PacWest Bancorp Announces Results For The Third Quarter 2017

Highlights

• Net Earnings of $101.5 Million, or $0.84 Per Diluted Share
• New Loan and Lease Production of $1.0 Billion
• Core Deposits Increase of $314 Million and Represent 81% of Total Deposits
• Tax Equivalent Net Interest Margin of 5.08%
• All Approvals Received for CUB Acquisition; Expected to Close October 20

LOS ANGELES, Oct. 17, 2017 (GLOBE NEWSWIRE) -- PacWest Bancorp PACW today announced net earnings for the third quarter of 2017 of $101.5 million, or $0.84 per diluted share, compared to net earnings for the second quarter of 2017 of $93.6 million, or $0.77 per diluted share. The increase in net earnings from the prior quarter was primarily due to lower income tax expense partially offset by lower noninterest income and a higher provision for credit losses. Income tax expense for the third quarter was lower due to a $13.6 million reversal of a valuation allowance related to tax credits which, based on our latest analysis, are more likely than not to be utilized before they expire.  

Matt Wagner, President and CEO, commented, "We delivered solid performance in the third quarter and continue to demonstrate our earning power. Our strong third quarter results produced a return on assets of 1.82% and a return on tangible equity of 16.85%."

Mr. Wagner continued, "All required approvals have been received and we look forward to closing the CU Bancorp acquisition this week. We are excited about the exceptional core deposit franchise and opportunities for increased operating efficiencies provided by this transaction."

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased by $0.8 million to $241.7 million for the third quarter of 2017 compared to $242.5 million for the second quarter of 2017 due mainly to interest expense growth exceeding interest income growth for the quarter. The loan and lease yield was 6.01% for the third quarter of 2017 compared to 6.07% for the second quarter of 2017.  The decrease in the loan and lease yield was principally due to the decrease in discount accretion on acquired loans and lower loan fee income.  Total discount accretion on acquired loans was $5.5 million in the third quarter of 2017 compared to $7.5 million in the second quarter of 2017.

The tax equivalent NIM was 5.08% for the third quarter of 2017 compared to 5.21% for the second quarter of 2017.  The decrease in the NIM was mostly due to the decrease in discount accretion on acquired loans and loan fee income and a higher cost of average interest-bearing liabilities. Total discount accretion on acquired loans contributed 11 basis points to the NIM for the third quarter of 2017 and 16 basis points for the second quarter of 2017.

The cost of average total deposits increased to 0.31% for the third quarter of 2017 from 0.25% for the second quarter of 2017 due to higher rates paid for non-core deposits and select large-balance deposit customers.

Noninterest Income

Noninterest income decreased by $3.9 million to $31.4 million for the third quarter of 2017 compared to $35.3 million for the second quarter of 2017 due mainly to a $3.3 million decrease in leased equipment income due to lower gains on early lease terminations and a $1.9 million decrease in other income as the second quarter included a BOLI death benefit and higher recoveries from third parties, offset by an increase in gain on sale of loans and leases of $2.2 million.   

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

Noninterest Expense

Noninterest expense increased by $0.8 million to $118.5 million for the third quarter of 2017 compared to $117.7 million for the second quarter of 2017 due mostly to a $2.3 million increase in foreclosed assets expense offset by decreases in several expense categories. The increase in foreclosed assets expense was due to a write-down of $2.1 million on foreclosed property.   

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

Income Taxes

The overall effective income tax rate was 27.2% for the third quarter of 2017 and 37.0% for the second quarter of 2017.  The effective rate for the third quarter was lower due to the $13.6 million reversal of a valuation allowance related to tax credits which, based on our latest analysis, are more likely than not to be utilized before they expire. The estimated effective tax rate for the full year 2017 is approximately 35%. 

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases held for investment, net of deferred fees, increased by $147.1 million in the third quarter to $15.7 billion at September 30, 2017.  The net increase was driven mainly by third quarter new production of $1.0 billion and disbursements of $722.8 million, offset partially by payoffs of $903.4 million and paydowns of $637.7 million.    
The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the periods indicated:

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

Deposits and Client Investment Funds

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

At September 30, 2017, core deposits totaled $13.5 billion, or 81% of total deposits, including $6.9 billion of noninterest-bearing demand deposits, or 41% 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 September 30, 2017 were $1.9 billion, of which $1.6 billion was managed by S1AM.

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

A provision for credit losses of $15.1 million was recorded in the third quarter of 2017 compared to $11.5 million in the second quarter of 2017.  The third quarter provision consisted of $15.5 million for non-purchased credit impaired ("Non-PCI") loans and leases and a $0.4 million negative provision for PCI loans; this compares to a provision of $12.5 million and a negative provision of $1.0 million, respectively, for the second quarter of 2017.  The higher provision for the third quarter of 2017 was due mainly to loan risk rating downgrades combined with net portfolio growth.  The allowance for Non-PCI credit losses to Non-PCI loans and leases held for investment coverage ratio was 1.11% and 1.02% at September 30, 2017 and June 30, 2017. 

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

The gross charge-offs for the third quarter of 2017 included $3.4 million for venture capital loans. Recoveries for the quarter included $2.6 million related to venture capital loans previously charged off in 2017. The annualized ratio of total net charge-offs to total average loans was 0.02% for the quarter ended September 30, 2017 and 0.40% for the nine months ended September 30, 2017.   

CREDIT QUALITY

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

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:

CU BANCORP MERGER ANNOUNCEMENT

On April 6, 2017, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest will acquire CU Bancorp ("CUB") in a transaction valued at approximately $705 million as of the announcement date. 

CUB, headquartered in Los Angeles, California, is the parent of California United Bank ("CU Bank"), a California state-chartered non-member bank, with approximately $3.0 billion in assets and nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties at June 30, 2017. In connection with the acquisition, CU Bank will be merged into Pacific Western Bank, the principal operating subsidiary of PacWest.

The acquisition, which has been approved by the PacWest and CUB boards of directors and bank regulatory authorities, is expected to close on October 20, 2017.

ABOUT PACWEST BANCORP

PacWest Bancorp ("PacWest") is a bank holding company with over $22 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (the "Bank"). The Bank has 74 full-service branches located throughout the state of California and one branch in Durham, North Carolina. We provide commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses.  We offer additional products and services through our CapitalSource and Square 1 Bank divisions. Our CapitalSource Division provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle market businesses on a national basis.  Our Square 1 Bank Division 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 forward-looking statements relating to the Company's current business plans and expectations regarding future operating results and metrics and including statements about our expectations regarding our pending merger between the Company and CUB. 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. These risks and uncertainties include, but are not limited to, our ability to compete effectively against other financial institutions in our banking markets; the impact of changes in interest rates or levels of market activity, especially on our loan and investment portfolios; deterioration, weaker than expected improvement, or other changes in the state of the economy or the markets in which we conduct business (including the levels of IPOs and M&A activities); changes in credit quality and the effect of credit quality on our provision for loan and lease losses and allowance for loan and leases losses; our ability to attract deposits and other sources of funding or liquidity; our capital requirements and our ability to generate capital internally or raise capital on favorable terms; the costs and effects of legal, compliance and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews; the Company's ability to complete the pending CUB acquisition, or any future acquisition, successfully integrate such acquired entities, or achieve expected beneficial synergies and/or operating efficiencies, in each case within expected timeframes or at all; and our success at managing the risks involved in the foregoing items and all other factors set forth in the Company's public reports, including the Annual Report on Form 10-K for the year ended December 31, 2016, and particularly the discussion of risk factors within that document.

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.