PACW PacWest Bancorp

SAN DIEGO, July 15 /PRNewswire-FirstCall/ -- PacWest Bancorp (Nasdaq: PACW) today announced net earnings for the second quarter of 2010 of $2.7 million, or $0.07 per diluted share, compared to a net loss of $60.5 million, or $1.76 per diluted share, for the first quarter of 2010.  The first quarter included a higher credit loss provision caused by the Company's previously reported sale of $323.6 million of classified loans in February 2010 for $200.6 million in cash.  

On July 1, 2010, we purchased a $234.1 million performing Southern California commercial real estate loan portfolio serviced by the Bank for a cash price of $228.3 million.  Such loans have a weighted-average coupon interest rate of 6.15% and a weighted average maturity of 4.6 years.  Had these loans been purchased on April 1, 2010, we estimated that our net interest margin would have been 5.20% for the second quarter of 2010.  

This press release contains non-GAAP financial disclosures for tangible common equity.  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.  Because the use of tangible common equity amounts and ratios is becoming more prevalent among banking regulators, investors and analysts, we disclose our tangible common equity ratios in addition to equity-to-assets ratios.  Please refer to the table at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.  

SECOND QUARTER RESULTS

The improvement in second quarter net earnings compared to the prior quarter net loss is due mostly to lower net credit and OREO costs.  The second quarter of 2010 credit loss provision was $110.3 million lower ($64.0 million after-tax) and OREO costs were $10.1 million lower ($5.8 million after-tax).  Net credit costs on a pre-tax basis are shown in the following table.

The credit loss provision for the second quarter has two components: $14.1 million for non-covered loans and $8.9 million for covered loans.  The non-covered credit loss provision was driven by (a) non-covered loan net charge-offs totaling $12.0 million and (b) the level of nonaccrual and classified loans.  Nonaccrual non-covered loans increased $8.4 million, or 8%, during the second quarter to $108.3 million.  The covered loan credit loss provision was driven by net charge-offs of $8.5 million which resulted mostly from updated appraisals reflecting credit deterioration subsequent to the Affinity acquisition date.  The impact of the $8.9 million covered loan credit loss provision was offset mostly by FDIC loss-sharing income of $7.0 million.  

The first quarter of 2010 credit loss provision included $112.5 million for non-covered loans and $20.7 million for covered loans.  The non-covered credit loss provision was driven by (a) the classified loan sale completed during the quarter which resulted in a charge-off of $123 million and (b) other non-covered loan net charge-offs totaling $22 million.  The covered loan credit loss provision was due to net charge-offs of $31.0 million.  The impact of the $20.7 million covered loan credit loss provision was offset mostly by FDIC loss-sharing income of $18.3 million.  

Matt Wagner, Chief Executive Officer, commented, "Our second quarter results and positive net earnings for the quarter reflect our efforts over the previous several quarters to increase capital, work through credit issues and focus on operating expenses.  While the economy remains fragile and the credit environment continues to be challenging, our core operations generate an income stream that should expand to the extent credit provisions are reduced.  Nevertheless, the ongoing uncertainty in the marketplace and resulting market volatility make it difficult to predict when credit provisions will return to more normalized levels."

Mr. Wagner continued, "Our return to profitability together with our credit loss reserve coverage and strong capital levels position us to grow both organically and through acquisitions.  We will continue to participate in the FDIC troubled bank bidding process and to identify other acquisition candidates in the banking sector that make sense for us.  We believe, as do others in the industry, that merger and acquisition activity will increase by the beginning of 2011."

Vic Santoro, Executive Vice President and Chief Financial Officer, stated, "We had a positive second quarter, showing a return to profitability, increased capital both on a regulatory and tangible basis, and continued strong deposit growth.  We used our strong liquidity position to purchase the performing loan portfolio on July 1, 2010 and deploy a portion of the cash that had been accumulated from operations and the classified loan sale.  Our strong net interest margin will be enhanced by the loan portfolio purchase."

YEAR TO DATE RESULTS

The higher net loss for the six months ended June 30, 2010 compared to the same period last year was due mostly to a higher credit loss provision from the Company's sale of $323.6 million of classified loans in the first quarter of 2010 and higher non-covered loan charge-offs.  When compared to the same period for 2009, the current 2010 period shows higher net interest income of $16.2 million ($9.4 million after-tax), higher provision for credit losses of $124.2 million ($72.0 million after-tax), higher FDIC loss sharing income of $23.2 million ($13.5 million after-tax) and higher noninterest expense of $6.4 million ($3.7 million after-tax).  The increase in these categories reflects the inclusion of the operating results for Affinity Bank since the August 2009 acquisition date.

BALANCE SHEET CHANGES

On February 23, 2010, we completed the sale of 61 non-covered adversely classified loans totaling $323.6 million to an institutional buyer for $200.6 million in cash. The sale proceeds along with cash flow generated from operations were used during the second quarter to purchase investment securities and repay FHLB advances.  Investment securities available-for-sale increased $221.2 million during the second quarter to $660.4 million at June 30, 2010.  FHLB advances totaling $125.0 million were repaid during the second quarter.  At June 30, 2010 overnight funds held at the Federal Reserve Bank totaled $316.0 million, a decrease of $114.9 million from the balance at March 31, 2010.  As mentioned above, on July 1, 2010 we utilized a portion of these funds to purchase a $234.1 million performing Southern California commercial real estate loan portfolio for $228.3 million in cash.

Gross non-covered loans decreased $69.0 million during the second quarter to $3.2 billion at June 30, 2010.   Declines in the non-covered portfolio continue as a result of weakened economic conditions which lowered the demand for loans, presented fewer acceptable lending opportunities and resulted in higher levels of charge-offs.  The covered loan portfolio continues to decline from resolutions of problem assets.  Non-covered OREO declined $5.1 million during the second quarter to $24.5 million at June 30, 2010 due to sales activity exceeding new foreclosures.  Covered OREO increased $2.4 million during the second quarter to $27.8 million at June 30, 2010.

Total deposits increased $67.7 million during the second quarter to $4.2 billion at June 30, 2010.  Core deposits, which include noninterest-bearing demand, interest checking, money market, and savings accounts, increased $20.1 million and totaled $3.1 billion at June 30, 2010.  Time deposits increased $47.6 million to $1.1 billion at June 30, 2010.  Time deposits with original terms of greater than one year increased $200.4 million as new and existing customers elected to extend the maturity of their time deposits.    Brokered and acquired money desk deposits totaled $104.9 million at June 30, 2010.  Noninterest-bearing demand deposits grew by $6.9 million during the second quarter to $1.4 billion and represented 33% of total deposits at June 30, 2010.

COVERED ASSETS

As part of the Affinity acquisition on August 28, 2009, we entered into a loss sharing agreement with the FDIC that covers a substantial portion of losses incurred after the acquisition date on loans, other real estate owned and certain investment securities.  A summary of the covered assets at June 30, 2010 and March 31, 2010 is shown in the following table.

NET INTEREST INCOME

Net interest income was $57.6 million for the second quarter of 2010 compared to $58.0 million for the first quarter of 2010.  The $406,000 net decrease is due mostly to lower average loans while interest expense declined $328,000 due mainly to lower average borrowings.  

Net interest income grew by $16.2 million to $115.6 million during the six months ended June 30, 2010 compared to the same period last year.  This growth was due to a $10.5 million increase in interest income and a $5.7 million decline in interest expense.  The increase in interest income was due primarily to higher average balances of loans and investment securities which are attributed to the Affinity acquisition in August 2009.  The decline in interest expense was due mainly to lower rates paid on deposits and borrowings and lower average borrowings.

NET INTEREST MARGIN

Our net interest margin for the second quarter of 2010 was 4.85%, a decrease of 5 basis points from the 4.90% posted for the first quarter of 2010.  Such decline reflects lower average loans during the second quarter as a result of the first quarter of 2010 classified loan sale.  The yield on average loans was 6.56% for the second quarter of 2010 compared to 6.27% for the prior quarter.  The loan yield, earning asset yield and net interest margin are all affected by loans being placed on nonaccrual and the acceleration of purchase discounts on covered loan pay-offs.  The net interest margin for the second quarter was positively impacted by 11 basis points from the combination of discount acceleration on covered loan pay-offs and nonaccrual loan accrued interest reversals.   The cost of interest-bearing deposits and all-in deposit costs each decreased 2 basis points to 0.99% and 0.66%, respectively; such decreases resulted from a combination of lower rates on money market and interest checking accounts and an increase in time deposit volume and related interest cost as customers elected products with a longer maturity.

The net interest margin for the first six months of 2010 was 4.87% compared to 4.82% for the first six months of 2009.  The increase is due mostly to lower funding costs offset somewhat by an increase in lower yielding assets as the Company increased its on-balance sheet liquidity.  

NONINTEREST INCOME

Noninterest income for the second quarter of 2010 totaled $12.1 million compared to $21.3 million for the first quarter of 2010.  Second quarter noninterest income includes FDIC loss sharing income of $7.0 million compared to $16.2 million recognized in the prior quarter.  FDIC loss sharing income represents the FDIC's share of credit losses occurring subsequent to the Affinity acquisition date.  

Noninterest income increased for the six months ended June 30, 2010 to $33.4 million from the $11.5 million earned during the same period in 2009.  The $21.9 million increase in noninterest income is due mainly to $23.2 million of FDIC loss sharing income.  

NONINTEREST EXPENSE

Noninterest expense totaled $42.8 million for the second quarter of 2010 compared to $50.6 million for the first quarter of 2010.  The $7.8 million decrease was due mostly to a combination of lower OREO costs, increased compensation costs from reinstated incentive accruals, and increased deposit insurance costs from higher assessments associated with the increase in our deposit balances and our participation in the Temporary Liquidity Guarantee Program.

Noninterest expense includes amortization of time-based and performance-based restricted stock, which is included in compensation, and intangible asset amortization.  Amortization of restricted stock totaled $2.2 million for the second quarter of 2010 compared to $2.3 million for the first quarter of 2010.  Amortization expense for restricted stock is estimated to be $8.5 million for 2010.  Intangible asset amortization totaled $2.4 million for both the second and first quarters of 2010 and is estimated to be $9.5 million for 2010.  The 2010 estimates of both restricted stock award expense and intangible asset amortization are subject to change.

Noninterest expense for the six months ended June 30, 2010 totaled $93.3 million compared to $86.9 million for the same period in 2009.  Other professional services increased $1.0 million due mainly to higher legal costs related to loan workouts.    Insurance and assessments decreased $584,000 due to a $2.0 million special assessment included in the second quarter of 2009 with no similar assessment in 2010 offset by higher deposit insurance premiums in the current year from rate increases and higher average deposit balances.  OREO costs increased $918,000 due to the volume of activity and continued deterioration in market values.  Other expense increased $1.9 million due mostly to higher loan-related costs of $760,000 from loan workouts and a $726,000 penalty for early repayment of $125 million of FHLB advances; there were no FHLB prepayment penalties in the first half of 2009.  The 2009 reorganization charges totaling $1.2 million related to a staff reduction and additional rent for a discontinued acquired office; there were no similar charges in 2010.  The increase in most other expense categories was due mostly to higher overhead costs related to the August 2009 Affinity acquisition.

TAXES

The effective tax rate for the second quarter of 2010 was 32.0% compared to 42.1% for the first quarter of 2010.  The lower rate in the second quarter results mostly from resolution of a tax contingency which reduced income tax expense by $400,000.  The Company's blended Federal and California statutory rate is 42.0%.

CREDIT QUALITY

Although our credit risk profile improved through both the classified loan sale and ongoing portfolio workout measures, our loan portfolio, including both non-covered and covered loans, continues to experience pressure from adverse economic conditions in Southern California and other areas where our borrowers and collateral are located.  We expect such situation to continue during the remainder of 2010.

Credit Loss Provisions

The second quarter provision for credit losses totaled $23.0 million and is composed of $14.1 million on the non-covered loan portfolio and $8.9 million on the covered loan portfolio.  The provision on the non-covered portfolio is generated by our allowance methodology and reflects net charge-offs and the levels of nonaccrual and classified loans.  The covered loan credit loss provision increases the covered loan allowance for credit losses and results from credit deterioration on covered loans since the Affinity acquisition date.

Second quarter net charge-offs on non-covered loans totaled $12 million; this compares to first quarter net charge-offs of $123 million related to the classified loan sale and $22 million in other non-covered loan charge-offs.  These charge-off levels reflect the aggressive actions we are taking to promptly identify and resolve problem credits.

The allowance for credit losses on the non-covered portfolio totaled $93.4 million and $91.4 million at June 30, 2010 and March 31, 2010 and represented 2.93% and 2.81% of the non-covered loan balances at those respective dates.

Non-covered Nonaccrual Loans and Other Real Estate Owned

Non-covered nonperforming assets include non-covered nonaccrual loans and non-covered OREO and totaled $132.8 million at June 30, 2010 compared to $129.6 million at March 31, 2010. The ratio of non-covered nonperforming assets to non-covered loans and non-covered OREO increased to 4.14% at June 30, 2010 from 3.95% at March 31, 2010.  The increase in non-covered nonperforming assets is due to higher nonaccrual loans.  

The types and balances of non-covered loans included in the categories of nonaccrual and accruing loans past due between 30 and 89 days at June 30, 2010 and March 31, 2010 follow:

Nonaccrual non-covered loans increased $8.4 million during the second quarter and is composed of (a) additions of $25.2 million, (b) reductions, payoffs and returns to accrual status of $10.1 million, (c) foreclosures of $3.5 million, and (d) charge-offs of $3.2 million.

At June 30, 2010, approximately 70% of nonaccrual loans were represented by:

1. SBA-related loans of $28.5 million.
2. Two loans collateralized by land in Ventura County, California totaling $26.2 million.  The borrower's unsecured loan for $4.2 million (included in the caption "Commercial" in the above table) has since been combined with the land loan and is now secured.  The value of the land, based on the most recent third party appraisal, exceeds the combined loan balance.
3. Two unrelated loans totaling $16.9 million secured by out-of-state shopping centers.  Each loan has been written down to its underlying collateral value based on the most recent third party appraisals.  A receiver is in place to manage one property while the borrowers associated with the other property have filed for bankruptcy protection.  Protracted collection efforts may result in additional write-downs on these loans and resultant credit loss provisions.
4. Two unrelated hotel-secured loans totaling $4.5 million.  These loans have also been written down to their collateral values based on the most recent third party appraisals.  Additional write-downs and resultant credit loss provisions may be necessary if economic conditions in the hospitality segment do not improve in the near future.

Of all the loans cited above, all but $2.1 million were on nonaccrual status at March 31, 2010.

The details of non-covered OREO follow:

The details of the non-covered nonowner-occupied residential construction loan portfolio as of the dates indicated follow:

The components of our non-covered real estate mortgage loan portfolio are as follows.

Covered Loans and Other Real Estate Owned

As part of the Affinity acquisition that occurred on August 28, 2009, we entered into a loss sharing agreement with the FDIC that covers a substantial portion of losses incurred after the acquisition date on loans, other real estate owned and certain investment securities.  The carrying value of loans that would normally be considered nonaccrual except for the accounting requirements regarding purchased impaired loans and other real estate owned covered by the loss sharing agreement ("covered nonaccrual loans" and "covered OREO"; collectively, "covered nonperforming assets") are as follows.

REGULATORY CAPITAL MEASURES ARE ABOVE THE WELL-CAPITALIZED MINIMUMS

PacWest and its wholly-owned banking subsidiary, Pacific Western Bank, each remained well capitalized at June 30, 2010 as shown in the following table.

COMMON STOCK

On March 1, 2010 holders of 1,348,040 warrants to acquire PacWest Bancorp common stock exercised such warrants for net proceeds of $26.6 million.  The warrants, which had a strike price of $20.20 per share, represented 99% of the 1,361,656 six-month warrants issued in August 2009.  An additional 1,361,657 million warrants issued in August 2009 with a strike price of $20.20 remain outstanding, of which 1,348,040 expire on August 27, 2010 and 13,617 expire on August 30, 2010.

On December 22, 2009, PacWest Bancorp filed a registration statement with the SEC to offer to sell, from time to time, shares of common stock, preferred stock, and other equity linked securities for an aggregate initial offering price of up to $350.0 million. The registration statement was declared effective on January 8, 2010. Proceeds from the offering are anticipated to be used to fund future acquisitions of banks and financial institutions and for general corporate purposes.  

ABOUT PACWEST BANCORP

PacWest Bancorp ("PacWest") is a bank holding company with $5.2 billion in assets as of June 30, 2010, with one wholly-owned banking subsidiary, Pacific Western Bank ("Pacific Western"). Through 68 full-service community banking branches, Pacific Western provides commercial banking services, including real estate, construction and commercial loans, to small and medium-sized businesses. Pacific Western's branches are located in Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Francisco, San Mateo and Ventura Counties.  Through its subsidiary BFI Business Finance and its division First Community Financial, Pacific Western also provides working capital financing to growing companies located throughout the Southwest, primarily in the states of Arizona, California and Texas. Additional information regarding PacWest Bancorp is available on the Internet at www.pacwestbancorp.com.  Information regarding Pacific Western Bank is also available on the Internet at www.pacificwesternbank.com.

FORWARD-LOOKING STATEMENTS

This press release contains certain forward-looking information about PacWest that is intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to: lower than expected revenues; credit quality deterioration or a reduction in real estate values could cause an increase in the allowance for credit losses and a reduction in net earnings; increased competitive pressure among depository institutions; the Company's ability to complete future acquisitions, successfully integrate such acquired entities, or achieve expected beneficial synergies and/or operating efficiencies within expected time-frames or at all; settlements with the FDIC related to our loss-sharing arrangement and other adjustments related to the Affinity Bank acquisition; the possibility that personnel changes will not proceed as planned; the cost of additional capital is more than expected; a change in the interest rate environment reduces interest margins; asset/liability repricing risks and liquidity risks; pending legal matters may take longer or cost more to resolve or may be resolved adversely to the Company; general economic conditions, either nationally or in the market areas in which the Company does or anticipates doing business, are less favorable than expected; environmental conditions, including natural disasters, may disrupt our business, impede our operations, negatively impact the values of collateral securing the Company's loans or impair the ability of our borrowers to support their debt obligations; the economic and regulatory effects of the continuing war on terrorism and other events of war, including the war in Iraq and Afghanistan; legislative or regulatory requirements or changes adversely affecting the Company's business; and changes in the securities markets; regulatory approvals for any capital activities cannot be obtained on the terms expected or on the anticipated schedule; and, other risks that are described in PacWest's public filings with the U.S. Securities and Exchange Commission (the "SEC"). If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be incorrect, PacWest's results could differ materially from those expressed in, implied or projected by such forward-looking statements. PacWest assumes no obligation to update such forward-looking statements.

For a more complete discussion of risks and uncertainties, investors and security holders are urged to read PacWest Bancorp's annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed by PacWest with the SEC.  The documents filed by PacWest with the SEC may be obtained at PacWest Bancorp's website at www.pacwestbancorp.com or at the SEC's website at www.sec.gov.  These documents may also be obtained free of charge from PacWest by directing a request to: PacWest Bancorp c/o Pacific Western Bank, 275 North Brea Boulevard, Brea, CA 92821.  Attention: Investor Relations. Telephone 714-671-6800.