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Why These 2 Bank Stocks Are Soaring Late Tuesday

Motley Fool - Tue Jul 25, 8:27PM CDT

The stock market continued its upward run on Tuesday, lifted by optimism about how earnings season is going. Even though the Federal Reserve is likely to raise interest rates when it completes its two-day meeting on Wednesday, investors seem comfortable with the idea that the monetary policy tightening cycle is coming to an end. Gains were largest for the Nasdaq Composite (NASDAQINDEX: ^IXIC), but the Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) also moved upward.

Index

Percentage Change

Point Change

Dow Jones Industrials

+0.08%

+27

S&P 500

+0.28%

+13

Nasdaq Composite

+0.61%

+86

Data source: Yahoo! Finance.

Even with some big tech stocks releasing their latest financial results after the closing bell, a pair of regional bank stocks captured the attention of investors. Both PacWest Bancorp (NASDAQ: PACW) and Banc of California (NYSE: BANC) said that they're looking to join forces to fight the pressures hitting the regional banking industry right now.

What the PacWest deal looks like

PacWest and Banc of California announced after the closing bell that they had agreed to a merger. Under the terms of the all-stock deal, PacWest shareholders will receive 0.6569 shares of Banc of California stock for each of their PacWest shares. Following the merger, the Banc of California name will survive.

The two banks argue that their merger will create the top business banking franchise within the California financial services market. The post-merger bank would have $36.1 billion in assets, $25.3 billion in loans, $30.5 billion in deposits, and more than 70 branches across the state. With the increased scale that the combination of the two banks will bring, PacWest and Banc of California anticipate that they'll be better able to capture opportunities as they arise, as well as broaden the scope of the services they provide to their customers.

At the same time, the two banks said that institutional investors Warburg Pincus and Centerbridge Partners would make a substantial capital infusion into the post-merger entity. With a combined $400 million in new cash, Banc of California should be able to sell assets in order to repay borrowed funds. A hedging transaction should help to protect against any further interest rate risk. After all of these actions have taken place, the bank anticipates that its pro forma common equity tier 1 ratio should exceed 10%, which would reflect a healthier balance sheet.

Best of all, Banc of California expects that the deal should be accretive to earnings and tangible book value by 2024. That makes the merger compelling, even though PacWest has seemed to face greater challenges than some of its regional bank peers in recent months.

What's next for regional banks?

The deal helped both stocks. PacWest climbed 31% after hours, while Banc of California got a 9% boost.

Some other regional bank stocks also climbed on the news. Western Alliance Bancorporation (NYSE: WAL) was up 8% after hours late Tuesday, regaining all of the 6% drop that the stock suffered during the regular trading session. To a large extent, investors had essentially figured that the worst for Western Alliance was behind it, although its stock hasn't come close to regaining all the ground it lost during the initial stages of the regional banking crisis in March.

Other bank stocks saw more modest gains. KeyCorp (NYSE: KEY) climbed almost 4% in after-hours trading, while Zions Bancorporation (NASDAQ: ZION) settled for a 3% gain.

At this point, investors need to watch how banks operate in the current environment. With such extensive losses on bond holdings for many regional banks, the danger is that a sudden outflow of deposits could leave banks having to realize those losses. If joining forces can help banks avoid that fate, then you could see more deals like the one PacWest and Banc of California agreed to on Tuesday.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Western Alliance Bancorporation. The Motley Fool has a disclosure policy.

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