Executive Summary / Key Takeaways

• California BanCorp (BCAL) is demonstrating enhanced profitability and operational efficiency following its transformative merger with CALB in July 2024, significantly increasing scale and market presence across California.
• First quarter 2025 results show robust net income growth year-over-year, driven by expanded interest-earning assets and improved net interest margin, partially offset by increased operating expenses related to the larger footprint.
• Asset quality metrics remain closely monitored, with fluctuations in nonaccrual and classified loans reflecting ongoing economic adjustments and specific portfolio dynamics, while the Allowance for Credit Losses (ACL) is managed using probability-weighted economic scenarios.
• BCAL maintains a solid capital position, exceeding "well capitalized" thresholds, and has increased its share repurchase authorization, signaling confidence in its financial health and commitment to shareholder value.
• The bank faces competitive pressures from larger regional players and digital alternatives, necessitating continued focus on its relationship-based model and strategic deposit management to sustain performance in a dynamic interest rate and economic environment.

A California Story: Building Scale Through Relationships and Strategic Growth

California BanCorp operates as a relationship-focused community bank, deeply embedded within the California market. Its core mission revolves around providing tailored financial products and services to individuals, professionals, and small- to medium-sized businesses. This approach, emphasizing accessibility to decision-makers and strong client partnerships, forms the bedrock of its strategy. The bank's history, marked by strategic acquisitions, including the integration of numerous branch offices over time, culminated in a significant milestone on July 31, 2024: the all-stock merger with California BanCorp (CALB). This merger was designed to expand BCAL's geographic footprint into Northern California, leveraging complementary business models and a robust deposit base to build scale and increase market share. The combined entity now operates through 14 full-service branches across the state, blending the strengths of both legacy organizations.

BCAL's service offerings span a range of lending products, including construction and land development, real estate, commercial and industrial (CI), consumer, and SBA loans, where it holds a Preferred SBA Lender designation. On the deposit side, it provides demand deposit, money market, and certificates of deposit accounts, enhanced by participation in reciprocal deposit networks like CDARS, ICS, and RT to facilitate FDIC insurance for larger customer balances. Treasury management services, such as online banking, cash vault, sweep accounts, and lock box services, further support its commercial clientele.

While the company does not detail proprietary core banking technology or significant R&D initiatives in the manner of a technology firm, BCAL's operational capabilities are supported by standard banking technologies, including online banking and treasury management platforms. These tools are essential for delivering the bank's relationship-based services efficiently. In the competitive landscape, larger rivals like Pacific Premier Bancorp (PPBI) and East West Bank (EWBC) are noted for more advanced digital tools, potentially offering faster transaction processing or more efficient loan origination. Banc of California (BANC) also competes directly with a broader statewide network. BCAL's strategic response relies on the strength of its localized branch network and personalized service, aiming to foster customer loyalty and retention, particularly in its Southern California strongholds. Its regulatory licenses, such as the Preferred SBA Lender status, provide a competitive edge in specific lending niches, potentially allowing for faster approvals compared to larger, less specialized institutions. However, BCAL's smaller scale compared to these larger regional banks can lead to higher operating costs per unit and potentially slower digital product development cycles, posing vulnerabilities that necessitate strategic focus on efficiency and adaptability.

Financial Performance: Merger-Driven Growth and Margin Dynamics

The financial results for the first quarter of 2025 underscore the significant impact of the CALB merger. Net income reached $16.9 million, or $0.52 per diluted share, a substantial increase from $4.9 million, or $0.26 per diluted share, in the same period of 2024. This growth was primarily fueled by a $21.8 million surge in net interest income, a direct consequence of the expanded asset base acquired in the merger. Noninterest income also saw a $1.2 million increase year-over-year, contributing to the improved top line.

Comparing the first quarter of 2025 to the preceding fourth quarter of 2024, net income saw a modest increase to $16.9 million from $16.8 million. This sequential change was influenced by a $1.6 million increase in noninterest income and a $1.2 million decrease in noninterest expense, which more than offset a $2.3 million decrease in net interest income. Pre-tax, pre-provision income also saw a sequential increase of $481 thousand, or 2.5%, reaching $19.9 million in Q1 2025.

Net interest income for Q1 2025 stood at $42.3 million, down from $44.5 million in Q4 2024, but significantly higher than $20.5 million in Q1 2024. The sequential decrease was primarily due to a $5.7 million decrease in total interest and dividend income, partially offset by a $3.4 million decrease in total interest expense. The decrease in interest income was linked to lower average loan balances and average deposits in other financial institutions. The reduction in interest expense was mainly driven by a $3.4 million decrease in interest expense on interest-bearing deposits, reflecting both lower average balances and a decrease in average interest-bearing deposit costs, influenced by the bank's deposit repricing strategy and the payoff of high-cost brokered deposits.

The net interest margin in Q1 2025 was 4.65%, a slight increase from 4.61% in Q4 2024 and a notable expansion from 3.80% in Q1 2024. The sequential improvement was primarily related to a 27 basis point decrease in the cost of funds, partially offset by a 22 basis point decrease in the yield on total interest-earning assets. Accretion income from net purchase accounting discounts on acquired loans continued to bolster loan yields, adding 62 basis points to the average total loan yield in Q1 2025. The cost of funds decreased to 1.72% in Q1 2025 from 1.99% in Q4 2024, mainly due to a 39 basis point decrease in the cost of average interest-bearing deposits. Average noninterest-bearing demand deposits remained a significant portion of the deposit base, representing 38.7% of total deposits at March 31, 2025.

Noninterest income in Q1 2025 was $2.6 million, a $1.6 million increase from $1.0 million in Q4 2024. This was largely driven by a gain on sale of loans of $577 thousand in Q1 2025, compared to a $1.1 million loss in Q4 2024 related to the sale of certain Sponsor Finance loans. Service charges and fees also increased sequentially due to the absence of a one-time waiver provided in the prior quarter. Year-over-year, noninterest income increased by $1.2 million, primarily reflecting the impact of the merger on various fee income categories.

Total noninterest expense decreased sequentially to $24.9 million in Q1 2025 from $26.1 million in Q4 2024, mainly due to lower merger-related expenses. However, regulatory assessments increased due to higher FDIC assessment rates. Compared to Q1 2024, total noninterest expense increased significantly by $9.9 million, reaching $24.9 million, primarily due to the larger operational scale and headcount resulting from the merger. Salaries and employee benefits saw a $6.3 million increase year-over-year. The efficiency ratio (non-GAAP) improved to 55.60% in Q1 2025, down from 57.40% in Q4 2024 and 68.40% in Q1 2024, indicating improved operational leverage post-merger.

The effective tax rate was 28.8% in Q1 2025, slightly up from 27.9% in Q4 2024, influenced by non-tax deductible merger expenses and equity award activity. It was lower than the 32.0% rate in Q1 2024, also due to the impact of merger expenses and equity awards.

Balance Sheet Evolution and Asset Quality Management

BCAL's total assets stood at $3.98 billion at March 31, 2025, a decrease of $48.6 million, or 1.2%, from $4.03 billion at December 31, 2024. This decrease was primarily attributable to a reduction in loans, partially offset by an increase in cash and cash equivalents. The shift in assets was linked to decreases in wholesale funding sources and activity in loan sales and payoffs.

The debt securities portfolio totaled $184.8 million at March 31, 2025, down $10.5 million from $195.3 million at December 31, 2024, mainly due to paydowns, maturities, and calls. The portfolio consists of both held-to-maturity ($53.2 million amortized cost) and available-for-sale ($131.6 million fair value) securities. Unrealized losses on these portfolios decreased in Q1 2025, influenced by changes in interest rates. At March 31, 2025, held-to-maturity securities had $5.9 million in pre-tax unrealized losses, while available-for-sale securities had $6.7 million in gross pre-tax unrealized losses. The bank has the intent and ability to hold held-to-maturity securities until maturity and does not intend to sell available-for-sale securities with unrealized losses, expecting to recover the full amortized cost basis.

Total loans held for investment decreased by $70.4 million to $3.07 billion at March 31, 2025. This change reflected originations of $69.4 million, offset by net paydowns, charge-offs, and payoffs/sales totaling $119.4 million. Loans secured by real estate decreased by $30.7 million, while commercial and industrial loans decreased by $38.5 million. Commercial real estate (CRE) loans, including loans held for sale, represented approximately 57% of the total loan portfolio at March 31, 2025. Office CRE loans, a segment facing unique risks from remote work trends and rising rates, are managed with an emphasis on loan-to-value and debt service ratios.

Asset quality metrics showed some fluctuation. Past due loans still accruing decreased to $5.1 million (0.17% of total loans) at March 31, 2025, from $12.1 million (0.39%) at December 31, 2024, largely due to charge-offs, sales, and loans being brought current. Nonaccrual loans decreased by $3.6 million to $22.8 million, influenced by downgrades, upgrades, and sales of nonaccrual loans. Special mention loans increased by $5.1 million to $74.4 million, while substandard loans decreased by $5.8 million to $111.8 million.

The Allowance for Credit Losses (ACL) for loans held for investment was $45.8 million at March 31, 2025, down from $50.5 million at December 31, 2024. This $4.7 million decrease was driven by net charge-offs of $1.5 million (including charge-offs from acquired consumer solar and CI dental loans, and a PCD CRE loan, partially offset by a recovery on a PCD CI loan), changes in qualitative risk factors, and changes related to classified loans and loan volume/mix. The ACL is estimated using a discounted cash flow methodology incorporating probability-weighted economic scenarios (80% base-case, 20% downside) and historical experience. Management believes the ACL is appropriately provisioned for the current environment, though a sensitivity analysis indicates a 100% weighting to the downside scenario would increase the ACL by approximately $6.9 million. The allowance for off-balance sheet commitments decreased to $2.5 million from $3.1 million, reflecting lower unfunded commitments and loss rates.

Total liabilities decreased by $68.1 million to $3.45 billion, primarily due to a $56.3 million decrease in total deposits. Total deposits were $3.34 billion at March 31, 2025, down from $3.40 billion at December 31, 2024. This decrease was mainly in brokered time deposits, partially offset by increases in other deposit categories. Reciprocal deposits increased slightly to $763.6 million (22.8% of total deposits), with the excess over 20% remaining within internal policy limits. Uninsured deposits represented 47% of total deposits. Total borrowings increased slightly to $70.3 million due to amortization of issuance costs related to subordinated debt.

Shareholders equity increased by $19.5 million to $531.4 million, driven by net income, a decrease in net unrealized losses on available-for-sale securities, stock-based compensation, and stock options exercised, partially offset by share repurchases for restricted stock unit settlements. Tangible book value per common share increased to $12.29 from $11.71. BCAL and its subsidiary bank continue to exceed the minimum capital requirements to be considered "well capitalized" under regulatory frameworks, demonstrating a strong capital position. The company also announced an increase in its share repurchase program authorization to 1.6 million shares on May 1, 2025, and the redemption of $18 million in subordinated notes, reflecting active capital management.

Outlook and Risks

BCAL's outlook is shaped by the prevailing macroeconomic environment and its strategic positioning post-merger. Economic forecasts from Moody's Analytics suggest modest US GDP growth of 1.3% in 2025, with California's GSP growth projected at 1.6%. Unemployment in California is expected to remain relatively stable, though a downside scenario forecasts a potential rise. Management continues to monitor these variables, along with interest rate trends and inflation, which directly impact loan demand, deposit costs, and asset quality.

Key risks for BCAL include potential volatility in the banking industry, challenges related to interest rate fluctuations and their impact on net interest margin and asset values, and the ability to effectively manage liquidity and deposit retention in a competitive environment. Credit quality deterioration, particularly within the CRE portfolio, remains a focus area, although management believes its ACL is appropriately sized based on current forecasts and qualitative factors. Natural disasters, such as the recent Southern California wildfires, are also noted as risks, though the impact on the loan portfolio is expected to be minimal. Competition from both traditional regional banks and increasingly sophisticated digital platforms poses ongoing challenges to market share and profitability. Regulatory changes and potential actions could also impact operations and capital requirements.

The successful integration of the CALB merger is crucial for realizing anticipated synergies and achieving scale benefits, though there is a risk that cost savings may be less than expected. The share repurchase program and redemption of subordinated debt signal management's confidence and focus on optimizing the capital structure and returning value to shareholders, but future capital needs and market conditions will influence the execution of these initiatives.

Conclusion

California BanCorp's first quarter 2025 results demonstrate the initial financial benefits of the CALB merger, marked by significant increases in net interest income and overall profitability compared to the prior year. The bank has successfully expanded its footprint and is leveraging its enhanced scale to improve operational efficiency. While facing a dynamic economic backdrop characterized by shifting interest rates and potential slowdowns, BCAL maintains a strong capital position and is actively managing its balance sheet and asset quality. The core investment thesis rests on the bank's ability to effectively integrate the acquired operations, capitalize on its expanded California market presence through its relationship-based commercial banking model, and navigate competitive pressures and macroeconomic uncertainties. Investors should closely monitor trends in net interest margin, asset quality, deposit dynamics, and the successful realization of merger synergies as key indicators of BCAL's future performance and the sustainability of its growth trajectory.