Press Release

PacWest Bancorp Announces Results for the Second Quarter 2019

Company Release - 7/16/2019 7:00 AM ET

Highlights

  • Net Earnings of $128.1 Million, or $1.07 Per Diluted Share; Up 16% from Prior Quarter
  • Tax Equivalent Net Interest Margin of 4.72%; Up 3 Basis Points from Prior Quarter
  • Loan and Lease Production of $1.4 Billion; $165 Million of Net Loan Growth
  • Core Deposits Represent 83% of Total Deposits

LOS ANGELES, July 16, 2019 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq: PACW) today announced net earnings for the second quarter of 2019 of $128.1 million, or $1.07 per diluted share, compared to net earnings for the first quarter of 2019 of $112.6 million, or $0.92 per diluted share. The increase in net earnings in the second quarter included a $22.2 million pre-tax gain on the sale of securities which contributed $0.13 per diluted share.

Matt Wagner, President and CEO, commented, “We continue to see favorable results from our credit de-risking strategy with sustained improvement in our credit quality metrics. Year-to-date net charge-offs are 48% lower than the same period in 2018 and year-to-date credit loss provisions are 44% lower than the same period in 2018. Our second quarter of 2019 results produced a return on assets of 1.99% and a return on tangible equity of 23.15%.”

Mr. Wagner continued, “We experienced solid loan production in the second quarter bringing our net loan growth to $515 million for the first half of 2019. However, competition for core deposits and customers desiring higher yields on their funds resulted in total deposits being flat in the first half of 2019. Core deposit generation remains a priority in order to help fund loan growth and maintain our net interest margin.”

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 2019   2019  (Decrease)  2019   2018  (Decrease)
  
 (Dollars in thousands, except per share data)
Net earnings$128,125  $112,604  $15,521  $240,729  $234,011  $6,718 
Diluted earnings per share$1.07  $0.92  $0.15  $1.99  $1.85  $0.14 
Return on average assets 1.99%  1.77%  0.22   1.88%  1.96%  (0.08)
Return on average           
tangible equity (1) 23.15%  20.64%  2.51   21.91%  21.03%  0.88 
            
Net interest margin ("NIM")           
(tax equivalent) 4.72%  4.69%  0.03   4.70%  5.15%  (0.45)
Yield on average loans and           
leases (tax equivalent) 6.26%  6.16%  0.10   6.21%  6.21%  - 
Cost of average total           
deposits 0.81%  0.73%  0.08   0.77%  0.34%  0.43 
Efficiency ratio 41.6%  42.4%  (0.8)  42.0%  40.7%  1.3 
            
Total assets$26,344,414  $26,324,138  $20,276  $26,344,414  $24,529,557  $1,814,857 
Loans and leases held           
for investment,           
net of deferred fees$18,472,852  $18,307,697  $165,155  $18,472,852  $16,885,192  $1,587,660 
Noninterest-bearing           
demand deposits$7,299,213  $7,712,409  $(413,196) $7,299,213  $8,126,153  $(826,940)
Core deposits$15,617,488  $16,127,638  $(510,150) $15,617,488  $15,586,238  $31,250 
Total deposits$18,805,756  $19,285,927  $(480,171) $18,805,756  $17,929,192  $876,564 
            
As percentage of total           
deposits:           
Noninterest-bearing           
demand deposits 39%  40%  (1)  39%  45%  (6)
Core deposits 83%  84%  (1)  83%  87%  (4)
            
Equity to assets ratio 18.42%  18.20%  0.22   18.42%  19.48%  (1.06)
Tangible common equity           
ratio (1) 9.50%  9.23%  0.27   9.50%  9.86%  (0.36)
Book value per share$40.49  $39.86  $0.63  $40.49  $38.36  $2.13 
Tangible book value per           
share (1)$18.83  $18.22  $0.61  $18.83  $17.35  $1.48 
            
(1) Non-GAAP measure.           


INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $6.0 million to $260.9 million for the second quarter of 2019 compared to $254.9 million for the first quarter of 2019 due to a higher yield on average loans and leases, a higher balance of average loans and leases, and one more day in the second quarter of 2019, offset partially by higher deposit costs. The tax equivalent yield on average loans and leases was 6.26% for the second quarter of 2019 compared to 6.16% for the first quarter of 2019. The increase in the yield on average loans and leases was due principally to loan prepayment fees being $6.3 million higher in the second quarter compared to the first quarter. The prepayment fees added 11 basis points to the second quarter loan yield and were primarily from two loans.

The tax equivalent NIM was 4.72% for the second quarter of 2019 compared to 4.69% for the first quarter of 2019. The increase in the NIM was due mainly to higher loan prepayment fees, partially offset by higher deposit costs.

The cost of average total deposits increased to 0.81% for the second quarter of 2019 from 0.73% for the first quarter of 2019 due to a lower average balance of noninterest-bearing deposits and higher rates paid on deposits.

Provision for Credit Losses

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 Losses 2019   2019
  (Decrease)
  
 (In thousands)
Addition to allowance for loan and lease losses$10,000  $4,000 $6,000 
Reduction to reserve for unfunded loan commitments (2,000)  -  (2,000)
Total provision for credit losses$8,000  $4,000 $4,000 

Noninterest Income

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

 Three Months Ended  
 June 30, March 31, Increase
Noninterest Income 2019   2019  (Decrease)
  
 (In thousands)
Service charges on deposit accounts$3,771  $3,730  $41 
Other commissions and fees 11,590   11,008   582 
Leased equipment income 9,182   9,282   (100)
Gain on sale of loans and leases 326   -   326 
Gain on sale of securities 22,192   2,161   20,031 
Other income:     
Dividends and (losses) gains on equity investments (83)  296   (379)
Warrant income 1,214   2,279   (1,065)
Other 2,701   2,308   393 
Total noninterest income$50,893  $31,064  $19,829 

Noninterest income increased by $19.8 million to $50.9 million for the second quarter of 2019 compared to $31.1 million for the first quarter of 2019 due mainly to a $20.0 million increase in the gain on sale of securities attributable to a $22.2 million net gain on sales of $980.4 million in the second quarter of 2019 compared to a net gain of $2.2 million on sales of $405.8 million in the first quarter of 2019. We re-positioned a portion of our securities portfolio in the second quarter to shorten the duration of the portfolio and to enhance liquidity.

Noninterest Expense

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

 Three Months Ended  
 June 30, March 31, Increase
Noninterest Expense 2019   2019  (Decrease)
  
 (In thousands)
Compensation$68,956  $70,845  $(1,889)
Occupancy 14,457   14,320   137 
Data processing 6,817   6,925   (108)
Other professional services 4,629   4,513   116 
Insurance and assessments 4,098   4,038   60 
Intangible asset amortization 4,870   4,870   - 
Leased equipment depreciation 5,558   5,651   (93)
Foreclosed assets (income) expense, net (146)  29   (175)
Acquisition, integration and reorganization costs -   618   (618)
Loan expense 3,451   2,885   566 
Other 12,737   11,593   1,144 
Total noninterest expense$125,427  $126,287  $(860)

Noninterest expense decreased by $0.9 million to $125.4 million for the second quarter of 2019 compared to $126.3 million for the first quarter of 2019 attributable primarily to a $1.9 million decrease in compensation expense, offset partially by a $1.1 million increase in other expense. Compensation expense decreased due mainly to lower payroll taxes and bonus expense. Other expense increased primarily due to a loss on the early termination of a lease.

Income Taxes

The overall effective income tax rate was 28.2% for the second quarter of 2019 and 27.7% for the first quarter of 2019. The effective tax rate for the full year 2019 is estimated to be in the range of 27-28%.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

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

 Three Months Ended Six Months Ended
Roll Forward of Loans and Leases HeldJune 30,  March 31,  June 30, 
for Investment, Net of Deferred Fees (1) 2019   2019   2019 
  
 (Dollars in thousands)
Balance, beginning of period$18,307,697  $17,957,713  $17,957,713 
Additions:     
Production 1,436,299   1,174,838   2,611,137 
Disbursements 1,293,747   1,192,972   2,486,719 
Total production and disbursements 2,730,046   2,367,810   5,097,856 
Reductions:     
Payoffs (1,529,213)  (933,300)  (2,462,513)
Paydowns (979,987)  (1,038,964)  (2,018,951)
Total payoffs and paydowns (2,509,200)  (1,972,264)  (4,481,464)
Sales (38,054)  (16,936)  (54,990)
Transfers to foreclosed assets -   (37)  (37)
Charge-offs (17,637)  (3,465)  (21,102)
Transfers to loans held for sale -   (25,124)  (25,124)
Total reductions (2,564,891)  (2,017,826)  (4,582,717)
Balance, end of period$18,472,852  $18,307,697  $18,472,852 
      
Weighted average rate on production (2) 5.15%  5.11%  5.13%
      
(1) Includes direct financing leases but excludes equipment leased to others under operating leases.  
(2) The weighted average rate on production presents contractual rates on a tax equivalent basis  
and excludes amortized fees.  Amortized fees added approximately 32 basis points to loan  
yields in 2019 and 31 basis points to loan yields in 2018.    

Loans and leases held for investment, net of deferred fees, increased by $165.2 million, or 4% annualized, in the second quarter of 2019 to $18.5 billion at June 30, 2019.  The net loan growth in the second quarter was primarily from the income producing and other residential loan class, which included $177 million of multi-family loan pool purchases, and the asset-based loan class.

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

 June 30, 2019 March 31, 2019 June 30, 2018
  % of   % of   % of 
Loan and Lease Portfolio (1)AmountTotal AmountTotal AmountTotal
  
 (In thousands)
Real estate mortgage:        
Commercial$4,435,27424% $4,640,51025% $5,010,68030%
Income producing and other        
residential 3,640,75220%  3,518,94819%  2,555,69515%
Total real estate mortgage 8,076,02644%  8,159,45844%  7,566,37545%
Real estate construction and land:        
Commercial 972,8915%  943,5965%  831,4625%
Residential 1,403,2398%  1,408,1288%  1,042,5646%
Total real estate construction        
and land 2,376,13013%  2,351,72413%  1,874,02611%
Total real estate 10,452,15657%  10,511,18257%  9,440,40156%
Commercial:        
Asset-based 3,606,00719%  3,422,20219%  3,184,30019%
Venture capital 2,194,74312%  2,027,45011%  2,008,20512%
Other commercial 1,773,56410%  1,974,70211%  1,873,60711%
Total commercial 7,574,31441%  7,424,35441%  7,066,11242%
Consumer 446,3822%  372,1612%  378,6792%
Total loans and leases held for        
investment, net of deferred fees$18,472,852100% $18,307,697100% $16,885,192100%
         
Total unfunded loan commitments$7,610,899  $7,465,392  $6,429,587 
         
    
(1) Excludes loans held for sale carried at lower of cost or fair value at March 31, 2019.   

Allowance for Credit Losses

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

 Three Months Ended June 30, 2019
 Allowance for Reserve for  Total
Allowance for Credit Loan and  Unfunded Loan Allowance for
Losses RollforwardLease Losses Commitments Credit Losses
  
 (In thousands)
Beginning balance$136,281  $36,861  $173,142 
Charge-offs (17,637)  -   (17,637)
Recoveries 6,393   -   6,393 
Net charge-offs (11,244)  -   (11,244)
Provision 10,000   (2,000)  8,000 
Ending balance$135,037  $34,861  $169,898 
      
  
 Three Months Ended March 31, 2019
 Allowance for Reserve for  Total
Allowance for Credit Loan and  Unfunded Loan Allowance for
Losses RollforwardLease Losses Commitments Credit Losses
  
 (In thousands)
Beginning balance$132,472  $36,861  $169,333 
Charge-offs (3,465)  -   (3,465)
Recoveries 3,274   -   3,274 
Net charge-offs (191)  -   (191)
Provision 4,000   -   4,000 
Ending balance$136,281  $36,861  $173,142 

The allowance for credit losses as a percentage of loans and leases held for investment decreased to 0.92% at June 30, 2019 from 0.95% at March 31, 2019.

Gross charge-offs for the second quarter of 2019 were $17.6 million and included $11.8 million for a single asset-based loan, $3.7 million for other commercial loans, and $1.5 million for venture capital loans compared to gross charge-offs for the first quarter of 2019 of $3.5 million which were primarily for other commercial loans.  Recoveries for the second quarter of 2019 were $6.4 million and included $4.8 million for venture capital loans and $1.0 million for other commercial loans compared to recoveries for the first quarter of 2019 of $3.3 million which included $2.3 million for venture capital loans and $0.8 million for other commercial loans.

For the second quarter of 2019 and first quarter of 2019, annualized net charge-offs to average loans and leases were 0.25% and 0.00%.

Deposits and Client Investment Funds

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

 June 30, 2019 March 31, 2019 June 30, 2018
  % of   % of   % of 
Deposit CompositionAmountTotal AmountTotal AmountTotal
  
 (Dollars in thousands)
Noninterest-bearing demand$7,299,213 39% $7,712,409 40% $8,126,153 45%
Interest checking 3,220,353 17%  3,163,228 16%