Doom Loop
Doom Loop
PacWest, Western Alliance and all the other banks
PacWest is a relatively new bank, as banks go. In June 2000, two very small Californian lenders merged to form First Community Bancorp. One of them operated just four branches in San Diego County; the other operated five in the area around Palm Springs. Combined, they had $305 million of deposits.
Over the next twenty years, First Community Bancorp went on an acquisition spree. Months after listing on the Nasdaq stock exchange, it used its currency to buy a bank in West Los Angeles. The following year, it bought six more banks including Pacific Western National Bank with branches in Los Angeles and Orange County. In 2006, it deployed the Pacific Western brand across its franchise and two years later abandoned First Community as its holding company name in favor of PacWest Bancorp. By then, it had bought 17 banks across California.
The global financial crisis presented PacWest with an opportunity, allowing it to pick up failed banks that fell into the hands of the Federal Deposit Insurance Corporation. It bought three of them and by the end of its first decade in the banking business, had grown to manage 77 branches and $4.6 billion of deposits.
But it was in its second decade that growth really took off. “Our management team has extensive expertise and a successful track record in evaluating, executing and integrating attractive, franchise-enhancing acquisitions,” the bank proclaimed. It progressed to larger deals, including a $2.3 billion purchase of commercial lending firm CapitalSource and an $850 million purchase of Square 1 Financial, “a commercial bank focusing on technology with entrepreneurs nationwide”. By the end of 2022, PacWest had done 31 acquisitions and sat on $33.9 billion of deposits.
Smashing together so many banks wasn’t without its problems. Alongside “the long history of acquisitions that brought us great customers and talented employees,” new CEO Paul Taylor admitted in January that so many deals also brought “varied processes and different cultures.” Earnings declined in 2022 and in the five years through to the end of the year, the stock was down 55%, underperforming the regional banking index which was flat.
Taylor put the brakes on growth. “We will simplify and improve our processes to deliver an even higher level of service to our customers,” he told investors in January. He announced an exit from two business lines – asset-based premium finance and multifamily lending – as well as the restructuring of a specialist home lending subsidiary.
Underlying the shift, he needed to shore up the balance sheet of PacWest. By the end of 2022, the group was sitting on a pretty low common equity tier 1 ratio of 8.70%. For every $100 of risk-weighted assets (and the group had $33 billion of risk-weighted assets), it maintained just $8.70 of capital. Although in excess of the 7.0% required by regulators to maintain a minimum capital conservation buffer, it didn’t leave much room for maneuver. Taylor’s goal was to get that ratio up to 10% (still lower than other banks).
“We are operating with a sense of urgency,” he told investors on his January call. He knew it wouldn’t be easy: “There are real challenges ahead with rising interest rates.”
And then Silicon Valley Bank happened.