PacWest Bancorp and Banc of California Inc.'s proposed merger is unlikely to face serious regulatory hurdles, potentially setting it up to serve as a harbinger for more regional bank deals.

In the first $1 billion US bank deal announced in nearly a year, the planned tie-up will put regulators up to the test after they signaled more openness to mergers following the industry tumult in March. But with an estimated closing period of late 2023 or early 2024, the estimated closing timeframe is faster than most US bank transactions with a value between $1 billion and $3 billion announced since 2020 have experienced.

A Dec. 1 close would result in a 129-day closing timeframe, while a Jan. 1, 2024, close would be a 160-day closing period — both below the 204-day median for the deals in S&P Global Market Intelligence's analysis.

However, the California companies will likely meet that projected timeframe because regulators will view the deal as taking a "problem" off their hands after PacWest was caught in the crosshairs of the failures of Silicon Valley Bank and Signature Bank in March, deal advisers said.

"It stabilizes one of the weaker players in the market with a lot more capital and new management, and hopefully it takes them off the list of banks that regulators have to be concerned about," said Keith Noreika, executive vice president and chairman of the banking supervision and regulation group at consultancy Patomak Global Partners.

Oftentimes, deals in which a stronger bank is acquiring a less strong bank are "attractive transactions for regulators," said James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group.

Deal likely welcomed by regulators

Immediately following the failures of Silicon Valley Bank and Signature Bank, several banks with venture capital exposure faced headwinds such as stock price slumps and deposit outflows.

PacWest was the third-worst performing US bank stock by total return year to date at March 10, a Market Intelligence analysis found. The bank also saw heavy deposit outflows in the first quarter and in May after First Republic Bank's failure, causing it to tap into wholesale funding sources to boost liquidity.

As a result of the turbulence, PacWest mapped out the steps it would take to shrink, including asset sales. However, regulators likely view an outright sale of the institution as the best possible outcome.

"PacWest was one of those banks that wasn't out of the woods," John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics, said in an interview. "This is taking a problem case off the regulators."

Regulators will likely view the combination as positive since "PacWest had been struggling" and because it will diversify PacWest's business strategy to Banc of California's community bank focus, according to Matthew Veneri, head of investment banking at Janney Montgomery Scott LLC.

But it took a unique structure to strike the deal. Under the terms of the transaction, Banc of California will be the legal acquirer, while PacWest will be the accounting acquirer, with fair value accounting applied to Banc of California's balance sheet at closing.

The deal had to be structured as such because Banc of California, which is four times smaller than PacWest, is too small to fill up the large capital hole on PacWest's balance sheet.

Due to increasing interest rates, PacWest's underwater assets were mounting, and the capital levels at Banc of California would not have been sufficient to ensure a healthy balance sheet at the combined entity without external capital. Two private equity firms, Warburg Pincus LLC and Centerbridge Partners LP, are providing $400 million in equity financing upon closing.

The regulatory outlook for the deal is also bright because the companies discussed the transaction with regulators prior to announcement, and likely got the go-ahead, advisers said.

On the companies' call discussing the deal, Banc of California Chairman, President and CEO Jared Wolff said the companies "previewed" the deal with regulators and "based on those conversations and the specifics of this transaction, we believe that timeline is achievable."

This combination "tells you that for companies that are perceived as having viability problems ... the government's going to be open, certainly, to having deals done," Gorman said.

Regional banks will be watching

If this deal goes off without a regulatory hitch, it could be a harbinger for more regional bank M&A, some deal advisers said.

"If this deal gets through, it will encourage M&A among the larger regional players, who are the ones that get really caught up in a lot of the regulatory closing" delays, Stevens said. "Smaller banks don't really get caught up in that as much."

Stevens added that he anticipates two or three deals that he is working on getting signed this year, after he had gone six to nine months not working on a deal.

US bank deal conversations are picking up, Janney's Veneri said. Several banks also reported rising discussion activity on second-quarter earnings calls.

"We've got a long way to go before I'll call it a wave," Veneri said in an interview. "But we're starting to see a lot more communication going on between parties — transactions that were in various stages of process in the first quarter of the year that are starting up again, and discussions are being had again, and so that's going to lead to more activity."

However, the interest rate environment and pricing differences between buyers and sellers are still stifling activity.

"The real problem with the M&A market right now is the interest rate ... marks that are involved," Gorman said.

As buyers and sellers overcome pricing hurdles, "we're going to see that wave build," Veneri said.

Potential integration issues

If the deal secures regulatory approval to close, the two banks foresee little integration risk given their acute familiarity with each other, executives said on the deal call. But their Golden State competitors might see the tie-up as an opportunity to poach talent, an ongoing strategy for many banks right now as they grapple with intense deposit competition.

There is a "risk of a run on the employees" from both companies, said Pierre Buhler, managing director in financial services at SSA & Co., a global management consulting firm.

"If they lose, say, 20% of their people due to the merger, they're in a deep, deep difficult situation," Buhler said.