Regional banks, Banc of California (NYSE:BANC) and PacWest Bancorp (NYSE:PACW) have agreed to merge into a well-capitalized, fortified bank and improve their presence in California. Additionally, private equity firms Warburg Pincus and Centerbridge have agreed to invest $400 million in the combined entity after the successful closing of the merger. Following the news, BANC stock rose 8.8% and PACW shares surged 31.3% in after-hours trading on July 25.
PacWest was one of the most talked-about banks during March’s banking crisis. The bank was under the threat of a possible default as it witnessed huge deposit outflows. Meanwhile, Banc of California was considered relatively safer. Both banks managed to surpass the crisis relatively unscathed and have now decided to merge in order to expand their offerings and market share in the community banking sector.
Details of BANC-PACW Merger
Per the deal, PacWest will merge into Banc of California, and the combined bank will continue to operate under the latter’s name and brand. Each shareholder of PACW will receive 0.6569 shares of BANC. The merger was unanimously approved by the Board of directors of both banks. The deal is expected to be completed by the end of Fiscal 2023 or early 2024. The merger is subject to certain regulatory approvals, shareholder approval of both banks, and certain closing conditions.
The combined bank will boast $36.1 billion in assets, including $30.5 billion in total deposits, and $25.3 billion in loans. Additionally, the combined bank will repay $13 billion in wholesale borrowings, leading to a reduction in its borrowing ratio. Jared Wolff, President and CEO of Banc of California, will continue in his role at the combined entity.
Post-closure of the deal, PacWest shareholders will represent roughly 47% of the outstanding equity of the combined bank, and Banc of California shareholders will represent approximately 34%. At the same time, the private firms, Warburg Pincus and Centerbridge, will receive newly issued equity securities of the new entity, which will represent roughly a 19% stake in the company.
Financial Gains from the BANC-PACW Merger
Importantly, the merger will result in a 20%+ accretion to FY2024 earnings per share (EPS) for the combined entity and an immediate accretion of 3% to tangible book value per share. The common Tier 1 Capital Ratio will be approximately 10% on a pro forma basis.
Both banks reported their Q2FY23 results yesterday. PACW posted a net loss of $197 million, falling significantly from the $242.49 million in net profit reported in the prior-year quarter. PacWest also divested non-current loan portfolios in the second quarter, thus boosting its liquidity position. On the other hand, BANC posted net earnings of $17.88 million, falling 33% year-over-year.
What is the BANC price target?
Based on the analyst ratings during the last three months, the average Banc of California price target is $16, which implies 9.5% upside potential from current levels. With three unanimous Buys, BANC stock has a Strong Buy consensus rating.
These ratings were allotted before the merger announcement and are subject to change as Wall Street indulges in changing its views and recommendations on the stock and the combined entity.
