Business Combinations

Apr. 01, 2021

Business Combinations [Abstract]

Acquisitions

BUSINESS COMBINATIONS

On November 30, 2023 (the “Merger Date”), PacWest Bancorp (“PACW”) merged with and into Banc of California, Inc. (“BANC”), with BANC continuing as the surviving legal corporation (the “Merger”). Promptly following the Merger, BANC’s wholly owned bank subsidiary, Banc of California, N.A., merged with and into PACW’s wholly owned bank subsidiary, Pacific Western Bank, with Pacific Western Bank surviving the merger. The name of the bank was then changed to Banc of California. Refer to Note 1. Nature of Operations and Summary of Significant Accounting Policies under the Basis of Financial Statement Presentation for more information pertaining to the completed Merger.

The Merger was accounted for as a reverse merger using the acquisition method of accounting; therefore, PACW was deemed the acquirer for financial reporting purposes, even though BANC was the legal acquirer. The Merger was an all-stock transaction and has been accounted for as a business combination. Pursuant to the merger agreement, on the Merger Date, each holder of PACW common stock received 0.6569 of a share (the “Exchange Ratio”) of BANC's common stock for each share of PACW common stock held. Each outstanding share of common stock of BANC remained outstanding and was unaffected by the Merger. As of the Merger Date, PACW had approximately 120.0 million and BANC had approximately 57.0 million shares of common stock outstanding. On the Merger Date, the shares of PACW common stock, which previously traded under the ticker symbol “PACW” on NASDAQ, ceased trading on, and were delisted from, NASDAQ. Following the Merger, BANC common stock continues to trade on NYSE, with the ticker symbol of “BANC.”

Each outstanding share of 7.75% Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A, of PACW was converted into the right to receive one share of a newly created series of BANC 7.75% Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series F. Likewise, following the completion of the mergers, each outstanding PACW depositary share representing a 1/40th interest in a share of PACW preferred stock became a BANC depositary share representing a 1/40th interest in a share of new BANC preferred stock. The PACW depositary shares were listed prior to the merger on NASDAQ under the symbol “PACWP”. The BANC depositary shares representing a 1/40th interest in a share of new BANC preferred stock were listed on the NYSE upon completion of the mergers under the symbol “BANC/PF.”

Concurrently with its entry into the merger agreement, BANC entered into separate investment agreements (the “Investment Agreements”), with (i) affiliates of funds managed by Warburg Pincus LLC (the “Warburg Investors”) and (ii) certain investment vehicles sponsored, managed or advised by Centerbridge Partners, L.P. and its affiliates (the “Centerbridge Investor” and, together with the Warburg Investors, the “Investors”). On the terms and subject to the conditions set forth in the Investment Agreements, the Investors invested an aggregate of $400 million (before transaction costs) in exchange for the sale and issuance by BANC of approximately (a) 21.7 million shares of BANC common stock and (b) 10.8 million shares of a new class of non-voting, common-equivalent stock of BANC (“NVCE stock”), in each case, at a purchase price of $12.30 per share. In addition, the Warburg Investors received warrants to purchase approximately 15.9 million shares of NVCE stock, and the Centerbridge Investor received warrants to purchase approximately 3.0 million shares of BANC common stock, in each case, with such warrants having an initial exercise price of $15.375 per share (collectively the “Warrants” and together with the BANC common stock and the NVCE stock to be issued pursuant to the Investment Agreements, the “Investments”). The Warrants carry a term of seven years but are subject to mandatory exercise when the market price of BANC common stock reaches or exceeds $24.60 for 20 or more trading days during any 30-consecutive trading day period.

As the legal acquirer, BANC issued approximately 111.3 million shares of BANC common stock in connection with the Merger, which represented approximately 66% of the voting interests in BANC upon completion of the Merger. The purchase price in a reverse acquisition is determined based on the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition. Therefore, the first step in calculating the purchase price in the Merger is to determine the ownership of the combined company following the Merger.

The table below summarizes the ownership of the combined company, BANC, following the Merger but prior to the Investments, as well as the market capitalization of the combined company prior to the Investments using shares of BANC and PACW common stock outstanding at November 30, 2023 and BANC’s closing price on November 30, 2023:

	BANC Ownership and Market Value Table
	(Pro Forma prior to Investments)
				Market Value at
	Number of	Percentage		$11.56 BANC Share
	Outstanding Shares	Ownership		Price
	(In thousands)
BANC shareholders	57,158	42.3	%	$	660,746
PACW shareholders	77,906	57.7	%	900,593
Total	135,064	100.0	%	$	1,561,339

Next, the hypothetical number of shares PACW would have to issue to give BANC shareholders the same percentage ownership in the combined company is calculated in the table below (based on shares of PACW common stock outstanding at November 30, 2023):

	Hypothetical PACW Ownership
	Number of PACW	Percentage
	Outstanding Shares	Ownership
	(In thousands)
BANC shareholders	87,932	42.3	%
PACW shareholders	119,969	57.7	%
Total	207,901	100.0	%

Finally, the purchase price for purposes of the transaction accounting adjustments is calculated based on the number of hypothetical shares of PACW common stock issued to BANC shareholders, multiplied by the share price as demonstrated in the table below:

	(In thousands, except
	per share data)
Number of hypothetical PACW common shares issued to BANC shareholders	87,932
PACW market price per share as of November 30, 2023	$	7.54
Purchase price consideration	$	663,004

Upon the closing of the transaction, the ownership distribution of the combined company will be as follows, assuming consummation of the Investments, and excluding the potential dilutive effect of warrants or other equity awards:

	Number of	Percentage
	Outstanding Shares	Ownership
	(In thousands)
BANC common stockholders	57,158	33.9	%
PACW stockholders	78,810	46.8	%
Investors	32,520	19.3	%
Total	168,488	100.0	%

The following table provides the preliminary purchase price allocation as of the Merger Date and the assets acquired and liabilities assumed at their estimated fair value as of the Merger Date as recorded by the Company. The estimates of fair value were recorded based on initial valuations available at the Merger Date, and these estimates, including initial accounting for deferred taxes and acquired loans, are considered preliminary as of December 31, 2023 and subject to adjustment for up to one year after the Merger Date. In many cases, the determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are highly subjective in nature and subject to change. While the Company believes that the information available on the Merger Date provided a reasonable basis for estimating fair value, additional information may be obtained during the measurement period that would result in changes to the estimated fair value amounts. The measurement period ends on the earlier of one year after the Merger Date or the date the Company concludes that all necessary information about the facts and circumstances that existed as of the Merger Date have been obtained. The fair value of acquired net tax assets may change once the final tax returns have been filed and the fair value of acquired loans may change due to additional information being obtained during the measurement period, including the determination of PCD loans as the Company further evaluates the information as of the acquisition date.

	November 30, 2023
	Purchase Price Consideration:
	(In thousands)
Total merger consideration			$	663,004
Fair value of assets acquired:
Cash and due from banks	$	335,300
Investment securities available-for-sale	872,800
Loans and leases held for sale	2,182,988
Loans and leases held for investment, net of allowance for loan and lease losses	3,965,112
Premises and equipment	103,500
Other intangible assets	145,500
Current and deferred tax assets, net	209,100
Other assets	392,550
Total assets acquired	$	8,206,850
Fair value of liabilities assumed:
Deposits	$	6,547,659
FHLB advances	794,000
Long-term debt	257,600
Other liabilities	143,214
Total liabilities assumed	$	7,742,473
Net assets acquired			464,377
Goodwill			$	198,627

In connection with the Merger, the Company recorded approximately $198.6 million of goodwill. Goodwill represents the excess of the purchase price over the fair value of the assets acquired, net of fair value of liabilities assumed. Information regarding the allocation of goodwill recorded as a result of the acquisition, as well as the carrying amounts and amortization of core deposit and other intangible assets, are provided in Note 7. Goodwill and Other Intangible Assets, Net of the Notes to Consolidated Financial Statements. None of the goodwill recognized is expected to be deductible for income tax purposes.

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.

Cash and due from banks: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.

Investment Securities: Fair values for investment securities were the actual sales prices of the securities when they were sold in December 2023 as this was determined to be the best indicator of fair value.

Loans held for sale: The loans held for sale portfolio was recorded at fair value based on quotes or bids from third party investors and/or recent sale prices.

Loans and leases: A valuation of the loans held for investment portfolio was performed by a third party as of the Merger Date to assess the fair value. The loans held for investment portfolio was segmented into three groups, including performing PCD loans, non-performing PCD loans and non-PCD loans. The loans were further pooled based on loan type and risk rating bands. Most of the loans were valued at the loan level using a discounted cash flow methodology. The methodology included projecting cash flows based on the contractual terms of the loans and the cash flows were adjusted to reflect credit loss expectations along with prepayments. Discount rates were developed based on the relative risk of the cash flows, taking into consideration the loan type, market rates as of the valuation date, recent originations in the portfolio, credit loss expectations, and liquidity expectations. Lastly, cash flows adjusted for credit loss expectations were discounted to present value and summed to arrive at the fair value of the loans. Other loans were valued based on recent quotes, bids or recent sale prices of similar loans and for one loan portfolio it was concluded the fair value equaled the portfolio's par value due to the short-term nature of the loan product, combined with the low expected credit losses and the variable interest rates being at market.

The Company is required to record PCD assets, defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized in subsequent periods as provision for credit losses (or recapture of credit losses) arises. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration is allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis is allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the allowance for credit losses, is accreted to interest income using the interest method based on the effective interest rate determined at the merger date.

Of the $4.0 billion net loans held for investment acquired, $1.7 billion were identified as PCD loans on the Merger Date. The following table provides a summary of these PCD loans at acquisition:

	November 30, 2023
	(In thousands)
Principal of PCD loans acquired	$	1,713,572
PCD ACL at acquisition	(25,623)
Non-credit discount on PCD loans	(154,498)
Fair value of PCD loans	$	1,533,451

Premises and equipment: The fair values of premises are based on a market approach, by obtaining third-party appraisals and broker opinions of value for land, office and branch space.

Core deposit intangible: Core deposit intangible represents the low cost of funding acquired core deposits provide relative to the Company’s marginal cost of funds. The fair value was estimated based on a discounted cash flow methodology that gave consideration to expected customer attrition rates, net maintenance cost of the deposit base, interest costs associated with customer deposits, and the alternative cost of funds. The cash flows from estimated net cost savings derived from the acquired core deposits were discounted to present value and summed to arrive at the fair value of the core deposit intangible. The intangible assets are being amortized over 10 years using the sum of years digits, based upon the period over which estimated economic benefits are estimated to be received.

Current and deferred tax assets, net: The fair values of the acquired net tax assets represent the estimated amount of tax benefits to be recognized on tax returns.

Deposits: The fair values used for the demand and savings deposits equal the amount payable on demand at the Merger Date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.

Borrowings: The fair values of FHLB advances and long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.

The Company's operating results for year ended December 31, 2023 include the operating results of the acquired assets and assumed liabilities of historical BANC subsequent to the Merger Date.

The following table shows the amount of the expenses related to the Merger for the year ended December 31, 2023:

	Year Ended
	December 31, 2023
	(In thousands)
Severance and employee-related	$	63,277
Legal and professional	32,523
Asset write-downs, lease terminations and other facilities-related	18,600
System conversion and integration	2,300
Other	5,024
Total merger-related expenses	$	121,724

The following table presents unaudited pro forma information as if the Merger had occurred on January 1, 2022. The pro forma adjustments give effect to any change in interest income due to the accretion of the discount (premium) associated with the fair value adjustments to acquired loans and leases, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustment to acquired interest-bearing deposits and long-term debt and the amortization of the core deposit intangible that would have resulted had the deposits been acquired as of January 1, 2022. The pro forma information is not indicative of what would have occurred had the Merger occurred as of the beginning of the year prior to the Merger Date. The pro forma amounts below do not reflect the Company's expectations as of the date of the pro forma information of further operating cost savings and other business synergies expected to be achieved, including revenue growth as a result of the Merger and the effects of the balance sheet repositioning completed subsequent to the Merger. As a result, actual amounts differed from the unaudited pro forma information presented.

	Unaudited Pro Forma for the
	Year Ended December 31,
	2023		2022
	(In thousands)
Net interest income	$	1,123,413	$	1,698,670
Noninterest (loss) income	$	(525,455)	$	92,177
Net (loss) earnings before income taxes (1)	$	(2,031,704)	$	600,322

___________________________

(1)    The 2023 pro forma net loss was adjusted to exclude $164.2 million of merger-related costs, inclusive of historical BANC merger-related costs, incurred in 2023 and the pro forma income for 2022 was adjusted to include these costs.