Banc of California, Inc. BANC and PacWest Bancorp PACW have agreed to combine in an all-stock merger transaction. Per the terms of the agreement, which has been approved by the boards of both companies, PacWest will merge into Banc of California, and Banc of California, N.A. will merge into Pacific Western Bank.

Following the announcement of the agreement, shares of BANC and PACW soared 10.1% and 31.3%, respectively in the afterhours trading session.

The combined holding company and bank will operate under the Banc of California name and brand after the merger is closed. The deal is subject to regulatory nods and approval by the stockholders of both companies, with the closing expected in late 2023 or early 2024.

Merger Agreement Details

PacWest stockholders will receive 0.6569 shares of BANC common stock for each share of PacWest common stock they own. Upon completion of the merger, the PacWest stockholders are expected to hold approximately 47% of the outstanding shares of the combined company, while the Investors (Warburg Pincus LLC and Centerbridge Partners, L.P. and its affiliates) will hold almost 19%. The remaining roughly 34% will be held by existing Banc of California stockholders.

To finance the merger and bolster the combined company’s balance sheet, Banc of California has entered into investment agreements with the Investors, who will invest a total of $400 million in newly issued equity securities concurrently with the deal’s closing.

Transaction Details

The merger is expected to result in a combined company with approximately $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and more than 70 branches across California.

The combined company will focus on serving small and medium-sized businesses in its footprint through commercial and real estate lending and treasury management services. The merger is expected to enhance the financial scale and capabilities, leading to increased investment in the franchise and improved efficiencies.

Financial Gains

The merger is expected to deliver an estimated 2024 earnings per share accretion of more than 20%.

Further, the pro forma combined company is expected to achieve compelling operating and return metrics, including a loan to deposit ratio of approximately 85%, wholesale funding asset ratio of roughly 8% and Common Equity Tier 1 capital Ratio of nearly 10.0%.

Strategic Benefits

Apart from being financially compelling, the merger is expected to bring several strategic benefits. Here are some of the notable ones:

Enhanced Scale and Market Opportunities: By combining their strengths, the new entity will be strategically positioned to capitalize on market opportunities in California, with increased operational and financial scale.

Robust Balance Sheet: The combined company will have access to additional liquidity through targeted balance sheet repositioning, supported by the $400 million investment from the Investors, resulting in robust capital levels and a strong liquidity profile.

Diversified Deposit Base and Loan Portfolio: The merger will result in a diversified loan portfolio that includes PacWest’s niche expertise in HOA banking services, portfolio lending, equipment lending and leasing, and SBA lending, along with Banc of California’s strengths in healthcare, education, entertainment and warehouse lending.

Banking Crisis and Steps Taken by PacWest Before the Merger Deal

Before the merger deal, PACW was among the lenders that were severely affected by the collapse of three regional banks. This resulted in the worst industry turmoil since the 2008 financial crisis.

To address the challenges and shore up investor confidence, PacWest took several steps before entering into the merger agreement. To mitigate potential risks and reassure regulators and investors, PacWest focused on prudent risk management practices and measures to protect its uninsured deposits.

Additionally, PACW divested assets and businesses to bolster its balance sheet and manage potential risks effectively. One notable transaction was the sale of a $3.54 billion lender finance portfolio to asset manager Ares Management ARES in June-end.

The first tranche of the sale, amounting to $2.07 billion, closed on Jun 22, with Ares Management assuming $187.14 million of the $1.33 billion of unfunded commitment. This initial transaction resulted in cash proceeds of $2.01 billion (before transaction costs) for PACW. The remaining portion of the portfolio will be sold in subsequent tranches, subject to customary closing conditions.

By taking these steps, PacWest aimed to improve its financial position, demonstrate its commitment to strategic vision and create value for its shareholders.

Parting Thoughts

The all-stock merger between Banc of California and PacWest is poised to create a robust, well-capitalized, and highly liquid banking institution. The combined company will be well-positioned to serve the banking needs of small and medium-sized businesses in California while capitalizing on market opportunities and delivering profitable and sustainable growth.

With experienced leadership, diversified offerings and a strong balance sheet, the new entity is expected to provide significant value for all stakeholders.

So far this year, shares of Banc of California and PacWest have declined 8.2% and 66.5%, respectively.

At present, BANC carries a Zacks Rank #3 (Hold) and PACW has a Zacks Rank of 5 (Strong Sell).

Banc of California, Inc. (BANC): Free Stock Analysis Report

PacWest Bancorp (PACW): Free Stock Analysis Report

Ares Management Corporation (ARES): Free Stock Analysis Report

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