California banks to combine in $234 million 'merger of equals'

Southern California Bancorp in San Diego and Oakland-based California BanCorp said they would merge in a $233.6 million, all-stock deal that would create a combined company with $4.6 billion of assets spanning the major metropolises of the country’s most populous state.

The $2.4 billion-asset Southern California Bancorp, the parent of Bank of Southern California, and the $2 billion-asset California BanCorp, the holding company for California Bank of Commerce, jointly announced the deal on Tuesday and billed it as a “merger of equals.”

However, the transaction, slated to close in the third quarter, would give Southern California Bancorp shareholders 57.1% ownership of the outstanding shares of the combined company. California BanCorp investors would own the rest. The deal consideration was based on Southern California Bancorp’s Jan. 29 closing stock price.

The merged bank would be based in San Diego and also cover Greater Los Angeles and the San Francisco Bay Area.

It marked the second large bank deal to date in the West in the new year. Seattle-based HomeStreet in mid-January said it planned to sell itself to FirstSun Capital Bancorp in Denver for $286 million.

The transactions come on the heels of a sluggish 2023 for M&A. There were only 98 deals announced last year, according to S&P Global Market Intelligence. That was down from 161 in the prior year. Buyers largely moved to the sidelines last year amid elevated regulatory scrutiny in the wake of regional bank failures and recession fears induced by a surge in interest rates. 

Jon Winick, CEO of bank consultancy Clark Street Capital, said the M&A headwinds “continue to blow” early in 2024. But he also said the economy has proven resilient and in growth mode, and this could give more bank executives confidence to jump back into the deal fray as community lenders need to bulk up to compete with larger peers.

The California banks said Tuesday their merger would unite two institutions that focus on middle market lending with complementary footprints, creating scale needed to further invest in technology and better manage risk, increase efficiency and provide customers with more products and services.

“Our two companies share the same vision and values with a customer-centric focus on providing outstanding service to mid-market businesses. We believe this combination, resulting in increased size and scale, will drive improved profitability and increase shareholder value,” David Rainer, chairman and CEO of Southern California Bancorp, said in a press release announcing the deal.

“It also offers customers increased product offerings and lending limits, as well as access to branches in both Northern and Southern California. The merger will also provide employees of both companies with increased career opportunities,” he added.

Rainer would become executive chairman of the combined parent company and bank as well as the boards of both.

Steven Shelton, CEO of California BanCorp, would assume that title of the merged company and bank. He would also be a director.

“The expanded scale and capabilities we will have as a result of this merger will enhance our ability to continue adding attractive full banking relationships with commercial clients that provide operating deposit accounts and high quality lending opportunities,” Shelton said in the release. The deal also would create opportunities to “move up market and work with larger businesses.”

The combined company’s board would consist of six directors from both banks. A lead independent director would be appointed after closing.

Additionally, Richard Hernandez, president of Southern California Bancorp, would retain that title post-merger.

Thomas Sa, who is president, chief financial officer and chief operating officer of California BanCorp, will serve as COO of the combined company and bank.

Thomas Dolan, CFO and COO of Southern California Bancorp, will serve as CFO of the combined company and chief strategy officer of the bank.

The companies said they would evaluate rebranding with new names and logos at the close of the transaction. The combined company’s common stock would continue to trade on the Nasdaq Capital Market.

The merged company’s Southern California footprint would include Bank of Southern California’s 13 branches that serve Los Angeles, Orange, San Diego and Ventura counties, as well as the Inland Empire of California. Its Northern California territory would include the California Bank of Commerce branch in Contra Costa County and its four loan production offices serving Alameda, Contra Costa, Sacramento and Santa Clara counties.

It would have $2.6 billion of loans and $3.8 billion of deposits.

The companies estimated the deal would create cost savings equal to about 15% of their combined noninterest expense base. They expect one-time, pre-tax merger expenses of $19.5 million.

They also projected 2025 earnings per share accretion of 48%. They expect to earn back tangible book value dilution of 18% in less than three years.