PACW PacWest Bancorp

Fourth Quarter 2019 Highlights

• Net Earnings of $117.9 Million, or $0.98 Per Diluted Share
• Loan and Lease Production of $1.0 Billion; $111 Million of Net Loan Growth
• Core Deposits Represents 84% of Total Deposits
• Cost of Average Total Deposits Decreased 12 Basis Points from Q3 to 71 Basis Points
• Net Charge-offs to Average Loans of Two Basis Points

Full Year 2019 Highlights

• Net Earnings of $468.6 Million, or $3.90 Per Diluted Share
• Loan and Lease Production of $4.9 Billion; $889 Million of Net Loan Growth or 5%
• Net Charge-offs to Average Loans of Nine Basis Points; 62% Lower for 2019 Compared to 2018

LOS ANGELES, Jan. 21, 2020 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq: PACW) today announced net earnings for the fourth quarter of 2019 of $117.9 million, or $0.98 per diluted share, compared to net earnings for the third quarter of 2019 of $110.0 million, or $0.92 per diluted share.  The increase in net earnings in the fourth quarter was primarily due to lower income tax expense, of which $9.1 million related to benefits from changes in state apportionment. Net earnings for the full year 2019 were $468.6 million, or $3.90 per diluted share, compared to net earnings for the full year 2018 of $465.3 million, or $3.72 per diluted share.

Matt Wagner, President and CEO, commented, “We finished the year with strong earnings and continued improvement in our credit quality metrics and credit costs reflected by our fourth quarter net charge-offs ratio of two basis points. Our fourth quarter results produced a return on assets of 1.77% and a return on tangible equity of 19.98%.”

Mr. Wagner continued, “The strong fourth quarter capped a year of profitable growth and continued our solid operating performance resulting in a 2019 return on assets of 1.80% and return on tangible equity of 20.66%. The de-risking strategy initiated in 2017 has proven to be successful as our net charge-offs ratio decreased from 40 basis points in 2017 to nine basis points in 2019, while the provision for credit losses declined by 63% from $59.0 million for non-PCI loans in 2017 to $22.0 million in 2019. Our strategy and these outstanding operating results allowed us to return $444 million to our stockholders in 2019 through stock repurchases and dividends. Our earnings per share for the full year 2019 increased by 5% over the prior year to $3.90.”  

Mr. Wagner added, “In 2019, we successfully completed the rebranding of all of our operating groups under one brand as Pacific Western Bank. As we head into 2020, we will continue to focus on profitable growth and increasing the value of our franchise for our stockholders.”   

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased by $5.6 million to $246.6 million for the fourth quarter of 2019 compared to $252.2 million for the third quarter of 2019 due mainly to a lower yield on average loans and leases and a lower balance of average loans and leases. The tax equivalent yield on average loans and leases was 5.67% for the fourth quarter of 2019 compared to 5.91% for the third quarter of 2019. The decrease in the yield on average loans and leases was due principally to the repricing of variable-rate loans causing lower coupon interest in addition to lower loan fee income in the fourth quarter compared to the third quarter, offset partially by higher loan prepayment fees. The prepayment fees added seven basis points to the fourth quarter yield on average loans and leases and five basis points to the third quarter yield on average loans and leases.

The tax equivalent NIM was 4.33% for the fourth quarter of 2019 compared to 4.46% for the third quarter of 2019. The decrease in the NIM was due mainly to the repricing of variable-rate loans causing lower coupon interest and lower loan fee income, offset partially by the lower cost of interest-bearing liabilities.            

The cost of average total deposits decreased to 0.71% for the fourth quarter of 2019 from 0.83% for the third quarter of 2019 due mainly to a lower cost of average interest-bearing deposits, offset partially by a lower average balance of noninterest-bearing deposits. Our cost of average total deposits has declined from a 2019 peak of 86 basis points in the month of July to a 2019 low of 66 basis points in the month of December. The lower cost of average interest-bearing deposits reflected actions taken to reduce deposit rates in light of the fed funds target rate cuts during the second half of 2019.

Provision for Credit Losses

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

The increase in the provision for unfunded commitments was the result of significant growth in unfunded construction loan commitments in the fourth quarter of 2019.

Noninterest Income

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

Noninterest income decreased by $6.3 million to $27.2 million for the fourth quarter of 2019 compared to $33.4 million for the third quarter of 2019 due primarily to a $2.7 million decrease in warrant income, a $1.7 million decrease in other income, a $0.8 million decrease in dividends and gains on equity investments, a $0.7 million decrease in gain on sale of loans and leases, and a $0.7 million decrease in gain on sale of securities, offset partially by a $1.0 million increase in leased equipment income.  The decrease in warrant income was due to lower gains resulting from exercised warrants. The decrease in other income was due mainly to lower gains from lease terminations. The decreases in gain on sale of loans and leases and gain on sale of securities were attributable to a lower level of sales activity in the fourth quarter of 2019 as compared to the third quarter of 2019. The increase in leased equipment income was due primarily to a higher average balance of leased equipment in the fourth quarter compared to the third quarter.

Noninterest Expense

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

Noninterest expense decreased by $3.1 million to $123.7 million for the fourth quarter of 2019 compared to $126.8 million for the third quarter of 2019 attributable primarily to a $3.5 million increase in foreclosed assets income and a $2.7 million decrease in other expense, offset partially by a $3.2 million increase in compensation expense. Foreclosed assets income increased due to a $3.3 million gain on the sale of a repossessed asset. Other expense decreased due primarily to a $1.7 million reversal of previously accrued merger costs and a $1.1 million credit adjustment to franchise tax expense for refunds related to state apportionment changes. Compensation expense increased due mainly to higher bonus expense of $2.9 million.  

Income Taxes

The overall effective income tax rate was 19.8% for the fourth quarter of 2019 and 27.5% for the third quarter of 2019. The fourth quarter 2019 effective tax rate was lower due primarily to $9.1 million of benefits related to changes in state apportionment net of the federal tax effect. The effective tax rate for the year ended December 31, 2019 was 26.0% and for the full year 2020 is currently estimated to be in the range of 26-28%.   

BALANCE SHEET HIGHLIGHTS

Loans and Leases

The following table presents roll forwards of loans and leases held for investment, net of deferred fees, for the periods indicated:

Loans and leases held for investment, net of deferred fees, increased by $111.3 million, or 2.4% annualized, in the fourth quarter of 2019 to $18.8 billion at December 31, 2019.  The net loan growth in the fourth quarter was primarily from the income producing and other residential real estate mortgage loan portfolio class and the residential real estate construction loan portfolio class. For the year ended December 31, 2019, loans and leases held for investment, net of deferred fees, increased by $889.2 million or 5.0%.

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

Allowance for Credit Losses

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

The allowance for credit losses as a percentage of loans and leases held for investment was 0.93% at December 31, 2019 and 0.92% at September 30, 2019.

Gross charge-offs for the fourth quarter of 2019 were $4.7 million and included $3.2 million for venture capital loans and $1.0 million for other commercial loans compared to gross charge-offs for the third quarter of 2019 of $6.5 million that included $4.4 million for venture capital loans and $1.7 million for other commercial loans.

Recoveries for the fourth quarter of 2019 were $3.9 million and included $1.8 million for other commercial loans, $0.9 million for asset-based loans, and $0.6 million for venture capital loans compared to recoveries for the third quarter of 2019 of $2.0 million that included $1.2 million for other commercial loans and $0.4 million for venture capital loans.

For the fourth quarter of 2019 and third quarter of 2019, annualized net charge-offs to average loans and leases were 0.02% and 0.10%.

For the full year 2019, net charge-offs were $16.7 million, of which $10.9 million related to one asset-based loan, while $1.2 million related to venture capital loans, a decrease from the full year 2018 net charge-offs of $43.8 million that included $24.2 million for venture capital loans.  This resulted in a decrease in net charge-offs to average loans for the venture capital portfolio from 1.17% in 2018 to 0.06% in 2019.   

For the full years 2019 and 2018, net charge-offs to average loans and leases declined to 0.09% from 0.26%.

Deposits and Client Investment Funds

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

At December 31, 2019, core deposits totaled $16.2 billion, or 84% of total deposits, including $7.2 billion of noninterest-bearing demand deposits, or 38% of total deposits. For the year ended December 31, 2019, total deposits increased by $362.5 million, or 2%, while core deposits decreased by $159.4 million, or 1%. 

In addition to deposit products, we also offer alternative non-depository cash investment options for select clients; these alternatives include investments managed by Pacific Western Asset Management Inc. (“PWAM”), our registered investment advisor subsidiary, and third-party sweep products.  Total off-balance sheet client investment funds at December 31, 2019 were $1.5 billion, of which $1.2 billion was managed by PWAM.

CREDIT QUALITY  

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

Nonaccrual, classified, and special mention loans and leases fluctuate from period to period as a result of loan repayments and our ongoing active portfolio monitoring.

During the fourth quarter of 2019, nonaccrual loans and leases decreased by $6.8 million, while classified loans and leases decreased by $12.7 million and special mention loans and leases increased by $55.0 million. There were no individually significant loan movements in the nonaccrual and classified loans and leases categories. The increase in special mention loans and leases in the fourth quarter was attributable to the downgrade of two security monitoring loans for $77.3 million, offset partially by the payoff of one security monitoring loan for $14.9 million and the net decrease in all other loans and leases of $7.4 million. 

The following table presents nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:

STOCK REPURCHASE PROGRAM

During the fourth quarter of 2019, there were no stock repurchases. At December 31, 2019, the remaining amount that could be used to repurchase shares under the $225 million Stock Repurchase Program was $124.7 million.

ABOUT PACWEST BANCORP

PacWest Bancorp (“PacWest”) is a bank holding company with over $26 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (the “Bank”). The Bank has 74 full-service branches located in California, one branch located in Durham, North Carolina, and one branch located in Denver, Colorado. Our Community Banking group provides lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. We offer additional products and services through our National Lending and Venture Banking groups. National Lending provides asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. Venture Banking offers a comprehensive suite of financial services focused on entrepreneurial or venture-backed businesses and their venture capital and private equity investors, with offices located in key innovative hubs across the United States.  For more information about PacWest Bancorp or Pacific Western Bank, visit www.pacwest.com.

FORWARD LOOKING STATEMENTS

This communication 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. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical facts. Such statements are based on information available at the time of this communication and are based on current beliefs and expectations of the Company’s management and are subject to significant risks, uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those set forth in the forward-looking statements due to a variety of factors, including the risk factors described in documents filed by the Company with the Securities and Exchange Commission.

We are under no obligation (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.