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Ex-bank regulator takes PacWest stake

September 03, 2008|E. Scott Reckard | Times Staff Writer

Amid the meltdown of home mortgage and construction loans in California, some banks are bound to be survivors. A former federal bank regulator thinks he has identified one.

A private equity firm headed by Eugene Ludwig agreed Tuesday to invest $100 million in PacWest Bancorp of San Diego in exchange for newly issued stock at $26 a share.

The infusion could make PacWest, formerly known as First Community Bancorp, strong enough to acquire the deposits of failed banks, essentially feeding on carcasses that drop by the wayside.

The news triggered a rush of interest in PacWest's shares, driving the price up $3.78, or nearly 17%, to $26.46. That is more than double the recent low of $12.75 on July 15.

The investment comes from CapGen Financial, headed by Ludwig, who from April 1993 to April 1998 was U.S. comptroller of the currency -- the chief regulator of so-called national banks.

New York-based CapGen will wind up owning 12% of PacWest, whose Pacific Western Bank has 60 branches in Los Angeles, Orange, Riverside, San Diego and San Bernardino counties, $4.3 billion of loans and other assets and $3.2 billion in deposits.

Although PacWest was hurt in the first half of this year by soured commercial real estate and residential construction loans, the $747-million loss it recorded in the period was mainly because of a big write-down of balance-sheet goodwill. Excluding that non-cash charge, first-half operating profit fell 71% to $15.1 million.

Despite the earnings slump, PacWest had maintained capital levels that exceeded regulators' standards for being "well capitalized." That cushion will be further boosted by CapGen's cash infusion.

Once CapGen's investment is complete, a measure of PacWest's capital cushion relative to the risks it takes will be almost in the 90th percentile for the banking industry, Friedman, Billings Ramsey & Co. analyst James Abbott said.

He called the investment "extremely positive" news for PacWest and its investors. First, he noted, the well-respected Ludwig agreed to pay 21% above the pre-announcement market price for his PacWest stake. That is a vote of confidence that the bank "is undervalued relative to the intrinsic value of its deposit franchise," Abbott said in a note to clients.

More important, a beefed-up capital base puts PacWest "squarely in the driver's seat to bid on distressed institutions, either before or ideally after FDIC assistance," Abbott said.




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