Rising Expenses Likely Slashed PacWest Earnings by a Third

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

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.

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%.