The future of PacWest Bancorp hangs in the balance as investors pull back from regional lenders following the sudden collapse of three prominent banks in a matter of weeks.
Shares of the $44 billion bank continued to slide Thursday, tumbling 60% to an all-time low of $2.57 and with trading briefly halted due to volatility. The latest dive in the stock, which has fallen 89% this year, followed a report by Bloomberg News on Wednesday that PacWest is weighing its strategic options, including a possible sale.
In a statement issued late Wednesday, PacWest confirmed that it has “explored strategic asset sales” and has recently “been approached by several potential partners and investors.” Those talks continue, the company added.
Although PacWest’s stock has tanked in recent weeks, the company hasn’t faced the kind of massive capital flight that crippled Silicon Valley Bank, noted analyst Adam Crisafulli of Vital Knowledge. In reporting its first-quarter earnings on April 25, PacWest said its total deposits had increased $1.1 billion to $28.2 billion.
PacWest also has far less in uninsured deposits — client funds in excess of the $250,000 account cap guaranteed by the U.S. — than SVB did when it capsized in March. CEO Paul Taylor noted last month that the bank’s total insured deposits had risen from 48% of total deposits at the end of 2022 to 71% as of March 31.
“It’s important to remember that Silicon Valley and First Republic were unique, and investors shouldn’t simply extrapolate what happened to them to the whole regional landscape,” Crisafulli said in a report.
Other banks under pressure
Wall Street has grown increasingly wary of midsize lenders since the March 10 collapse of Silicon Valley Bank (SVB) and the failure only days later of Signature Bank after depositors rushed to withdraw their money.
Shares of Western Alliance Bancorporation, a $65 billion lender based in Phoenix, plunged 58% Thursday even as it sought to reassure investors that its financial position remains solid. The company said late Wednesday that it hasn’t experienced unusual deposit outflows amid the turbulence buffeting the banking sector, noting that its deposits have risen $1.2 billion this quarter to $48.8 billion. As of May 2, 74% of its total deposits were insured.
As investors soured on $229 billion First Republic, federal financial regulators were forced to arrange a shotgun marriage with JPMorgan Chase, which agreed this week to buy most of the company’s assets.
In announcing the deal on Monday, JPMorgan CEO Jamie Dimon said that absorbing First Republic would help stabilize the banking industry, while warning that the turmoil affecting midsize and small lenders could continue.
Federal Reserve Chair Jerome Powell, speaking Wednesday after the central bank moved to hike its benchmark rate for a 10th consecutive time, expressed confidence in the U.S. banking industry, saying it remains “sound and resilient.”
The Federal Deposit Insurance Corporation is set to seize control of First Republic Bank, according to multiple reports.
Shares of the ailing regional bank cratered on Friday following a CNBC report that it is likely to be seized by federal financial regulators, putting it in jeopardy of becoming the third bank to collapse since Silicon Valley and Signature Bank failed last month. FDIC officials think First Republic is out of time to arrange a rescue involving other banks, leaving the agency no choice but to take the bank into receivership, Reuters reported.
- Federal Reserve report blames Silicon Valley Bank execs – and itself – for bank’s collapse
First Republic’s stock price, which topped $200 as recently as 2021, plunged 43% on Friday and continued to sink in after-hours trading. The shares have fallen 97% this year.
Investors were spooked earlier this week by the San Francisco bank’s disclosure that depositors withdrew more than $100 billion during last month’s crisis, raising concerns about First Republic’s stability. The fund outflows were “unprecedented,” bank executives said on an earnings call Monday.
As with Silicon Valley, a significant share of First Republic’s deposits were uninsured, which makes it more prone to withdrawals from skittish customers.
The troubled bank, which had roughly $233 billion in assets under management as of March 31, said it now plans to sell off assets and restructure its balance sheet, as well as lay off as much as a quarter of its workforce, which totaled about 7,200 employees at the end of 2022. The bank will also shrink its corporate office footprint, cut executives’ compensation by a “significant” amount and eliminate “nonessential” projects, executives said Monday.
In a rare move, 11 of the nation’s largest financial institutions gave First Republic $30 billion in deposits last month to prop up the troubled bank.
Silicon Valley Bank, at the time the 16th-largest U.S. bank with $210 billion in assets, was taken over by state regulators in March after concerns about potential losses spurred many depositors to withdraw their funds. New York’s Signature Bank failed only days later after a similar bank run.
In a self-critical report on Friday, the Federal Reserve attributed SVB’s startling collapse to a combination of extremely poor bank management, weakened regulations and lax government supervision.
JPMorgan Chase’s move to acquire most of First Republic Bank’s assets this week hasn’t stemmed investor concerns about the financial prospects for other regional lenders.
The stock prices of Comerica, PacWest Bancorp, Western Alliance Bank and Zions Bank shares fell sharply Tuesday as attention shifted to other financial players that could be at risk of the startling bank runs that have taken down First Republic, Silicon Valley Bank and Signature Bank in recent weeks.
“Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon and is ready to focus on the next weakest link — potentially distressed lenders with tremendous exposure to commercial real estate,” Edward Moya, a senior market analyst at Oanda, said in a research note.
Shares of Los Angeles-based PacWest, with $44 billon in assets, plunged 28%, while $65 billion Western Alliance tumbled 15%. The KBW regional bank index fell 5.5% on the day and is down 28% this year.
The selloff comes one day after JPMorgan won a government bid to take over most of assets of First Republic, which was seized by bank regulators as part of the deal. JPMorgan CEO Jamie Dimon said on Monday that the emergency deal would help stabilize the banking industry, while warning that the turmoil affecting midsize and small lenders could continue.
Investors aren’t withdrawing from PacWest and Western Alliance for the same reasons they ditched Silicon Valley Bank, said Adam Crisafulli, an analyst at Vital Knowledge. In March, customers pulled their money out because of concerns the banks could be on the hook for hefty losses, Crisafulli said in a research note.
“That is not spurring the selling now,” he said. “Instead, the anxiety today is more philosophical, with people asking ‘Why do you exist?’ with regards to many regionals.”
For some investors, regional banks are becoming akin to “stodgy brick-and-mortar retailers focused on selling non-perishable commodity products,” Crisafulli added.
Regional bank leaders say they’ve become collateral damage to Silicon Valley Bank’s failure, but some banks showed signs of stress even before SVB’s collapse. PacWest saw its deposits fall by $5.7 billion between January and March, Kevin Thompson, chief financial officer, said in an earnings call last week. Western Alliance, which also posted earnings last week, reported $3.3 billion in deposit outflows.
Despite the recent bank failures, officials from the U.S. Treasury Department, Federal Deposit Insurance Corporation and the Biden administration have repeatedly expressed confidence in the stability of the broader banking system.
Yet investors have increasingly shunned banks that, like SVB, have large amounts of uninsured deposits — accounts holding more than the FDIC’s $250,000 deposit insurance limit. Some banks have also been wrong-footed by rising interest rates, which have raised their costs at the same time that depositors have withdrawn funds in search of higher-returning investments.