PacWest Bancorp had borrowed its way into a corner. A smaller rival smelled an opportunity. And there was private equity money eager to swoop in.

Add a touch of Jamie Dimon and there was enough for a struggling bank to pull off a deal without the government needing to step in.

Before it all came together, interest expenses at PacWest had soared more than 1,300% in the first six months from a year ago as the teetering California lender loaded up on loans from the Federal Reserve, hoping to avoid the fate of rival regional banks that collapsed this year. Bank executives had already taken an ax to many of the firm’s key businesses, but losses on asset sales had sapped profits.

With his options running out, Chief Executive Officer Paul Taylor, just months into his role, found exactly the right match in Jared Wolff. The man at the helm of Banc of California had previously spent more than a decade climbing to the No. 2 spot at PacWest. Together, the pair arranged a deal with $400 million thrown in from Warburg Pincus and Centerbridge Partners.

Crucially, Dimon’s JPMorgan Chase & Co., which was also advising Banc of California, agreed to buy up $1.8 billion of the beleaguered lender’s loans to seal the deal. It also acted as placement agent on the $400 million capital injection.

Dimon had taken a keen interest in PacWest since April, when the California lender became engulfed in the broader turmoil hitting regional banks. The CEO had earlier considered a direct equity investment in PacWest as part of a consortium, believing the move would help calm jitters and stabilize the run on deposits hitting smaller banks nationwide.

And while Dimon would instead go on to stage a May rescue of ailing First Republic Bank in a government-led acquisition, the PacWest transaction eschewed any government backing.

This account is based on conversations with half a dozen people involved in the negotiations who asked not to be identified discussing private talks. Spokespeople for both Banc of California and PacWest as well as JPMorgan, Warburg Pincus and Centerbridge declined to comment.

‘Had to Happen’

The companies have already received signals from regulators that the transaction will sail through the approvals process relatively quickly. Just as importantly, they may have just mapped a way out for the dozens of regional banks across the country facing a similar quagmire.

So far, investors seem to approve. Banc of California shares are up 15% this week, while PacWest shares are roughly flat. The private equity investors are already sitting on paper gains of about $80 million on their shares, with the value of warrants to buy more taking that figure even higher.

“This is one of those deals that kind of had to happen” even though high interest rates have largely kept a lid on bank mergers so far this year, said Al Dominick, a partner at the bank consultancy Cornerstone Advisors. “While the market has been cautious since March, you could see a deal like this really starting to get bank boards thinking ‘Is now the time to explore something strategic or an outright exit?”’

Read More: JPMorgan to Buy Almost $2 Billion of Mortgages in PacWest Deal

When Taylor and his top deputies kicked off a sale process in recent weeks, one name stood out: Wolff. In the years since he departed, Wolff, 54, had stayed close with his former colleagues at PacWest. Back in 2016, when he was co-managing partner of the real estate investment company Quarter Group, Wolff engineered a deal to acquire and lease back four PacWest properties in partnership with Fortress Investment Group. During his time at PacWest, Wolff oversaw more than 20 acquisitions.

In recent weeks, Wolff and key executives structuring the deal dined at his private beach club in California as they hashed out details of the agreement.

“We know the culture of the organizations and the businesses that they operate,” Wolff said on a conference call with analysts. “During the diligence process and evaluation of the transaction, our ability to discuss issues on a deeper level was evident.”

Warburg’s Interest

Wolff also had deep ties in the private equity community, including with Dan Zilberman at Warburg Pincus and top staffers at Centerbridge.

For Warburg, participating in the deal was something of a no-brainer. The company has long wanted to invest in PacWest, and first looked to sink money into the lender back in 2008. The investment firm took another look in 2020, during the depths of the coronavirus pandemic, and again this year as the company’s rivals were engulfed in the regional-bank crisis.

“We are excited to back the strategic combination of two institutions we know well and respect,” Todd Schell, who will join the combined bank’s board from Warburg Pincus, said in a statement announcing the agreement Tuesday.

At Centerbridge, executives had been watching Wolff since he started at Banc of California four years ago. During that time, the lender’s profit has more than tripled.

With Warburg and Centerbridge on board, Wolff was in business. His tiny California lender, with just $9.2 billion in assets at year-end, would acquire PacWest, a bank that was almost five times bigger.

Still, the two companies were determined not to announce a raft of asset sales along with a large capital raise without also making it clear they had already lined up willing investors — a misstep that had already precipitated the collapse of Silicon Valley Bank earlier this year.

Investors Interested

That’s where JPMorgan played its part, with bankers Andrew Spicehandler and Usman Ghani leading the effort. Dimon and Fernando Rivas, JPMorgan’s head of investment banking for North America, were regularly briefed as the deal came together.

The nation’s biggest bank, which had already agreed to serve as sole placement agent on the $400 million private investment in public equity, simultaneously agreed to buy up the $1.8 billion in single-family mortgages that the companies had decided they would need to sell in the aftermath of the deal.

The banking giant also helped PacWest arrange hedges on the remainder of the $7 billion loan portfolio to protect the company until the deal is completed.

“Silicon Valley Bank announced two things: They announced they were going to take losses on the bond portfolio and they announced they were going to raise capital,” said Greg Hertrich, head of US depository strategies at Nomura Securities.

“From 10,000 feet, it’s the same kind of thing,” Hertrich said. “You sold assets and now you raised capital to make up the capital hole. Broadly, it’s the same trade. I think it makes sense to be able to say we have identified investors who would be supportive of the new entity.”

--With assistance from Matthew Monks.

(Corrects percentage of interest expense increase in third paragraph.)

Author: Jenny Surane, Sridhar Natarajan and Katherine Doherty