Southern California Bancorp Adopts CECL and Reports $3.9 Million Decrease in Retained Earnings

Southern California Bancorp (ticker: BCAL), a commercial banking institution, recently adopted the Accounting Standard Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326),” which replaces the incurred loss impairment methodology with a current expected credit losses (CECL) methodology. This change required the company to consider its historical experience, current conditions, and reasonable and supportable forecasts to estimate expected credit losses for financial assets held at the reporting date.

On January 1, 2023, the Company recorded a net decrease of $3.9 million in the beginning balance of retained earnings due to the adoption of the CECL methodology. This decrease reflects an initial adjustment of $5.5 million to the allowance for credit losses (ACL), which includes a $5.0 million increase in the ACL – loans and a $439 thousand increase in reserve for unfunded commitments, net of the related deferred tax assets arising from temporary differences of $1.6 million. The Company refers to this as the “Day 1” adjustment.

The Day 1 adjustment reflects the development of the CECL models to estimate lifetime expected credit losses on loans held for investment and unfunded commitments. The models primarily use a lifetime loss methodology and management’s current expectation of future economic conditions. As a result, the results for the reporting period starting after January 1, 2023, will be presented under the CECL methodology, while prior period amounts will continue to be reported under the probable incurred loss accounting standards.

Adoption of ASU 2022-02

Along with the adoption of ASU 2016-13, the Company also adopted ASU 2022-02, “Financial Instrumentsโ€”Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures.” This update eliminates TDR accounting prospectively for all loan modifications occurring on or after January 1, 2023, and adds additional disclosure requirements for current period gross charge-offs by the year of origination. Loans that were considered a TDR before the adoption of ASU 2022-02 will continue to be accounted for under the superseded TDR accounting guidance until the loans are paid off, liquidated, or subsequently modified.

Impact on Southern California Bancorp

Southern California Bancorp’s adoption of the CECL methodology and the related changes in its accounting policies are based on the GAAP and conform to predominant practices within the banking industry. These changes are expected to provide a more accurate reflection of the company’s financial condition and results of operations, as well as improve the transparency and comparability of its financial statements.

It is important for investors and other stakeholders to understand the changes in the Company’s accounting policies and how the adoption of the CECL methodology may impact its financial performance and condition moving forward. However, it is worth noting that this adoption does not necessarily indicate a change in the underlying performance or risk profile of the Company’s loan portfolio, but rather a change in the way credit losses are measured and reported.

Income Statement

Financials in millions USD. Fiscal year is January – December. source

Year 2022 2021
0 Revenue 86.01 67.73
1 Revenue Growth (YoY) 27.00%
2 Gross Profit 86.01 67.73
3 Selling, General & Admin 51.43 46.83
4 Other Operating Expenses 12.6 6.71
5 Operating Expenses 64.03 53.54
6 Operating Income 21.98 14.19
7 Pretax Income 21.98 14.19
8 Income Tax 5.87 3.48
9 Net Income 16.11 10.71
10 Net Income Growth 50.46%
11 Shares Outstanding (Basic) 18
12 EPS (Basic) 0.90 0.74
13 EPS (Diluted) 0.88 0.72
14 EPS Growth 22.22%
15 Free Cash Flow Per Share 0.90
16 Gross Margin 100.00% 100.00%
17 Operating Margin 25.56% 20.95%
18 Profit Margin 18.73% 15.81%
19 Free Cash Flow Margin 18.81% 26.43%
20 Effective Tax Rate 26.70% 24.51%
21 EBITDA 23.98 15.91
22 EBITDA Margin 27.88% 23.49%
23 Depreciation & Amortization 2 1.72
24 EBIT 21.98 14.19
25 EBIT Margin 25.56% 20.95%

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