Executive Summary

This report highlights 22 publicly-traded banks in SoCal with assets between $800 million and $12.0 billion. Southern California (SoCal) is a banking market dominated by large institutions, but includes many public banks with niche businesses that serve business and various ethnic communities. Our highlighted region encompasses 10 counties that are home to approximately 25 million people with much cultural, economic, and demographic diversity. We define SoCal as ranging from the Mexican border and Pacific Ocean to Arizona and Nevada and the Sierra Nevada Mountains.

We believe banks in this size range are large enough to operate efficiently and small enough to deliver personalized services. These stocks typically trade “under the radar screen” – they are not widely followed by brokerages or institutional investors for several reasons, including relatively low market caps and little trading volume.

COVID-19 impacts all economic activity and nearly every aspect of life throughout the U.S., including SoCal. On March 19, California issued a stay-at-home directive except for essential jobs or to shop for essential needs. On May 4, local health jurisdictions and industry sectors were informed that they may gradually reopen under new state modifications and guidance. The coronavirus hit the SoCal region harder than the northern part of the state. We believe that, in general, the pandemic will accentuate the divide between “haves” and “have nots” and hasten the evolution and/or demise of many industries and companies already struggling to compete effectively in the technology-driven 21st Century. Community banks are part of this “survival of the fittest” challenge and must consider strategies such as expanding niche-focused businesses, better uses of fintech, and/or pursuing M&A in order to thrive.

The uncertain environment underscores that nothing is more significant to a bank’s capital and earnings than credit quality. We expect credit costs will climb and stay elevated for quite some time due to the shocking increase in unemployment levels and government-mandated business closures. PNC FIG Advisory believes banks, therefore, should consider all liquidity and capital options under various economic scenarios to construct stronger balance sheets. Along with more dynamic trading strategies, there is a need to vigorously assess capital raising options, cash dividends, and stock repurchase programs. Included among the various capital raising options are subordinated debt (“sub debt”) and preferred stock issuances, both of which have been favorably received by the market. Sensitivity models tailored to individual banks can best identify additional capital needs and, if so, what form of capital is best suited for current and longer-term strategic plans.

Highlights

  • Home to approximately 25 million people, Southern California ranks as the nation’s third most populous region (the Northeast Corridor and Chicago area are even more congested). The population density, however, is uneven, as Greater Los Angeles (LA metro and the Inland Empire) combine to have over 17 million residents.
  • Our highlighted SoCal region has 48 publicly-traded banks and thrifts. Only 11 companies headquartered there have assets greater than $5 billion and 24 companies have assets less than $1 billion.
  • We believe net interest margins will be overshadowed by changes in credit quality and loan loss provisioning. Net interest margins for individual banks will be more erratic and depend more upon the size of the PPP, loan deferrals, and nonperforming assets.

For more information, please visit pnc.com/fig or contact PNC FIG Advisory by calling 1-610-351-1633.

FOR AN IN-DEPTH LOOK
Flying under the Radar: Small and Micro-Cap Banks in Southern California