Most banking companies in search of capital these days need it to absorb loan losses, but PacWest Bancorp in San Diego has far different plans for the $100 million it just raised: It wants to start buying banks again.
The $4.3 billion-asset company said Tuesday that it has agreed to sell a 12% stake to CapGen Financial, a private-equity firm run by former comptroller of the currency Eugene Ludwig.
PacWest did not specify what it intends to do with the proceeds, but John Sullivan, CapGen's managing director, said the California company is well positioned both to beef up lending as its competitors, saddled with credit losses, scale back and to buy banks hit hard by the meltdown in the mortgage markets.
"We think PacWest is one of the finest franchises in California," Mr. Sullivan said. "They've done a great job of weathering the perfect storm of what's been going on in California, and they have very bright prospects for the future."
In a press release Tuesday, PacWest's chief executive Matt Wagner said the company did not have to raise capital but that the infusion puts "PacWest in an enviable position going forward." The company did not return calls for comment.
CapGen in Washington is paying $26 per share for its stake in PacWest, or a 21% premium over the average closing price for the preceding five trading days. In connection with the PacWest investment, CapGen plans to form a bank holding company.
The infusion would increase PacWest's book value 13.5% and boost its Tier 1 risk-based capital ratio and total risk-based capital ratios to 10.89% and 12.14%, respectively.
PacWest's stock, which had lost more than 60% of its value in the last year, rose 16.7% on the news, to close at $26.46 a share.
PacWest's majority owner is Castle Creek Capital LLC in Rancho Santa Fe, Calif., whose chief executive, John Eggemeyer, is known for his dealmaking prowess.
PacWest, known until this year as First Community Bancorp, made 19 acquisitions in California from 2001 to 2006, though it has not bought a bank since then.
CapGen's first investment in a banking company involved another Castle Creek interest — the $612 million-asset BankShares Inc. in Melbourne, Fla. In October 2007 CapGen bought a 21% stake in BankShares, in which Castle Creek now owns a 32% stake.
CapGen was formed in 2007, and in July of that year, it raised $500 million to buy institutions ranging in asset size from $500 million to $20 billion in "highly desirable" economic regions, Mr. Sullivan said.
PacWest has not completely escaped the damage caused by the real estate downturn. Its loss provision through the first half of this year was nearly $30 million, and its operating earnings in the second quarter fell 43% from the year earlier. (This does not include a $486.7 million impairment charge it took in the second quarter to reflect the declining value of goodwill accumulated through acquisitions. It took a $275 million goodwill impairment charge in the first quarter.)
But analysts said it is far better off than most other California banking companies, and they too expect to see PacWest use the capital infusion to make more loans and resume buying banks.
James Abbott, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a research note that the additional capital puts PacWest "squarely in the driver's seat to bid on distressed institutions.
"In our minds, this is the single best way to create shareholder value in this environment — buying the deposits of failed competitors," he wrote.
But Christopher Marinac, an analyst at FIG Partners LLC, said he does not expect PacWest to buy banks until it sees how credit-quality issues play out in California.
Rather, he said PacWest would probably use the capital at first to make more loans, particularly since other banking companies have had to shrink assets and curtail lending to boost capital ratios, he said.