Commercial lender PacWest suffers from bank contagion

Pacific Western Bancorp, a Beverly Hills-based regional bank and commercial real estate lender, has proven its not immune to the fallout of First Republic Bank and the bank contagion that has led to waves of deposit outflows across the country. 

PacWest’s stock price plummeted more than 25 percent on Tuesday, a day after the Federal Deposit Insurance Corporation seized and sold First Republic Bank to JPMorgan Chase. The plummet was worse than other regional banks — the KBW Regional Banking Index dropped almost 6 percent on Tuesday. 

The share price for PacWest dropped to $6.68 by the market close on Tuesday — well below its historic low of $9.78 a share in 2009. 

PacWest is smaller than First Republic Bank with about $41 billion in assets. However, almost 80 percent of its loan book is dedicated to commercial real estate-backed loans and residential mortgages. 

In the first quarter, PacWest had about $3.8 billion in commercial loans, $5.5 billion in multifamily loans and $15.4 billion in residential mortgages, it disclosed in a first-quarter earnings release last month. It also held about $4.6 billion in construction loans for both commercial and residential properties.

After PacWest released its earnings last month, an analyst note from Raymond James said the bank had survived “the worst of the recent banking crisis,” a reference to the collapse of Silicon Valley Bank and Signature Bank in March. But the note added that PacWest’s share price “will remain volatile until we gain more clarity on the bank’s future.” 

During the quarter, PacWest lost about 10 percent of its deposits — a metric that was better than originally expected, and substantially better than First Republic Bank, which lost nearly half of its deposits in the same period. 

The closure of First Republic has left what some industry insiders have called a “gaping hole” in multifamily lending. Any time a lender exits the market, it gives other banks the opportunity to sweep in and offer less competitive loan terms. 

Similar to First Republic, PacWest struggled during the quarter with rising expenses which shrunk net interest income, calculated as income from interest on loans minus the interest the bank has to pay out on customer deposits and other liabilities. 

In the first quarter, PacWest reported $279.3 million in net interest income, down from $322.9 million in the fourth quarter of last year, according to its earnings release. 

However, the bank has more commercial real estate and construction loans on its books compared to residential mortgages — two segments that charge higher interest rates, allowing it to make more money on interest from those loans. 

Also, PacWest plans to sell off some of its assets to boost liquidity. The firm has already marketed its $2.7 billion lender finance division for sale, CEO Paul Taylor said in a release. 

Western Alliance Bank, another regional lender based in Phoenix, also suffered steep stock losses on Tuesday, sinking about 14 percent as of market close. The bank ended the day at $31.45 per share.

Western Alliance holds about $11.4 billion worth of commercial real estate loans and about $15 billion in residential mortgages, according to its first quarter earnings release.