Why Shares of PacWest Bancorp Are Plunging Today

What happened

Shares of PacWest Bancorp (PACW) traded roughly 24% lower as of 11:51 a.m. ET today after the bank disclosed in a regulatory filing that deposits declined by about 9.5% during the week ended May 5.

So what

PacWest has been the most pressured stock in the banking sector since the collapse, seizure, and subsequent sale of First Republic Bank last week. In the filing, the bank said this event "heightened market and customer fears of additional bank failures, including PacWest."

Furthermore, the bank said that subsequent media reports on May 3 of the bank exploring strategic options and speaking with potential partners and investors led to a big sell-off of the stock and increased concerns among the bank's customers, which prompted deposit outflows. PacWest added that the majority of the deposit outflows it witnessed occurred on May 4 and May 5 right after the media reports. 

PacWest replaced these deposits with on-balance sheet liquidity and also said the bank pledged more assets to increase its borrowing capacity from the Federal Reserve's discount window on May 10.

PacWest also said in its quarterly filing that it had completed $431 million of loan sales as of May 5 and also designated $384 million of loans to be held for sale, while recognizing $12.2 million of these loans as likely loan losses. The company has previously discussed selling assets to boost its capital levels.

Now what

It's certainly unfortunate to see media reports and social media impacting banks like PacWest so significantly. Essentially, depositors are hearing about trouble at the bank, seeing the stock decline, and then moving their deposits out of an abundance of caution.

While I do think the bank can survive and rebound if it can get deposits to stabilize, which is certainly possible, the situation is still very risky, given these new dynamics with banking and social media.

For this reason, I think there are better risk-reward propositions elsewhere in the banking sector, and wouldn't recommend anything other than a small, speculative position here.