Press Release

PacWest Bancorp Announces Results for the Second Quarter 2018

Company Release - 7/17/2018 7:00 AM ET

Highlights

  • Net Earnings of $115.7 Million, or $0.92 Per Diluted Share
  • Tax Equivalent Net Interest Margin of 5.18%
  • New Loan and Lease Production of $1.3 Billion; $430 Million of Net Loan Growth
  • Core Deposits at 87% of Total Deposits

LOS ANGELES, July 17, 2018 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) today announced net earnings for the second quarter of 2018 of $115.7 million, or $0.92 per diluted share, compared to net earnings for the first quarter of 2018 of $118.3 million, or $0.93 per diluted share.  The decrease in net earnings from the prior quarter was due primarily to a higher provision for credit losses offset partially by higher net interest income and higher noninterest income. 

The provision for credit losses increased by $13.5 million in the second quarter of 2018 compared to the first quarter of 2018 due mainly to higher net charge-offs.  Net interest income increased by $5.8 million in the second quarter of 2018 due mostly to a higher yield on average loans and leases and one more day in the current quarter, partially offset by an increase in the cost of average total deposits and borrowings.     

Matt Wagner, President and CEO, commented, “While the credit provision was higher than expected, we were pleased with the increase in loan and lease production and net loan growth in the second quarter.  The second quarter efficiency ratio improved to 39.8% as a result of higher revenues combined with lower operating expenses. Our second quarter results produced a return on assets of 1.93% and a return on tangible equity of 20.98%.”

Mr. Wagner continued, “Our second quarter tax equivalent NIM increased by seven basis points to 5.18%. While the NIM benefitted from the repricing of variable-rate loans and higher recapture of nonaccrual interest, this was partially offset by higher rates on deposits and higher balances and rates on borrowings.  The growth in loans outstanding and unfunded commitments during the quarter should be a catalyst for increased interest income in the second half of the year.”

FINANCIAL HIGHLIGHTS

            
 At or For the    At or For the   
 Three Months Ended   Six Months Ended  
 June 30, March 31, Increase June 30, Increase
Financial Highlights 2018
 2018
 (Decrease) 2018
 2017
 (Decrease)
                        
 (Dollars in thousands, except per share data)
Net earnings$115,735  $118,276  $(2,541) $234,011  $172,315  $61,696 
Diluted earnings per share$0.92  $0.93  $(0.01) $1.85  $1.42  $0.43 
Return on average assets 1.93%  1.99%  (0.06)  1.96%  1.59%  0.37 
Return on average           
tangible equity (1) 20.98%  21.08%  (0.10)  21.03%  15.00%  6.03 
            
Net interest margin ("NIM")           
(tax equivalent) 5.18%  5.11%  0.07   5.15%  5.19%  (0.04)
Yield on average loans and           
leases (tax equivalent) 6.30%  6.11%  0.19   6.21%  6.01%  0.20 
Cost of average total deposits 0.37%  0.31%  0.06   0.34%  0.23%  0.11 
Efficiency ratio 39.8%  41.7%  (1.9)  40.7%  40.8%  (0.1)
            
Total assets$24,529,557  $24,149,330  $380,227  $24,529,557  $22,246,877  $2,282,680 
Loans and leases held           
for investment,           
net of deferred fees$16,885,192  $16,455,285  $429,907  $16,885,192  $15,543,457  $1,341,735 
Noninterest-bearing deposits$8,126,153  $8,232,140  $(105,987) $8,126,153  $6,701,039  $1,425,114 
Core deposits$15,586,238  $15,661,529  $(75,291) $15,586,238  $13,217,574  $2,368,664 
Total deposits$17,929,192  $18,078,788  $(149,596) $17,929,192  $16,874,977  $1,054,215 
            
Noninterest-bearing           
deposits as percentage           
of total deposits 45%  46%  (1)  45%  40%  5 
Core deposits as           
percentage of total           
deposits 87%  87%  -   87%  78%  9 
            
Equity to assets ratio 19.48%  20.16%  (0.68)  19.48%  20.50%  (1.02)
Tangible common equity           
ratio (1) 9.86%  10.43%  (0.57)  9.86%  11.75%  (1.89)
Book value per share$38.36  $38.47  $(0.11) $38.36  $37.55  $0.81 
Tangible book value per           
share (1)$17.35  $17.75  $(0.40) $17.35  $19.40  $(2.05)
            
(1) Non-GAAP measure.           
            

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $5.8 million to $262.3 million for the second quarter of 2018 compared to $256.5 million for the first quarter of 2018 due mainly to a higher yield on average loans and leases and one additional day in the second quarter.  The tax equivalent yield on average loans and leases was 6.30% for the second quarter of 2018 compared to 6.11% for the first quarter of 2018. The increase in the yield on average loans and leases was due principally to higher coupon interest (15 basis points) and higher recapture of nonaccrual interest (four basis points).    

The tax equivalent NIM was 5.18% for the second quarter of 2018 compared to 5.11% for the first quarter of 2018.  The increase in the NIM was due mainly to the higher yield on average loans and leases resulting from higher loan coupon interest and higher recapture of nonaccrual interest, which was partially offset by an increase of six basis points in the cost of average total deposits.          

The cost of average total deposits increased to 0.37% for the second quarter of 2018 from 0.31% for the first quarter of 2018 due to higher rates paid for non-core deposits and pricing adjustments for select customers in light of recent market rate increases and the competitive market environment.  

Provision for Credit Losses

A provision for credit losses of $17.5 million was recorded in the second quarter of 2018 compared to $4.0 million in the first quarter of 2018, which benefitted from higher than normal recoveries of $7.2 million.  The higher provision for the second quarter of 2018 was due mainly to higher net charge-offs. The allowance for credit losses as a percentage of loans and leases held for investment decreased to 0.99% at June 30, 2018 from 1.02% at March 31, 2018.

The following table presents details of the provision for credit losses for the periods indicated:

      
 Three Months Ended  
 June 30, March 31, Increase
Provision for Credit Losses2018 2018 (Decrease)
      
 (In thousands)
Addition to (reduction in) allowance for loan     
and lease losses$15,000 $(226) $15,226 
Addition to (reduction in) reserve for unfunded     
loan commitments 2,500  4,226   (1,726)
Total provision for credit losses$17,500 $4,000  $13,500 
           

Noninterest Income

Noninterest income increased by $1.1 million to $39.6 million for the second quarter of 2018 compared to $38.6 million for the first quarter of 2018 due mainly to increases in all income categories except for the gain on sale of securities and the gain on sale of loans and leases, as sale activities were minimal in the second quarter.  The significant increase in other income was attributable to $7.5 million of gains on early lease terminations.

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

      
 Three Months Ended  
 June 30, March 31, Increase
Noninterest Income2018 2018 (Decrease)
      
 (In thousands)
Service charges on deposit accounts$4,265 $4,174 $91 
Other commissions and fees 11,767  10,265  1,502 
Leased equipment income 9,790  9,587  203 
Gain on sale of loans and leases 106  4,569  (4,463)
Gain on sale of securities 253  6,311  (6,058)
Other income:     
Dividends and gains on equity investments 1,992  251  1,741 
Warrant income 1,225  248  977 
Other 10,240  3,154  7,086 
Total noninterest income$39,638 $38,559 $1,079 
          

Noninterest Expense

Noninterest expense decreased by $0.9 million to $126.4 million for the second quarter of 2018 compared to $127.4 million for the first quarter of 2018 attributable primarily to a $1.1 million decrease in compensation expense due mainly to lower payroll taxes.

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

      
 Three Months Ended  
 June 30, March 31, Increase
Noninterest Expense2018 2018 (Decrease)
      
 (In thousands)
Compensation$69,913  $71,023  $(1,110)
Occupancy 13,575   13,223   352 
Data processing 6,896   6,659   237 
Other professional services 5,257   4,439   818 
Insurance and assessments 5,330   5,727   (397)
Intangible asset amortization 5,587   6,346   (759)
Leased equipment depreciation 5,237   5,375   (138)
Foreclosed assets income, net (61)  (122)  61 
Loan expense 3,058   2,271   787 
Other 11,657   12,454   (797)
Total noninterest expense$126,449  $127,395  $(946)
            

Income Taxes

The overall effective income tax rate was 26.8% for the second quarter of 2018 and 27.7% for the first quarter of 2018.  The effective tax rate for the full year 2018 is estimated to be approximately 28%.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Loans and leases held for investment, net of deferred fees, increased by $429.9 million in the second quarter of 2018 to $16.9 billion at June 30, 2018.  The net increase was driven mainly by new production of $1.3 billion and disbursements of $1.2 billion, offset partially by payoffs of $1.2 billion, paydowns of $829.1 million, and sales of $27.8 million.

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

      
 Three Months Six Months
 Ended Ended
Loans and Leases June 30,  March 31, June 30,
Held for Investment Roll Forward (1)2018 2018 2018
            
 (Dollars in thousands)
Balance, beginning of period$16,455,285  $16,972,743  $16,972,743 
New production 1,256,559   744,918   2,001,477 
Existing loans and leases:     
Payoffs (1,154,400)  (930,973)  (2,085,373)
Paydowns (829,119)  (936,002)  (1,765,121)
Disbursements 1,203,940   747,376   1,951,316 
Sales (27,779)  (130,624)  (158,403)
Transfers to foreclosed assets (1,059)  -   (1,059)
Charge-offs (18,235)  (12,153)  (30,388)
Balance, end of period$16,885,192  $16,455,285  $16,885,192 
      
Weighted average rate on new production (2) 5.00%  5.36%  5.13%
        
          
(1) Includes direct financing leases but excludes equipment leased to others under operating leases.
(2) The weighted average rate on new production presents contractual rates and does not include
amortized fees.  Amortized fees added approximately 31 basis points to loan yields in 2018.
 

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

        
 June 30, March 31, December 31, June 30,
Loan and Lease Portfolio2018 2018 2017 2017
            
 (In thousands)
Real estate mortgage:       
Commercial$5,010,680 $5,033,006 $5,385,740 $4,418,463
Residential 2,555,695  2,521,237  2,466,894  1,719,269
Total real estate mortgage 7,566,375  7,554,243  7,852,634  6,137,732
Real estate construction and land:       
Commercial 831,462  789,892  769,075  691,828
Residential 1,042,564  887,110  822,154  473,282
Total real estate construction and land 1,874,026  1,677,002  1,591,229  1,165,110
Total real estate 9,440,401  9,231,245  9,443,863  7,302,842
Commercial:       
Asset-based 3,184,300  2,957,890  2,924,950  2,655,762
Venture capital 2,008,205  1,920,643  2,122,735  2,001,427
Other commercial 1,873,607  1,947,590  2,071,394  3,184,957
Total commercial 7,066,112  6,826,123  7,119,079  7,842,146
Consumer 378,679  397,917  409,801  398,469
Total loans and leases held for       
investment, net of deferred fees (1)$16,885,192 $16,455,285 $16,972,743 $15,543,457
        
Total unfunded loan commitments$6,429,587 $6,352,803 $6,234,061 $4,926,743
        
            
(1) Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017 and June 30, 2017.
 

Allowance for Credit Losses

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

      
 Three Months Ended June 30, 2018
 Allowance for Reserve for  Total
Allowance for Credit Loan and  Unfunded Loan Allowance for
Losses RollforwardLease Losses Commitments Credit Losses
           
 (In thousands)
Beginning balance$134,275  $32,861 $167,136 
Charge-offs (18,235)  -  (18,235)
Recoveries 1,099   -  1,099 
Net charge-offs (17,136)  -  (17,136)
Provision 15,000   2,500  17,500 
Ending balance$132,139  $35,361 $167,500 
           


  
 Three Months Ended March 31, 2018
 Allowance for Reserve for  Total
Allowance for CreditLoan and  Unfunded Loan Allowance for
Losses RollforwardLease Losses Commitments Credit Losses
           
 (In thousands)
           
Beginning balance$139,456  $28,635 $168,091 
Charge-offs (12,153)  -  (12,153)
Recoveries 7,198   -  7,198 
Net charge-offs (4,955)  -  (4,955)
Provision (226)  4,226  4,000 
Ending balance$134,275  $32,861 $167,136 
           

Gross charge-offs for the second quarter of 2018 were $18.2 million and included $6.1 million for venture capital loans, $4.7 million for real estate mortgage loans, $4.4 million for other commercial loans and $2.9 million for asset-based loans. Gross charge-offs for the first quarter of 2018 were $12.2 million and included $6.8 million for other commercial loans, $2.6 million for real estate mortgage loans, and $2.3 million for venture capital loans.  Four loans accounted for $14.2 million or 78 percent of the gross charge-offs in the second quarter of 2018. Recoveries in the second quarter of 2018 were $1.1 million and included $0.8 million for other commercial loans. Recoveries for the first quarter of 2018 were $7.2 million and included $4.6 million for venture capital loans.    

The annualized ratio of net charge-offs to average loans was 0.41% for the second quarter of 2018 and 0.12% for the first quarter of 2018.

Deposits and Client Investment Funds

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

        
 June 30, March 31, December 31, June 30,
Deposit Category2018 2018 2017 2017
                
 (Dollars in thousands)
Noninterest-bearing demand deposits$8,126,153  $8,232,140  $8,508,044  $6,701,039 
Interest checking deposits 2,184,785   2,076,152   2,226,885   1,762,016 
Money market deposits 4,631,658   4,676,734   4,511,730   4,033,471 
Savings deposits 643,642   676,503   690,353   721,048 
Total core deposits 15,586,238   15,661,529   15,937,012   13,217,574 
Non-core non-maturity deposits 607,388   585,399   863,202   1,329,324 
Total non-maturity deposits 16,193,626   16,246,928   16,800,214   14,546,898 
Time deposits $250,000 and under 1,394,117   1,482,118   1,709,980   1,940,872 
Time deposits over $250,000 341,449   349,742   355,342   387,207 
Total time deposits 1,735,566   1,831,860   2,065,322   2,328,079 
Total deposits$17,929,192  $18,078,788  $18,865,536  $16,874,977 
        
Noninterest-bearing demand deposits       
as percentage of total deposits 45%  46%  45%  40%
Core deposits as percentage of total deposits 87%  87%  85%  78%
                

At June 30, 2018, core deposits totaled $15.6 billion, or 87% of total deposits, including $8.1 billion of noninterest-bearing demand deposits, or 45% 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 off-balance sheet client investment funds at June 30, 2018 were $2.5 billion, of which $1.7 billion was managed by S1AM.

CREDIT QUALITY  

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

      
 June 30, March 31, Increase
Credit Quality Metrics 2018 2018 (Decrease)
            
 (Dollars in thousands)
Nonaccrual loans and leases held for investment (1)$113,745  $103,725  $10,020 
Accruing loan contractually past due     
90 days or more -   500   (500)
Foreclosed assets, net 2,231   1,236   995 
Total nonperforming assets$115,976  $105,461  $10,515 
      
Nonaccrual loans and leases held for investment (1)$113,745  $103,725  $10,020 
Performing troubled debt restructured loans     
held for investment 58,148   60,173   (2,025)
Total impaired loans and leases$171,893  $163,898  $7,995 
      
Pass$16,142,052  $15,832,127  $309,925 
Special mention 506,848   415,116   91,732 
Classified 236,292   208,042   28,250 
Total loans and leases held for investment,     
net of deferred fees$16,885,192  $16,455,285  $