On May 3, as PacWest Bancorp's stock price was plunging, the company's board of directors met to discuss strategic options. Later that evening, news of the deliberations
Around 9:30 p.m. on the West Coast, PacWest issued a press release stating that the Los Angeles bank had not "experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news."
But over the next two days, PacWest's deposits fell by $1.7 billion, according to a securities filing that sheds new light on the Los Angeles bank's predicament prior to the July 25 announcement of a merger agreement with Banc of California. In just two days, roughly 6% of PacWest's total deposits at the end of the first quarter were gone.
Earlier in the spring, following the failures of Silicon Valley Bank and Signature Bank, PacWest executives had evaluated the possibility of raising more equity capital through a private placement or a public offering, according to the securities filing.
But the game plan changed in early May. Investment bankers acting on PacWest's behalf reached out to 13 potential acquirers and business-combination partners.
Nine of those parties entered into confidentiality agreements and conducted due diligence, and two of them showed interest in pursuing an all-cash transaction. Banc of California, headquartered in Orange County, was one of the nine potential suitors, but not one of the two interested in an all-cash transaction.
By mid-June, the two potential all-cash buyers had failed to commit or to procure the capital that would have been required, and the talks ended.
Then on June 16, Banc of California President and CEO Jared Wolff contacted PacWest President and CEO Paul Taylor about a potential tie-up, according to the securities filing, which Banc of California filed on Monday.
Over the next five-plus weeks, the two Southern California banks hammered out an all-stock merger agreement that has some unusual contours.
Despite having total assets of just $9.4 billion as of June 30 — less than a quarter of the total at PacWest — Banc of California would be the legal acquirer. Wolff would be the combined company's CEO, and eight of the board's 12 directors would come from Banc of California. The combined bank would operate under the Banc of California name.
On the other hand, when the deal closes, 47% of the shares in the combined company are expected to be held by PacWest stockholders, compared with roughly 34% in the hands of Banc of California shareholders. The remaining 19% are expected to be held by funds managed by Warburg Pincus and Centerbridge Partners — two private-equity firms that were perhaps the key to the deal.
According to the Aug. 28 securities filing, investors affiliated with Warburg and Centerbridge were among the parties that poked around PacWest in March — during the initial panic that followed SVB's failure.
"Various potential investors conducted due diligence, and indicative terms and documentation were discussed," Banc of California said in the securities filing. "These discussions and negotiations progressed for approximately two weeks amidst the height of the volatility in the regional banking sector in March 2023."
After the two private-equity firms reengaged during the deal talks with Banc of California, funds affiliated with them agreed to invest an aggregate of $400 million for newly issued securities when the merger closes. The proceeds of that capital raise will be used to reposition the combined company's balance sheet, allowing for the repayment of about $13 billion in wholesale borrowings.
The combined bank is expected to have $36.1 billion of assets — compared with the total of $47.7 billion that the two banks reported at the end of the second quarter.
Before the Banc of California deal, the parent company of Pacific Western Bank was on a troubled path, said Kevin Stein, a senior advisor at the consulting firm Klaros Group. But unlike the sales of SVB, Signature and First Republic, a sale of PacWest was arranged without government assistance.
"The fear was that they were in a death spiral. And if they were in a death spiral, and you've got uninsured deposits, you've got to get your money out of that bank," Stein said.
By shedding certain assets and shrinking its balance sheet, the combined bank will get an earnings boost, as well as cost savings and additional scale, Stein said. After the merger closes, the firm is expected to have 70 branches in California.
"It's going to be a higher-returning, scaled institution," Stein said.
He noted that
The March deposit run at SVB followed the Santa Clara, California-based bank's announcement that it was writing down the value of underwater securities and that it planned to raise capital, but had not yet done so, which spooked depositors.
"There's a big opportunity for private capital to support consolidation," Stein said.
PacWest and Banc of California have said that they expect their deal to close in late 2023 or early 2024, which is a fast timeline. Stein said that he believes the deal got a green light from regulators in the wake of the springtime banking crisis.
"They got waved in," he said. "Washington wanted a solution to PacWest."
