Press Release

PacWest Bancorp Announces Results for the Fourth Quarter and Full Year 2017

Company Release - 1/18/2018 7:00 AM ET

Fourth Quarter 2017 Highlights

  • CU Bancorp (“CUB”) Acquisition Closed October 20, 2017
  • Sold $1.5 Billion of Cash Flow Loans
  • Net Earnings of $84.0 Million, or $0.66 Per Diluted Share
  • New Loan and Lease Production of $1.6 Billion and Annualized Growth Excluding Acquired and Sold Loans of 17%
  • Classified Loans and Leases Reduced by 19%
  • Tax Benefit of $1.2 Million from Enactment of Tax Cuts and Jobs Act

Full Year 2017 Highlights

  • Net Earnings of $357.8 Million, or $2.91 Per Diluted Share
  • New Loan and Lease Production of $4.7 Billion and Growth Excluding Acquired and Sold Loans of 7%
  • Core Deposits Growth of $3.4 Billion, Including $2.7 Billion from CUB Acquisition
  • Tax Equivalent Net Interest Margin of 5.10%
  • Classified Loans and Leases Reduced by 32%

LOS ANGELES, Jan. 18, 2018 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) today announced net earnings for the fourth quarter of 2017 of $84.0 million, or $0.66 per diluted share, compared to net earnings for the third quarter of 2017 of $101.5 million, or $0.84 per diluted share.  Net earnings for the full year 2017 were $357.8 million, or $2.91 per diluted share, compared to net earnings for the full year 2016 of $352.2 million, or $2.90 per diluted share.

The decrease in net earnings from the prior quarter was due primarily to higher noninterest expense, higher income tax expense and lower noninterest income offset by higher net interest income and a lower provision for credit losses.  Noninterest expense for the fourth quarter of 2017 was higher mainly due to an increase in acquisition, integration and reorganization costs of $14.6 million related to the CUB acquisition and integration. Income tax expense for the fourth quarter of 2017 was higher as the third quarter of 2017 reflected a $13.6 million reversal of a valuation allowance related to tax credits, while the fourth quarter reflected a $2.0 million increase in the valuation allowance. Noninterest income for the fourth quarter of 2017 declined mainly due to the tax-related decision to sell certain securities resulting in a loss for the quarter of $3.3 million.

Matt Wagner, President and CEO, commented, “Although the fourth quarter included several significant items, the benefits of the CUB acquisition for our future profitability were apparent in our fourth quarter results. Interest income on loans and leases increased 10% over the prior quarter, core deposits increased to 85% of total deposits, and the CUB integration as well as the vast majority of cost save initiatives were achieved in December. We are on track to achieve the remainder of our targeted expense savings during the first quarter of 2018.”

Mr. Wagner continued, “Our organic loan growth of $684 million in the fourth quarter was the strongest of the year. The fourth quarter sale of $1.5 billion in cash flow loans and the exit from the CapitalSource Division origination operations related to general, technology, and healthcare cash flow loans allows us to focus on profitably growing our other businesses.”

Mr. Wagner added, “The strong fourth quarter capped a year of profitable growth and continued our solid operating performance resulting in a 2017 return on assets of 1.58% and return on tangible equity of 15.15%. These outstanding operating results allowed us to return $347 million to our stockholders in 2017 through stock repurchases and dividends, including $100 million of stock repurchases in the fourth quarter.”

FINANCIAL HIGHLIGHTS

             
  At or For the Three Months Ended At or For the Year Ended
  December 31, September 30,   December 31,  
Financial Highlights (1) 2017   2017  Change    2017   2016  Change
  (Dollars in thousands, except per share data)
Net earnings$84,037  $101,466  $(17,429) $357,818  $352,166  $5,652 
Diluted earnings per share$0.66  $0.84  $(0.18) $2.91  $2.90  $0.01 
Return on average assets 1.34%  1.82%  (0.48)  1.58%  1.66%  (0.08)
Return on average           
tangible equity (2) 13.75%  16.85%  (3.10)  15.15%  15.52%  (0.37)
             
Net interest margin           
(tax equivalent) 4.97%  5.08%  (0.11)  5.10%  5.40%  (0.30)
Efficiency ratio 41.0%  40.4%  0.6   40.8%  39.8%  1.0 
             
Total assets $24,994,876  $22,242,932  $2,751,944  $24,994,876  $21,869,767  $3,125,109 
Loans and leases held             
for investment, net of             
deferred fees$16,972,743  $15,690,517  $1,282,226  $16,972,743  $15,455,954  $1,516,789 
Noninterest-bearing             
deposits $8,508,044  $6,911,874  $1,596,170  $8,508,044  $6,659,016  $1,849,028 
Core deposits$15,937,012  $13,531,300  $2,405,712  $15,937,012  $12,523,834  $3,413,178 
Total deposits$18,865,536  $16,773,245  $2,092,291  $18,865,536  $15,870,611  $2,994,925 
               
Noninterest-bearing             
deposits as percentage             
of total deposits 45%  41%  4   45%  42%  3 
Core deposits as           
percentage of total           
deposits  85%  81%  4   85%  79%  6 
             
Equity to assets ratio 19.91%  20.73%  (0.82)  19.91%  20.48%  (0.57)
Tangible common equity           
ratio (2)  10.50%  12.02%  (1.52)  10.50%  11.54%  (1.04)
Book value per share$38.65  $37.96  $0.69  $38.65  $36.93  $1.72 
Tangible book value per           
share (2) $18.24  $19.84  $(1.60) $18.24  $18.71  $(0.47)
                                                                                       
(1) The operations of CU Bancorp are included from its October 20, 2017 acquisition date.        
(2) Non-GAAP measure.           
            

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $21.3 million to $263.0 million for the fourth quarter of 2017 compared to $241.7 million for the third quarter of 2017 due mainly to higher average loan and lease balances primarily from the CUB acquisition. The loan and lease yield was 5.89% for the fourth quarter of 2017 compared to 6.01% for the third quarter of 2017.  The decrease in the loan and lease yield was principally due to a lower yield on the acquired CUB loans, offset partially by an increase in discount accretion on acquired loans.  Total discount accretion on acquired loans was $6.8 million for the fourth quarter of 2017 (15 basis points on the loan and lease yield) compared to $5.5 million for the third quarter of 2017 (14 basis points on the loan and lease yield). A total discount of $37.0 million was recorded in connection with the acquired CUB loan portfolio, of which $2.9 million was accreted during the fourth quarter. The total remaining acquired loan discount as of December 31, 2017 was $56.9 million.

The tax equivalent NIM was 4.97% for the fourth quarter of 2017 compared to 5.08% for the third quarter of 2017.  The decrease in the NIM was mostly due to the lower yield on the CUB loans and securities and a higher cost of average interest-bearing liabilities, offset partially by the increase in discount accretion on acquired loans.  Total discount accretion on acquired loans contributed 13 basis points to the NIM for the fourth quarter of 2017 and 11 basis points for the third quarter of 2017.

The cost of average total deposits decreased to 0.30% for the fourth quarter of 2017 from 0.31% for the third quarter of 2017 due to the lower cost of the deposits acquired from CUB.

Noninterest Income

Noninterest income decreased by $4.6 million to $26.8 million for the fourth quarter of 2017 compared to $31.4 million for the third quarter of 2017 due mainly to a $4.6 million decrease in the gain on sale of securities. In light of the reduction in the statutory federal income tax rate effective January 1, 2018, we sold approximately $173 million of securities during the fourth quarter of 2017 resulting in a realized loss for the quarter of $3.3 million. The proceeds will be reinvested into higher yielding securities that are expected to recoup the realized loss in approximately one year. In addition, dividends and gains on equity investments decreased by $1.5 million and service charges on deposit accounts increased by $1.1 million primarily due to the increased number of accounts from the CUB acquisition.

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

 Three Months Ended
 December 31, September 30, Increase
Noninterest Income 2017   2017 (Decrease)
 (In thousands)    
Service charges on deposit accounts$4,574  $3,465 $1,109 
Other commissions and fees 10,505   9,944  561 
Leased equipment income 8,258   8,332  (74)
Gain on sale of loans and leases 1,988   2,848  (860)
(Loss) gain on sale of securities (3,329)  1,236  (4,565)
FDIC loss sharing expense, net -   -  - 
Other income:     
Dividends and realized gains on equity investments 342   1,845  (1,503)
Warrant income 831   731  100 
Other 3,626   2,981  645 
Total noninterest income$26,795  $31,382 $(4,587)
 

Noninterest Expense

Noninterest expense increased by $24.3 million to $142.9 million for the fourth quarter of 2017 compared to $118.5 million for the third quarter of 2017 due mostly to an increase in acquisition, integration and reorganization costs of $14.6 million related to the CUB acquisition and integration.  Almost all operating expense categories were higher quarter over quarter due mainly to the CUB acquisition. Compensation expense also includes $2.9 million for separation costs in connection with exiting the origination operations related to general, technology, and healthcare cash flow loans. Intangible asset amortization increased $2.0 million as a result of the CUB acquisition partially offset by scheduled reductions in amortization for previous acquisitions. The intangible asset amortization for 2018 is expected to be approximately $24 million. During the fourth quarter of 2017, a foreclosed property that represented approximately 90% of the total foreclosed property balance was sold for a nominal gain. This property was subject to a valuation write-down of $2.1 million in the third quarter of 2017.

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

 Three Months Ended
 December 31, September 30, Increase
Noninterest Expense 2017  2017 (Decrease)
 (In thousands)    
Compensation$71,986  $64,413 $7,573 
Occupancy 12,715   12,729  (14)
Data processing 6,764   6,459  305 
Other professional services 5,786   4,213  1,573 
Insurance and assessments 5,384   4,702  682 
Intangible asset amortization 5,062   3,049  2,013 
Leased equipment depreciation 5,048   4,862  186 
Foreclosed assets (income) expense, net (475)  2,191  (2,666)
Acquisition, integration and reorganization costs 16,085   1,450  14,635 
Loan expense 3,140   3,421  (281)
Other 11,373   11,053  320 
Total noninterest expense$142,868  $118,542 $24,326 
 

Income Taxes

The overall effective income tax rate was 40.2% for the fourth quarter of 2017 and 27.2% for the third quarter of 2017.  The effective tax rate for the fourth quarter of 2017 was higher mainly due to the fourth quarter tax provision including a $2.0 million increase in the foreign tax credit valuation allowance due to the sale of certain foreign loans, whereas the prior quarter included a $13.6 million reversal of a valuation allowance related to foreign tax credits which were deemed more likely than not to be utilized before they expire. The fourth quarter tax provision also included $2.4 million of income tax expense related to non-deductible merger costs and other adjustments offset by a $1.2 million benefit from remeasuring the deferred federal tax assets and liabilities as a result of the Tax Cuts and Jobs Act. This adjustment to deferred federal tax liabilities is management’s best estimate based on the information available as of this earnings release and is subject to change as final tax calculations are completed in conjunction with the filing of the Form 10-K. The effective tax rate for the full year 2017 was 35.5%. While the analysis on the impact of the Tax Cuts and Jobs Act is still ongoing at this time, we expect the 2018 effective tax rate to be in the range of 27% to 29%.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases held for investment, net of deferred fees, increased by $1.3 billion in the fourth quarter of 2017 to $17.0 billion at December 31, 2017.  The net increase was driven mainly by the acquisition of CUB loans of $2.1 billion, fourth quarter new production of $1.6 billion, and disbursements of $724 million, partially offset by loan sales of $1.0 billion, payoffs of $729 million, paydowns of $813 million, and transfers to loans held for sale of $481 million.  For the year ended December 31, 2017, loans and leases held for investment, net of deferred fees, increased by $1.5 billion. Excluding the effect of the acquired CUB loans and the two portfolio sales in 2017, the annualized loan growth rate for the fourth quarter of 2017 was 17% and the growth rate for the full year 2017 was 7%.

The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the periods indicated:

 Three Months Ended Year Ended
Loans and Leases December 31, September 30, December 31,
Held for Investment Roll Forward (1)2017 2017   2017
 (Dollars in thousands)
Balance, beginning of period$15,690,517  $15,543,457  $15,455,954 
New production 1,556,257   1,002,887   4,685,763 
Existing loans and leases:    
Payoffs (728,628)  (903,395)  (3,801,592)
Paydowns (812,726)  (637,674)  (2,769,309)
Disbursements 723,914   722,777   3,203,796 
Sales (2) (1,026,660)  (31,528)  (1,140,625)
Transfers to foreclosed assets -   -   (580)
Charge-offs (24,721)  (6,007)  (80,296)
Transfers to loans held for sale (481,100)  -   (656,258)
Loans acquired through CUB acquisition 2,075,890   -   2,075,890 
Balance, end of period$16,972,743  $15,690,517  $16,972,743 
      
Weighted average rate on new production (3) 4.95%  5.04%  4.96%
                                                                            
(1) Includes direct financing leases but excludes equipment leased to others under operating leases. 
(2) Sales for the three months ended December 31, 2017 exclude loans held for sale of $481.1 million at December 31, 2017.  
Sales for the three months ended September 30, 2017 exclude sales of loans that were transferred to loans held for sale  
of $175.2 million at June 30, 2017.    
(3) The weighted average rate on new production presents contractual rates and does not include amortized fees.  
Amortized fees added approximately 30 basis points to loan yields in 2017.  
   

Cash Flow Loan Sale

During the fourth quarter of 2017, the Company sold $1.5 billion of cash flow loans, of which none were on nonaccrual and $4.7 million were classified, and exited its CapitalSource Division origination operations related to general, technology, and healthcare cash flow loans.  These actions were taken to lower the Company’s credit risk profile and improve its funding mix by allowing the majority of our wholesale deposits to run off. As of December 31, 2017, $1.0 billion of the loans sold had settled while $481 million were classified as held for sale. As of January 17, 2018, 99% of the year-end loans held for sale balance was settled.

The impact of the loan sale and decision to exit the above-mentioned origination operations affected various components of our statement of earnings as follows: 

  Three Months Ended
  December 31,
   2017 
                                          (In thousands)
Gain on sale of loans $  1,988 
Negative provision for credit losses    14,132 
Other commissions and fees    (1,155)
Other income    (113)
Compensation expense    (2,854)
Other expense    (586)
Total increase in pre-tax earnings $                                11,412 
 

The following table presents the composition of loans and leases held for investment, net of deferred fees, as of the dates indicated:

 December 31, September 30, June 30, December 31,
Loan and Lease Portfolio2017 2017   2017   2016
 (In thousands)
Real estate mortgage:       
Commercial$5,385,724 $4,338,933 $4,418,463 $4,396,696
Residential 2,466,894  1,850,324  1,719,269  1,314,036
Total real estate mortgage 7,852,618  6,189,257  6,137,732  5,710,732
Real estate construction and land:       
Commercial 769,075  680,950  691,828  581,246
Residential 822,154  568,273  473,282  384,001
Total real estate construction and land 1,591,229  1,249,223  1,165,110  965,247
  Total real estate 9,443,847  7,438,480  7,302,842  6,675,979
Commercial:       
Asset-based 3,011,770  2,577,470  2,392,203  2,611,796
Venture capital 2,122,735  1,959,489  2,001,427  1,987,900
Cash flow 1,327,595  2,734,454  2,834,966  3,112,890
Equipment finance 656,995  594,473  613,550  691,967
Total commercial 7,119,095  7,865,886  7,842,146  8,404,553
Consumer 409,801  386,151  398,469  375,422
Total loans and leases held for       
  investment, net of deferred fees (1)$16,972,743 $15,690,517 $15,543,457 $15,455,954
        
Total unfunded loan commitments$6,234,061 $5,037,084 $4,926,743 $4,166,703
                                                                                   
(1) Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017 and June 30, 2017.     
        

Included in total loans as of December 31, 2017 were $2.0 billion acquired from CUB, of which $1.3 billion were real estate mortgage loans, $518 million were commercial loans, and $210 million were real estate construction and land loans. In addition, the total unfunded loan commitments as of December 31, 2017 included $914 million associated with loans acquired from CUB.

Deposits and Client Investment Funds

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

 December 31, September 30, June 30, December 31,
Deposit Category2017 2017   2017 2016
 (Dollars in thousands)
Noninterest-bearing demand deposits$8,508,044  $6,911,874  $6,701,039  $6,659,016 
Interest checking deposits 2,226,885   1,957,485   1,762,016   1,448,394 
Money market deposits 4,511,730   3,967,224   4,033,471   3,705,385 
Savings deposits 690,353   694,717   721,048   711,039 
Total core deposits 15,937,012   13,531,300   13,217,574   12,523,834 
Non-core non-maturity deposits 863,202   1,118,694   1,329,324   1,174,487 
Total non-maturity deposits 16,800,214   14,649,994   14,546,898   13,698,321 
Time deposits $250,000 and under 1,709,980   1,770,439   1,940,872   1,758,434 
Time deposits over $250,000 355,342   352,812   387,207   413,856 
Total time deposits 2,065,322   2,123,251   2,328,079   2,172,290 
 Total deposits$18,865,536  $16,773,245  $16,874,977  $15,870,611 
        
Noninterest-bearing demand deposits       
as percentage of total deposits 45%  41%  40%  42%
Core deposits as percentage of total deposits 85%  81%  78%  79%
        

At December 31, 2017, core deposits totaled $15.9 billion, or 85% of total deposits, including $8.5 billion of noninterest-bearing demand deposits, or 45% of total deposits. Core deposits obtained in the CUB acquisition totaled $2.7 billion.

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 off-balance sheet client investment funds at December 31, 2017 were $2.1 billion, of which $1.7 billion was managed by S1AM.

PROVISION AND ALLOWANCE FOR CREDIT LOSSES