefit from higher yields on the earning assets, and a shift from noninterest-bearing deposits to interest-bearing deposits. For the first half of 2023, net interest margin was 5.01%, compared to 3.83% for the corresponding period in 2022. The increase from prior year is attributed to an improvement on yield from earning assets, favorably impacted by multiple rate increases in prime and other indices, and increases in our cost of funds lagging behind the market rate increases during most of 2022.
For the Quarter Ended | ||||||||
June 30, 2023 | March 31, 2023 | |||||||
(Dollars in thousands) | Average | Interest | Avg | Average | Interest | Avg | ||
ASSETS | ||||||||
Interest-earning due from banks | $ 24,158 | $ 220 | 3.66 % | $ 38,630 | $ 283 | 2.98 % | ||
Investments | 299,055 | 1,154 | 1.55 % | 327,856 | 1,232 | 1.52 % | ||
Loans | 1,317,378 | 21,705 | 6.61 % | 1,288,518 | 20,631 | 6.49 % | ||
Total interest-earning assets | 1,640,591 | 23,079 | 5.64 % | 1,655,004 | 22,146 | 5.43 % | ||
Noninterest-earning assets | 75,402 | 76,589 | ||||||
Total assets | $ 1,715,993 | $ 1,731,593 | ||||||
LIABILITIES | ||||||||
Interest-bearing deposits | $ 857,260 | 2,588 | 1.21 % | $ 842,824 | 1,134 | 0.55 % | ||
Borrowings | 24,517 | 314 | 5.14 % | 22,603 | 278 | 4.99 % | ||
Total interest-bearing liabilities | 881,777 | 2,902 | 1.32 % | 865,427 | 1,412 | 0.66 % | ||
Noninterest-bearing deposits | 606,997 | 651,050 | ||||||
Other noninterest-bearing liabilities | 18,426 | 15,032 | ||||||
Total liabilities | 1,507,200 | 1,531,509 | ||||||
EQUITY | 208,793 | 200,084 | ||||||
Total liabilities and equity | $ 1,715,993 | $ 1,731,593 | ||||||
Net interest income /margin | $ 20,177 | 4.93 % | $ 20,734 | 5.08 % | ||||
Cost of funds | 0.78 % | 0.38 % | ||||||
For the Six Months Ended | ||||||||
June 30, 2023 | June 30, 2022 | |||||||
(Dollars in thousands) | Average | Interest | Avg | Average | Interest | Avg | ||
ASSETS | ||||||||
Interest-earning due from banks | $ 31,354 | $ 504 | 3.24 % | $ 111,755 | $ 309 | 0.56 % | ||
Investments | 313,376 | 2,386 | 1.54 % | 328,233 | 1,552 | 0.95 % | ||
Loans | 1,303,028 | 42,335 | 6.55 % | 1,193,868 | 29,892 | 5.05 % | ||
Total interest-earning assets | 1,647,758 | 45,225 | 5.53 % | 1,633,856 | 31,753 | 3.92 % | ||
Noninterest-earning assets | 75,993 | 75,648 | ||||||
Total assets | $ 1,723,751 | $ 1,709,504 | ||||||
LIABILITIES | ||||||||
Interest-bearing deposits | $ 850,082 | 3,722 | 0.88 % | $ 807,677 | 744 | 0.19 % | ||
Borrowings | 23,565 | 592 | 5.07 % | 170 | 1 | 0.43 % | ||
Total interest-bearing liabilities | 873,647 | 4,314 | 1.00 % | 807,847 | 745 | 0.19 % | ||
Noninterest-bearing deposits | 628,902 | 699,508 | ||||||
Other noninterest-bearing liabilities | 16,728 | 15,650 | ||||||
Total liabilities | 1,519,277 | 1,523,005 | ||||||
EQUITY | 204,474 | 186,499 | ||||||
Total liabilities and equity | $ 1,723,751 | $ 1,709,504 | ||||||
Net interest income /margin | $ 40,911 | 5.01 % | $ 31,008 | 3.83 % | ||||
Cost of funds | 0.58 % | 0.10 % | ||||||
Noninterest Income / Expense
Noninterest income for the quarter ended June 30, 2023 was $839 thousand compared to $733 thousand for the trailing quarter and $1.45 million in the second quarter of 2022. There were no SBA sales in either of the first two quarters of 2023. Gains on SBA loan sales were $587 thousand in the second quarter of 2022. The market premium on SBA loans declined, making it less favorable to sell SBA loans in 2023.
Noninterest expense was $8.7 million in the second quarter of 2023, $173 thousand or 2% more than prior quarter, primarily due to less bonus expense in the first quarter of 2023. Noninterest expense increased $999 thousand, or 13% compared to the same quarter last year, primarily due to higher salaries and related expense from higher headcount to support the Bank's growth in footprint. Average full-time equivalent staff increased from 145 in the second quarter of 2022 to 149 in the second quarter of 2023.
Loans and Asset Quality
Non-PPP loans increased by $144.5 million or 12% compared to June 30, 2022, more than replacing the $22.1 million year-over-year reduction in PPP loans. Non-PPP loans increased by $21.7 million or 2% from the prior quarter. Growth in the non-PPP loan portfolio was driven by new originations in commercial real estate loans, including multifamily projects, and funding of commercial lines.
The allowance for credit losses was $24.8 million, or 1.85% of the total loans, at June 30, 2023, compared to $25.9 million, or 1.96% of the total loans, at March 31, 2023. The decrease in the allowance as a percent of total loans was due to a reduction in the expected average life of loans in the commercial real estate and commercial portfolios which in turn reduced the expected loss rates. To a lesser degree, the decrease was also due to a reversal of the qualitative reserve on the farmland and agriculture portfolio that was added in the first quarter of 2023, as anticipated losses from seasonal rain and flooding did not materialize in the second quarter. Additionally, there was a $1 million charge-off on an unsecured commercial loan that became a problem credit in the second quarter of 2023.
The allowance for credit losses includes specific reserves in the amount of $1.5 million as of both June 30, 2023 and March 31, 2023, for individually evaluated impaired commercial loans on nonaccrual status. A $6.5 million commercial real estate loan was added to nonaccrual status during the second quarter of 2023. The loan was individually evaluated and determined to be collateral dependent but is adequately secured by real estate and has no recorded reserve. The following tables summarize the Bank's loan mix and delinquent/nonperforming loans:
Loan Mix | ||||||
As of | ||||||
(Dollars in thousands) | 06/30/2023 | 03/31/2023 | 06/30/2022 | |||
Loans held for sale | $ 34,354 | $ 41,456 | $ 63,874 | |||
SBA and B&I loans | 146,875 | 144,709 | 121,499 | |||
PPP loans | 397 | 3,079 | 22,460 | |||
Commercial term loans | 110,076 | 115,579 | 94,939 | |||
Revolving commercial lines | 135,148 | 119,075 | 113,874 | |||
Asset-based lines of credit | 7,569 | 5,468 | -- | |||
Construction loans | 134,655 | 163,244 | 167,590 | |||
Real estate loans | 726,477 | 688,519 | 600,323 | |||
Home equity lines of credit | 28,753 | 28,687 | 27,658 | |||
Consumer and other loans | 10,852 | 5,894 | 1,628 | |||
Deferred loan expenses, net of fees | 2,547 | 3,017 | 1,458 | |||
Total gross loans | $ 1,337,703 | $ 1,318,727 | $ 1,215,303 | |||
Delinquent and Nonperforming Loans | |||||
As of or for the Quarter Ended | |||||
(Dollars in thousands) | 06/30/2023 | 03/31/2023 | 06/30/2022 | ||
Loans past due 30-89 days, excluding PPP loans | $ 2,999 | $ 1,041 | $ 2,283 | ||
PPP loans past due 30-89 days | -- | 1,168 | 1,426 | ||
Delinquent loans (past due 90+ days still accruing) | -- | -- | 298 | ||
Nonaccrual loans | 8,027 | 2,616 | 25 | ||
Other real estate owned | -- | -- | -- | ||
Nonperforming assets | 8,027 | 2,616 | 333 | ||
Net loan charge-offs (recoveries) QTD | 1,000 | -- | 3 | ||
Net loan charge-offs (recoveries) YTD | 1,000 | -- | 72 | ||
Deposits
Deposits were $1.47 billion at June 30, 2023, reflecting a decrease of 5.7% or $87.9 million since June 30, 2022, and 42% of deposits were noninterest-bearing. Deposits increased $5.4 million during the second quarter of 2023. The ten largest depositors, excluding fully collateralized government agency deposits, represent approximately 10% of total deposits as of June 30, 2023.
Deposit Mix | ||||
As of | ||||
(Dollars in thousands) | 06/30/2023 | 03/31/2023 | 06/30/2022 | |
Noninterest-bearing demand | $ 615,923 | $ 619,178 | $ 703,949 | |
Interest-bearing demand | 208,421 | 217,270 | 217,534 | |
Money markets | 368,282 | 346,074 | 373,970 | |
Savings | 114,946 | 122,261 | 146,549 | |
Time certificates of deposit > $250,000 | 108,269 | 91,649 | 67,789 | |
Time certificates of deposit < $250,000 | 36,217 | 37,106 | 45,441 | |
Brokered deposits | 15,276 | 28,388 | -- | |
Total deposits | $ 1,467,334 | $ 1,461,926 | $ 1,555,232 | |
Total deposits – personal | $ 599,902 | $ 566,573 | $ 636,288 | |
Total deposits – business | $ 867,432 | $ 895,353 | $ 918,944 | |
Shareholders' Equity
Total shareholders' equity was $208.2 million at June 30, 2023, a $4.0 million or 2% increase over March 31, 2023 and an increase of $22.7 million or 12% over June 30, 2022. Earnings of $8.3 million in the second quarter of 2023 contributed to the increase over last quarter-end. The repurchases of $1.6 million of stock and declaration of cash dividends on common stock at $0.15 per sh
