What happened
Shares of PacWest Bancorp (PACW) traded roughly 10% lower as of 12:08 p.m. ET on Wednesday after the bank provided an update on deposit flows and announced that it would not pursue a capital raise, despite exploring the idea.
So what
PacWest has been one of the banks that investors have been watching very closely following the collapse of SVB Financial due to its exposure to the venture capital (VC) space, which made up about a third of the bank's total deposits at the end of 2022.
In its update, PacWest said deposits have declined from about $34 billion at the end of 2022 to roughly $27.1 billion as of March 20. About $5 billion of that decline was associated with PacWest's VC clients, while the bank also saw about a $1.8 billion decline among its community-banking customers.
Analysts from RBC Capital Markets believe some of the outflows in community banking are due to the intense media exposure surrounding the bank since the SVB collapse. They also noted that PacWest does tend to see seasonal deposit outflows in the first quarter of the year.
PacWest also said that cash balances of $11.4 billion currently exceed its $9.5 billion of uninsured deposits. Roughly 65% of the bank's deposits are now insured by the Federal Deposit Insurance Corporation. In order to bolster liquidity, PacWest has drawn on $3.5 billion of borrowings from the Federal Home Loan Bank, $10.5 billion from the Federal Reserve's discount window, and $2.1 billion from the Bank Term Funding Program created by the Fed in the wake of SVB's and Signature Bank's collapse.
PacWest has also gotten $1.4 billion of cash through a financing vehicle from Atlas SP Partners. Interestingly, PacWest noted that is has seen 130 new accounts opened in its venture banking business since March 9.
While management did explore a capital raise, it said that it ultimately did not pursue one "in light of the current volatility in the market and depressed market prices for regional bank stocks, as well as the availability of other options to enhance capital."
Now what
There's definitely a lot to digest here. On one hand, I think it's good news that PacWest was able to secure liquidity from a private firm, showing that there is confidence in the bank. The decision not to pursue a capital raise is also good news because it shows the bank doesn't need it.
However, the deposit outflows are not exactly reassuring, although it's not surprising to see VC funds fleeing, given everything that has happened. I also think investors are going to have concerns about PacWest drawing on the Fed's discount window and the BTFP. These programs are intended to enhance liquidity, but they also tend to create the perception that a bank is having liquidity issues.
I'm cautiously optimistic that PacWest survives, but the bank is looking at earnings struggles in the near term because of the higher-cost funding it is bringing onto its balance sheet. I would like to see conditions further stabilize and I believe there are better risk-reward opportunities in the banking sector.
