What sold a small California bank on PacWest (it wasn't the price)

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PacWest Bancorp’s reputation as a skilled acquirer gave it an upper hand in its recent pursuit of a California bank.

The expectation that the $25 billion-asset PacWest would negotiate and close the deal quicker than other bidders, and its experience in safely digesting acquisitions, led El Dorado Savings Bank to choose PacWest’s offer even though it was not the highest, according to a prospectus filed by El Dorado that detailed their $467 million agreement.

PacWest’s initial offer for the $2.2 billion-asset El Dorado was roughly 10% lower than the top bid, the filing said.

The disclosures show how sellers take more than price into consideration — and how much a would-be buyer’s experience matters. PacWest has bought eight banks in the past decade, including CU Bancorp in its hometown of Los Angeles last year.


El Dorado, based in Placerville, Calif., first decided to explore its options earlier this year. Its board determined at a May 8 meeting that selling would reward many El Dorado shareholders, and their families, some of which had been invested in the bank for as long as 50 years.

Pressure from rising interest rates and threats from “lesser regulated and non-taxed credit unions, nonbank mortgage lenders and other providers of bank-like products and services” were also driving factors, the filing said.

El Dorado’s investment bank contacted 24 potential acquirers between July 3 and July 19. Ten signed confidentiality agreements; half of those submitted letters of intent with proposals ranging from $349 million to $505 million.

The directors at El Dorado were worried about the highest bid because the bank said its final price would rely on due diligence and more negotiations. Timing was another concern; the unnamed suitor suggested it would take nearly five months before it could announce a deal.

PacWest said it would be willing to pay $456 million, with three-fourths of the consideration in stock.

Another contender proposed an all-cash bid of roughly $430 million. Two bids were deemed by El Dorado to be insufficient.

Following discussions with El Dorado’s investment bank, PacWest increased its offer by 5% to $478 million. El Dorado’s board determined that PacWest’s “significantly higher dividend yield … reduced the pricing gap” with the top bid, the filing said.

Other factors were said to set PacWest apart from its competition.

PacWest indicated that it could reach a definitive agreement within 21 days of signing a letter of intent. And El Dorado’s board determined that PacWest, which was bigger than the highest bidder, would have less execution risk since the seller would represent a smaller portion of the combined company.

Meanwhile, the highest bidder failed to resolve the issues raised by El Dorado’s board.

A strategic committee of El Dorado’s board was swayed by “the certainty and confidence the PacWest bid provided, the substantially superior dividend yield offered by PacWest, PacWest's extensive experience in consummating acquisitions, the robust liquidity offered by its common stock and its demonstrated level of preparedness,” the filing said.

On Aug. 15, the committee recommended entering into a nonbinding letter of intent with PacWest. That letter was signed five days later, with PacWest agreed that 87.5% of the offer would be in stock.

El Dorado and PacWest spent several weeks finalizing due diligence and negotiations over the deal’s closing conditions.

For instance, El Dorado must maintain an average of nearly $2 billion in deposits during the calendar month immediately before closing. Sticky deposits have been a hallmark at El Dorado; the filing noted that the bank has an average deposit relationship of 23 years.

The boards of El Dorado and PacWest approved the merger on Sept. 11. The deal, announced the next day, priced El Dorado at 204% of its tangible equity. It is expected to close in the first quarter.

The transaction will provide PacWest with its first branches in northern California.

The acquisition "opens an entirely new banking market for us with a high-quality and prudently managed 60-year-old institution,” Matt Wagner, PacWest's president and CEO, said in the press release announcing the deal. “We are confident the proposed merger will create long-term value for both PacWest and El Dorado stockholders, provide a broader product array for customers and enhance our California community bank franchise.”

PacWest expects the deal to be 1% accretive to its 2019 and 2020 earnings per share. It should take a little more than three years to earn back any dilution to PacWest's tangible book value.

PacWest plans to cut about 17% of El Dorado's annual noninterest expenses. It expects to incur roughly $35 million in merger-related expenses.

John Cook, El Dorado's president and chief operating officer, will become president of PacWest's Central Valley-Sierra region.

The filing disclosed that Cook is set to receive an annual salary of $240,000. He will also be eligible for a $100,000 retention bonus if he stays at PacWest through an agreed-upon period that will likely be the first anniversary of the deal’s closing.

PacWest also entered into consulting agreements with Thomas Meuser, El Dorado’s chairman; George Cook Jr., the bank’s CEO; and William Blucher, its chief financial officer.

Meuser will be paid $33,000 for a six-month agreement, while Cook will receive $190,000 for a year of service. PacWest will pay Blucher $145,000 under an 18-month consulting deal. The executives will also be bound by five-year noncompete clauses when they leave PacWest.

El Dorado shareholders will vote on the proposed acquisition on Jan. 9.

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