Banc of California and PacWest Bancorp announced the signing of a definitive agreement pursuant to which the companies will combine in an all-stock merger transaction. Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, PacWest will merge into Banc of California, and Banc of California, N.A. will merge into Pacific Western Bank. The combined holding company and bank will operate under the Banc of California name and brand following closing of the transaction. Under the terms of the merger agreement, PacWest stockholders will receive 0.6569 of a share of Banc of California common stock for each share of PacWest common stock.

The merger will create the premier California business banking franchise, which will be well-positioned to capitalize on market opportunities and broaden the channels and customers it serves through increased scale and expanded product offerings.

Banc of California also announced that it has entered into investment agreements with affiliates of funds managed by Warburg Pincus LLC (the “Warburg Investors”) and certain investment vehicles, managed or advised by Centerbridge Partners, L.P. and its affiliates (the “Centerbridge Investors” and, together with the Warburg Investors, the “Investors”), which will invest an aggregate of $400 million for newly issued equity securities concurrently with, and subject to, closing of the merger. The proceeds from this capital raise are expected to be utilized in conjunction with other planned actions to reposition the combined company’s balance sheet and generate material savings. The combined company will repay ~$13 billion in wholesale borrowings, funded by sales of assets which are fully marked as a result of the transaction, and excess cash. Banc of California, N.A. has entered into a $3.5 billion interest rate swap and a contingent forward asset sale agreement to hedge interest rate risk and lock in proceeds. These repositioning transactions for the combined company will result in a higher net interest margin, estimated to add over 170bps compared to the pre-restructured balance sheet. The actions result in a CET1 of 10%+ pro forma, which includes the cost of swaps purchased and forward sales.

Following closing and the asset sales, the combined company is expected to have approximately $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and more than 70 branches in California.

Upon completion of the proposed transaction, (a) the shares issued to PacWest stockholders in the merger are expected to represent approximately 47% of the outstanding shares of the combined company, (b) the shares issued to the Investors in the equity capital raise transaction discussed above are expected to represent approximately 19% of the outstanding shares of the combined company and (c) the shares of Banc of California common stock that are outstanding immediately prior to completion of the merger are expected to represent approximately 34% of the outstanding shares of the combined company.

Jared Wolff, President and Chief Executive Officer of Banc of California, will retain the same roles at the combined company. John Eggemeyer, who currently serves as the independent Lead Director on the board of PacWest, will become the Chairman of the board of the combined company following the merger. The board of directors of the combined company will consist of 12 directors: eight from the existing Banc of California board, three from the existing PacWest board and one from the Warburg Investors.

“This transformational merger will create a robust, well-capitalized and highly liquid institution poised to deliver exceptional service to even more California businesses and communities,” said Mr. Wolff. “We believe both Banc of California and PacWest stockholders will benefit from the compelling economics of the combined company and its enhanced ability to deliver profitable and sustainable growth. Out of the gate, 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.”

Mr. Wolff added, “Due to the high degree of familiarity between our businesses, we anticipate a smooth integration that will enable us to quickly and effectively capitalize on the long-term opportunities unlocked by the strength of our combined platform. Both institutions follow a client-first, relationship-based approach to serving our clients and communities while emphasizing prudent risk management. We believe that uniting the talent and expertise from both organizations, along with our cultural similarities and deep familiarity with each other’s business, will accelerate the execution and delivery of strong and growing franchise value for all stakeholders.”

Paul Taylor, President and Chief Executive Officer of PacWest, stated, “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. 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."

Todd Schell, who will join the board from Warburg Pincus, noted, “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.”

Strategic Benefits of the Transactions

Enhanced scale and capabilities to serve substantial void in California: The combined company will be strategically positioned to capitalize on market opportunities in California. It will have operational and financial scale to increase investment in the franchise, including its technology platform, in order to elevate the client experience, improve efficiencies, attract the highest quality talent, and enhance new business development efforts.

Strong balance sheet: The combined company will have access to additional liquidity through a targeted balance sheet repositioning at closing, supported by committed capital of $400 million from the Investors, resulting in robust capital levels and a strong liquidity profile.

Diversified deposit base and loan portfolio: The combined company will focus on serving small and medium-sized businesses in its footprint through exceptional treasury management services and commercial and real estate lending that leverage Banc of California’s and PacWest’s mutual strengths in core community banking. Banc of California’s niche strengths in healthcare, education, entertainment and warehouse lending, and PacWest’s niche expertise in HOA banking services, portfolio lending, equipment lending and leasing, and SBA lending combine for a diversified loan portfolio. The combination also creates a more diverse overall deposit mix by combining complementary deposit specialties.

Experienced management teams with significant integration experience and deep familiarity: The combined leadership team is seasoned with a proven track record of performance and merger integration.

Financial Benefits of the Merger

The financial benefits of the transaction are compelling, with estimated 2024 EPS and tangible book value accretion of 20+% and ~3%, respectively. The pro forma combined company financial metrics are based on Banc of California’s stand-alone consensus median analyst estimates, estimated combined company cost synergies, anticipated purchase accounting adjustments, the expected merger closing time-frame, and the capital raise. On a pro forma basis, the business is expected to deliver compelling operating and return metrics with cost savings on a fully-phased in basis, including:

•     Loan to Deposit Ratio of approximately 85%
•     Wholesale Funding Asset Ratio of approximately 8%
•     Liquidity Coverage Ratio of 2.0x+
•     Common Equity Tier 1 Capital Ratio of approximately 10.0%
•     Tangible Common Equity to Total Asset Ratio of 7.2%
•     4Q24 Run-Rate Cash Return on Average Tangible Common Equity of approximately 13.0%
•     4Q24 Run-Rate Return on Average Assets of approximately 1.10%
•     Capital generation in excess of 100bps per year; and
•     2024 Estimated EPS range of $1.65–$1.80

As a result of the merger announcement, both companies have cancelled their previously scheduled 2023 second quarter earnings conference calls.

Transaction Details

Banc of California will be the legal acquirer, and Banc of California N.A. will merge with and into Pacific Western Bank, which will take the Banc of California name and apply to become a Federal Reserve member. PacWest will be the accounting acquirer, with fair value accounting applied to Banc of California’s balance sheet at closing. Under the terms of the merger agreement, PacWest stockholders will receive 0.6569 of a share of Banc of California common stock for each share of PacWest common stock. Each outstanding share of 7.75% Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A, of PacWest will be converted into the right to receive one share of a newly created series of substantially identical preferred stock of Banc of California with the same terms and conditions.

In the equity capital raise transaction, Banc of California will sell approximately (i) 21.8 million shares of its common stock at a purchase price of $12.30 per share and (ii) 10.8 million shares of a new class of its non-voting, common-equivalent stock at a purchase price of $12.30 per share to the Investors. In addition, the Warburg Investors will receive warrants to purchase approximately 15.9 million shares of Banc of California non-voting, common-equivalent stock, and the Centerbridge Investors will receive warrants to purchase approximately 3.0 million shares of Banc of California common stock, each with an exercise price of $15.375 per share, a 25% premium to the price paid on common stock. The warrants carry a term of seven years but are subject to mandatory exercise when the market price reaches $24.60 over a specified period, a 100% premium to the price paid on common stock.

Timing and Approvals

The parties expect the closing of the merger to occur in late 2023 or early 2024, subject to satisfaction of closing conditions, including receipt of customary required regulatory approvals and requisite approval by the stockholders of each company, and the concurrent closing of the equity capital raise. The equity capital raise is expected to close concurrently with the merger, subject to the concurrent closing of the merger and other closing conditions.

Advisors

J.P. Morgan Securities LLC is acting as financial advisor and rendered a fairness opinion to the board of directors of Banc of California and is acting as sole placement agent to Banc of California. Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal counsel to Banc of California. Piper Sandler & Co. is acting as financial advisor to, and rendered a fairness opinion to the board of directors of, PacWest. Sullivan & Cromwell LLP is serving as legal counsel to PacWest. Jefferies LLC is acting as financial advisor to Warburg Pincus and Centerbridge. Wachtell, Lipton, Rosen & Katz is serving as legal counsel to Warburg Pincus, and Simpson Thacher & Bartlett LLP is serving as legal counsel to Centerbridge.