PacWest plans to shrink assets, make 'significant expense reductions'

Morgan Lieberman/Bloomberg

A decline in deposits during the banking crisis and a likely drop in assets over the coming months have prompted PacWest Bancorp to speed up its plan to cut costs.

PacWest, based in Beverly Hills, California, is looking at an array of potential areas for expense reductions, including facilities, employee headcount and vendor relationships, it said Wednesday.

The $44 billion-asset parent company of Pacific Western Bank is planning for a future with a smaller balance sheet in part because of the fallout from the March banking crisis. PacWest lost almost $6 billion in deposits during the first quarter, when spooked customers moved their money elsewhere.

On the other side of the balance sheet, PacWest is planning to sell certain assets, and its total assets are expected to fall to about $35 million.

"We've got a smaller balance sheet, so we absolutely need to accelerate the expense reduction plan," Chief Executive Officer Paul Taylor said on a call with analysts Wednesday morning. "You will continue to see, throughout the year, significant expense reductions."

Even before it was impacted by last month's crisis, PacWest had already begun to chip away at its expenses. The company encouraged a number of early retirements in the fourth quarter, executives said, and reduced headcount by about 200 in its mortgage subsidiary, Civic Financial, in the first quarter.

The largest item expected to come off PacWest's balance sheet is its $2.7 billion lender finance portfolio, which it expects to sell in the near term.

"We don't have a contractual sale in place," Taylor said. "But there does appear to be some real, genuine interest there."

PacWest has grown its deposits by about $1.8 billion in recent weeks, according to first-quarter results. Total deposits stood at $28.9 billion as of April 24, up from $27.1 billion on March 20, after it suffered large deposit outflows during the banking crisis. Deposits remain well below their fourth-quarter 2022 level of $33.9 billion.

But much of the recent deposit inflows have been "higher-cost deposits," David Chiaverini, a Wedbush analyst, wrote in a research note.

That trend could weigh on the bank's net interest margin. The margin fell to 2.89% in the first quarter, down from 3.41% in the fourth quarter and below analysts' forecasts.

Still, investors interpreted the results positively, boosting the bank's share price by more than 14%, to $11.79, in midday trading Wednesday.

PacWest reports steady deposit growth over last several weeks

During PacWest's earnings call, the bank's management team provided a clearer picture of borrowing sources the bank used to shore itself up during the crisis. PacWest said it borrowed from the Federal Home Loan Bank of San Francisco and the Federal Reserve's discount window. The bank also used the Fed's Bank Term Funding Program, which Taylor called "fantastic" and "very favorable."

PacWest plans to raise its common equity Tier 1 capital ratio to 10% over the next few months, executives said. The bank's capital level was 9.22% at the end of the first quarter, up from 8.70% at the end of 2022.

The bank isn't the first affected by the crisis to outline plans to increase its capital. Western Alliance Bancorp last week said it would boost its capital ratio to 11% to insulate against future liquidity issues.