PacWest Bank’s share price nosedived by some 36% in pre-market trading on Thursday as the troubled California-based lender said it was exploring “all options” including a possible sale or a capital raise.
A liquidity boost announced in March failed to inspire confidence in PacWest’s ailing share price, fueling sentiment that the bank could be the next domino to fall just days after another regional lender, First Republic, was sold to JPMorgan Chase.
Los Angeles-based PacWest is hoping to avoid the fate of other regional lenders that were taken over by regulators in the last two months by proactively finding a solution that bolsters its finances, a source told Reuters, asking not to be identified because the matter is confidential.
The stock price of other regional lenders also dipped in pre-market activity on Thursday.
First Horizon, the Memphis-based bank which is the fourth largest in the southeast US, fell by as much as 40% before the opening bell on Wall Street.
In another ominous sign for the banking industry, Canadian lender TD Bank announced it was scrapping its $13.4 billion acquisition of First Horizon.
The deal would have made the Toronto-based based the sixth largest in the US.
The cancellation of the merger will require TD to make a $200 million cash payment to First Horizon.
The deal, which was first announced in February of last year, was delayed repeatedly due to increased regulatory scrutiny.
“Because there is uncertainty as to when and if these regulatory approvals can be obtained, the parties mutually agreed to terminate the merger agreement,” the two banks said in a joint statement.
Western Alliance stock fell by more than 13% while Zions Bank’s share price was down around 11%.
Nelson Peltz, the activist investor, warned that more regional lenders are at risk.
He called on the Federal Deposit Insurance Corporation to backstop all deposits at regional banks.
Peltz told Financial Times that depositors with more than $250,000 in all US banks should pay a small insurance premium to the FDIC.
That money would then be used to insure deposits larger than $250,000 would be covered by the FDIC.
“It should stop the deposit outflow from the small regional and community banks,” Peltz told FT. “I don’t think we want all of the funds just going to major banks.”
Bill Ackman, the billionaire hedge fund guru who founded Pershing Square Capital Management, also sounded the alarm on Wednesday.
“The regional banking system is at risk,” Ackman tweeted on Wednesday, adding that “we are running out of time to fix this problem.”
“Confidence in a financial institution is built over decades and destroyed in days,” he wrote. “As each domino falls, the next weakest bank begins to wobble.”
Ackman wrote that he believes First Republic “would not have failed if the FDIC temporarily guaranteed deposits while a new guarantee regime were created.”
“Instead, we watch the dominoes fall at great systemic and economic cost.”
“How many more unnecessary bank failures do we need to watch before the FDIC, @USTreasury and our government wake up?” Ackman tweeted.
“We need a systemwide deposit guarantee regime now.”
PacWest released a statement confirming that it was talking to potential investors and partners.
“The company will continue to evaluate all options to maximize shareholder value,” the bank said in its statement.
“The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news,” the statement read.
PacWest said that its core customer deposits have increased since March 31, with total deposits totaling $28 billion as of May 2.
The bank said that its insured deposits total 75% — up from 71% at quarter end and 73% as of April 24.
PacWest also said that it “paid down $1 billion of borrowings with our excess liquidity.”
“Our cash and available liquidity remains solid and exceeded our uninsured deposits, representing 188% as of May 2, 2023,” the bank said.
In the last year, PacWest’s stock is down by more than 80%.
In February of last year, the share price exceeded $48.
As of early Thursday morning, PacWest stock was listed on the Nasdaq at $6.42 per share.
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