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PacWest Bancorp Announces Results for the Second Quarter 2019

Highlights

  • Net Earnings of $128.1 Million, or $1.07 Per Diluted Share; Up 16% from Prior Quarter
  • Tax Equivalent Net Interest Margin of 4.72%; Up 3 Basis Points from Prior Quarter
  • Loan and Lease Production of $1.4 Billion; $165 Million of Net Loan Growth
  • Core Deposits Represent 83% of Total Deposits

LOS ANGELES, July 16, 2019 (GLOBE NEWSWIRE) -- PacWest Bancorp (PACW) today announced net earnings for the second quarter of 2019 of $128.1 million, or $1.07 per diluted share, compared to net earnings for the first quarter of 2019 of $112.6 million, or $0.92 per diluted share. The increase in net earnings in the second quarter included a $22.2 million pre-tax gain on the sale of securities which contributed $0.13 per diluted share.

Matt Wagner, President and CEO, commented, “We continue to see favorable results from our credit de-risking strategy with sustained improvement in our credit quality metrics. Year-to-date net charge-offs are 48% lower than the same period in 2018 and year-to-date credit loss provisions are 44% lower than the same period in 2018. Our second quarter of 2019 results produced a return on assets of 1.99% and a return on tangible equity of 23.15%.”

Mr. Wagner continued, “We experienced solid loan production in the second quarter bringing our net loan growth to $515 million for the first half of 2019. However, competition for core deposits and customers desiring higher yields on their funds resulted in total deposits being flat in the first half of 2019. Core deposit generation remains a priority in order to help fund loan growth and maintain our net interest margin.”

FINANCIAL HIGHLIGHTS

  At or For the        At or For the     
  Three Months Ended       Six Months Ended    
  June 30,   March 31,   Increase   June 30,   Increase
Financial Highlights   2019       2019     (Decrease)     2019       2018     (Decrease)
   
  (Dollars in thousands, except per share data)
Net earnings $ 128,125     $ 112,604     $ 15,521     $ 240,729     $ 234,011     $ 6,718  
Diluted earnings per share $ 1.07     $ 0.92     $ 0.15     $ 1.99     $ 1.85     $ 0.14  
Return on average assets   1.99 %     1.77 %     0.22       1.88 %     1.96 %     (0.08 )
Return on average                      
tangible equity (1)   23.15 %     20.64 %     2.51       21.91 %     21.03 %     0.88  
                       
Net interest margin ("NIM")                      
(tax equivalent)   4.72 %     4.69 %     0.03       4.70 %     5.15 %     (0.45 )
Yield on average loans and                      
leases (tax equivalent)   6.26 %     6.16 %     0.10       6.21 %     6.21 %     -  
Cost of average total                      
deposits   0.81 %     0.73 %     0.08       0.77 %     0.34 %     0.43  
Efficiency ratio   41.6 %     42.4 %     (0.8 )     42.0 %     40.7 %     1.3  
                       
Total assets $ 26,344,414     $ 26,324,138     $ 20,276     $ 26,344,414     $ 24,529,557     $ 1,814,857  
Loans and leases held                      
for investment,                      
net of deferred fees $ 18,472,852     $ 18,307,697     $ 165,155     $ 18,472,852     $ 16,885,192     $ 1,587,660  
Noninterest-bearing                      
demand deposits $ 7,299,213     $ 7,712,409     $ (413,196 )   $ 7,299,213     $ 8,126,153     $ (826,940 )
Core deposits $ 15,617,488     $ 16,127,638     $ (510,150 )   $ 15,617,488     $ 15,586,238     $ 31,250  
Total deposits $ 18,805,756     $ 19,285,927     $ (480,171 )   $ 18,805,756     $ 17,929,192     $ 876,564  
                       
As percentage of total                      
deposits:                      
Noninterest-bearing                      
demand deposits   39 %     40 %     (1 )     39 %     45 %     (6 )
Core deposits   83 %     84 %     (1 )     83 %     87 %     (4 )
                       
Equity to assets ratio   18.42 %     18.20 %     0.22       18.42 %     19.48 %     (1.06 )
Tangible common equity                      
ratio (1)   9.50 %     9.23 %     0.27       9.50 %     9.86 %     (0.36 )
Book value per share $ 40.49     $ 39.86     $ 0.63     $ 40.49     $ 38.36     $ 2.13  
Tangible book value per                      
share (1) $ 18.83     $ 18.22     $ 0.61     $ 18.83     $ 17.35     $ 1.48  
                       
(1) Non-GAAP measure.                      


INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $6.0 million to $260.9 million for the second quarter of 2019 compared to $254.9 million for the first quarter of 2019 due to a higher yield on average loans and leases, a higher balance of average loans and leases, and one more day in the second quarter of 2019, offset partially by higher deposit costs. The tax equivalent yield on average loans and leases was 6.26% for the second quarter of 2019 compared to 6.16% for the first quarter of 2019. The increase in the yield on average loans and leases was due principally to loan prepayment fees being $6.3 million higher in the second quarter compared to the first quarter. The prepayment fees added 11 basis points to the second quarter loan yield and were primarily from two loans.

The tax equivalent NIM was 4.72% for the second quarter of 2019 compared to 4.69% for the first quarter of 2019. The increase in the NIM was due mainly to higher loan prepayment fees, partially offset by higher deposit costs.

The cost of average total deposits increased to 0.81% for the second quarter of 2019 from 0.73% for the first quarter of 2019 due to a lower average balance of noninterest-bearing deposits and higher rates paid on deposits.

Provision for Credit Losses

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

  Three Months Ended    
  June 30,   March 31,   Increase
Provision for Credit Losses   2019       2019
    (Decrease)
   
  (In thousands)
Addition to allowance for loan and lease losses $ 10,000     $ 4,000   $ 6,000  
Reduction to reserve for unfunded loan commitments   (2,000 )     -     (2,000 )
Total provision for credit losses $ 8,000     $ 4,000   $ 4,000  

Noninterest Income

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

  Three Months Ended    
  June 30,   March 31,   Increase
Noninterest Income   2019       2019     (Decrease)
   
  (In thousands)
Service charges on deposit accounts $ 3,771     $ 3,730     $ 41  
Other commissions and fees   11,590       11,008       582  
Leased equipment income   9,182       9,282       (100 )
Gain on sale of loans and leases   326       -       326  
Gain on sale of securities   22,192       2,161       20,031  
Other income:          
Dividends and (losses) gains on equity investments   (83 )     296       (379 )
Warrant income   1,214       2,279       (1,065 )
Other   2,701       2,308       393  
Total noninterest income $ 50,893     $ 31,064     $ 19,829  

Noninterest income increased by $19.8 million to $50.9 million for the second quarter of 2019 compared to $31.1 million for the first quarter of 2019 due mainly to a $20.0 million increase in the gain on sale of securities attributable to a $22.2 million net gain on sales of $980.4 million in the second quarter of 2019 compared to a net gain of $2.2 million on sales of $405.8 million in the first quarter of 2019. We re-positioned a portion of our securities portfolio in the second quarter to shorten the duration of the portfolio and to enhance liquidity.

Noninterest Expense

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

  Three Months Ended    
  June 30,   March 31,   Increase
Noninterest Expense   2019       2019     (Decrease)
   
  (In thousands)
Compensation $ 68,956     $ 70,845     $ (1,889 )
Occupancy   14,457       14,320       137  
Data processing   6,817       6,925       (108 )
Other professional services   4,629       4,513       116  
Insurance and assessments   4,098       4,038       60  
Intangible asset amortization   4,870       4,870       -  
Leased equipment depreciation   5,558       5,651       (93 )
Foreclosed assets (income) expense, net   (146 )     29       (175 )
Acquisition, integration and reorganization costs   -       618       (618 )
Loan expense   3,451       2,885       566  
Other   12,737       11,593       1,144  
Total noninterest expense $ 125,427     $ 126,287     $ (860 )

Noninterest expense decreased by $0.9 million to $125.4 million for the second quarter of 2019 compared to $126.3 million for the first quarter of 2019 attributable primarily to a $1.9 million decrease in compensation expense, offset partially by a $1.1 million increase in other expense. Compensation expense decreased due mainly to lower payroll taxes and bonus expense. Other expense increased primarily due to a loss on the early termination of a lease.

Income Taxes

The overall effective income tax rate was 28.2% for the second quarter of 2019 and 27.7% for the first quarter of 2019. The effective tax rate for the full year 2019 is estimated to be in the range of 27-28%.

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:

  Three Months Ended   Six Months Ended
Roll Forward of Loans and Leases Held June 30,    March 31,    June 30, 
for Investment, Net of Deferred Fees (1)   2019       2019       2019  
   
  (Dollars in thousands)
Balance, beginning of period $ 18,307,697     $ 17,957,713     $ 17,957,713  
Additions:          
Production   1,436,299       1,174,838       2,611,137  
Disbursements   1,293,747       1,192,972       2,486,719  
Total production and disbursements   2,730,046       2,367,810       5,097,856  
Reductions:          
Payoffs   (1,529,213 )     (933,300 )     (2,462,513 )
Paydowns   (979,987 )     (1,038,964 )     (2,018,951 )
Total payoffs and paydowns   (2,509,200 )     (1,972,264 )     (4,481,464 )
Sales   (38,054 )     (16,936 )     (54,990 )
Transfers to foreclosed assets   -       (37 )     (37 )
Charge-offs   (17,637 )     (3,465 )     (21,102 )
Transfers to loans held for sale   -       (25,124 )     (25,124 )
Total reductions   (2,564,891 )     (2,017,826 )     (4,582,717 )
Balance, end of period $ 18,472,852     $ 18,307,697     $ 18,472,852  
           
Weighted average rate on production (2)   5.15 %     5.11 %     5.13 %
           
(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 32 basis points to loan    
yields in 2019 and 31 basis points to loan yields in 2018.        

Loans and leases held for investment, net of deferred fees, increased by $165.2 million, or 4% annualized, in the second quarter of 2019 to $18.5 billion at June 30, 2019.  The net loan growth in the second quarter was primarily from the income producing and other residential loan class, which included $177 million of multi-family loan pool purchases, and the asset-based loan class.

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

  June 30, 2019   March 31, 2019   June 30, 2018
    % of      % of      % of 
Loan and Lease Portfolio (1) Amount Total   Amount Total   Amount Total
   
  (In thousands)
Real estate mortgage:                
Commercial $ 4,435,274 24%   $ 4,640,510 25%   $ 5,010,680 30%
Income producing and other                
residential   3,640,752 20%     3,518,948 19%     2,555,695 15%
Total real estate mortgage   8,076,026 44%     8,159,458 44%     7,566,375 45%
Real estate construction and land:                
Commercial   972,891 5%     943,596 5%     831,462 5%
Residential   1,403,239 8%     1,408,128 8%     1,042,564 6%
Total real estate construction                
and land   2,376,130 13%     2,351,724 13%     1,874,026 11%
Total real estate   10,452,156 57%     10,511,182 57%     9,440,401 56%
Commercial:                
Asset-based   3,606,007 19%     3,422,202 19%     3,184,300 19%
Venture capital   2,194,743 12%     2,027,450 11%     2,008,205 12%
Other commercial   1,773,564 10%     1,974,702 11%     1,873,607 11%
Total commercial   7,574,314 41%     7,424,354 41%     7,066,112 42%
Consumer   446,382 2%     372,161 2%     378,679 2%
Total loans and leases held for                
investment, net of deferred fees $ 18,472,852 100%   $ 18,307,697 100%   $ 16,885,192 100%
                 
Total unfunded loan commitments $ 7,610,899     $ 7,465,392     $ 6,429,587  
                 
       
(1) Excludes loans held for sale carried at lower of cost or fair value at March 31, 2019.      

Allowance for Credit Losses

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

  Three Months Ended June 30, 2019
  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 $ 136,281     $ 36,861     $ 173,142  
Charge-offs   (17,637 )     -       (17,637 )
Recoveries   6,393       -       6,393  
Net charge-offs   (11,244 )     -       (11,244 )
Provision   10,000       (2,000 )     8,000  
Ending balance $ 135,037     $ 34,861     $ 169,898  
           
   
  Three Months Ended March 31, 2019
  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 $ 132,472     $ 36,861     $ 169,333  
Charge-offs   (3,465 )     -       (3,465 )
Recoveries   3,274       -       3,274  
Net charge-offs   (191 )     -       (191 )
Provision   4,000       -       4,000  
Ending balance $ 136,281     $ 36,861     $ 173,142  

The allowance for credit losses as a percentage of loans and leases held for investment decreased to 0.92% at June 30, 2019 from 0.95% at March 31, 2019.

Gross charge-offs for the second quarter of 2019 were $17.6 million and included $11.8 million for a single asset-based loan, $3.7 million for other commercial loans, and $1.5 million for venture capital loans compared to gross charge-offs for the first quarter of 2019 of $3.5 million which were primarily for other commercial loans.  Recoveries for the second quarter of 2019 were $6.4 million and included $4.8 million for venture capital loans and $1.0 million for other commercial loans compared to recoveries for the first quarter of 2019 of $3.3 million which included $2.3 million for venture capital loans and $0.8 million for other commercial loans.

For the second quarter of 2019 and first quarter of 2019, annualized net charge-offs to average loans and leases were 0.25% and 0.00%.

Deposits and Client Investment Funds

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

  June 30, 2019   March 31, 2019   June 30, 2018
    % of      % of      % of 
Deposit Composition Amount Total   Amount Total   Amount Total
   
  (Dollars in thousands)
Noninterest-bearing demand $ 7,299,213   39%   $ 7,712,409   40%   $ 8,126,153   45%
Interest checking   3,220,353   17%     3,163,228   16%     2,184,785   12%
Money market   4,578,083   24%     4,714,078   25%     4,631,658   26%
Savings   519,839   3%     537,923   3%     643,642   4%
Total core deposits   15,617,488   83%     16,127,638   84%     15,586,238   87%
Non-core non-maturity deposits   436,833   2%     454,277   2%     607,388   3%
Total non-maturity deposits   16,054,321   85%     16,581,915   86%     16,193,626   90%
Time deposits $250,000 and under   2,284,023   12%     2,258,989   12%     1,394,117   8%
Time deposits over $250,000   467,412   3%     445,023   2%     341,449   2%
Total time deposits   2,751,435   15%     2,704,012   14%     1,735,566   10%
Total deposits $ 18,805,756   100%   $ 19,285,927   100%   $ 17,929,192   100%

At June 30, 2019, core deposits totaled $15.6 billion, or 83% of total deposits, including $7.3 billion of noninterest-bearing demand deposits, or 39% of total deposits. The decrease in core deposits is primarily due to decreases in noninterest-bearing demand deposits across each of our business groups as customers seek out interest-earning accounts in the competitive market environment.

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 June 30, 2019 were $2.0 billion, of which $1.6 billion was managed by PWAM.

CREDIT QUALITY

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

...
  June 30,   March 31,   Increase
Credit Quality Metrics   2019       2019     (Decrease)
   
  (Dollars in thousands)
NPAs and Performing TDRs:          
Nonaccrual loans and leases held for investment (1)(2) $ 81,265     $ 88,527     $ (7,262 )
Accruing loans contractually past due 90 days or more   -       -       -  
Foreclosed assets, net   1,472       3,291       (1,819 )
Total nonperforming assets ("NPAs") $ 82,737     $ 91,818     $ (9,081 )
           
Nonaccrual loans and leases held for investment          
to loans and leases held for investment   0.44 %     0.48 %    
Nonperforming assets to loans and leases