Jared Wolff knows PacWest Bancorp well, having helped it make more than 20 acquisitions during his 12 years there as president and other roles.
Now, four years after Wolff took over as chief executive of Santa Ana-based Banc of California Inc. (NYSE: BANC), he’s buying the Beverly Hills-based bank in a complex $1.1 billion all-stock deal (Nasdaq: PACW).
“PacWest is where I really learned banking,” Wolff told analysts on a July 25 conference call.
“I can go on and on about the cultural fit. In all the deals that I’ve done, I never seen one that has this amount of overlap and commonality between two institutions.”
While Wolff will become chief executive of the third-largest bank based in California, it also means Orange County will lose another locally based bank as its new headquarters will be in Los Angeles.
After the Wall Street Journal first reported the news, investors sent PacWest shares dropping 27% to $7.69, fearing the bank was being sold at a discount.
After the two companies made their official announcement that clarified the deal, the shares rebounded 27% to $9.76 and a $1.2 billion market cap.
Banc of California shares rose 11% to about $14.66 and an $851 million market cap following the announcement.
Wolff “more than anyone knew how achingly undervalued PacWest was … and crucially, how few options PACW’s board of directors would have to increase that valuation without outside assistance,” Jim Collins, CEO of small cap investor Excelsior Capital Partners, wrote after the announcement.
“I believe that the combined Banc of California/PacWest entity will be much stronger than either bank on its own.
“So ‘The Wolff’ has delivered to us a credit position in a much stronger bank.”
Wolff took over as CEO in 2019 at a time when Banc of California was struggling. He cut pet projects of a previous CEO, focused the bank on commercial real estate and health industries and reduced $2 billion in less profitable assets; the bank’s assets fell as low as $7.8 billion.
“Lending to sophisticated real estate investors is something I’ve done at all the banks I’ve been at,” Wolff told the Business Journal in 2019.
In 2021, the bank completed its $226 million acquisition of smaller local rival Pacific Mercantile Bancorp. Wolff at the time said Banc of California was “certainly in growth mode.”
In March this year, regional banks took a hit when three collapsed as depositors fled over fears that they couldn’t survive rising interest rates.
PacWest found itself in turmoil as its shares fell 64% over a three-day period in March. Its deposits fell 17%, or $5.7 billion, to $28.2 billion in the first quarter.
Its shares, which topped $50 each in early 2022, eventually fell as low as $2.48 in May.
On May 3, PacWest announced it was considering “strategic options, including a sale.”
By contrast, Banc of California boosted its cash level to $1 billion in March, up fourfold from a year earlier. Its total deposits declined by a relatively small 2.3% from the fourth quarter to $6.95 billion.
“Our team did a remarkable job of giving our clients confidence and explaining our balance sheet and the strength that we have, and I think that’s proven out,” Wolff said in April.
Since March 6, Banc of California’s shares are down 16%, in line with the benchmark KBW Regional Bank Index.
The combined holding company and bank will operate under the Banc of California name and brand. The deal is expected to close by early next year.
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.
The board will have 12 directors: eight from the existing Banc of California board, three from the existing PacWest board and one from investor Warburg Pincus Inc.
The combined company is expected to have $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and more than 70 branches in California.
The deal, structured as a reverse merger, is “a marvel of financial engineering,” reported the Wall Street Journal, which broke the news on the deal.
While Banc of California is the so-called legal acquirer, PacWest will be designated as the acquirer for accounting purposes, which means it will absorb Banc of California’s assets and liabilities onto its own balance sheet for reasons including the economics of the transaction and the relative size of the two entities.
Banc of California also announced that it has entered into investment agreements with affiliates of funds managed by Warburg Pincus and Centerbridge Partners LP, which will invest an aggregate of $400 million for newly issued equity securities.
The two banks plan to sell about $7 billion of loans, mortgage bonds and other assets in their securities portfolios to repay expensive borrowings that now total $13 billion. The discrepancy was brought on by a rapid rise in interest rates and deposit outflows, analysts said.
“The proposed merger of PacWest and Banc of California represents a fair, but not overwhelmingly compelling offer, in our view,” Wedbush analyst David Chiaverini wrote in a note to investors.
“We conclude that PACW was already a willing seller even prior to the mini banking crisis occurring in March, and the recent stress in the industry could have led the board and management to accelerate sale plans, in our view.”
The deal will immediately be accretive to earnings and “significant savings” will occur in 2024, Wolff said. He added the economy now is “slow” and he expects growth to restart in 2025.
Wolff said he anticipates a smooth integration “due to the high degree of familiarity” between the two banks.
“I know this will be a powerhouse franchise,” Wolff told analysts.