West Coast Community Bancorp, Parent Company of Santa Cruz County Bank, Reports Earnings For the Quarter Ended September 30, 2023, Board Declares Increase in Quarterly Cash Dividend

SANTA CRUZ, Calif., Oct. 24, 2023 /PRNewswire/ -- West Coast Community Bancorp ("Bancorp", OTCQX: SCZC), the parent company of Santa Cruz County Bank (the "Bank"), announced unaudited earnings for the quarter ended September 30, 2023 of $9.1 million, an increase of 10% from $8.3 million in the prior quarter and a decrease of 1% from $9.2 million in the third quarter of 2022. Basic and diluted earnings per share in the third quarter of 2023 were $1.09 and $1.08, respectively, and both improved over the prior quarter by $0.10. Basic and diluted earnings per share in the third quarter of 2023 improved over the prior year comparative quarter by $0.01 and $0.04, respectively.

Year-to-date earnings for the nine-month period ended September 30, 2023 were $26.3 million, an increase of 26% from $20.9 million over 2022. Basic and diluted earnings for the nine-month period of 2023 improved over 2022 by $0.68 and $0.73, respectively, to $3.13 and $3.11.

President and CEO, Krista Snelling commented: "We are pleased to report record gross loans and growth in deposits in the third quarter. The Bank's total FDIC deposit market share for the County of Santa Cruz increased to 15.5% as of June 30, 2023 as compared to over 15.3% a year ago. Market share improvements over prior year were also recorded in Monterey County due to the opening of our Salinas branch in January. Also during the quarter, we successfully completed the formation of the Bank's holding company which positions us to take advantage of future strategic opportunities for growth and diversification."

On October 19, 2023, the Board of Directors of Bancorp, declared a quarterly cash dividend of $0.16 per common share, an increase of $0.01 per share from the prior quarter, payable on November 13, 2023 to shareholders of record at the close of business on November 7, 2023.  

"We are pleased to raise our quarterly cash dividend for the third consecutive year," said Stephen Pahl, Chairman of the Board of Directors. "This increase reflects the Board's confidence in our franchise and the management team, our strong capital position and 2023 year-to-date financial results."

Financial Highlights

Performance highlights as of and for the quarter ended September 30, 2023, included the following:

• Quarterly net income of $9.1 million increased 10% from $8.3 million in the prior quarter and decreased 1% from $9.2 million in the third quarter ended September 30, 2022. Net income for the nine-month period ended September 30, 2023 was $26.3 million, an increase of 26% from $20.9 million over the nine-month period of the prior year.
• Total assets of $1.77 billion as of September 30, 2023, increased $26.9 million or 2%, compared to $1.75 billion as of June 30, 2023.
• Liquidity position remains healthy. Primary liquidity ratio, defined as cash and equivalents, deposits held in other banks and unpledged available-for-sale ("AFS") securities as a percentage of total assets was 15.2% and 15.3% at September 30 and June 30, 2023, respectively.
• Deposits totaled $1.53 billion at September 30, 2023, an increase of $61.5 million or 4%, compared to June 30, 2023. Relationship deposits, i.e. deposits gathered outside of wholesale channels, increased $69.6 million compared to June 30, 2023. Total uninsured deposits, excluding collateralized deposits, represented approximately 45% and 43% of total deposits as of September 30 and June 30, 2023, respectively. The increases reflected several significant new commercial deposit relationships and cyclical fluctuation from our large depositors influenced by tourism and the agricultural harvest cycle.
• Record gross loans (excluding PPP) of $1.37 billion, an increase of $37.6 million or 3%, compared to June 30, 2023, and an increase of $140.6 million or 11%, compared to September 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 $10.7 million, or 0.78% of gross loans, as of September 30, 2023, compared to $8.0 million, or 0.60% of total loans as of June 30, 2023. The increase during the third quarter is primarily due to the addition of a $3.0 million commercial real estate loan that is well-secured without loss expected.
• Current Expected Credit Loss ("CECL") methodology was adopted January 1, 2023. The allowance for credit losses ("ACL"), which is based on estimating credit losses for the life of the loans in the portfolio, totaled $25.1 million, or 1.83% of total loans at September 30, 2023, compared to 1.85% at June 30, 2023. The slight decline in ACL as a percentage of total outstanding loans was due to adjustments to the qualitative factors, as well as slight declines in historical loss rates. In addition, the allowance on unfunded credit commitments, presented as part of other liabilities, increased $556 thousand in the third quarter of 2023 due to higher reserve level on unfunded multi-year construction commitments.
• Provision for credit losses, including funded and unfunded credit commitments, was $858 thousand in the third quarter, compared to $486 thousand for the second quarter of 2023 and a reversal of $317 thousand for the same period in 2022. The provision was driven by growth in the portfolio, particularly the large and longer-term credit commitments mentioned above.
• Net interest margin was 4.92% in the third quarter of 2023, compared to 4.93% in the prior quarter and 4.22% for the corresponding quarter in 2022. In the third quarter of 2023, higher yields on interest-earning assets were more than offset by increased funding costs. Net interest margin was 4.98% for the nine months ended September 2023, compared to 3.97% for the nine months ended September of 2022. The Bank's large proportion of adjustable-rate loans benefited from the rising prime index rate in 2022. However, the Bank experienced pressure from the rising cost of funds, particularly in 2023 following the failures of several high-profile banks which accelerated a trend of bank depositors shifting to higher rate deposit networks for increased FDIC insurance coverage and to higher yielding investment opportunities, increasing funding pressure across the banking industry.
• For the quarters ended September 30, 2023 and June 30, 2023, return on average assets was 2.05% and 1.94%, respectively, return on average equity was 16.85% and 15.98%, respectively, and the return on average tangible equity was 19.33% and 18.42%, respectively. For the nine months ended September 30, 2023, return on average assets was 2.02%, compared to 1.60% for the nine months ended September 30, 2022, return on average equity was 16.90% and 14.89% for the nine months ended September 30, 2023 and 2022, respectively, and return on average tangible equity was 19.50% and 17.51% for the nine months ended September 30, 2023 and 2022, respectively.
• The efficiency ratio was 38.23% for the third quarter of 2023, as compared to 41.52% in the prior quarter and 36.17% in the third quarter of 2022. The efficiency ratio was 39.83% and 42.41% for the nine months ended September 2023 and 2022, respectively.
• All capital ratios were above regulatory requirements for a well-capitalized institution with a total risk-based capital ratio of 14.83% at September 30, 2023 compared to 14.57% at June 30, 2023. Tangible common equity to tangible asset ratio increased from 10.51% at June 30, 2023 to 10.89% at September 30, 2023.
• Tangible book value per share increased to $22.65 at September 30, 2023 from $21.54 at June 30, 2023 and $18.77 at September 30, 2022.

Liquidity Position

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 15.2% at September 30, 2023, compared to 15.3% at June 30, 2023. As of September 30, 2023, on-balance sheet liquidity including cash and equivalents, deposits held in other banks and unpledged available-for-sale securities totaled $269.7 million. This, combined with available borrowing capacity of $514.1 million, exceeded uninsured and uncollateralized deposits of $687.9 million, with a coverage ratio greater than 114%. SBA loans held for sale of $34.6 million at September 30, 2023 also provides additional liquidity.

U.S. Treasury bonds, securities issued by U.S. Government sponsored agencies and SBA accounted for 76%, 17% and 4% of the investment portfolio as of September 30, 2023, respectively, and thus presented minimal credit or liquidity risk. The investment portfolio of $291.1 million at September 30, 2023 has an average life of 2.6 years, and the Bank expects to receive principal, in full, when the investments mature. Net unrealized losses on AFS securities totaled $21.4 million ($15.1 million after-tax). Held-to-maturity securities totaled $7.6 million at September 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 increased to $434.1 million with no overnight borrowings outstanding as of September 30, 2023, compared to the borrowing capacity of $301.2 million with $48 million in overnight borrowings at June 30, 2023.

Quarterly Earnings

For the third quarter 2023, net income was $9.1 million, compared to $8.3 million in the second quarter of 2023 and $9.2 million in the third quarter of 2022. Major factors impacting earnings in the third quarter include: interest income on loans, gain on sale of assets and interest expense on deposits and borrowings. Interest income on loans increased $911 thousand in the third quarter of 2023 from the previous quarter, primarily attributable to increases in the market interest rates and growth in the loan portfolio. On the other hand, market interest rate pressure resulted in a $441 thousand interest expense increase during the third quarter of 2023. In addition, the Bank sold its vacant office property in the third quarter of 2023 and recorded a gain of $255 thousand.

Interest Income / Interest Expense and Net Interest Margin

Net interest income of $21.1 million in the third quarter of 2023 improved $873 thousand from $20.2 million for the quarter ended June 30, 2023, primarily due to increased volume of interest-bearing assets and a decrease in volume of interest-bearing liabilities, partially offset by the impact of rising rates, which caused a larger increase in deposit costs than the corresponding increase in loan yields. The Bank's cost of funds increased nine basis points from the second quarter of 2023 of 0.78%, to 0.87% in the third quarter of 2023.

For the third quarter of 2023, net interest margin was 4.92%, compared to 4.93% in the second quarter and 4.22% for the corresponding quarter in 2022. The slight decrease from the prior quarter reflected rising costs of funds, and the impact of the placement of a commercial real estate loan on nonaccrual status, partially offset by the benefit from higher yields on interest-earning assets and a slight shift from interest-bearing deposits to noninterest-bearing deposits due to seasonal fluctuation in the Bank's largest commercial depositors.

Net interest income increased from the same quarter last year by $2.6 million, or 14%, 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 an increase of 75 basis points in the cost of funds from 0.12% in the third quarter of 2022.

For the nine months ended September 2023, net interest margin was 4.98%, compared to 3.97% 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 increases in prime rate and other indices, and increases in our cost of funds lagging behind the market rate increases during most of 2022. 

Noninterest Income / Expense

Noninterest income for the quarter ended September 30, 2023 was $1.2 million compared to $839 thousand for the previous quarter and $1.5 million in the third quarter of 2022. The Bank sold its vacant office property in July 2023 and recognized a $255 thousand gain. There were no SBA sales in any of the first three quarters of 2023. Gains on SBA loan sales were $658 thousand in the third quarter of 2022. The market premium on SBA loans declined, making it less favorable to sell SBA loans in 2023.

Noninterest expense was $8.5 million in the third quarter of 2023, $238 thousand or 3% less than prior quarter, primarily due to a decrease in employee incentive and benefit expense, partially offset by higher professional expenses resulting from the formation of the Bank's holding company. Noninterest expense increased $1.3 million, or 18% compared to the same quarter last year, the result of higher operating costs across the board due to inflation, as well as holding company formation expenses and the new Salinas branch. Noninterest expense increased $3.2 million, or 14% during the first nine months of 2023 compared to the corresponding period of 2022 for similar reasons.

Loans and Asset Quality

Non-PPP loans increased $37.6 million or 3% from June 30, 2023 and $140.6 million or 11% compared to September 30, 2022. 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 $25.1 million, or 1.83% of the total loans, at September 30, 2023, compared to $24.8 million, or 1.85% of the total loans, at June 30, 2023. The decrease in the allowance as a percent of total loans was due to adjustments to the qualitative factors, as well as slight declines in historical loss rates.

The allowance for credit losses includes specific reserves in the amount of $1.4 million as of September 30, 2023 and $1.5 million as of June 30, 2023, for individually evaluated commercial loans on nonaccrual status. A $3.0 million and a $6.5 million commercial real estate loan were added to nonaccrual status during the third and second quarter of 2023, respectively. Both loans were individually evaluated and determined to be collateral dependent but are adequately secured by real estate and have no recorded reserve.

The following tables summarize the Bank's loan mix and delinquent/nonperforming loans:

Deposits

Deposits were $1.53 billion at September 30, 2023, reflecting an increase of $61.5 million during the third quarter of 2023. The increase reflected several significant new commercial deposit relationships and cyclical fluctuation from our large depositors influenced by tourism and harvest season. The ten largest deposit relationships, excluding fully collateralized government agency deposits, represent approximately 12% of total deposits as of September 30, 2023, up from 10% at June 30, 2023, primarily reflecting the seasonal factor noted earlier. The Bank's noninterest-bearing deposits represented 42% of total deposits at both September 30, 2023 and June 30, 2023.

Shareholders' Equity

Total shareholders' equity was $217.7 million at September 30, 2023, a $9.5 million or 5% increase over June 30, 2023 and an increase of $30.7 million or 16% over September 30, 2022. Earnings of $9.1 million in the third quarter of 2023 contributed to the increase over last quarter-end. The after-tax unrealized losses on AFS securities decreased slightly from $15.2 million as of June 30, 2023 to $15.1 million as of September 30, 2023.

ABOUT SANTA CRUZ COUNTY BANK AND WEST COAST COMMUNITY BANCORP

Founded in 2004, Santa Cruz County Bank is the wholly owned subsidiary of West Coast Community Bancorp, a bank holding company. The Bank is a top-rated, locally operated, and full-service community bank headquartered in Santa Cruz, California with branches in Aptos, Capitola, Cupertino, Monterey, Salinas, Santa Cruz, Scotts Valley, and Watsonville. Santa Cruz County Bank is distinguished from "big banks" by its relationship-based service, problem-solving focus, and direct access to decision makers. The Bank is a leading SBA lender in Santa Cruz County and Silicon Valley and a top USDA lender in the state of California. As a full-service bank, Santa Cruz County Bank offers competitive deposit and lending solutions for businesses and individuals; including business loans, lines of credit, commercial real estate financing, construction lending, asset-based lending, agricultural loans, SBA and USDA government guaranteed loans, credit cards, merchant services, remote deposit capture, mobile and online banking, bill payment, and treasury management. True to its community roots, Santa Cruz County Bank has supported regional well-being by actively participating in and donating to local not-for-profit organizations.

NATIONAL, STATE, AND LOCAL RATINGS AND AWARDS

• American Banker Magazine: The Bank is ranked #89 in the Top 200 Community Banks list based upon 3-year average equity for banks under $2 billion in assets and ranked #13 out of 21 California banks.
• S&P Global Market Intelligence: The Bank is ranked #6 in the Top 100 banks nationwide for 2022 performance for banks under $3 billion in assets and ranked #3 for the best-performing community banks in the Western U.S. with assets under $10 billion.
• The Findley Reports, Inc.: The Bank has received the top ranking of Super Premier for 13 consecutive years.
• Bauer Financial Reports, Inc.: The Bank is rated 5-star "Superior" based upon its financial performance.
• U.S. Small Business Administration: The Bank is in the Top 100 most active SBA 7(a) lenders in the nation.
• Silicon Valley Business Journal: The Bank is ranked 15^th in volume of SBA loans lent to Silicon Valley businesses from October 1, 2021 to September 1, 2022.
• Good Times, 2023 Best of Santa Cruz County Award, Voted "Best Bank" for 11 consecutive years.
• Santa Cruz Sentinel, 2022 Reader's Choice Award, number one bank in Santa Cruz County as voted by Santa Cruz Sentinel readers for 8 years.

Forward-Looking Statements

This release may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties may include but are not necessarily limited to fluctuations in interest rates (including but not limited to changes in depositor behavior in relation thereto), inflation, government regulations and general economic conditions, and competition within the business areas in which the Bank is conducting its operations, including the real estate market in California and other factors beyond the Bank's control. Such risks and uncertainties could cause results for subsequent interim periods or for the entire year to differ materially from those indicated. Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date hereof. The Bank undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

Concurrent with this earnings release, the Bank issued presentation slides providing supplemental information, intended to be reviewed together with this release and can be found online at: https://www.sccountybank.com/investor_relations.cfm

SOURCE West Coast Community Bancorp