California Bancorp current report, 30 January 2024

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Business Context and Reporting Period

Southern California Bancorp (SCB), parent of Bank of Southern California, N.A., filed this Form 8-K on January 30, 2024. The filing reports a definitive merger agreement with California BanCorp (CBC), parent of California Bank of Commerce. The transaction is a strategic business combination, not a quarterly financial results filing.

Transaction Terms and Key Financial Matters

  • CBC will merge into SCB, with SCB surviving; CBC Bank will subsequently merge into SCB Bank, with SCB Bank surviving.
  • Each CBC common share, subject to specified exclusions, will be exchanged for 1.590 shares of SCB common stock.
  • The transaction is expected to qualify as a tax-free reorganization for CBC shareholders receiving SCB stock.
  • CBC stock options will generally be canceled and settled in cash based on the value, if any, of the options using SCB’s volume-weighted average share price and the exchange ratio.
  • No revenue, profit, cash flow, margin, debt, liquidity, capital, or other operating metrics are provided in the filing text.
  • The merger agreement provides for a $9.3 million termination fee in specified circumstances.

Material Changes and Post-Merger Leadership

  • Closing is expected in the third quarter of 2024, subject to shareholder approvals, regulatory approvals, registration effectiveness, tax opinions, and other customary conditions.
  • David I. Rainer, SCB’s current CEO and chairman, is expected to become executive chairman of the combined company, bank, and boards.
  • Steven E. Shelton, CBC’s current CEO, is expected to become CEO of the combined company and bank.
  • Thomas A. Sa is expected to become executive vice president and chief operating officer; Richard Hernandez is expected to become president; and Thomas G. Dolan is expected to become chief financial officer of the combined company and chief strategy officer of the bank.
  • The post-merger boards are expected to have 12 members, split equally between current SCB and CBC directors. The companies will evaluate rebranding the surviving entities.

Management Agreements, Outlook, and Risks

  • Rainer’s post-merger employment agreement provides for an initial four-year term, monthly base salary of $55,000, a $750,000 restricted stock unit award vesting over five years, and specified severance and change-in-control benefits.
  • Shelton’s agreement provides for a four-year term with a potential one-year renewal, monthly base salary of $50,833.33, a $500,000 restricted stock unit award vesting over four years, and specified severance and change-in-control benefits.
  • Sa’s agreement provides for monthly base salary of $35,416.66, a $300,000 restricted stock unit award vesting over three years, and specified change-in-control benefits.
  • The merger may be terminated if it is not completed by January 30, 2025, required approvals are not obtained, shareholder approval fails, or specified contractual breaches remain uncured. Additional termination rights apply to competing acquisition proposals.
  • Identified risks include delays or failure to obtain regulatory or shareholder approvals, adverse regulatory conditions, litigation, integration difficulties, higher-than-expected costs, lower-than-expected cost savings, business disruption, employee or customer retention issues, economic changes, and adverse developments affecting bank stability or liquidity.
  • The filing states that completion timing, expected benefits, and other transaction-related expectations are forward-looking statements and are subject to significant uncertainty.

Important Facts for Investors to Verify

  1. Review the forthcoming Form S-4 and joint proxy statement/prospectus for detailed transaction terms, financial information, pro forma results, and required shareholder votes.
  2. Verify receipt of all required regulatory approvals and the effectiveness of the registration statement.
  3. Confirm whether the merger closes by the expected third quarter 2024 target and before the January 30, 2025 termination deadline.
  4. Assess the final share issuance, dilution, option settlement costs, transaction expenses, and any termination fee exposure.
  5. Review the complete merger agreement and executive employment agreements, including termination rights, severance obligations, equity awards, and change-in-control provisions.