PacWest, Hammered by Banking Crisis, Merges With Banc of California

A Pacific Western Bank location in Irvine, Calif., on May 3, 2023. (John Fredricks/The Epoch Times)

Banc of California and PacWest Bancorp announced their merger in an all-stock deal to create a bank with $36 billion in assets, after being hammered by the recent banking crisis.

The two local lenders made their decision on July 25, just months after the regional banking sector was hit with a severe crisis.

Four regional banks have already failed this year, including Silicon Valley Bank, Silvergate Bank, and First Republic Bank, which prompted the worst turmoil in the industry since the 2008 financial crisis.

Signature Bank of New York also collapsed, and major Swiss lender Credit Suisse merged with rival UBS.

PacWest was one of the lenders severely hit by the collapse of the other regional banks this spring, and its stock has fallen 66 percent year-to-date.

On May 3, PacWest saw its share price plummet over 50 percent after rumors broke about a sale.

PacWest reported a $197.4 million loss in net income last quarter, with the Beverly Hills-based bank also reporting total deposits dropping by $290 million, to $27.9 billion.

Banc of California saw a much smaller decline in net income of $2.4 million in the last quarter, as total deposits for the Santa Ana-based bank dipped slightly from $7 billion to $6.9 billion.

PacWest had a market capitalization of $1.24 billion as of July 25, about 63 percent higher than Banc of California, according to Refinitiv.

Banc of California had total assets of $10 billion, while PacWest had assets of $44 billion at the end of March, according to separate company filings.

Bank Mergers Likely to Escalate

The banking crisis has resulted in analysts predicting another round of consolidations in the sector, especially after JPMorgan Chase acquired First Republic.

The previous global financial crisis of 2008 led to a contraction in the banking sector, with the number of independent commercial banks operating in the United States from 2007 through 2013 shrinking by 14 percent, or 800 firms, according to government records.

The United States currently has more than 4,700 banks, and Nomura Holdings predicts that only half of these may survive by the end of the decade.

The newly formed institution from the Banc of California–PacWest Bancorp merger will contain $25.3 billion in total loans and more than 70 branches in California. It will be based in Los Angeles and run by Banc of California CEO Jared Wolff.

Mr. Wolff was previously the president of a PacWest subsidiary, Pacific Western Bank, and oversaw more than 20 acquisitions there.

“The combined company will have the strength and market position to support the banking needs of small and medium-size businesses in California and to capitalize on the opportunities created for stronger financial institutions in the wake of the recent banking industry turmoil,” said Mr. Wolff.

Pacific Western Bank on Wilshire Boulevard, Beverly Hills, Calif., on May 4, 2023. (Jill McLaughlin/The Epoch Times)

The deal is one of the few recent financial combinations in the sector after several troubled banks failed to merge via government-negotiated sales over the past few months.

Securing regulatory clearance for bank mergers on a timely basis has been one of the biggest concerns of industry figures in recent times.

Mr. Wolff said regulators were aware of the merger process from a “very early phase.”

Accounting regulations have also been a deterrent to bank mergers, as they require institutions to mark their securities portfolios to current market values during an acquisition, causing them losses upfront, said David Smith, an analyst at Autonomous Research.

According to the agreement, the Banc of California’s balance sheet will be marked, while PacWest will not have to since it is the “accounting acquirer.”

PacWest to Be Largely Absorbed

Before the merger, PacWest had been signing deals to shed some assets and strengthen its balance sheet.

Last month, the asset manager Ares Management said it would buy a $3.54 billion lender finance portfolio from PacWest, which needed to improve its cash supply and fulfill potential withdrawal requests, reported Yahoo Finance.

The June deal helped drive up PacWest shares by more than 6 percent, after the bank said the previous month that it was evaluating asset sales, which almost sparked another bank scare.

The two banks then agreed to sell $400 million of its shares to private equity firms Warburg Pincus and Centerbridge Partners, to help fund the merger.

The two private equity firms will issue $400 million of Banc of California stock at a price of $12.30 per share.

Todd Schell of Warburg Pincus, who will be a new member of the board, stated: “We are excited to back the strategic combination of two institutions we know well and respect. The transaction provides an opportunity to execute a highly accretive balance sheet repositioning which generates substantial incremental earnings and positions the combined company for the next leg of profitable growth.”

“Both the banks are in the same geographies, are focused on commercial assets and so this could be seen as a marriage of convenience,” Timothy Coffey, an analyst at Janney Montgomery Scott, said right before the deal.

Treasury Secretary Janet Yellen said in May that more mergers among small to midsize U.S. banks could be necessary, after the series of bank failures.

“Over the past 18 months, the competitive environment in California has changed dramatically,” Mr. Wolff told analysts on a conference call.

“We’ve seen many other banks either completely exit or significantly pull back from California. As a result, there’s a sizable opportunity.”

Shares of PacWest surged 34 percent after the market closed on July 25, while Banc of California surged 9 percent.

PacWest stockholders will receive 0.6569 Banc of California per share, for each PacWest that they own.

“This merger is a tremendous opportunity for PacWest’s stockholders, customers, communities and employees, representing significant immediate and long-term value beyond PacWest’s standalone strategic plan,” said Paul Taylor, president and CEO of PacWest, in a statement.

“I am honored and extremely proud of the PacWest team’s fortitude over the past several months amidst industry-wide volatility. With the combined strength of both institutions, new capital from investors that are committed to the strategic vision and value creation of this merger, and a proven track record of successful integrations, the combined company will be well-positioned to provide significant value for the long term to all of our constituents,” Mr. Taylor said.

The merger is expected to be completed by late 2023 or early 2024.

Reuters contributed to this report.