PacWest Bancorp (NASDAQ: PACW), a California-based bank whose stock has cratered over the past year due to business struggles, is getting a saving grace. It has struck a deal to combine with the Banc of California (NYSE: BANC), a local rival.

Banc of California will pay $1.1bn in shares to absorb PacWest. The combined bank will raise $400mn from two private equity firms, Warburg Pincus and Centerbridge Partners, to shore up its finances.

This deal ends speculation about PacWest’s fate amid dwindling deposits and heavy unrealized losses on its books. PacWest was rocked by significant deposit outflows — a 17% drop in this year’s first quarter — after three regional banks collapsed earlier this year, prompting the worst turmoil in the American banking sector since the 2008 crisis.

• PacWest courts deposits from rich clients and offers favourable loans in exchange. This business model became a liability after three regional banks collapsed over five days in March. PacWest clients feared a similar fate and pulled out deposits significantly; many held above the $250,000 government-backed insurance limit, so their fears were justified.

• PacWest began selling off assets and businesses to boost investor morale as its business struggled. Yet, the bank estimated having unrealized losses on its loans and bonds equivalent to 95% of its book value. Its stock collapsed more than 60% over the past year.

This deal is unusual, as it’s a smaller bank absorbing a bigger bank. Banc of California had nearly $7bn in deposits in June, and PacWest reported having $28bn in deposits at the end of March. Both banks are merging into a single corporate entity; existing PacWest shareholders will own 47% of the combined company, Banc of California’s shareholders will own 34%, and the remaining 19% will be owned by the two private equity firms buying $400mn worth of shares.

PacWest had a market capitalization of $1.2bn before the deal was announced. It’s selling for less than that figure, signalling it had few options.

At least, investors can be grateful that PacWest didn’t collapse and sell for scraps like its three fellow regional lenders in March; First Republic Bank, Silicon Valley Bank, and Signature Bank. Equity investors in these three banks were wiped out, and bigger banks took over the businesses, respectively JPMorgan Chase, First Citizens Bank, and New York Community Bank.

• The combined PacWest-Banc of California entity will have $36bn in assets and 70 branches across California. That’s less than the $41bn of assets on PacWest’s books alone at the end of 2022.

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