Business Context and Reporting Period
This Form 8-K, dated November 28, 2023, reports the completion of the merger between Banc of California, Inc. ("Banc of California") and PacWest Bancorp ("PacWest"). The transaction closed effective November 30, 2023. Following the merger, PacWest Bank merged into Banc of California, National Association, with the surviving entity rebranded as "Banc of California." The filing also details concurrent capital raises, debt assumptions, and significant changes to the Board of Directors and accounting firm.
Key Financial Metrics and Capital Structure
- Merger Consideration: Approximately 78.8 million shares of Banc of California Common Stock were issued to PacWest shareholders at an exchange ratio of 0.6569 shares per PacWest share.
- Capital Raise: Banc of California raised $400 million from Warburg Pincus and Centerbridge Partners. This included the issuance of approximately 21.7 million shares of Common Stock and 10.8 million shares of non-voting common-equivalent stock at $12.30 per share.
- Warrants Issued: Warrants were issued to purchase approximately 15.9 million shares of non-voting stock (Warburg) and 3.0 million shares of Common Stock (Centerbridge) at an exercise price of $15.375 per share.
- Debt Assumption: Banc of California assumed $539.04 million in aggregate principal amount of PacWest's subordinated notes. As of September 30, 2023, these notes carried a weighted average interest rate of 7.98%.
- Asset Sales: Approximately $1.9 billion in assets were sold as part of a balance sheet repositioning strategy, including $1.5 billion of PacWest securities and $447.4 million of Banc of California securities. A forward sale of $1.8 billion in single-family residential mortgages is expected to close around December 1, 2023.
- Share Count: The estimated total number of Banc of California Common Stock shares outstanding immediately after closing is approximately 157.5 million.
Material Changes Versus Prior Period
- Corporate Structure: PacWest has been fully integrated into Banc of California, with the surviving bank adopting the Banc of California name and brand.
- Equity Dilution: Significant issuance of new shares occurred via the merger consideration and the $400 million private placement, increasing the total share count.
- Liabilities: The company's debt load increased by the assumption of $539 million in subordinated notes from PacWest.
- Asset Composition: The balance sheet was repositioned through the sale of $1.9 billion in securities and the pending sale of $1.8 billion in mortgage loans to reduce wholesale borrowings and higher-cost funding.
Guidance, Outlook, and Management Commentary
- Use of Proceeds: Proceeds from asset sales and the capital raise are expected to be utilized primarily for the repayment of the Surviving Bank's wholesale borrowings and higher-cost funding.
- Accounting Firm Change: Ernst & Young LLP resigned as the independent auditor due to independence rules related to the merger. KPMG LLP is expected to be appointed on December 4, 2023, to audit the 2023 financial statements.
- Board Changes: John M. Eggemeyer, III was appointed Chairman of the Board. Jared M. Wolff ceased serving as Chairman but remains CEO and Vice Chairman. Three former PacWest directors and one Warburg Pincus representative joined the Board. Four directors retired.
- Equity Awards: PacWest performance-based restricted stock units were cancelled without consideration as performance was below threshold levels. Banc of California performance awards vested at target levels.
Important Facts for Investor Verification
- Verify the final post-merger share count and the impact of the 78.8 million merger shares plus 32.5 million private placement shares on earnings per share.
- Confirm the terms and maturity schedule of the $539 million in assumed subordinated notes, specifically the 7.98% weighted average interest rate.
- Monitor the closing of the $1.8 billion single-family residential mortgage portfolio sale and the subsequent reduction in wholesale funding costs.
- Review the lock-up provisions for Warburg Pincus and Centerbridge investors (90-day lock-up, followed by restricted transfer periods).
- Track the transition of the audit function from Ernst & Young to KPMG and any potential restatements or adjustments in the upcoming 2023 annual report.