PacWest Bancorp Announces Results for the Third Quarter

Highlights

• Net Earnings of $93.9 Million, or $0.77 Per Diluted Share
• New Loan and Lease Production of $1.1 Billion for the Quarter; $101 Million of Net Loan Growth
• Core Deposit Increase of $599 Million during the Quarter Representing 77% of Total Deposits
• Tax Equivalent Net Interest Margin of 5.26%; Core Tax Equivalent Net Interest Margin of 5.08%

LOS ANGELES, Oct. 18, 2016 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq: PACW ) today announced net earnings for the third quarter of 2016 of $93.9 million, or $0.77 per diluted share, compared to net earnings for the second quarter of 2016 of $82.2 million, or $0.68 per diluted share.  The increase in net earnings was due to the elimination of FDIC loss sharing expense, a lower provision for credit losses and a lower effective tax rate as compared to the second quarter of 2016. 

Matt Wagner, President and CEO, commented, “We are very pleased with our strong third quarter results which produced a return on assets of 1.77% and a return on tangible equity of 16.15%. While the current quarter benefited from lower credit costs and a lower effective tax rate, we continue to demonstrate our sustained earning power.”

Patrick Rusnak, Executive Vice President and CFO stated, “Our third quarter core tax equivalent NIM, which excludes accelerated accretion, decreased three basis points to 5.08% and our NIM excluding all purchase accounting items decreased two basis points to 4.98%. We are pleased with how our NIM has held up during this sustained period of low interest rates.”

Mr. Rusnak continued, “Third quarter loan growth fell below expectations due largely to dramatically higher prepayments in our healthcare real estate portfolio, which totaled approximately $200 million for the quarter, resulting from both refinancings and property sales. The solid originations from other lending groups, in particular Venture Banking and Construction, give us confidence that future-period loan growth will return to more normalized levels. Although nonaccrual loans increased due to the migration of a single, classified loan to nonaccrual status, total classified loans and leases decreased on a linked quarter basis as several previously classified loans paid off in full.”

Mr. Wagner continued, “Over the past few years we have significantly strengthened our company through execution on a strategy focused on profitable growth and prudent risk management. This performance, our initial DFAST stress test submission and robust capital levels have allowed the Board to authorize a stock repurchase program which provides another tool to actively manage capital levels and facilitate improved shareholder returns.”

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $0.9 million to $234.6 million in the third quarter of 2016 compared to $233.8 million in the second quarter of 2016 due to the combination of higher average loan and lease balances, higher nonaccrual interest recoveries and one additional day in the period offset by lower discount accretion on acquired loans and a lower loan and lease yield.  Total accretion on acquired loans was $14.2 million in the third quarter of 2016 (39 basis points on the loan and lease yield) compared to $16.2 million in the second quarter of 2016 (45 basis points on the loan and lease yield).  The loan and lease yield for the third quarter of 2016 was 6.17% compared to 6.24% for the second quarter of 2016.  The decrease in the loan and lease yield was due to the lower accretion on acquired loans and a lower yield on new production relative to the current portfolio yield. Excluding accelerated accretion, the core loan and lease yield was 5.94% in the third quarter compared to 5.97% in the second quarter.   

The tax equivalent NIM for the third quarter of 2016 was 5.26% compared to 5.33% for the second quarter of 2016.  The decrease in the NIM was mostly due to lower accretion on acquired loans. Such accretion contributed 31 basis points to the NIM in the third quarter of 2016 and 36 basis points to the NIM in the second quarter of 2016.  Excluding accelerated accretion, the core tax equivalent NIM was 5.08% for the third quarter compared to 5.11% for the second quarter.

Included in net interest income for the third quarter of 2016 was $3.0 million of interest resulting from the payoff in full of a nonperforming loan. This recovery contributed seven basis points to the third quarter 2016 NIM and eight basis points of loan and lease yield for the third quarter of 2016.      

The cost of total deposits decreased to 0.19% in the third quarter from 0.20% in the second quarter due to a lower average cost and balance of time deposits.

The tax equivalent NIM and loan and lease yield are impacted by volatility in accelerated accretion of acquisition discounts due to the prepayment of acquired loans and leases. The effects of this item are shown in the following table for the periods indicated:

The impact on the tax equivalent net interest income and NIM from all purchase accounting items is set forth in the table below for the periods indicated:

Noninterest Income

Noninterest income increased by $4.8 million to $26.9 million for the third quarter of 2016 compared to $22.1 million for the second quarter of 2016 due mostly to a $6.5 million decrease in FDIC loss sharing expense and a $1.5 million increase in other commissions and fees offset by decreases in dividends and gains on equity investments and foreign currency translation net gains. The lower FDIC loss sharing expense was due to the early termination of all FDIC loss share agreements for which a $6.0 million pre-tax charge was recognized in the second quarter.  Other commissions and fees increased due to higher prepayment and other loan-related fees. These items were offset by lower dividends and gains on equity investments of $1.8 million and lower foreign currency translation net gains of $0.5 million.

The following table presents details of noninterest income for the periods indicated:

Noninterest Expense

Noninterest expense increased by $0.6 million to $110.7 million for the third quarter of 2016 compared to $110.1 million for the second quarter of 2016.  The expense category with the highest increase was other professional services, which increased $1.2 million primarily due to higher legal expense. 

The following table presents details of noninterest expense for the periods indicated:

Income Taxes

The overall effective income tax rate was 34.1% in the third quarter of 2016 and 37.7% in the second quarter of 2016. The effective rate for the third quarter was lower due to certain discrete items associated with completion of the 2015 tax returns. The expected effective tax rate for the full year 2016 is approximately 37.5%.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases increased by $101.4 million in the third quarter to $14.7 billion at September 30, 2016.  The net increase was driven by third quarter originations and purchases of $1.1 billion, offset partially by principal repayments of $932.9 million.     

The following table presents a roll forward of the loan and lease portfolio for the periods indicated:

The following table presents the composition of our loan and lease portfolio as of the dates indicated:

Loan growth in the third quarter came primarily from the construction, venture capital and consumer portfolios. These same portfolios also accounted for most of the growth in our unfunded commitments during the quarter.

Deposits and Client Investment Funds

The following table presents the composition of our deposit portfolio as of the dates indicated:

At September 30, 2016, core deposits totaled $12.0 billion, or 77% of total deposits, including $6.5 billion of noninterest-bearing demand deposits, or 42% of total deposits. 

In addition to deposit products, we also offer alternative non-depository cash investment options for select clients; these alternatives include investments managed by Square 1 Asset Management, Inc. (“S1AM”), our registered investment advisor subsidiary, and third-party sweep products.  Total client investment funds at September 30, 2016 were $1.4 billion, of which $1.1 billion was managed by S1AM.

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

A provision for credit losses of $8.5 million was recorded in the third quarter of 2016 compared to $13.9 million in the second quarter of 2016.  The third quarter provision consisted of $8.0 million for non-purchased credit impaired (“Non-PCI”) loans and leases and $0.5 million for PCI loans. The allowance for Non-PCI credit losses to Non-PCI loans and leases coverage ratio increased to 1.05% at September 30, 2016 from 1.03% at June 30, 2016. 

The following tables show roll forwards of the allowance for credit losses for the periods indicated:

The lower third quarter 2016 provision was due in part to a $4.8 million increase in recoveries of previously charged off loans.  The third quarter 2016 Non-PCI charge-offs included $9.7 million of loans and leases that had specific reserves in the allowance for credit losses at June 30, 2016.

All acquired loans are recorded initially at their estimated fair value including an estimate of credit losses. The table below presents two alternative views of credit risk coverage ratios for Non-PCI loans reflecting adjustments for acquired loans and leases and associated purchase accounting discounts:

Non-PCI loans and leases at September 30, 2016 included $10.1 billion of originated loans and leases that were not obtained through acquisitions. The related allowance for loan and lease losses totaled $93.2 million, or 0.93% of the outstanding balance.

CREDIT QUALITY

The following table presents Non-PCI loan and lease credit quality metrics as of the dates indicated:

The increase in nonaccrual loans and leases during the third quarter of 2016 was largely the result of a classified $50 million healthcare real estate loan secured by a continuing care retirement facility which migrated to nonaccrual status due to continued weak operating performance and cash flow difficulties. This loan is current with respect to principal and interest payments as of the date of this release and the borrower is actively pursuing viable options for additional liquidity. Total classified loans and leases decreased by $23.5 million in the third quarter as resolutions, including repayment in full of four loans totaling $49.9 million, exceeded new downgrades.

Credit Exposure Affected by Low Oil Prices

At September 30, 2016, we had 14 outstanding loan and lease relationships totaling $101.7 million to borrowers involved in the oil and gas services industry, down from $116.9 million at June 30, 2016.  The collateral for this credit exposure includes primarily equipment, such as drilling equipment and transportation vehicles.  The reserves related to this credit exposure total approximately 14% of the related balance.  At September 30, 2016, two relationships totaling $40.3 million were on nonaccrual status and were classified, down from five relationships totaling $48.5 million at June 30, 2016.   The largest of these relationships had an aggregate outstanding balance of $39.9 million at September 30, 2016.  Of the $8.2 million decrease in nonaccrual classified oil and gas loans in the third quarter, $6.7 million was charged off (all were fully reserved at June 30, 2016) and $1.5 million was collected.   

The following table presents Non-PCI nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by portfolio segment and class as of the dates indicated:

The following table presents nonperforming assets as of the dates indicated:

SALE OF BRANCHES

On October 3, 2016, the Company announced that Pacific Western Bank had entered into a definitive agreement to sell two branches to First Foundation Bank (the “Transaction”).  The branches are located in Laguna Hills and Seal Beach, California (the “Branches”).  As of September 30, 2016, the deposits of the Branches totaled approximately $200 million, principally comprised of time deposits.  No loans are being sold in connection with the Transaction.  The Transaction is expected to be completed during the fourth quarter of 2016 subject to regulatory approval and customary closing conditions.

STOCK REPURCHASE PROGRAM

On October 17, 2016, PacWest’s Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. The common stock repurchases may be effected through open market purchases or in privately negotiated transactions, and may utilize any derivative or similar instrument to effect share repurchase transactions (including without limitation, accelerated share repurchase contracts, equity forward transactions, equity option transactions, equity swap transactions, cap transactions, collar transactions, floor transactions or other similar transactions or any combination of the foregoing transactions).

The Stock Repurchase Program expires on December 31, 2017. The amount and exact timing of any repurchases will depend upon market conditions and other factors. There are no assurances the Company will repurchase any shares during the period and the Stock Repurchase Program may be suspended or discontinued at any time.

ABOUT PACWEST BANCORP

PacWest Bancorp (“PacWest”) is a bank holding company with over $21 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (“Pacific Western”). The Bank has 79 full-service branches located throughout the state of California and one branch in Durham, North Carolina. Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses.  Pacific Western offers additional products and services under the brands of its business groups, CapitalSource and Square 1 Bank. CapitalSource provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle market businesses on a national basis.  Square 1 Bank offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. For more information about PacWest Bancorp, visit www.pacwestbancorp.com , or to learn more about Pacific Western Bank, visit www.pacificwesternbank.com . 

FORWARD LOOKING STATEMENTS

This release contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our profitability, loan and lease portfolio growth, capital management, including reducing excess capital, effective tax rates, and branch sale. All statements contained in this release that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:

• changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;
• loan repayments higher than expected;
• higher than anticipated delinquencies, charge-offs, and loan and lease losses;
• compression of spreads on newly originated loans and leases;
• the impact of asset/liability repricing risk and liquidity risk on net interest margin and the value of investments;
• higher than anticipated increases in operating expenses;
• increased costs to manage and sell foreclosed assets;
• reduced demand for our services due to strategic or regulatory reasons;
• our inability to grow deposits or access wholesale funding sources;
• legislative or regulatory requirements or changes could negatively impact our business including an increase to capital requirements;
• the need to retain capital for strategic or regulatory reasons;
• the financial performance of the Company;
• stock price fluctuations;
• credit quality deterioration or pronounced and sustained reduction in market values or other economic factors which adversely affect our borrowers’ ability to repay loans and leases and/or require an increased provision for loan and lease losses;
• changes in tax laws or regulations affecting our business;
• tax planning or disallowance of tax benefits by tax authorities;
• changes in tax filing jurisdictions or entity classifications;
• our ability to obtain regulatory approvals and meet other closing conditions to the branch sale on the expected terms and schedule; and
• other risk factors described in documents filed by PacWest with the U.S. Securities and Exchange Commission (“SEC”).

All forward-looking statements included in this release are based on information available at the time of the release. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.