PacWest Bancorp Announces Results for the Second Quarter of 2014

Highlights

• CapitalSource Merger Closed April 7, 2014; Deposit System Converted April 12, 2014
• Net Earnings of $10.6 Million or $0.10 Per Diluted Share; Adjusted Net Earnings of $63.8 Million or $0.64 Per Diluted Share
• Net Interest Margin at 6.24%
• Loan and Lease Production of $881.3 Million; $143.0 Million of Organic Loan and Lease Growth in the Quarter
• Demand Deposits Increased $0.3 Billion in the Second Quarter and are 23% of Total Deposits
• Core Deposits Increased $1.0 Billion in the Second Quarter and are 49% of Total Deposits

LOS ANGELES, July 22, 2014 (GLOBE NEWSWIRE) -- PacWest Bancorp PACW today announced net earnings for the second quarter of 2014 of $10.6 million, or $0.10 per diluted share, compared to net earnings for the first quarter of 2014 of $25.1 million, or $0.55 per diluted share. When certain income and expense items described below are excluded, adjusted net earnings are $63.8 million, or $0.64 per diluted share.

Matt Wagner, President and CEO, commented, "The benefits of the CapitalSource merger are apparent in our second quarter results: record adjusted net earnings of $64 million, new loan and lease fundings of $881 million, organic loan and lease growth of $143 million, and significant progress in meeting our deposit transformation and cost savings targets. Our loan fundings were strong across both divisions, with the national lending platform embodied in the CapitalSource division originating $745 million in loans and leases and our Community Bank division originating $137 million in loans. Loan refinancings by other lenders at liberal pricing metrics continued, and the improving economy in our market areas enabled borrowers to either sell their properties or use excess cash balances to reduce outstandings. Nevertheless, our pipelines are robust and we expect continued high levels of loan and lease fundings."

Mr. Wagner continued, "PacWest Bancorp is a very strong and well-positioned company. Our second quarter adjusted return on assets and adjusted return on tangible equity stood at 1.70% and 16.05%. Our tangible common equity ratio was 12.14% at June 30, well above the 10% target we set when we initiated the CapitalSource merger. The strengths of these financial metrics position us to support asset growth and produce solid earnings."

Vic Santoro, Executive Vice President and CFO, stated, "Our core net interest margin was 5.74% for the quarter, right about where we expected it to be. We have made great strides in reaching our cost savings targets, with our adjusted efficiency ratio at 43%. Our Deposit Solutions Team, which concentrates on generating core deposits from legacy CapitalSource borrowers, has achieved significant success so far with new core deposits of $95 million and a pipeline of almost $175 million. Overall, organic core deposit growth was $200 million in the second quarter, and our teams remain focused on gathering new deposits from all sources."

FINANCIAL HIGHLIGHTS

ADJUSTED EARNINGS

In evaluating its earnings, the Company removes certain items to arrive at Adjusted Net Earnings and Adjusted Diluted Earnings Per Share, as detailed below:

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $106.5 million to $192.5 million for the second quarter of 2014 compared to $86.0 million for the first quarter of 2014 due to the significant increase in interest-earning assets from the CapitalSource merger. Net interest margin ("NIM") for the second quarter of 2014 was 6.24%, compared to 5.95% for the first quarter of 2014. The 29 basis point increase in NIM was driven by the increase in interest-earning assets, which resulted from loans and leases added with the CapitalSource merger and organic loan growth during the quarter. Loan yield for the second quarter of 2014 was 7.34%, compared to 7.42% for the first quarter of 2014. The impact on the loan yield from accelerated discount accretion resulting from acquired loan payoffs was 58 basis points in the second quarter compared to 74 basis points in the first quarter. The total cost of deposits increased to 0.26% from 0.09% in the prior quarter due primarily to the higher-cost time deposits acquired in the CapitalSource merger.

Net interest margin information is presented in the following table for the periods indicated:

The NIM and loan and lease yield are impacted by accelerated accretion of acquisition discounts resulting from acquired loan payoffs that cause volatility. The effects of this item are shown in the following table for the periods indicated:

Noninterest Income

Noninterest income increased by $3.8 million to $8.5 million for the second quarter of 2014 from $4.7 million for the first quarter of 2014. The increase was due mostly to income streams gained in the CapitalSource merger, including certain other commissions and fees and leased equipment income, and lower FDIC loss sharing expense offset by lower gain on asset sales and other income. The increase in other commissions and fees is due to higher unused commitment fees, letter of credit fees and prepayment fees of $3.1 million, all attributed to the added CapitalSource operations. FDIC loss sharing expense, which relates to four loss sharing agreements with the FDIC, decreased due to lower gain on sales of covered OREO and lower losses on the FDIC loss sharing asset. Covered assets totaled $399.0 million at June 30, 2014 and $421.2 million at March 31, 2014.

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

The following table presents the details of FDIC loss sharing expense for the periods indicated: 

Noninterest Expense

Noninterest expense increased by $119.0 million to $169.9 million for the second quarter of 2014 compared to $50.9 million for the first quarter of 2014. The increase was due mostly to higher acquisition, integration and reorganization costs related to the CapitalSource merger, which increased $84.0 million, and higher operating expenses of $29.5 million. The second quarter acquisition, integration and reorganization costs of $86.2 million included CapitalSource merger expenses, such as investment banking, legal and accounting fees, lease terminations, and change in control payments, as well as $7.5 million to write off goodwill and other intangibles relating to the reorganization of the legacy PacWest asset financing segment, which included the sale of certain of its assets.

Operating expenses increased to $80.1 million for the second quarter of 2014 compared to $50.5 million for the first quarter of 2014 due to including the CapitalSource operations after the April 7, 2014 merger date. As a result of the merger, the number of employees increased to approximately 1,450 at June 30 from approximately 1,100 at March 31, and nine branch locations and administrative offices were added.

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

Income Taxes

Our overall effective income tax rate was 57.7% for the second quarter of 2014 and 35.8% for the first quarter of 2014. The second quarter effective tax rate was driven higher than normal by the non-deductibility and tax treatment of certain acquisition, integration and reorganization costs. When these items are excluded, our adjusted effective tax rate was 40.2% for the second quarter.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases increased $7.0 billion in the second quarter to $11.2 billion at June 30, 2014. Excluding the $6.9 billion of loans and leases acquired in the CapitalSource merger, loans and leases increased by $143.0 million in the second quarter.

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

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

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

Deposits

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

The following table summarizes the maturities of our time deposits as of the date indicated: 

At June 30, 2014, core deposits totaled $5.7 billion, or 49% of total deposits, and noninterest-bearing demand deposits, which totaled $2.7 billion, were 23% of total deposits. Total deposits increased $6.3 billion during the second quarter to $11.7 billion at June 30, 2014, including an increase in core deposits of $1.0 billion. The increase in the quarter was due to $6.2 billion of deposits acquired in the CapitalSource merger, including $5.3 billion of time deposits with a weighted average rate of 98 basis points and a weighted average effective cost of 70 basis points. The purchase accounting discount on acquired time deposits totaled $17.2 million, and the remaining unamortized time deposit discount at June 30, 2014 was $11.6 million with a weighted average life of seven months.

ALLOWANCE FOR CREDIT LOSSES

The allowance for Non-PCI credit losses was $72.4 million or 0.67% of Non-PCI loans and leases at June 30, 2014, compared to $67.0 million, or 1.75% of Non-PCI loans and leases at March 31, 2014. We made a provision for credit losses of $5.0 million in the second quarter of 2014 in accordance with our loan methodology, which takes into consideration new loan and lease fundings, commitments to make loans and leases, and underlying credit quality trends. The decrease in the credit loss ratio was due to the loans acquired in the CapitalSource merger for which there is no initial credit loss allowance. All acquired loans are initially recorded at their estimated fair value with such initial fair value including an estimate of credit losses. We present the two additional credit coverage ratios shown in the table below to give an indication of overall credit risk coverage:  

CREDIT QUALITY

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

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

The following table presents our 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:

CAPITALSOURCE MERGER

On April 7, 2014, PacWest Bancorp ("PacWest") completed the merger with CapitalSource Inc. ("CapitalSource"). The combined company is called PacWest Bancorp. As part of the merger, CapitalSource Bank, a wholly-owned subsidiary of CapitalSource, merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank, and the combined subsidiary bank is called Pacific Western Bank.

Upon closing, PacWest created the CapitalSource division of Pacific Western Bank. This division operates under the CapitalSource name and continues to serve businesses nationwide with a full spectrum of middle-market lending. Pacific Western Bank, through its combined network of 81 branches throughout California, continues to serve small and medium-sized businesses with financing solutions, cash management and deposit services.

In the merger with CapitalSource, each share of CapitalSource common stock was converted into the right to receive $2.47 in cash and 0.2837 of a share of PacWest Bancorp common stock. PacWest issued an aggregate of approximately 56.7 million shares of PacWest common stock to CapitalSource stockholders. Based on the closing price of PacWest's common stock on April 7, 2014 of $45.83 per share, the aggregate consideration paid to CapitalSource common stockholders and holders of equity awards to acquire CapitalSource common stock was approximately $3.1 billion.

The integration of CapitalSource Bank's deposit system and the conversion of CapitalSource Bank's branches to Pacific Western Bank's operating platform were completed over the weekend of April 12, 2014. CapitalSource had 21 branches, 12 of which were closed in the consolidation with Pacific Western Bank at the close of business on April 11, 2014. One overlapping Pacific Western branch was closed on April 11, 2014 as well. All remaining branches re-opened on Monday April 14, 2014 as Pacific Western Bank branches.

The following table shows the various purchase accounting adjustments at the merger date by category along with accretion/amortization periods: 

ABOUT PACWEST BANCORP

PacWest Bancorp is a bank holding company with over $15 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank ("Pacific Western"). Through 81 full-service branches located throughout the state of California, Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, to small and medium-sized businesses. Its national lending divisions CapitalSource and Pacific Western Equipment Finance, and its subsidiary CapitalSource Business Finance Group (formerly known as BFI Business Finance), deliver the full spectrum of financing solutions nationwide across numerous industries and property types. 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 profitability, return on assets, and Pacific Western Bank loan and lease portfolio growth and production. 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;
• deteriorations in credit and other markets;
• higher than anticipated loan losses;
• sustained reduction in real estate markets could negatively impact the value of our collateral and our borrowers' ability to repay loans;
• a change in the interest rate environment reduces interest margins;
• loan repayments higher than expected;
• lower than expected revenues;
• asset/liability repricing risks and liquidity risks reduces interest margins and the value of investments;
• increased costs to manage and sell foreclosed assets;
• higher mix of cash and investments;
• reduced demand for our services;
• our inability to grow deposits and access wholesale funding sources;
• legislative or regulatory requirements or changes adversely affected the Company's business, including an increase to capital requirements;
• regulatory approvals for any capital activities cannot be obtained on the terms expected or on the anticipated 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.

GAAP TO NON-GAAP RECONCILIATION

This press release contains certain non-GAAP financial disclosures for adjusted net earnings, adjusted return on average assets, adjusted return on average equity, return on average tangible equity, adjusted return on average tangible equity, tangible common equity amounts and ratios, tangible book value per share, adjusted efficiency ratio, core net interest margin, and operating expense as a percentage of average assets. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance:

• Adjusted net earnings - as analysts and investors view this measure as an indicator of the Company's ability to both generate earnings and absorb credit losses, we disclose this amount in addition to net earnings.
• Adjusted return on average assets, adjusted return on average equity, return on average tangible equity, adjusted return on average tangible equity, tangible common equity amounts and ratios, and tangible book value per share - given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to return on average assets, return on average equity, equity-to-assets ratio, and book value per share, respectively.
• Adjusted efficiency ratio - we disclose this measure in addition to efficiency ratio as it shows the trend in recurring overhead-related noninterest expense relative to recurring net revenues.

Please refer to the tables on the following pages for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.