PACW PacWest Bancorp

Highlights

• Net Earnings of $69.6 Million, or $0.68 Per Diluted Share; Adjusted Net Earnings of $65.2 Million, or $0.63 Per Diluted Share
• New Loan and Lease Production of $1.1 Billion; Annualized Growth Rate of 14%
• Core Deposits Increased $230.6 Million in the Quarter and Represent 56% of Total Deposits
• Core Tax Equivalent Net Interest Margin of 5.19%
• Square 1 Merger Closed October 6, 2015

LOS ANGELES, Oct. 15, 2015 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) (“PacWest”) today announced net earnings for the third quarter of 2015 of $69.6 million, or $0.68 per diluted share, compared to net earnings for the second quarter of 2015 of $85.1 million, or $0.83 per diluted share.  When certain income and expense items described below are excluded, adjusted net earnings were $65.2 million, or $0.63 per diluted share, for the third quarter of 2015 compared to $73.1 million, or $0.71 per diluted share, for the second quarter of 2015.  The decrease in adjusted net earnings is largely the result of higher foreclosed assets expense, lower adjusted noninterest income, and a higher provision for credit losses as compared to the second quarter.

Matt Wagner, President and CEO, commented, “As expected, the loan and lease production and growth rebounded strongly in the third quarter and will have a positive impact on revenues in the fourth quarter. We remain confident with our outlook for upper single-digits annual growth for the near term, bearing in mind there may be some volatility between quarters in the growth rate due to payoff activity.”

“The decline in our adjusted earnings on a linked-quarter basis was mostly due to a few discrete items, including an increase in foreclosed assets expense and a decline in equity investment income. Even with the noise from these items, our profitability levels remained solid with an adjusted ROA and ROTE for the third quarter of 1.55% and 14.1%.”

Mr. Wagner continued, “Our Non-PCI credit metrics improved during the third quarter, with meaningful reductions in the level of classified and nonperforming assets.  In addition, our credit exposure to the oil and gas services industry also improved, with reductions in both outstandings and nonaccrual balances of 14% and 25%, respectively.”

Mr. Wagner commented on the Square 1 merger stating, “With the completion of the Square 1 merger, PacWest has a substantially improved core deposit base and a proven platform for generating profitable loan, deposit and noninterest income growth in the venture capital banking space.  We welcome our new director, Mr. Paul Burke, and all of the Square 1 clients and employees.” 

Patrick Rusnak, Executive Vice President and CFO stated, “Third quarter core deposit growth was very good, totaling over $230 million of which about one third was generated by the CapitalSource Division.  While we have continued to make progress towards our goal of remixing the Bank’s deposit base, the Square 1 merger will significantly accelerate that process.”

Mr. Rusnak continued, “Our core tax equivalent net interest margin remains very strong at 5.19%.  We continue to control operating expenses as shown by the adjusted efficiency ratio of 40.6% in the third quarter.  Our focus for the remainder of 2015 will be loan and lease growth, core deposit growth, expense control and the successful integration of Square 1.” 

FINANCIAL HIGHLIGHTS

ADJUSTED NET 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 decreased $10.1 million to $192.5 million for the third quarter of 2015 compared to $202.6 million for the second quarter of 2015 due to lower discount accretion on acquired loans and lower FHLB dividends, offset by one more day in the third quarter.  The loan and lease yield for the third quarter of 2015 was 6.34% compared to 6.75% for the second quarter of 2015.  The decrease in the loan and lease yield was due to lower discount accretion on acquired loans and the yield on new originations being lower than the current portfolio yield. Discount accretion on acquired loans was $17.1 million in the third quarter of 2015 (57 basis points on the loan and lease yield) compared to $28.0 million in the second quarter of 2015 (92 basis points on the loan and lease yield). The decrease in discount accretion was due primarily to lower accelerated accretion from early payoffs.

The tax equivalent net interest margin (“NIM”) for the third quarter of 2015 was 5.46% compared to 5.89% for the second quarter of 2015. The decrease in the NIM was due to lower discount accretion on acquired loans, lower FHLB dividends and a higher percentage of average lower-yielding assets in the mix. Discount accretion on acquired loans contributed 48 basis points to the NIM in the third quarter of 2015 and 81 basis points in the second quarter of 2015. A $1.4 million special dividend received from the FHLB in the second quarter of 2015 contributed four basis points to the second quarter NIM.  

The cost of total deposits decreased to 0.33% in the third quarter from 0.37% in the prior quarter due primarily to a lower level of higher-cost time deposits and the increased balance of noninterest-bearing deposits.  The repricing of maturing time deposits at current rates and new time deposit production resulted in the decline in the weighted average contractual interest rate on time deposits to 0.67% at September 30, 2015 from 0.71% at June 30, 2015.

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

The tax equivalent NIM and loan and lease yield are impacted by volatility in accelerated accretion of acquisition discounts due to the prepayment of acquired loans and leases. The effects of this item are shown in the following table for the periods indicated:

The impact on the tax equivalent net interest income and NIM from all purchase accounting items is set forth in the table below for the periods indicated:

Noninterest Income

Noninterest income decreased by $3.8 million to $15.8 million for the third quarter of 2015 compared to $19.6 million for the second quarter of 2015 due mostly to lower realized gains and dividends on equity investments and lower income recognized as a result of loan and lease prepayments, offset by lower foreign currency translation net losses and higher net gains on sale of securities. Realized gains and dividends on equity investments tend to fluctuate from period to period based upon sales activity and actual dividends received. The second quarter of 2015 included the sale of three equity investments at a net gain of $6.0 million compared to one sale in the third quarter at a gain of $0.1 million and dividends on equity investments increased $2.2 million in the third quarter. Foreign currency translation net losses decreased $1.0 million from the prior quarter as the result of movement of the U.S. Dollar against various foreign currencies, principally the Euro. In June 2015, PacWest hedged its Euro-denominated trust preferred issuance with a cross currency swap to reduce the related foreign currency translation volatility. 

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 $4.8 million to $90.1 million for the third quarter of 2015 compared to $85.3 million for the second quarter of 2015.  The increase was due mostly to higher foreclosed assets expense of $6.9 million, offset by lower insurance and assessments expense of $0.9 million and lower compensation expense of $0.9 million.  The increase in foreclosed assets expense was due mostly to a write-down of $4.6 million on an existing foreclosed property in the third quarter, while the second quarter included gains related to foreclosed asset sales of $2.8 million. Insurance and assessments expense decreased due to lower FDIC insurance assessment expense. The reduction in compensation expense was principally due to lower stock-based compensation expense.

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

Income Taxes

Our overall effective income tax rate was 36.4% for the third quarter of 2015 and 34.7% for the second quarter of 2015.  The effective rate for the second quarter was lower due to the utilization of a portion of the capital loss carryforward and adjustments to certain deferred tax assets. The effective tax rate for calendar year 2015 is expected to be 37.5%. 

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases increased $418.0 million in the third quarter to $12.5 billion at September 30, 2015.   The net increase was driven by third quarter originations and purchases of $1.1 billion, offset partially by principal repayments of $630.3 million.   For the twelve months ended September 30, 2015, total loans and leases increased $877 million, or approximately 8%.

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 business division for the period indicated:

The Company identified an $82 million group of multi-family loans during the third quarter and re-underwrote and acquired them in anticipation of launching a multi-family loan origination group later this year that will initially focus on the Los Angeles, Orange County and Bay Area metropolitan markets.  The Company expects this initiative will reduce its overall portfolio credit risk, especially in an adverse economic environment.

The Company’s portfolio of student loans has repaid rapidly. In order to replace such runoff and to further diversify the loan and lease portfolio by product and geography, the Company purchased a $50 million pool of student loans in the third quarter. These multi-family and student loans, which are included under “Community Banking” in the above table, reduced the third quarter new production yield by 23 basis points.

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

Credit Exposure Affected by Low Oil Prices

At September 30, 2015, PacWest had 27 outstanding loan and lease relationships totaling $152.3 million to borrowers involved in the oil and gas services industry, down from $177.2 million at June 30, 2015.  The collateral for these loans and leases primarily includes equipment, such as drilling equipment and transportation vehicles.  At September 30, 2015, four relationships totaling $47.9 million were on nonaccrual status and were classified, down from $64.2 million at June 30, 2015.   The largest of these relationships had an aggregate outstanding balance of $40 million at September 30, 2015, for which a current collateral appraisal indicated a liquidation value significantly in excess of the carrying value.

Deposits

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

At September 30, 2015, core deposits totaled $6.8 billion, or 56% of total deposits, including $3.5 billion of noninterest-bearing demand deposits, or 29% of total deposits.  Deposits obtained from the CapitalSource Division totaled $527.8 million at September 30, 2015, of which $514.1 million were core deposits. 

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

The remaining purchase accounting premium on acquired CapitalSource time deposits was $1.2 million at September 30, 2015, of which $0.4 million will be recognized as a reduction of interest expense during the fourth quarter of 2015.   

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

A provision for credit losses of $8.7 million was recorded in the third quarter of 2015 as compared to $6.5 million in the second quarter of 2015. The third quarter provision was comprised of an $11.0 million provision for Non-PCI loans and leases and a negative provision of $2.3 million for PCI loans.  For the Non-PCI portfolio, the $11.0 million provision, combined with net charge-offs of $3.2 million, resulted in an increase in the allowance for credit losses of $7.8 million.  The allowance for Non-PCI credit losses to Non-PCI loans and leases coverage ratio increased to 0.82% at September 30 from 0.78% at June 30.  The negative provision for PCI loans resulted from increases in expected cash flows on such loans, mostly due to payoffs.

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

Non-PCI loans and leases at September 30, 2015 included $7.1 billion of originated loans and leases that were not obtained through acquisitions. The allowance for loan and lease losses related to these loans and leases totaled $80.1 million, or 1.13% of the outstanding balance.

All acquired loans are recorded initially at their estimated fair value including an estimate of credit losses. The table below presents two alternative views of credit risk coverage ratios for Non-PCI loans reflecting adjustments for acquired loans and associated purchase accounting discounts:

The decrease in adjusted coverage ratios reflected in the table above resulted from the combination of newly originated loans being provided for at a rate lower than the current coverage ratio and normal and accelerated accretion of unamortized discount.

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:

SQUARE 1 FINANCIAL, INC. MERGER

On October 6, 2015, PacWest completed the merger with Square 1 Financial, Inc. (“Square 1”) in a transaction valued at approximately $815 million.  The combined company is called PacWest Bancorp and the combined subsidiary bank is called Pacific Western Bank, with the banking operations of Square 1 conducted under the trade name of Square 1 Bank, a division of Pacific Western Bank.

Under the terms of the merger agreement, Square 1 stockholders received 0.5997 shares of PacWest common stock for each share of Square 1 common stock and holders of stock options and restricted stock units received cash consideration as described in the merger agreement. The total value of the per share merger consideration was $26.37, based on the closing price of PacWest common stock of $43.97 on October 6, 2015.

As of September 30, 2015, on a pro forma combined basis with Square 1 and excluding purchase accounting adjustments, PacWest would have had approximately $21 billion in assets with 80 branches throughout California and one in North Carolina.

Summary unaudited financial information for Square 1 for the third quarter of 2015 follows:

ABOUT PACWEST BANCORP

PacWest Bancorp (“PacWest”) is a bank holding company with over $21 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (“Pacific Western”). With 80 full-service branches located throughout the state of California, Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses.  Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions.  The 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.  The Square 1 Bank Division, headquartered at Pacific Western’s Durham, North Carolina branch, offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in all 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 certain plans, strategies, goals, and projections and including statements about our expectations regarding our merger with Square 1, credit loss exposure, profitability, deposit growth, loan and lease portfolio growth, operating expenses, intentions to expand Pacific Western’s lending business, and effective tax rates. 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:

• the Company’s ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
• business disruption following the Square 1 merger;
• the reaction to the Square 1 merger of the companies’ customers, employees and counterparties;
• credit quality deterioration or pronounced and sustained reduction in market values or other economic factors which adversely affect our borrowers’ ability to repay loans and leases;
• higher than anticipated loan losses;
• continued or worsening credit losses or charge-offs;
• higher than anticipated delinquencies and reserves;
• compression of spreads on newly originated loans;
• asset/liability repricing risks and liquidity risks reduces interest margins and the value of investments;
• increased costs to manage and sell foreclosed assets;
• changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;
• reduced demand for our services due to strategic or regulatory reasons;
• our ability 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;
• loan repayments higher than expected;
• higher than anticipated increases in operating expenses;
  
• increased litigation;
  
• increased asset workout or loan servicing expenses;
  
• higher compensation costs and professional fees to retain and/or incent employees;
  
• inability to attract qualified professionals;
  
• the success and timing of other business strategies;
  
• changes in tax laws or regulations affecting our business;
  
• our inability to generate sufficient earnings;
  
• tax planning or disallowance of tax benefits by tax authorities;
  
• changes in tax filing jurisdictions or entity classifications; 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.