Market Overview

PacWest Bancorp Announces Results for the Third Quarter 2018

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Highlights

  • Net Earnings of $116.3 Million, or $0.94 Per Diluted Share
  • Tax Equivalent Net Interest Margin of 4.99% for Q3 and 5.09% YTD 2018
  • New Loan and Lease Production of $1.3 Billion; $345 Million of Net Loan Growth
  • Net Charge-offs 48% Lower for YTD 2018 Compared to Same Period in 2017
  • Core Deposits Steady at 87% of Total Deposits
  • Announced Agreement to Acquire El Dorado Savings Bank, F.S.B.

LOS ANGELES, Oct. 16, 2018 (GLOBE NEWSWIRE) -- PacWest Bancorp (NASDAQ:PACW) today announced net earnings for the third quarter of 2018 of $116.3 million, or $0.94 per diluted share, compared to net earnings for the second quarter of 2018 of $115.7 million, or $0.92 per diluted share.  The increase in net earnings from the prior quarter was due primarily to a lower provision for credit losses, offset partially by lower net interest income and lower noninterest income. 

The provision for credit losses decreased by $6.0 million in the third quarter of 2018 compared to the second quarter of 2018 due mainly to a lower level of loans rated special mention.  Net interest income decreased by $2.0 million in the third quarter of 2018 due mostly to higher deposit costs and a lower yield on average loans and leases, offset partially by a higher balance of average loans and leases.  Noninterest income decreased by $2.7 million in the third quarter of 2018 due primarily to a $6.4 million decrease in other income, offset partially by a $2.6 million increase in warrant income and a $0.9 million increase in dividends and gains on equity investments.   

Matt Wagner, President and CEO, commented, "We achieved strong net loan growth across all our business lines along with solid earnings and operating metrics. Our third quarter results produced a return on assets of 1.89% and a return on tangible equity of 21.61%."

Mr. Wagner continued, "Our third quarter tax equivalent NIM decreased by 19 basis points to 4.99% due to higher rates on deposits from competitive pressures and lower loan yields resulting from lower discount accretion."

Mr. Wagner continued, "We recently announced our pending acquisition of El Dorado Savings Bank which will expand our Community Banking franchise into Northern California and Northern Nevada and enhance our core funding with approximately $2.0 billion of stable low cost deposits." 

FINANCIAL HIGHLIGHTS

  At or For the        At or For the     
  Three Months Ended       Nine Months Ended    
  September 30,   June 30,   Increase   September 30,   Increase
Financial Highlights    2018       2018     (Decrease)     2018       2017     (Decrease)
   
  (Dollars in thousands, except per share data)
Net earnings $   116,287     $   115,735     $   552     $   350,298     $   273,781     $   76,517  
Diluted earnings per share $   0.94     $   0.92     $   0.02     $   2.79     $   2.26     $   0.53  
Return on average assets   1.89 %     1.93 %       (0.04 )     1.94 %     1.67 %       0.27  
Return on average                      
tangible equity (1)    21.61 %     20.98 %       0.63       21.22 %     15.63 %       5.59  
                       
Net interest margin ("NIM")                      
(tax equivalent)   4.99 %     5.18 %       (0.19 )     5.09 %     5.15 %       (0.06 )
Yield on average loans and                       
leases (tax equivalent)   6.20 %     6.30 %       (0.10 )     6.20 %     6.01 %       0.19  
Cost of average total deposits   0.46 %     0.37 %       0.09       0.38 %     0.26 %       0.12  
Efficiency ratio   40.9 %     39.8 %       1.1       40.8 %     40.7 %       0.1  
                       
Total assets $   24,782,126     $   24,529,557     $   252,569     $   24,782,126     $   22,242,932     $   2,539,194  
Loans and leases held                       
for investment,                       
net of deferred fees $   17,230,146     $   16,885,192     $   344,954     $   17,230,146     $   15,690,517     $   1,539,629  
Noninterest-bearing deposits $   7,834,480     $   8,126,153     $   (291,673 )   $   7,834,480     $   6,911,874     $   922,606  
Core deposits $   15,512,742     $   15,586,238     $   (73,496 )   $   15,512,742     $   13,531,300     $   1,981,442  
Total deposits $   17,879,543     $   17,929,192     $   (49,649 )   $   17,879,543     $   16,773,245     $   1,106,298  
                       
Noninterest-bearing                       
deposits as percentage                       
of total deposits   44 %     45 %       (1 )     44 %     41 %       3  
Core deposits as                       
percentage of total                      
deposits   87 %     87 %       -       87 %     81 %       6  
                       
Equity to assets ratio    19.13 %     19.48 %       (0.35 )     19.13 %     20.73 %       (1.60 )
Tangible common equity                       
ratio (1)   9.61 %     9.86 %       (0.25 )     9.61 %     12.02 %       (2.41 )
Book value per share $   38.46     $   38.36     $   0.10     $   38.46     $   37.96     $   0.50  
Tangible book value per                       
share (1) $   17.28     $   17.35     $   (0.07 )   $   17.28     $   19.84     $   (2.56 )
                       
(1) Non-GAAP measure.                      
                       

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased by $2.0 million to $260.3 million for the third quarter of 2018 compared to $262.3 million for the second quarter of 2018 due to interest expense growth exceeding interest income growth.  Interest expense increased due to higher deposit costs and one additional day in the third quarter.  Interest income increased due primarily to a higher balance of average loans and leases and one additional day in the third quarter, offset partially by a lower yield on average loans and leases.  The tax equivalent yield on average loans and leases was 6.20% for the third quarter of 2018 compared to 6.30% for the second quarter of 2018. The decrease in the yield on average loans and leases was due principally to lower discount accretion on acquired loans (14 basis points in the third quarter versus 21 basis points in the second quarter).    

The tax equivalent NIM was 4.99% for the third quarter of 2018 compared to 5.18% for the second quarter of 2018. The decrease in the NIM was due mainly to higher deposit costs and a lower yield on average loans and leases resulting from lower discount accretion on acquired loans.          

The cost of average total deposits increased to 0.46% for the third quarter of 2018 from 0.37% for the second quarter of 2018 due to higher rates paid on deposits in conjunction with increased market interest rates.  

Provision for Credit Losses

A provision for credit losses of $11.5 million was recorded in the third quarter of 2018 compared to $17.5 million in the second quarter of 2018. The lower provision for the third quarter of 2018 was due to a lower level of loans graded special mention at September 30, 2018 compared to June 30, 2018. Loans graded special mention have a higher general reserve amount than loans graded pass.  

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

  Three Months Ended       Nine Months Ended
  September 30,   June 30,   Increase   September 30,
Provision for Credit Losses  2018    2018   (Decrease)    2018
   
  (In thousands)
Addition to allowance for loan              
and lease losses $   11,500   $   15,000   $   (3,500 )   $   26,274
Addition to reserve for unfunded             
loan commitments     -       2,500       (2,500 )       6,726
Total provision for credit losses $   11,500   $   17,500   $   (6,000 )   $   33,000
               

Noninterest Income

Noninterest income decreased by $2.7 million to $36.9 million for the third quarter of 2018 compared to $39.6 million for the second quarter of 2018 due mainly to decreases in other income and leased equipment income, partially offset by increases in warrant income, dividends and gains on equity investments, and other commissions and fees.  Other income and leased equipment income decreased in the third quarter due to lower gains on early lease terminations. Warrant income increased due to higher realized gains on exercised warrants primarily from a $3.1 million gain on a warrant in a company that completed an IPO. Dividends and gains on equity investments increased due to higher realized gains on investments sold. The increase in other commissions and fees was attributable to higher loan-related fees.

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

  Three Months Ended    
  September 30,   June 30,   Increase
Noninterest Income  2018    2018   (Decrease)
   
  (In thousands)
Service charges on deposit accounts $   3,979   $   4,265   $   (286 )
Other commissions and fees     12,397       11,767       630  
Leased equipment income     9,120       9,790       (670 )
Gain on sale of loans and leases     -       106       (106 )
Gain on sale of securities     826       253       573  
Other income:          
Dividends and gains on equity investments   2,895
    1,992
    903
 
Warrant income   3,818
    1,225
    2,593
 
Other   3,877
    10,240
      (6,363 )
Total noninterest income  $   36,912   $   39,638   $   (2,726 )
 

Noninterest Expense

Noninterest expense increased by $1.7 million to $128.1 million for the third quarter of 2018 compared to $126.4 million for the second quarter of 2018 attributable primarily to a $2.4 million increase in compensation expense, a $0.8 million increase in other professional expense, and a $0.8 million increase in acquisition costs, partially offset by decreases in most other expense categories. Compensation expense increased due to higher stock compensation expense for our performance-based restricted stock units as we now expect to achieve a higher level of certain performance metrics, and higher commissions expense related to the increased warrant income. Other professional services increased due to higher legal and consulting expense. The increase in acquisition costs relates to the recently announced pending acquisition of El Dorado Savings Bank.

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

  Three Months Ended    
  September 30,   June 30,   Increase
Noninterest Expense  2018      2018     (Decrease)
  (In thousands)
Compensation $   72,333     $   69,913     $   2,420  
Occupancy      13,069         13,575         (506 )
Data processing     6,740         6,896         (156 )
Other professional services     6,058         5,257         801  
Insurance and assessments     5,446         5,330         116  
Intangible asset amortization     5,587         5,587         -  
Leased equipment depreciation     5,001         5,237         (236 )
Foreclosed assets income, net     (257 )       (61 )       (196 )
Acquisition, integration and reorganization costs     800         -         800  
Loan expense     2,249         3,058         (809 )
Other     11,127         11,657         (530 )
Total noninterest expense $   128,153     $   126,449     $   1,704  
 

Income Taxes

The overall effective income tax rate was 26.2% for the third quarter of 2018 and 26.8% for the second quarter of 2018. The effective tax rate for the nine months ended September 30, 2018 was 26.9% while 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 $345.0 million in the third quarter of 2018 to $17.2 billion at September 30, 2018.  The net increase was driven mainly by production of $1.3 billion and disbursements of $966.7 million, offset partially by payoffs of $1.1 billion and paydowns of $795.2 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 Ended   Nine Months Ended
Loans and Leases  September 30,    June 30,    September 30, 
Held for Investment Roll Forward (1)   2018       2018       2018  
   
  (Dollars in thousands)
Balance, beginning of period $   16,885,192     $   16,455,285     $   16,972,743  
Additions:          
Production     1,315,572         1,256,559         3,317,049  
Disbursements     966,668         1,203,940         2,917,984  
 Total production and disbursements     2,282,240         2,460,499         6,235,033  
Reductions:          
Payoffs     (1,133,233 )       (1,154,400 )       (3,218,606 )
Paydowns     (795,243 )       (829,119 )       (2,560,364 )
 Total payoffs and paydowns     (1,928,476 )       (1,983,519 )       (5,778,970 )
Sales      (3,326 )       (27,779 )       (161,729 )
Transfers to foreclosed assets     (2,176 )       (1,059 )       (3,235 )
Charge-offs     (3,308 )       (18,235 )       (33,696 )
 Total reductions     (1,937,286 )       (2,030,592 )       (5,977,630 )
Balance, end of period $   17,230,146     $   16,885,192     $   17,230,146  
           
Weighted average rate on production (2)   5.17 %     5.04 %     5.16 %
           
(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 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:

  September 30,   June 30,   March 31,   September 30,
Loan and Lease Portfolio 2018   2018   2018   2017
   
  (In thousands)
Real estate mortgage:  
Commercial $   4,932,823   $   5,010,680   $   5,033,006   $   4,338,933
Residential     2,745,837       2,555,695       2,521,237       1,850,324
Total real estate mortgage     7,678,660       7,566,375       7,554,243       6,189,257
Real estate construction and land:              
Commercial     854,346       831,462       789,892       680,950
Residential     1,146,611       1,042,564       887,110       568,273
Total real estate construction and land     2,000,957       1,874,026       1,677,002       1,249,223
Total real estate      9,679,617       9,440,401       9,231,245       7,438,480
Commercial:              
Asset-based     3,222,311       3,184,300       2,957,890       2,792,823
Venture capital     2,031,895       2,008,205       1,920,643       1,959,489
Other commercial     1,897,852       1,873,607       1,947,590       3,113,574
Total commercial     7,152,058       7,066,112       6,826,123       7,865,886
Consumer     398,471       378,679       397,917       386,151
Total loans and leases held for               
investment, net of deferred fees $   17,230,146   $   16,885,192   $   16,455,285   $   15,690,517
               
Total unfunded loan commitments $   7,055,833   $   6,429,587   $   6,352,803   $   5,037,084
                       

Allowance for Credit Losses

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

  Three Months Ended September 30, 2018
  Allowance for   Reserve for    Total
Allowance for Credit  Loan and    Unfunded Loan   Allowance for
Losses Rollforward Lease Losses   Commitments   Credit Losses
  (In thousands)
Beginning balance $   132,139     $   35,361   $   167,500  
Charge-offs     (3,308 )       -       (3,308 )
Recoveries     1,589         -       1,589  
Net charge-offs     (1,719 )       -       (1,719 )
Provision      11,500         -       11,500  
Ending balance $   141,920     $   35,361   $   177,281  
           
           
   
  Three Months Ended June 30, 2018
  Allowance for   Reserve for    Total
Allowance for Credit  Loan and    Unfunded Loan   Allowance for
Losses Rollforward Lease 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  
           

The allowance for credit losses as a percentage of loans and leases held for investment increased to 1.03% at September 30, 2018 from 0.99% at June 30, 2018 due primarily to an increase in the level of specific reserves on impaired loans.

Gross charge-offs for the third quarter of 2018 were $3.3 million and included $1.1 million for venture capital loans, $0.7 million for real estate mortgage loans, and $0.7 million for asset-based loans.  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.  Recoveries for the third quarter of 2018 were $1.6 million and included $1.0 million for venture capital loans. Recoveries in the second quarter of 2018 were $1.1 million and included $0.8 million for other commercial loans.   

The annualized ratio of net charge-offs to average loans was 0.04% for the third quarter of 2018 compared to 0.41% for the second quarter of 2018. The annualized ratio of net charge-offs to average loans was 0.19% for the nine months ended September 30, 2018 compared to 0.35% for the same period in 2017.

Deposits and Client Investment Funds

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

  September 30,   June 30,   March 31,   September 30,
Deposit Category  2018      2018      2018      2017  
   
  (Dollars in thousands)
Noninterest-bearing demand deposits $   7,834,480     $   8,126,153     $   8,232,140     $   6,911,874  
Interest checking deposits     2,277,537         2,184,785         2,076,152         1,957,485  
Money market deposits     4,782,724         4,631,658         4,676,734         3,967,224  
Savings deposits     618,001         643,642         676,503         694,717  
Total core deposits     15,512,742         15,586,238         15,661,529         13,531,300  
Non-core non-maturity deposits     483,528         607,388         585,399         1,118,694  
Total non-maturity deposits     15,996,270         16,193,626         16,246,928         14,649,994  
Time deposits $250,000 and under     1,509,214         1,394,117         1,482,118         1,770,439  
Time deposits over $250,000     374,059         341,449         349,742         352,812  
Total time deposits     1,883,273         1,735,566         1,831,860         2,123,251  
Total deposits $   17,879,543     $   17,929,192     $   18,078,788     $   16,773,245  
 
Noninterest-bearing demand deposits   
as percentage of total deposits   44 %     45 %     46 %     41 %
Core deposits as percentage of total deposits   87 %     87 %     87 %     81 %
                               

At September 30, 2018, core deposits totaled $15.5 billion, or 87% of total deposits, including $7.8 billion of noninterest-bearing demand deposits, or 44% 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, 2018 were $2.0 billion, of which $1.5 billion was managed by S1AM.

CREDIT QUALITY  

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

  September 30,   June 30,   Increase
Credit Quality Metrics 2018   2018   (Decrease)
   
  (Dollars in thousands)
Nonaccrual loans and leases held for investment (1) $   112,972     $   113,745     $   (773 )
Accruing loans contractually past due           
90 days or more     -         -         -  
Foreclosed assets, net     4,407         2,231