Rising Expenses Likely Slashed PacWest Earnings by a Third

Exponentially higher interest costs probably took a toll on first-quarter results

Pacific Western Bank headquarters in Beverly Hills, CA, USA.

JHVEPhoto / Getty Images

Rising expenses, primarily from soaring interest costs, likely reduced PacWest Bancorp's (PACW) profit by about a third in the first quarter.

Key Takeaways

  • Analysts estimate PacWest's interest expenses increased 20-fold in the first quarter.
  • Revenue likely fell along with net interest income.
  • Total deposits likely dropped during the quarter, but interest-bearing deposits probably rose slightly from the same period a year ago.

PacWest, one of several California-based regional banks investors scrutinized in the wake of Silicon Valley Bank's demise last month, likely will report net income of $78.9 million, or 66 cents a share, according to estimates compiled by Visible Alpha. The bank earned $119.8 million, or $1.02 per share, in the same period a year ago.

Consensus projections peg the company's revenue at $316.2 million, down 5% from last year's first quarter. The expected decline reflects a projected 9% drop in net interest income to $285.4 million from $312.7 million. The bank will report earnings after markets close Tuesday.

PacWest Key Stats
   Q1 2023 (est)  Q1 2022  Q1 2021
Adjusted EPS ($)  0.66  1.02  1.32
Revenue ($M)  316  333  309
Interest Expense ($M)  268  14  12
Source: Visible Alpha

Interest Costs Soar

Rising interest rates creating losses for banks' bond investments led to the failure of Silicon Valley Bank and New York-based Signature Bank. But that's not how rising rates hurt PacWest during the quarter.

Instead, higher rates likely caused an almost 20-fold increase in the bank's interest expense. Higher interest rates likely boosted interest income, too, but only by about 60%. Consequently, the bank's net interest income, accounting for about 90% of its revenue, probably shrank.

Meanwhile, the company's non-interest expenses also likely rose by 15%, reflecting inflationary impacts on compensation, insurance premiums, fees, and other costs.

PacWest is expected to have set aside $10 million for loan losses, compared with no such provisions a year ago. While non-performing loans likely increased 64% to $109 million, that's still less than 1% of the bank's $28.5 billion loan portfolio.

Customers drained deposits from some banks during March's banking turmoil, and PacWest's total deposits likely fell 17% between the beginning and the end of the quarter. But interest-earning deposits probably dropped just 13% over the quarter and likely will remain 3% higher than a year ago.

PacWest's shares have lost 50% of their value so far this year, most of it being lost amid frenzied concern about unrealized balanced sheet losses in the banking system. The S&P Bank Select Industry index fell 17%.

Total return of PacWest stock, the S&P 500, and the S&P Banks Select Industry Index.
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  1. Visible Alpha. "Financial Data."

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