That collective sigh of relief you heard when JPMorgan Chase & Co. (NYSE: JPM) purchased the assets of First Republic Bank has morphed into panic. Another regional bank, PacWest Bancorp (NASDAQ: PACW) confirmed that it’s in discussions with investors. 

Shares of California-based PacWest opened more than 41% lower on May 4, as the bank said it was considering various options. In addition to garnering further investment, options could include a sale of assets. 

Meanwhile, First Horizon Corp. (NYSE: FHN) was breaking down after the announcement that its $13 billion acquisition by TD Bank (NYSE: TD) is off. In a jointly issued news release, the companies said, “TD informed First Horizon that TD does not have a timetable for regulatory approvals to be obtained for reasons unrelated to First Horizon.  Because there is uncertainty as to when and if these regulatory approvals can be obtained, the parties mutually agreed to terminate the merger agreement.”

That’s very vague, and comes at a time when skepticism about the financial health of regional banks is rampant. 

PacWest Says Withdrawals Stablized

Meanwhile, in its own news release, PacWest said it wasn’t experiencing an unusual level of withdrawals, the fact that it’s in discussions with potential investors or purchasers indicates managers and board members see some kind of trouble.  

In a news release posted late May 3, PacWest said, “In accordance with normal practices the Company and its Board of Directors continuously review strategic options. Recently, the Company has been approached by several potential partners and investors - discussions are ongoing. The company will continue to evaluate all options to maximize shareholder value.”

It went on to say, “The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news. Core customer deposits have increased since March 31, 2023, with total deposits totaling $28 billion as of May 2, 2023 with insured deposits totaling 75% vs. 71% at quarter end and 73% as of April 24, 2023. In addition, the company recently 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.”

Stock Decline Began A Year Ago

PacWest’s price decline began over a year ago. The stock is down -77.93% on a one-year basis. In the past week, shares plunged -42.06%.

The company began issuing updates on its financial conditions in the week following the Silicon Valley Bank collapse, but that obviously wasn’t enough to reassure markets.

Regional banks, as a whole, are among the market’s worst performers. In addition to PacWest and First Horizon, one of the biggest downside movers on May 4 was Western Alliance Bancorporation (NYSE: WAL), which skidded 19% at the open.

In recent earnings reports, both PacWest and Western Alliance noted nothing out of the ordinary, and both said deposit outflows were stable. Nonetheless, we’re at a moment where human emotions, not just algorithms, are controlling price action of regional banks, as investors are nervous about which domino will be next to fall.

Concerns About Deposit Protection

One very real concern: Would deposits above $250,000 be protected if banks failed? Although that angle has gotten a lot of press, very few individuals or couples actually park more than $250,000 in cash at a bank. It’s a bigger risk for small businesses that need plenty of cash readily available to meet payroll and other regular expenses. 

For example, PacWest is geared toward businesses. It serves venture capital and private equity investors. While those businesses don’t get much sympathy from the general public, they still have obligations to workers and vendors, and it’s understandable if those businesses pull funds. PacWest also has been growing its business with homeowners’ associations, which also have regular expenses and can’t risk their money evaporating.

Markets Not Convinced

Despite reassurances from luminaries including JPMorgan Chase CEO Jamie Dimon, Federal Reserve chair Jerome Powell and even President Biden, markets and the general public aren’t convinced of the safety of the banking system right now. 

Although the crisis is centered on regional banks, and there’s reason to believe “too big to fail” remains in place with the larger banks, the S&P 500 large-cap financial sector was down 1.35% on May 4, leading the S&P lower.