Executive Summary

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.

This Industry Report highlights key performance ratios and valuation metrics of 25 publicly traded, SoCal community banks using June 2021 quarter financial data.

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.

The pandemic has shown that banks of all asset sizes face major and lasting tests, which include a greater need for scale. As part of this “survival of the fittest challenge”, SoCal’s community banks should actively consider expanding niche businesses and fintech applications; and/or pursuing merger partners. We believe many SoCal banks should consider merger-of-equals (MOE) transactions to gain the requisite scale to better compete.

June 2021 quarter results for our highlighted banks were generally good. Credit remains excellent and many banks had lower, or even negative, loan loss provisions. Some SoCal banks took advantage of near-perfect interest rates and other favorable market conditions to issue subordinated debt (“sub debt”) and preferred stock issuances, which have been favorably received by the market. ESG bonds are also good options for issuers and investors in many instances.

PNC FIG Advisory recommends that 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.

Banks that are considering strategic plans and/or capital management initiatives need to track proposed tax, supervisory, and regulatory policies changes. For example, House Democrats proposed a new 26.5% top Federal tax rate vs. the current 21% rate. Although the final changes and their ultimate impacts cannot be determined at this time, early indications signal that bankers should not consider most proposals as business-friendly.


  • Interest rates and spreads are about the same as those three months ago. Although one size does not fit all, some strategies that should work well in the current environment include deleveraging through the prepayment of FHLB advances, selling lower-yielding securities, purchasing whole loans, and by investing in higher-yielding sub debt issuances of other financial institutions.
  • Opportunistic banks continue to take advantage of favorable debt markets to raise sub debt. Because it is unlikely pricing can improve much, we believe there is limited value for prospective issuers to wait for better conditions. Community bank sub debt coupon rates for rated deals have trended down as certain new issue sub debt deals were recently priced with coupons below 3.00%. Selective investments in sub debt are also good options to consider for enhanced yield.
  • PNC Advisory continues to suggest that community bankers already contemplating their “exit strategy” over the next 18 months or so may want to accelerate that timetable. In addition to the “normal” financial and social factors that typically drive consolidation, the progressive attitude in Washington may result in higher taxes and more supervision along with burdensome regulatory scrutiny of M&A deals.

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

Flying under the Radar: Small and Micro-Cap Banks in Southern California