PACW as a corporate entity will be the surviving corporate entity while Bac of California's management / board is taking over and they'll take the name. This means the shares won't automatically be redeemed.
Hmmmm. Did the PACW name gain value for having survived a newsworthy bank run?
Matt Levine writes that PACW will survive as an accounting entity while Banc of CA will survive in name.
If I understand correctly, the acquiring entity can sell assets at the price of the disappearing entity under accounting regs, and accounting regs specify that the bigger bank (PACW!) is the acquirer. Thus the bank will sell assets at Banc of CA full pricing, not weak PACW pricing, to pay down expensive debt that PACW had needed to prevent further runs. In effect the merger reduced costs, rather than deriving value from PACW name - or in other words, actually gained value by removing the besmirched PACW name. Value was not gained compared to before the bank run, but some of the bank run's value damage was removed by the merger.
Text below is from second article on day linked (yesterday, as I write).
https://newsletterhunt.com/emails/35221"PacWest
Here is the simplest story of what went wrong at US regional banks this year:
In the good times, they attracted a lot of deposits, paid 0% interest on those deposits, and invested them in long-term assets (mortgages and loans and bonds) paying 3%.
Then interest rates went up and all those assets were worth like 90 cents on the dollar at market prices.
Depositors panicked, worrying that the banks were insolvent, and took their money out, forcing the banks to sell the assets at 90 cents on the dollar, which did not raise enough money to pay back the depositors, which led to bank failure.
That story is actually a reasonably accurate description of the fall of Silicon Valley Bank, but for most regional banks the story is a bit more nuan ced, more like this:
In the good times, they attracted a lot of deposits, paid 0% interest on those deposits, and invested them in long-term assets paying 3%.
Then interest rates went up and all those assets were worth like 90 cents on the dollar at market prices.
Depositors panicked, worrying that the banks were insolvent, and took their money out, forcing the banks to borrow from the government — from the Federal Reserve’s discount window, from its new Bank Term Funding Program or from the Federal Home Loan Bank System — at like 5% interest. (They also get “hot money” from brokered deposits, also at high interest rates.)
Funding 3% loans with 0% deposits is a good business, but funding 3% loans with 5% government funding is a bad business: You lose 2% every year. So those banks are struggling to be profitable because they replaced cheap good deposit funding with expensive government funding.
That story more accurately captures the doldrums that some regional banks are in. But even there you could add some nuance. At the end of March, PacWest Bancorp had about $44 billion of assets, of which about $6.7 billion was cash earning about 4.7% interest and about $4.9 billion was available-for-sale securities held at fair value earning about 2.5% interest. And it had about $10.4 billion of FHLB and BTFP borrowings at rates of about 4.4% to 5.1%.[1] PacWest could have sold its 2.5%-yielding securities, withdrawn some of its own cash from other banks, and used the money to pay down its 5% government financing. There is no need, economically, for PacWest to replace cheap deposit funding with expensive government funding: It could just sell some stuff and pay back the government.
In fact, in the second quarter, PacWest did sell some loans and used the proceeds to pay off its FHLB advances. But it didn’t actually use its most liquid, low-yielding stuff — its cash and available-for-sale securities — to pay off that government funding; it kept its cash and securities positions roughly the same, and still has $4.9 billion of expensive BTFP funding.
Basically if you are a troubled regional bank these days, you have to borrow from the government at high rates not just to fund your long-term assets, but also to keep lots of cash around in case of a bank run. “Our cash and available liquidity remains solid and exceeded our uninsured deposits, representing 188% as of May 2, 2023,” PacWest announced in May, and that is a ratio that people care about. Uninsured deposits, at California regional banks in 2023, are notoriously flighty; if you have a lot of them, you have to manage your balance sheet as though they might all disappear at any moment. If you don’t have plenty of cash lying around to cover your uninsured deposits, then they really might flee, and then where would you be?
The point here is that restoring confidence in a bank makes it more profitable. PacWest borrows a lot of money expensively in order to keep lots of cash just in case its depositors flee; if those deposits became less flighty it could save a lot of interest expense.
The standard way to restore confidence in a mid-sized bank, these days, is for it to be bought by another bank. Being bought by JPMorgan Chase & Co. is ideal, but being bought by another mid-sized bank that has avoided negative attention is okay too. There is a list of names that bank investors worry about, and PacWest is on it, and if you get rid of that name by merging with another bank you get a bit of a confidence boost. And if you get a bit of a confidence boost, you can stop borrowing so much expensive money.
There is a technical accounting problem with being bought, though. If you are a bank in this situation:
You have assets (loans, held-to-maturity bonds, etc.) valued at $100 on your balance sheet.
The market value of those assets is more like $90, due to interest-rate moves.
If you sell those assets, you will have a $10 accounting loss, which will eat up a lot of your regulatory capital and lead to more panic.
If you sell yourself, at fair value, the acquirer will mark your assets to market, which will give you a $10 accounting loss, which will eat up a lot of regulatory capital and require the acquirer to put in extra money to keep you well capitalized. (This is the problem that JPMorgan had when it bought First Republic Bank.)
As a matter of market perception, it is good to sell yourself, because that will restore confidence. As a matter of accounting, it is bad to sell yourself, because that will cause a big mark-to-market loss and undermine confidence.
Here’s a solution:
PacWest Bancorp is being bought by smaller rival Banc of California as it seeks to navigate a bout of upheaval that brought down a handful of its peers.
The deal includes a $400 million investment from Warburg Pincus and Centerbridge Partners, which obtain about 20% of the combined company and receive warrants to buy more shares, the banks said Tuesday.
PacWest stockholders will get 0.66 of a share of Banc of California common stock for each of their shares. The banks will sell assets with the aim of repaying $13 billion of wholesale borrowings, they said.
The merger is aimed at shoring up confidence in the banks after a run on deposits struck several US regional lenders earlier this year, leading to the collapse of three California-based banks and one in New York. Rising interest rates depressed the value of bonds they bought when rates were low, and the sudden surges in customer withdrawals forced some of them to sell those assets at a loss.
PacWest is sort of being bought by Banc of California, but also sort of not. From the press release:
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. …
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.
Banc of California — relatively unscathed by this year’s troubles — is the legal acquirer, and keeping its name. PacWest — which has been in the news a lot — will disappear. But PacWest, as the larger bank, is the accounting acquirer, meaning that Banc of California’s relatively clean balance sheet gets marked to market, while PacWest gets to avoid marking down its assets.
Also:
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.
The key point there is that these two banks have a total of $13 billion of expensive wholesale funding (government programs, brokered deposits, etc.) that they can pay down in part by selling Banc of California assets and in part by using their existing cash. If you combine two banks, they are safer and more stable than they would be separately, which means that they need to keep less cash lying around, which means they can use that cash to pay back some of their expensive borrowing. PacWest is a $38 billion bank; Banc of California is about a $9 billion bank; together they will be a $36 billion bank: Combining them allows them to shrink. From the investor presentation:
The other point is that Warburg and Centerbridge are putting in $400 million for about 19% of the combined company (plus warrants). One way to restore confidence in a beaten-down regional bank is to merge it with another bank, but another way is just to raise a bunch of equity: If depositors are worried that your assets are secretly worth less than your liabilities, raising a bunch of cash from equity investors should reassure them. The problem with this is that the regional bank equity market seized up a bit in March, when Silicon Valley Bank announced a stock offering that led directly to its failure: Raising equity can shore up confidence in a bank and prevent a run on deposits, but trying to raise equity can undermine confidence and cause a run on deposits. You can’t announce a stock sale first and then try to do it; you have to do it first and then announce it."
