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PacWest Bancorp Announces Results for the Third Quarter 2019

Highlights

  • Net Earnings of $110.0 Million, or $0.92 Per Diluted Share
  • Loan and Lease Production of $1.2 Billion; $263 Million of Net Loan Growth
  • Core Deposits Growth of $854 million; Represent 84% of Total Deposits
  • Net Charge-offs to Average Loans of 10 basis points in Third Quarter; 12 basis points Year-To-Date

LOS ANGELES, Oct. 16, 2019 (GLOBE NEWSWIRE) -- PacWest Bancorp (PACW) today announced net earnings for the third quarter of 2019 of $110.0 million, or $0.92 per diluted share, compared to net earnings for the second quarter of 2019 of $128.1 million, or $1.07 per diluted share. The decrease in net earnings in the third quarter of 2019 was due primarily to a $22.2 million pre-tax gain on the sale of securities in the second quarter of 2019 that contributed $0.13 per diluted share.

Matt Wagner, President and CEO, commented, “We had a solid quarter highlighted by very strong core deposits growth, another quarter of consistent loan production from all of our business groups, and the continuation of our trend of lower credit costs. Our third quarter of 2019 results produced a return on assets of 1.65% and a return on tangible equity of 19.01%.”

Mr. Wagner continued, “In a very competitive market, we achieved our largest core deposit growth quarter ever with growth of $854 million in the third quarter. Core deposits generation, with an emphasis on noninterest-bearing deposits, remains a priority in this declining-rate environment. We achieved solid loan and lease production of $1.2 billion in the third quarter bringing our net loan growth to $778 million, or 6% annualized, for the first nine months of 2019.”

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 
  2019       2019       (Decrease)       2019
      2018       (Decrease)
 
                                               
  (Dollars in thousands, except per share data)
Net earnings $   110,026     $   128,125     $   (18,099 )   $   350,755     $   350,298     $   457  
Diluted earnings per share $   0.92     $   1.07     $   (0.15 )   $   2.91     $   2.79     $   0.12  
Return on average assets 1.65 %   1.99 %     (0.34 )   1.80 %   1.94 %     (0.14 )
Return on average                                  
tangible equity (1)  19.01 %   23.15 %     (4.14 )   20.90 %   21.22 %     (0.32 )
                                   
Net interest margin ("NIM")                                  
(tax equivalent) 4.46 %   4.72 %     (0.26 )   4.62 %   5.09 %     (0.47 )
Yield on average loans and                                   
leases (tax equivalent) 5.91 %   6.26 %     (0.35 )   6.11 %   6.20 %     (0.09 )
Cost of average total                                   
deposits 0.83 %   0.81 %     0.02     0.79 %   0.38 %     0.41  
Efficiency ratio 42.3 %   41.6 %     0.7     42.1 %   40.8 %     1.3  
                                   
Total assets $   26,724,627     $   26,344,414     $   380,213     $   26,724,627     $   24,782,126     $   1,942,501  
Loans and leases held                                   
for investment,                                   
net of deferred fees $   18,735,543     $   18,472,852     $   262,691     $   18,735,543     $   17,230,146     $   1,505,397  
Noninterest-bearing                                   
demand deposits $   7,441,185     $   7,299,213     $   141,972     $   7,441,185     $   7,834,480     $   (393,295 )
Core deposits $   16,471,264     $   15,617,488     $   853,776     $   16,471,264     $   15,512,742     $   958,522  
Total deposits $   19,733,203     $   18,805,756     $   927,447     $   19,733,203     $   17,879,543     $   1,853,660  
                                   
As percentage of total                                  
deposits:                                  
Noninterest-bearing                                   
demand deposits 38 %   39 %     (1 )   38 %   44 %     (6 )
Core deposits  84 %   83 %     1     84 %   87 %     (3 )
                                   
Equity to assets ratio  18.41 %   18.42 %     (0.01 )   18.41 %   19.13 %     (0.72 )
Tangible common equity                                   
ratio (1) 9.65 %   9.50 %     0.15     9.65 %   9.61 %     0.04  
Book value per share $   41.06     $   40.49     $   0.57     $   41.06     $   38.46     $   2.60  
Tangible book value per                                   
share (1) $   19.43     $   18.83     $   0.60     $   19.43     $   17.28     $   2.15  
                                   
(1) Non-GAAP measure.                                  


INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased by $8.7 million to $252.2 million for the third quarter of 2019 compared to $260.9 million for the second quarter of 2019 due mainly to a lower yield on average loans and leases, offset partially by a higher balance of average loans and leases and one more day in the third quarter of 2019. The tax equivalent yield on average loans and leases was 5.91% for the third quarter of 2019 compared to 6.26% for the second 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 prepayment fees in the third quarter compared to the second quarter. The prepayment fees added five basis points to the third quarter loan and lease yield and 14 basis points to the second quarter loan and lease yield.

The tax equivalent NIM was 4.46% for the third quarter of 2019 compared to 4.72% for the second quarter of 2019. The decrease in the NIM was due mainly to lower coupon interest, lower loan prepayment fees, and lower loan fee income.

The cost of average total deposits increased to 0.83% for the third quarter of 2019 from 0.81% for the second quarter of 2019 due to a higher average balance of core interest-bearing deposits combined with a lower average balance of noninterest-bearing deposits. The cost of average interest-bearing deposits declined by one basis point in the third quarter and the cost of average total deposits for the month of September was 0.80%, reflecting actions taken to reduce certain deposit rates in light of the fed funds target rate cuts during the third quarter.

Provision for Credit Losses

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

  Three Months Ended
       
  September 30,     June 30,     Increase  
Provision for Credit Losses 2019     2019     (Decrease)  
          (In thousands)          
Addition to allowance for loan and lease losses $   8,000     $   10,000     $   (2,000 )
Reduction to reserve for unfunded loan commitments   (1,000 )     (2,000 )     1,000  
Total provision for credit losses $   7,000     $   8,000     $   (1,000 )


Noninterest Income

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

  Three Months Ended        
  September 30,   June 30,     Increase  
Noninterest Income 2019   2019     (Decrease)  
        (In thousands)          
Service charges on deposit accounts $   3,525   $   3,771     $   (246 )
Other commissions and fees   10,855     11,590       (735 )
Leased equipment income   9,615     9,182       433  
Gain on sale of loans and leases   765     326       439  
Gain on sale of securities   908     22,192       (21,284 )
Other income:              
Dividends and gains (losses) on equity investments   14     (83 )     97  
Warrant income   3,936     1,214       2,722  
Other   3,811     2,701       1,110  
Total noninterest income  $   33,429   $   50,893     $   (17,464 )


Noninterest income decreased by $17.5 million to $33.4 million for the third quarter of 2019 compared to $50.9 million for the second quarter of 2019 due primarily to a $21.3 million decrease in the gain on sale of securities attributable to a $0.9 million net gain on sales of $143 million in the third quarter of 2019 compared to a $22.2 million net gain on sales of $980 million in the second 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. Partially offsetting the decrease in the gain on sale of securities was a $2.7 million increase in warrant income and a $1.1 million increase in other income for the third quarter of 2019. The increase in warrant income was due to higher gains resulting from exercised warrants. The increase in other income was mainly due to higher gains from lease terminations.

Noninterest Expense

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

  Three Months Ended        
  September 30,   June 30,     Increase  
Noninterest Expense 2019   2019     (Decrease)  
        (In thousands)          
Compensation $   71,424   $   68,956     $   2,468  
Occupancy    14,089     14,457       (368 )
Data processing   7,044     6,817       227  
Other professional services   4,400     4,629       (229 )
Insurance and assessments   4,100     4,098       2  
Intangible asset amortization   4,833     4,870       (37 )
Leased equipment depreciation   5,951     5,558       393  
Foreclosed assets expense (income), net   8     (146 )     154  
Loan expense   3,628     3,451       177  
Other   11,332     12,737       (1,405 )
Total noninterest expense $   126,809   $   125,427     $   1,382  

 

Noninterest expense increased by $1.4 million to $126.8 million for the third quarter of 2019 compared to $125.4 million for the second quarter of 2019 attributable primarily to a $2.5 million increase in compensation expense, offset partially by a $1.4 million decrease in other expense. Compensation expense increased due mainly to higher incentives expense and higher stock compensation expense, partially offset by lower payroll taxes and benefits expense. Other expense decreased primarily due to lower business development expense and a loss on the early termination of an office lease in the second quarter.

Income Taxes

The overall effective income tax rate was 27.5% for the third quarter of 2019 and 28.2% for the second 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     Nine Months Ended
Roll Forward of Loans and Leases Held September 30,      June 30,      September 30, 
for Investment, Net of Deferred Fees (1) 2019     2019     2019
          (Dollars in thousands)          
Balance, beginning of period $   18,472,852     $   18,307,697     $   17,957,713  
Additions:                
Production   1,230,817       1,436,299       3,841,954  
Disbursements   1,288,111       1,293,747       3,774,830  
Total production and disbursements   2,518,928       2,730,046       7,616,784  
Reductions:                
Payoffs   (1,390,883 )     (1,529,213 )     (3,853,396 )
Paydowns   (837,551 )     (979,987 )     (2,856,502 )
Total payoffs and paydowns   (2,228,434 )     (2,509,200 )     (6,709,898 )
Sales    (21,302 )     (38,054 )     (76,292 )
Transfers to foreclosed assets   -       -       (37 )
Charge-offs   (6,501 )     (17,637 )     (27,603 )
Transfers to loans held for sale   -       -       (25,124 )
Total reductions   (2,256,237 )     (2,564,891 )     (6,838,954 )
Net increase    262,691       165,155       777,830  
Balance, end of period $   18,735,543     $   18,472,852     $   18,735,543  
                 
Weighted average rate on production (2) 5.45 %   5.15 %   5.21 %
                 
(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 30 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 $262.7 million, or 6% annualized, in the third quarter of 2019 to $18.7 billion at September 30, 2019. The net loan growth in the third quarter was primarily from the asset-based loan portfolio class and residential real estate construction loan portfolio class.

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:

  September 30, 2019     June 30, 2019     September 30, 2018  
    % of        % of        % of   
Loan and Lease Portfolio  Amount Total     Amount Total     Amount Total  
          (In thousands)          
Real estate mortgage:                      
Commercial $   4,300,566 23 %   $   4,435,274 24 %   $   4,932,823 28 %
Income producing and other                       
residential   3,596,358 19 %     3,640,752 20 %     2,745,837 16 %
Total real estate mortgage   7,896,924 42 %     8,076,026 44 %     7,678,660 44 %
Real estate construction and land:                      
Commercial   1,009,362 6 %     972,891 5 %     854,346 5 %
Residential   1,542,112 8 %     1,403,239 8 %     1,146,611 7 %
Total real estate construction                       
and land   2,551,474 14 %     2,376,130 13 %     2,000,957 12 %
Total real estate    10,448,398 56 %     10,452,156 57 %     9,679,617 56 %
Commercial:                      
Asset-based   3,810,741 20 %     3,606,007 19 %     3,222,311 19 %
Venture capital   2,209,649 12 %     2,194,743 12 %     2,031,895 12 %
Other commercial   1,858,167 10 %     1,773,564 10 %     1,897,852 11 %
Total commercial   7,878,557 42 %     7,574,314 41 %     7,152,058 42 %
Consumer   408,588 2 %     446,382 2 %     398,471 2 %
Total loans and leases held for                       
investment, net of deferred fees $   18,735,543 100 %   $   18,472,852 100 %   $   17,230,146 100 %
                       
Total unfunded loan commitments $   7,790,796       $   7,610,899       $   7,055,833    


Allowance for Credit Losses

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

  Three Months Ended September 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 $   135,037     $   34,861     $   169,898  
Charge-offs   (6,501 )     -       (6,501 )
Recoveries   2,016       -       2,016  
Net charge-offs   (4,485 )     -       (4,485 )
Provision    8,000       (1,000 )     7,000  
Ending balance $   138,552     $   33,861     $   172,413  


  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  


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

Gross charge-offs for the third quarter of 2019 were $6.5 million and included $4.4 million for venture capital loans and $1.7 million for other commercial loans compared to gross charge-offs for the second quarter of 2019 of $17.6 million that 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.

Recoveries for the third quarter of 2019 were $2.0 million and included $1.2 million for other commercial loans and $0.4 million for venture capital loans compared to recoveries for the second quarter of 2019 of $6.4 million that included $4.8 million for venture capital loans and $1.0 million for other commercial loans.

For the third quarter of 2019 and second quarter of 2019, annualized net charge-offs to average loans and leases were 0.10% and 0.25%.

Deposits and Client Investment Funds

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

null
  September 30, 2019     June 30, 2019     September 30, 2018  
    % of        % of        % of   
Deposit Composition Amount Total     Amount Total     Amount Total