Company Overview

California BanCorp, formerly known as Southern California Bancorp, is a dynamic community bank that has weathered various storms, emerging as a resilient financial institution serving the needs of individuals, professionals, and small-to-medium sized businesses across California. With a focus on relationship-driven banking, the company has established a strong foothold in both Southern and Northern California, providing a diverse range of financial products and services through its 14 branch offices.

History and Evolution

The company's history can be traced back to its inception in December 2001, when it began operations as Ramona National Bank. Over the years, the bank underwent several name changes, becoming First Business Bank, N.A. in 2006, Bank of Southern California, N.A. in 2010, and finally California Bank of Commerce, N.A. on July 31, 2024. A significant milestone in the company's evolution was the completion of a reorganization on May 15, 2020, which resulted in California Bank of Commerce, N.A. becoming a wholly-owned subsidiary of the newly incorporated California corporation, Southern California Bancorp.

Transformative Merger

The transformative merger between Southern California Bancorp and the former California BanCorp was announced in January 2024. This all-stock merger received regulatory approvals on May 13, 2024, and shareholder approvals on July 17, 2024, before finally closing on July 31, 2024. As part of this merger, California Bank of Commerce, a California state-chartered bank and wholly-owned subsidiary of the former California BanCorp, merged with and into Bank of Southern California, N.A. Following these mergers, the corporate names were changed to California BanCorp and California Bank of Commerce, N.A., respectively.

This strategic merger significantly expanded the company's geographical footprint, particularly into Northern California. It provided an opportunity for building scale and increasing market share through complementary business models with a strong deposit base. The combined entity retained the banking offices of both banks, adding California Bank of Commerce's one full-service bank branch and its four loan production offices in the Bay Area to the existing 13 full-service bank branches located throughout the Southern California region.

Financials

California BanCorp's financial performance has been marked by both successes and challenges. In the fiscal year 2023, the company reported net income of $25.9 million, or $1.39 per diluted share, showcasing its ability to generate steady earnings. The company's revenue for the same period stood at $97.5 million, while its operating cash flow and free cash flow were $33.1 million and $32.8 million, respectively.

However, the first nine months of 2024 saw the company's net income decline to $11.3 million, or $0.53 per diluted share, primarily due to the impact of the merger-related expenses and the initial provision for credit losses on acquired loans and unfunded commitments. The company's revenue for the same period increased to $117.2 million, while its operating cash flow and free cash flow were $26.7 million and $32.4 million, respectively.

The most recent quarter (Q3 2024) presented significant challenges, with the company reporting a net loss of $16.5 million. This marked a substantial decline from the net income of $6.6 million reported in Q3 2023. The loss was primarily attributed to a $22.9 million increase in noninterest expense and a $23.1 million increase in provision for credit losses, which were partially offset by a $13.7 million increase in net interest income and an $8.9 million decrease in income taxes. These changes were largely related to costs associated with the merger between Southern California Bancorp and California BanCorp, which closed on July 31, 2024.

Liquidity and Capital Position

One of the key factors contributing to California BanCorp's resilience has been its strong capital position. As of September 30, 2024, the company's total capital ratio stood at 12.65%, well above the regulatory requirement for well-capitalized institutions. This robust capital base has enabled the company to withstand the challenges posed by the recent volatility in the banking industry, stemming from factors such as rising interest rates, inflationary pressures, and the potential for an economic slowdown.

The company's liquidity position remains strong, with cash and cash equivalents of $614.4 million as of September 30, 2024. California BanCorp maintains a debt-to-equity ratio of 0.17, indicating a conservative approach to leverage. The company's current ratio and quick ratio both stand at 14.29, reflecting its ability to meet short-term obligations.

Furthermore, California BanCorp has access to significant credit facilities, including $663.6 million available from a Federal Home Loan Bank (FHLB) secured line of credit, $446.4 million from the Federal Reserve discount window, and $110.5 million in unsecured federal funds lines of credit. These resources provide additional financial flexibility and support the company's ability to manage liquidity effectively.

Loan Portfolio and Risk Management

The company's loan portfolio is primarily composed of commercial real estate (CRE) loans, which accounted for 54.3% of the total loan portfolio as of September 30, 2024. While CRE lending carries inherent risks, California BanCorp has implemented comprehensive underwriting policies, semi-annual loan-level reviews, and close monitoring of industry, geographical, and collateral type concentrations to mitigate these risks. As of September 30, 2024, the company's non-performing loans stood at $25.7 million, or 0.8% of total loans held for investment, which is manageable given the size of the loan portfolio.

California BanCorp's total loans held for investment reached $3.20 billion as of September 30, 2024, representing 73.3% of total assets. This marks a significant increase of $1.24 billion from December 31, 2023, largely attributable to the merger with California BanCorp, which added $1.36 billion in loans to the portfolio. The loan portfolio is diversified across several categories, including construction and land development loans, real estate loans (1-4 family residential, multifamily residential, and commercial real estate), commercial and industrial (CI) loans, and consumer loans.

Navigating Industry Challenges

In the face of the recent challenges faced by the banking industry, California BanCorp has demonstrated its ability to adapt and navigate the landscape. The company's management team has proven its expertise in managing interest rate risk, maintaining a diversified deposit base, and prudently deploying its capital resources.

Deposit Base Expansion

One key area of focus for the company has been the expansion of its deposit base, particularly through the utilization of deposit networks such as the Certificate of Deposit Account Registry Service (CDARS), IntraFi Network Insured Cash Sweep (ICS), and Reich Tang Deposit Solutions (RT). These reciprocal deposit products have allowed the company to fully qualify large customer deposits for FDIC insurance, reducing its reliance on more volatile funding sources.

As of September 30, 2024, California BanCorp's total deposits reached $3.74 billion, marking a substantial increase of $1.80 billion from December 31, 2023. This growth was primarily driven by the merger with California BanCorp, which contributed $1.64 billion in deposits. The deposit base is diversified, consisting of noninterest-bearing demand deposits (36.6% of total deposits), interest-bearing NOW accounts (20.9%), money market and savings accounts (30.7%), and time deposits (5.9%). Notably, the company's utilization of reciprocal deposit products increased to $839.7 million, representing 22.4% of total deposits.

Investment Portfolio Management

Additionally, the company has been proactive in managing its investment portfolio, repositioning its debt securities mix to protect against the unpredictable interest rate environment. As of September 30, 2024, the company's held-to-maturity debt securities, which are not marked to market, accounted for approximately 1.2% of its total assets, while its available-for-sale debt securities, which are subject to market fluctuations, represented 3.7% of its total assets.

Product Offerings and Services

California BanCorp offers a comprehensive range of financial products and services tailored to meet the needs of its diverse customer base. In addition to its core lending and deposit offerings, the company provides treasury management services, including online banking, cash vault, sweep accounts, and lockbox services. These offerings cater to the complex financial needs of businesses and professionals in its markets.

The company also originates and services Small Business Administration (SBA) loans, which it can either hold in its portfolio or sell in the secondary market. As of September 30, 2024, California BanCorp had $150.2 million in loans serviced for others, including $36.3 million in SBA loans. This diversification in product offerings allows the company to generate fee income and manage its balance sheet effectively.

Future Outlook

Looking ahead, California BanCorp's management has positioned the company to navigate the challenges posed by the current economic environment. The company's diversified loan portfolio, prudent risk management practices, and strong capital position are expected to serve as a foundation for its continued growth and profitability.

The recent merger with California BanCorp presents significant opportunities for synergies and expansion, particularly in the Northern California market. As the company continues to integrate the acquired operations, it will be crucial to monitor asset quality, manage the combined loan portfolio effectively, and capitalize on the expanded customer base and market presence.

Conclusion

In conclusion, California BanCorp's journey as a community bank has been marked by its ability to adapt and thrive in the face of adversity. The company's commitment to relationship-driven banking, sound risk management strategies, and strategic decision-making have positioned it as a resilient financial institution capable of weathering the storms that have swept through the banking industry. As California BanCorp continues to serve the needs of its customers and communities, investors can take comfort in the company's demonstrated ability to navigate challenging times and capitalize on emerging opportunities.

The recent merger and expansion into Northern California represent a pivotal moment in the company's history, offering potential for increased market share and operational efficiencies. While the short-term financial results have been impacted by merger-related expenses and provisions, the long-term prospects for California BanCorp remain promising. The company's strong liquidity position, diverse product offerings, and strategic focus on relationship banking provide a solid foundation for future growth and value creation in the competitive California banking landscape.