California BanCorp (NASDAQ: BCAL) is a relationship-focused community bank that has steadily expanded its footprint in Southern and Northern California over the past two decades. With a diverse loan portfolio, strong deposit base, and prudent risk management, the company has navigated the challenging economic landscape while positioning itself for continued growth.
Business Overview and History
California BanCorp has a rich history dating back to 2001 when it began operations as Ramona National Bank. The company has undergone several name changes and strategic transformations over the years, reflecting its growth and evolving market positioning. In 2006, it transitioned to First Business Bank, N.A., followed by a change to Bank of Southern California, N.A. in 2010.
A significant milestone in the company’s history occurred in May 2020 when it completed a reorganization, forming Southern California Bancorp as a holding company for Bank of Southern California, N.A. This strategic move was designed to better position the company for future growth and acquisitions.
The most recent and transformative event in the company’s history took place in July 2024 when Southern California Bancorp merged with California BanCorp in an all-stock merger of equals. This merger led to the adoption of the California BanCorp name for the combined entity and the rebranding of the bank subsidiary to California Bank of Commerce, N.A. The merger significantly expanded the company’s geographic footprint, adding presence in Northern California to its existing Southern California operations.
Throughout its history, California BanCorp has demonstrated resilience in the face of economic challenges. In 2023, the company navigated a volatile interest rate environment as the Federal Reserve implemented rapid rate hikes to combat high inflation. This period also saw broader uncertainty in the banking industry following the failure of several financial institutions. Despite these challenges, the company maintained a strong capital position and leveraged its diversified loan portfolio to weather the storm.
Financials
As of September 30, 2024, California BanCorp reported total assets of $4.36 billion, a significant increase from the $2.36 billion in total assets reported at the end of 2023. This growth was largely driven by the merger with California BanCorp, which added $1.86 billion in fair value of total assets, including $1.36 billion in loans held for investment.
The company’s loan portfolio is diversified across various sectors, with commercial real estate loans comprising 54.3% of the total loan portfolio, including owner-occupied and non-owner-occupied properties. Commercial and industrial loans make up 23.9% of the portfolio, while 1-4 family residential, multifamily, and consumer loans account for the remaining 21.8%.
At the end of the third quarter of 2024, California BanCorp reported net loans of $3.15 billion, up from $1.93 billion at the end of 2023. The allowance for credit losses (ACL) stood at $57.62 million, or 1.80% of total loans, compared to $23.50 million, or 1.20% of total loans, at the end of 2023. The increase in the ACL was largely driven by the merger, which resulted in a $11.22 million initial allowance for credit losses on acquired purchased credit-deteriorated (PCD) loans and an $18.50 million initial provision for credit losses on acquired non-PCD loans.
Deposits grew significantly to $3.74 billion as of September 30, 2024, up from $1.94 billion at the end of 2023. This increase was primarily attributable to the $1.64 billion in fair value of deposits acquired in the merger. Noninterest-bearing demand deposits represented 36.6% of total deposits, while interest-bearing deposits, including reciprocal deposits, made up the remaining 63.4%.
For the most recent quarter, California BanCorp reported revenue of $38,116,000 and a net loss of $16,463,999. The net loss was largely due to $14.6 million in merger and related expenses associated with the completion of the merger between Southern California Bancorp and California BanCorp. Additionally, the company recorded a $22.96 million provision for credit losses, which included an $18.5 million initial provision for credit losses on acquired non-PCD loans and a $2.7 million initial provision for credit losses on acquired unfunded loan commitments related to the merger.
Operating cash flow (OCF) for the quarter was negative $8,362,000, while free cash flow (FCF) was negative $8,135,000. It’s important to note that this is the first quarter reporting financials after the merger, so year-over-year growth comparisons are not applicable.
Liquidity and Capital Strength
California BanCorp maintains a strong liquidity position, with total cash and cash equivalents of $614.42 million as of September 30, 2024, compared to $86.79 million at the end of 2023. This significant increase was largely due to the $336.30 million in cash acquired in the merger. The company’s total liquidity ratio, which includes liquid assets, loans held for sale, and available-for-sale debt securities, stood at 21.0% as of September 30, 2024, well above the company’s internal target of approximately 10%.
The company’s capital position also remains strong, with a total risk-based capital ratio of 12.65% and a Tier 1 leverage ratio of 10.55% as of September 30, 2024. These ratios easily exceed the regulatory requirements for well-capitalized banks, providing a solid foundation for growth and the ability to withstand potential economic challenges.
California BanCorp has several available credit lines to support its liquidity needs. These include an FHLB Secured Line of Credit with $663.6 million available out of $786.1 million total, a Federal Reserve Discount Window with $446.4 million available, and unsecured lines of credit totaling $110.5 million from six correspondent banks.
The company’s current ratio and quick ratio both stand at 14.29, indicating a strong ability to meet short-term obligations.
Navigating Challenges and Opportunities
The rapid interest rate hikes by the Federal Reserve between 2022 and 2023, aimed at combating high inflation, have had a significant impact on the banking industry, including California BanCorp. The company’s net interest margin (NIM) decreased from 4.43% in the third quarter of 2024 to 4.12% for the nine-month period ended September 30, 2024, as the cost of funds increased more than the yield on interest-earning assets.
To mitigate the pressure on NIM, California BanCorp has been proactive in adjusting deposit rates and managing its liquidity and funding sources. The company has also continued to focus on commercial real estate, commercial and industrial, and SBA lending, which have historically been the core of its business model.
Despite the challenges posed by the interest rate environment, California BanCorp has remained committed to its growth strategy. The merger with California BanCorp has expanded the company’s geographic footprint, added new customer relationships, and provided opportunities for cross-selling and operational efficiencies. The company is also actively exploring additional acquisition opportunities that could further enhance its market presence and competitive position.
Risks and Outlook
While California BanCorp has demonstrated its ability to navigate economic cycles and integrate acquisitions, the company faces several risks that warrant close monitoring. These include:
Potential credit quality deterioration due to the rising interest rate environment and its impact on borrowers’ ability to service debt.
Integration and execution risks associated with the recent merger, including the potential for higher-than-anticipated merger-related expenses and the ability to fully realize the expected cost savings and revenue synergies.
Increased competition for deposits and loans, which could put pressure on the company’s net interest margin and growth opportunities.
Despite these risks, California BanCorp remains optimistic about its future prospects. The company’s management team has a proven track record of navigating challenging environments and delivering value to shareholders. The merger with California BanCorp has strengthened the company’s market position, diversified its revenue streams, and provided a platform for continued growth.
Looking ahead, California BanCorp expects to continue leveraging its strong liquidity and capital position to pursue strategic opportunities, both organic and through potential acquisitions. The company’s focus on relationship banking, conservative underwriting, and diversified business model position it well to navigate the current economic landscape and capitalize on future growth opportunities.
Product and Service Offerings
California BanCorp operates in a single reportable segment – commercial banking. The company offers a range of financial products and services to individuals, professionals, and small- to medium-sized businesses through its 14 branch offices serving Southern and Northern California.
BCAL’s lending products consist primarily of construction and land development loans, real estate loans, commercial and industrial (CI) loans, and consumer loans. The company is also a Preferred SBA Lender, which allows it to provide small business loans with government guarantees.
On the deposit side, BCAL offers demand deposit, money market, and certificate of deposit products. The company also provides treasury management services, including online banking, cash vault, sweep accounts, and lock box services, which cater to the needs of its business clients.
A key aspect of BCAL’s deposit strategy is the use of reciprocal deposit products, such as the Certificate of Deposit Account Registry Service (CDARS), IntraFi Network Insured Cash Sweep (ICS), and Reich Tang Deposit Solutions (RT) networks. These reciprocal deposits totaled $839.7 million, or 22.4% of total deposits, at the end of the third quarter of 2024, up from $274.1 million, or 14.1% of deposits, at the end of 2023.
Conclusion
California BanCorp has established itself as a robust community bank with a strong presence in Southern and Northern California. The company’s recent merger with California BanCorp has expanded its geographic footprint, enhanced its competitive position, and provided a platform for continued growth. While the company faces risks inherent in the banking industry, its experienced management team, diversified business model, and sound financial position suggest that California BanCorp is well-equipped to navigate the current challenges and capitalize on future opportunities. As the company continues to execute its strategic initiatives, investors should closely monitor its progress and performance in integrating the merged entities and leveraging its expanded market presence to drive growth and profitability.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.