On July 25, PacWest Bancorp (PACW) faced a sudden flash crash, causing significant alarm as its shares plummeted by a staggering 27%. The stock’s value nosedived from $10.33 to a worrisome low of $7.50 during late trading, prompting concerns within the finance and cryptocurrency communities alike.
As news of the sharp decline spread, speculations arose, with some questioning if this incident signalled the beginning of another banking collapse. However, to the relief of investors, share prices swiftly rebounded during after-hours trading and were valued at a more reassuring $10.10 at the time of reporting.
The rapid recovery was attributed to a major announcement regarding a merger between PacWest Bancorp and its smaller competitor, the Banc of California. Both banking institutions seemed to be taking this strategic step to fortify themselves amidst the turmoil that rocked the banking industry earlier in 2023.
The merger was structured as an all-stock deal and gained support from two prominent private-equity firms, Warburg Pincus and Centerbridge, who committed to injecting $400 million in equity, securing roughly a 19% stake in the newly combined business.
With the merger, the two banks’ combined assets are projected to reach approximately $36 billion, with total loans exceeding $25 billion. PacWest Bancorp’s market capitalization stood at around $1.2 billion, while Banc of California’s was approximately $764 million, resulting in a combined market cap of approximately $2 billion.
As part of the merger terms, PacWest shareholders were set to receive 0.66 shares of Banc of California common stock. Furthermore, the merged company pledged to repay approximately $13 billion in wholesale borrowings through strategic asset sales.
PacWest Bancorp has encountered some challenges in recent times, facing a significant plunge of over 60% in May, sparking worries that the bank could be at risk of failure, following the collapses of other financial institutions such as Silicon Valley Bank, Signature Bank, and First Republic Bank earlier in the year.
In response to the ongoing financial situation and the potential risks in the banking sector, the Federal Reserve’s emergency bank bailout loan facility, the Bank Term Funding Program (BTFP), has reached record highs, surpassing a notable $100 billion in late June. This program aims to provide support and stability during turbulent economic times.