Private Bank of America PBAM: Experiencing the Tailwinds of California Banking

Over the last 5 years, the company has grown tangible book value at 20.4% annually.

Unlike my other deep dives, this one is a little special. I wrote this piece alongside my friend, David Diranko, Founder and CIO of Diranko Capital and Writer of Contrarian Cashflows. David is one of the best analysts I have had the opportunity to work with. His piece covers another California bank, California BanCorp. Additionally, in his piece, David provided a layout of the US and Californian banking environments.

Investment Thesis

CalPrivate is a high-performing bank in terms of yields on earning assets, earnings per share growth, and strong returns on equity. Additionally, the bank has grown its tangible book value at a 20.4% 5-year CAGR. This has been driven by strong growth on both the loan and deposit sides of the business. The continuation of this growth, driven by the opening of a new branch and some key new hires, makes this an interesting opportunity. Trading at 1.27x Price/TBV, the bank is valued reasonably; however, if there is a meaningful downturn, an opportunity could present itself. Alternatively, if the bank continues to grow and maintains or improves asset quality and efficiency, a value opportunity could be created.

Introduction & Background

CalPrivate is in the process of opening its 7th branch, in Montecito, CA. All of the company’s branches are in Southern California. The bank has operated since 2006, making it one of the newer banks in the US.

Source: CalPrivate Investor Relations

On the lending side, the bank is primarily focused on commercial/business clients. The majority of the loans are on or secured by real estate. The bank does some SBA lending, which is not secured by real estate; however, this represents a small portion of the loan book.

On the deposit side, CalPrivate has offerings for businesses and nonprofits as well as high-net-worth individuals. Offerings for businesses and nonprofits are advantageous for the bank because earning high rates on deposits is not generally the customer’s focus. On the high-net-worth individual side, these can be strong long-term deposits built through relationships. The bank hired 8 new relationship managers in 2024, which should boost deposits in both consumer and business lines. Their deposit offerings are relatively standard, with checking, savings, and time deposits. The bank does not offer additional services like wealth management.

Performance & Value Creation

The company has reported strong returns on equity consistently in the mid to high teens, including 17.5% in 2024 and even as high as 24.8% in 2023. This puts the bank among the highest-returning banks in the US. Due to the bank’s low non-interest income, the main driver of returns is net interest income.

Over the last 5 years, the company has grown tangible book value at 20.4% annually, with more significant growth in recent years, 24.1% annually for the last 3 years. Within bank investing, this is a better measurement of growth compared to revenue or earnings. That being said, the bank has still grown diluted EPS at 36.4% annually over the past 5 years while growing revenue at 20.7% annually over that same period.

Operationally, along with the opening of a new branch, the bank hired 8 new relationship managers in 2024 with the purpose of driving high-net-worth depositors and improving customer relations.

Loans

CalPrivate has $2.06bn in loans across Commercial Real Estate (CRE), Commercial, and Consumer. The bank has grown net loans at 15% annually over the last 5 years. This represents strong growth for the bank, especially at an opportunistic time with inflated interest rates. The loan book has an average yield of 7.28% making CalPrivate a very high-yielding bank. Combining this with interest expense, the bank had a net interest margin of 4.67% in 2024. This is very strong for the US banking industry.

1. CRE

Representing the largest portion of loans at $1.62bn or 78.6% of total loans, CRE is further segmented into 6 categories: Investor Occupied, Owner Occupied, Multifamily, Secured by Single Family, Land and Construction, and SBA secured by Real Estate. Overall, this has been a strong value driver with only a few problems in recent years (see Asset Quality below).

2. Commercial

The next largest portion of loans is Commercial with $461m or 22.4% of total loans. Commercial loans are comprised of Commercial and Industrial (C&I) and SBA non-secured by real estate segments.

3. Consumer

Finally, Consumer loans account for only $2.1m or 0.1% of total loans. These are residential loans and not a very meaningful part of the overall business.

Asset Quality

The bank has shown overall strong asset quality. Based on their reporting format, they appear to focus on credits early in the problem cycle, breaking out when they become special mention as opposed to non-performing. This focus gives investors more visibility into how the credit portfolio is doing. Next, the bank has shown additional strong performance in recoveries of charge-offs. For example, in 2023, the bank recovered $7.7m or 80% of a 2019 charged-off loan, along with additional rights to further recoveries in the future. This kind of active lending and recovering is very encouraging as a bank investor and is a positive signal of strong relationships with borrowers.

Further, the bank as a whole has only a small portion of assets listed as special mention, substandard-still accruing, or substandard-non-accruing. The biggest areas of asset quality problems have been in the CRE portion of the portfolio, not surprising considering its high portion of the loan book. This accounts for $9.6m in special mention, $3.4m in substandard-still accruing, and most notably $9m in substandard-non-accruing. However, still in the context of a $1.6bn CRE loan book, this is a small portion, and all of the non-accrual CRE loans are secured by real estate.

Funding

1. Deposits

Deposits are by far the largest funding source at $2.13bn in total. The largest portion of deposits is Savings and Money Market, which accounts for $888m, followed by Non-interest-bearing accounts at $553m, Time Deposits above $250k at $321m, Interest-Bearing checking accounts at $252m, and Time Deposits below $250k at $120m. The distinction here in above and below $250k in Time Deposits, has to do with the FDIC insurance limit (of below $250k).

Deposits had an average cost in 2024 of 2.2% down from a high in 2023 of 2.7%. Even in 2023, this is a reasonable level for deposits considering the bank’s high loan yields. Further, the fluctuation of deposit costs is relatively small compared to the distribution of deposits by segment (checking, savings, time, etc.).

The bank has a 90.3% Loan/Deposit Ratio, giving it some flexibility to grow loans in excess of deposits; however, in recent years, the bank has shown strong growth in both areas. Over the past 5 years, the bank has grown deposits by 17.2% annually while decreasing its already small portion of brokered deposits. This is a move for generally cheaper and higher quality deposits while simultaneously growing total deposits.

2. Federal Funding

CalPrivate only has $28m in borrowings from the Federal Home Loan Bank (FHLB). The company is authorized for borrowing capacities of $546m and $523.5m from the FHLB and Federal Reserve Bank (FRB), respectively. This can be a useful supplementary funding source; however, based on the interest rates of outstanding lines, it is expensive. The existing FHLB lines have interest rates that range from 3.96% to 5.11%. At scale, this would significantly increase funding costs.

3. Notes & Other Funding

Notes and other funding sources represent a very small portion of the bank’s funding. Currently, CalPrivate has a note outstanding of $18m with a fixed-to-floating structure. The note is currently floating at 342 bps above 3-month SOFR until 2029, but is now callable at any time. This is a high-cost funding source for the bank; however, the impact is negligible due to its size. The note was issued in 2019 to pay off a previous similar note.

Non-Interest Income

The majority of CalPrivate’s non-interest income comes from service charges and fees on deposit accounts and gains on the sale of small business administration (SBA) loans. With significant variability in the amount of loans that are sold, non-interest income is very different year to year. Service charges on deposits have consistently grown over the past 5 years. However, in context, non-interest income represented only 6.5% of total revenue.

Efficiency

The bank had an efficiency ratio of 50.5% in 3Q25. This is not a very competitive level in the context of the US banking industry. Further, this is a high-earning bank relative to its size, making this less impressive. The bank just opened a new branch and is hiring a number of new key employees, so subsequent growth from this investment can justify shorter-term inefficiency. This will be an important area of the bank to track going forward.

Securities

CalPrivate has a $145.2m, 6% of total assets, debt securities portfolio. All of the securities are available-for-sale (AFS). This means they have more actively tracked value compared to held-to-maturity (HTM) securities. HTM securities have been a recent concern with the important role they played in the failure of Silicon Valley Bank. The securities portfolio, because of its size, is not a significant driver of income; however, the portfolio grew by 41.7% in 2024. Since then, the securities portfolio has climbed to $199.9m in 3Q25. These are primarily debt securities bought by the bank as opposed to those originated by the bank.

Regulatory Capital

The bank has a total risk-weighted capital ratio of 12.5% with a requirement of 10% to be considered well capitalized and a CET1 Ratio of 11.3% with a well-capitalized requirement of 6.5%. This puts the bank far above requirements with meaningful flexibility to deploy capital.

Valuation

The bank currently trades at 1.27x Price/Book Value, which is relatively in line with the 5-year average for the company of 1.22x. Further, with the recent minor asset quality incidents, this seems like a reasonable valuation. If these conditions are improved to previous levels, along with the many tailwinds that local California banks are experiencing, a more premium 1.4-1.5x book value multiple could be justified. This would classify the bank as a more premium entity, which appears to be a reasonable assumption based on the strong returns and high yield on earning assets.

Capital Allocation

CalPrivate, unlike most small US banks, does not pay a dividend. As an alternative way to return value to shareholders, the bank has conducted multiple share repurchase programs. Currently, the bank is in the process of a buyback program of $5m or ~1.5% of shares outstanding. This demonstrates that management likely views the bank’s current valuation as undervalued. This program runs through the end of 2025.

Why Are Californian Banks Interesting?

In 2023 and 2024, large banks saw large declines in deposits driven by many doubts in large banks’ stability, catalyzed by the Silicon Valley Bank failure. This drove deposits into smaller institutions in California. Additionally, the regional banking crisis caused many large banks to step back or away from the local California banking market.

Smaller banks are further advantaged by higher interest rates as they tend to rely on traditional lending and deposit models. This means that they can lock in long-term loans at attractive rates. This is all with the background of strong low-rate deposits, meaning that these high interest rates primarily boost interest income without proportional interest expense increases, leading to expanding net interest margins. A further tailwind to driving strong low-rate deposits has been the Community Reinvestment Act in California, which encourages citizens to bank locally and for those banks to use deposits to lend to the community through mortgages, small business loans, and more. All of these elements combine to create an attractive and opportunistic banking market for small local Californian banks.

Until Thursday,

Soren