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PacWest Bancorp Announces Results for the Fourth Quarter and Full Year 2018

Fourth Quarter 2018 Highlights

  • Net Earnings of $115.0 Million, or $0.93 Per Diluted Share
  • Tax Equivalent Net Interest Margin of 4.91%
  • Loan and Lease Production of $1.6 Billion; $728 Million of Net Loan Growth
  • Core Deposits Increase of $834 Million and Represent 87% of Total Deposits

Full Year 2018 Highlights

  • Net Earnings of $465.3 Million, or $3.72 Per Diluted Share
  • Tax Equivalent Net Interest Margin of 5.05%
  • Loan and Lease Production of $4.9 Billion; $985 Million of Net Loan Growth
  • Net Charge-offs 36% Lower for 2018 Compared to 2017
  • Core Deposits Growth of $410 Million

LOS ANGELES, Jan. 17, 2019 (GLOBE NEWSWIRE) -- PacWest Bancorp ( PACW ) today announced net earnings for the fourth quarter of 2018 of $115.0 million, or $0.93 per diluted share, compared to net earnings for the third quarter of 2018 of $116.3 million, or $0.94 per diluted share.  Net earnings for the full year 2018 were $465.3 million, or $3.72 per diluted share, compared to net earnings for the full year 2017 of $357.8 million, or $2.91 per diluted share.

Matt Wagner, President and CEO, commented, “We finished the year with strong growth in both loans and deposits and continued improvement in our credit quality metrics. Our fourth quarter results produced a return on assets of 1.84% and a return on tangible equity of 21.23%.”

Mr. Wagner continued, “Our net earnings for the full year 2018 increased 30% over the prior year to $465.3 million. The increase was driven largely by the benefits of tax reform and lower credit costs, while revenue growth significantly outpaced noninterest expense growth.  Our tax equivalent net interest margin remained above 5% for the full year 2018 and continued cost controls resulted in our efficiency ratio being unchanged from the prior year at 41%.”

Mr. Wagner continued, “We are pleased with the fourth quarter’s organic loan and core deposit growth and will work to carry that momentum into 2019. We will also retire the division names and branding of CapitalSource and Square 1 Bank and replace them with the National Lending and Venture Banking groups under one brand as Pacific Western Bank.”

FINANCIAL HIGHLIGHTS

At or For the
At or For the
Three Months Ended
Year Ended
December 31, September 30, Increase December 31,
Increase
Financial Highlights 2018 2018 (Decrease) 2018 2017 (Decrease)
(Dollars in thousands, except per share data)
Net earnings $ 115,041 $ 116,287 $ (1,246 ) $ 465,339 $ 357,818 $ 107,521
Diluted earnings per share $ 0.93 $ 0.94 $ (0.01 ) $ 3.72 $ 2.91 $ 0.81
Return on average assets 1.84 % 1.89 % (0.05 ) 1.91 % 1.58 % 0.33
Return on average
tangible equity (1) 21.23 % 21.61 % (0.38 ) 21.22 % 15.15 % 6.07
Net interest margin ("NIM")
(tax equivalent) 4.91 % 4.99 % (0.08 ) 5.05 % 5.10 % (0.05 )
Yield on average loans and
leases (tax equivalent) 6.27 % 6.20 % 0.07 6.22 % 5.97 % 0.25
Cost of average total deposits 0.62 % 0.46 % 0.16 0.44 % 0.27 % 0.17
Efficiency ratio 41.7 % 40.9 % 0.8 41.0 % 40.8 % 0.2
Total assets $ 25,731,354 $ 24,782,126 $ 949,228 $ 25,731,354 $ 24,994,876 $ 736,478
Loans and leases held
for investment,
net of deferred fees $ 17,957,713 $ 17,230,146 $ 727,567 $ 17,957,713 $ 16,972,743 $ 984,970
Noninterest-bearing deposits $ 7,888,915 $ 7,834,480 $ 54,435 $ 7,888,915 $ 8,508,044 $ (619,129 )
Core deposits $ 16,346,671 $ 15,512,742 $ 833,929 $ 16,346,671 $ 15,937,012 $ 409,659
Total deposits $ 18,870,501 $ 17,879,543 $ 990,958 $ 18,870,501 $ 18,865,536 $ 4,965
Noninterest-bearing
deposits as percentage
of total deposits 42 % 44 % (2 ) 42 % 45 % (3 )
Core deposits as
percentage of total
deposits 87 % 87 % (0 ) 87 % 85 % 2
Equity to assets ratio 18.75 % 19.13 % (0.38 ) 18.75 % 19.91 % (1.16 )
Tangible common equity
ratio (1) 9.60 % 9.61 % (0.01 ) 9.60 % 10.50 % (0.90 )
Book value per share $ 39.17 $ 38.46 $ 0.71 $ 39.17 $ 38.65 $ 0.52
Tangible book value per
share (1) $ 18.02 $ 17.28 $ 0.74 $ 18.02 $ 18.24 $ (0.22 )
(1) Non-GAAP measure.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased by $1.4 million to $261.8 million for the fourth quarter of 2018 compared to $260.3 million for the third quarter of 2018 due to a higher yield on average loans and leases and a higher balance of average loans and leases, offset partially by higher deposit costs.  The tax equivalent yield on average loans and leases was 6.27% for the fourth quarter of 2018 compared to 6.20% for the third quarter of 2018. The increase in the yield on average loans and leases was due principally to higher coupon interest.

The tax equivalent NIM was 4.91% in the fourth quarter of 2018 compared to 4.99% for the third quarter of 2018. The decrease in the NIM was due mainly to higher deposit and borrowing costs, partially offset by a higher yield on average loans and leases and a higher yield on investment securities.

The cost of average total deposits increased to 0.62% for the fourth quarter of 2018 from 0.46% for the third quarter of 2018 due to higher rates paid on deposits in conjunction with increased market interest rates.

Provision for Credit Losses

The provision for credit losses increased by $0.5 million to $12.0 million for the fourth quarter of 2018 compared to $11.5 million for the third quarter of 2018.

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

Three Months Ended Year Ended
December 31, September 30, Increase December 31,
Provision for Credit Losses 2018 2018 (Decrease) 2018
(In thousands)
Addition to allowance for loan
and lease losses $ 10,500 $ 11,500 $ (1,000 ) $ 36,774
Addition to reserve for unfunded
loan commitments 1,500 - 1,500 8,226
Total provision for credit losses $ 12,000 $ 11,500 $ 500 $ 45,000

Noninterest Income

Noninterest income decreased by $3.4 million to $33.5 million for the fourth quarter of 2018 compared to $36.9 million for the third quarter of 2018 due mainly to a $4.2 million decrease in dividends and gains on equity investments, a $1.6 million decrease in warrant income, and a $1.3 million decrease in other commissions and fees, offset partially by a $3.4 million increase in other income.  Dividends and gains on equity investments decreased mainly due to lower realized gains on investments sold and decreased fair values of investments still held. Warrant income decreased due to lower realized gains on exercised warrants as the third quarter included a $3.1 million gain on a warrant in a company that completed an IPO. Other commissions and fees decreased mostly due to lower prepayment and other loan-related fees.  Other income increased primarily due to higher miscellaneous income from borrower settlements and higher BOLI income from a death benefit received.

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

Three Months Ended
December 31, September 30, Increase
Noninterest Income 2018 2018 (Decrease)
(In thousands)
Service charges on deposit accounts $ 4,091 $ 3,979 $ 112
Other commissions and fees 11,114 12,397 (1,283 )
Leased equipment income 9,384 9,120 264
Gain on sale of loans and leases - - -
Gain on sale of securities 786 826 (40 )
Other income:
Dividends and (losses) gains on equity investments (1,331 ) 2,895 (4,226 )
Warrant income 2,187 3,818 (1,631 )
Other 7,295 3,877 3,418
Total noninterest income $ 33,526 $ 36,912 $ (3,386 )

Noninterest Expense

Noninterest expense increased by $1.1 million to $129.2 million for the fourth quarter of 2018 compared to $128.1 million for the third quarter of 2018 attributable primarily to a $3.7 million increase in other expense, offset partially by a $3.0 million decrease in compensation expense. Other expense increased due to the $2.1 million write-off of the Square 1 trademark asset as a result of our plan to retire the Square 1 Bank name and increased employee expense due to executive relocation costs.  Compensation expense decreased due mostly to lower stock compensation expense, lower bonus expense, and lower commissions expense as a result of the decreased warrant income.

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

Three Months Ended
December 31, September 30, Increase
Noninterest Expense 2018 2018 (Decrease)
(In thousands)
Compensation $ 69,299 $ 72,333 $ (3,034 )
Occupancy 13,356 13,069 287
Data processing 6,930 6,740 190
Other professional services 6,198 6,058 140
Insurance and assessments 4,202 5,446 (1,244 )
Intangible asset amortization 4,986 5,587 (601 )
Leased equipment depreciation 5,758 5,001 757
Foreclosed assets income, net (311 ) (257 ) (54 )
Acquisition, integration and reorganization costs 970 800 170
Loan expense 2,991 2,249 742
Other 14,856 11,127 3,729
Total noninterest expense $ 129,235 $ 128,153 $ 1,082

Income Taxes

The overall effective income tax rate was 25.3% for the fourth quarter of 2018 and 26.2% for the third quarter of 2018.  The decrease in the fourth quarter effective tax rate was due primarily to a change in the state apportionment method applied by the state of Maryland.  The effective tax rate for the year ended December 31, 2018 was 26.5% while the full year 2019 is estimated to be in the range of 27-28%.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Loans and leases held for investment, net of deferred fees, increased by $727.6 million in the fourth quarter of 2018 to $18.0 billion at December 31, 2018.  The net increase was driven mainly by production of $1.6 billion and disbursements of $1.2 billion, offset partially by payoffs of $1.1 billion and paydowns of $920.6 million.  For the year ended December 31, 2018 loans and leases held for investment, net of deferred fees, increased by $985.0 million or 5.8%.

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

Three Months Ended Year Ended
Loans and Leases December 31, September 30, December 31,
Held for Investment Roll Forward (1) 2018 2018 2018
(Dollars in thousands)
Balance, beginning of period $ 17,230,146 $ 16,885,192 $ 16,972,743
Additions:
Production 1,571,565 1,315,572 4,888,614
Disbursements 1,186,351 966,668 4,104,335
Total production and disbursements 2,757,916 2,282,240 8,992,949
Reductions:
Payoffs (1,070,691 ) (1,133,233 ) (4,289,297 )
Paydowns (920,633 ) (795,243 ) (3,480,997 )
Total payoffs and paydowns (1,991,324 ) (1,928,476 ) (7,770,294 )
Sales - (3,326 ) (161,729 )
Transfers to foreclosed assets (13,679 ) (2,176 ) (16,914 )
Charge-offs (25,346 ) (3,308 ) (59,042 )
Total reductions (2,030,349 ) (1,937,286 ) (8,007,979 )
Balance, end of period $ 17,957,713 $ 17,230,146 $ 17,957,713
Weighted average rate on production (2) 5.38 % 5.17 % 5.23 %
(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 31 basis points to loan yields in 2018.

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

December 31, September 30, June 30, December 31,
Loan and Lease Portfolio 2018 2018 2018 2017
(In thousands)
Real estate mortgage:
Commercial $ 4,824,298 $ 4,932,823 $ 5,010,680 $ 5,385,740
Residential 3,093,843 2,745,837 2,555,695 2,466,894
Total real estate mortgage 7,918,141 7,678,660 7,566,375 7,852,634
Real estate construction and land:
Commercial 912,583 854,346 831,462 769,075
Residential 1,321,073 1,146,611 1,042,564 822,154
Total real estate construction and land 2,233,656 2,000,957 1,874,026 1,591,229
Total real estate 10,151,797 9,679,617 9,440,401 9,443,863
Commercial:
Asset-based 3,305,421 3,222,311 3,184,300 2,924,950
Venture capital 2,038,748 2,031,895 2,008,205 2,122,735
Other commercial 2,060,426 1,897,852 1,873,607 2,071,394
Total commercial 7,404,595 7,152,058 7,066,112 7,119,079
Consumer 401,321 398,471 378,679 409,801
Total loans and leases held for
investment, net of deferred fees $ 17,957,713 $ 17,230,146 $ 16,885,192 $ 16,972,743
Total unfunded loan commitments $ 7,528,248 $ 7,055,833 $ 6,429,587 $ 6,234,061

Allowance for Credit Losses

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

Three Months Ended December 31, 2018
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 $ 141,920 $ 35,361 $ 177,281
Charge-offs (25,346 ) - (25,346 )
Recoveries 5,398 - 5,398
Net charge-offs (19,948 ) - (19,948 )
Provision 10,500 1,500 12,000
Ending balance $ 132,472 $ 36,861 $ 169,333


Three Months Ended September 30, 2018
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 $ 132,139 $ 35,361 $ 167,500
Charge-offs (3,308 ) - (3,308 )
Recoveries 1,589 - 1,589
Net charge-offs (1,719 ) - (1,719 )
Provision 11,500 - 11,500
Ending balance $ 141,920 $ 35,361 $ 177,281

The allowance for credit losses as a percentage of loans and leases held for investment decreased to 0.94% at December 31, 2018 from 1.03% at September 30, 2018 as certain specific reserves in place at September 30, 2018 were charged off during the fourth quarter, lowering the specific reserves on impaired loans at December 31, 2018 compared to September 30, 2018.

Gross charge-offs for the fourth quarter of 2018 were $25.3 million and included $23.4 million for venture capital loans, of which $20.0 million related to two loans, and $1.7 million for other commercial loans.  Gross charge-offs for the third quarter of 2018 were $3.3 million and included $1.1 million for venture capital loans, $0.7 million for real estate mortgage loans, and $0.7 million for asset-based loans. Recoveries for the fourth quarter of 2018 were $5.4 million and included $3.1 million for venture capital loans and $1.7 million for other commercial loans. Recoveries for the third quarter of 2018 were $1.6 million and included $1.0 million for venture capital loans.

For the full year 2018, net charge-offs were $43.8 million and included $24.2 million for venture capital loans, a decrease from the full year 2017 net charge-offs of $68.7 million that included $36.0 million for venture capital loans.  This resulted in a decrease in net charge-offs to average loans for the venture capital portfolio from 1.77% in 2017 to 1.17% in 2018.

For the fourth quarter of 2018 and third quarter of 2018, annualized net charge-offs to average loans and leases were 0.46% and 0.04%.  For the full years 2018 and 2017, net charge-offs to average loans and leases were 0.26% and 0.43%.

Deposits and Client Investment Funds

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

December 31, September 30, June 30, December 31,
Deposit Category 2018 2018 2018 2017
(Dollars in thousands)
Noninterest-bearing demand deposits $ 7,888,915 $ 7,834,480 $ 8,126,153 $ 8,508,044
Interest checking deposits 2,842,463 2,277,537 2,184,785 2,226,885
Money market deposits 5,043,871 4,782,724 4,631,658 4,511,730
Savings deposits 571,422 618,001 643,642 690,353
Total core deposits 16,346,671 15,512,742 15,586,238 15,937,012
Non-core non-maturity deposits 518,192 483,528 607,388 863,202
Total non-maturity deposits 16,864,863 15,996,270 16,193,626 16,800,214
Time deposits $250,000 and under 1,593,453 1,509,214 1,394,117 1,709,980
Time deposits over $250,000 412,185 374,059 341,449 355,342
Total time deposits 2,005,638 1,883,273 1,735,566 2,065,322
Total deposits $ 18,870,501 $ 17,879,543 $ 17,929,192 $ 18,865,536
Noninterest-bearing demand deposits
as percentage of total deposits 42 % 44 % 45 % 45 %
Core deposits as percentage of total deposits 87 % 87 % 87 % 85 %

At December 31, 2018, core deposits totaled $16.3 billion, or 87% of total deposits, including $7.9 billion of noninterest-bearing demand deposits, or 42% of total deposits.

In addition to deposit products, we also offer alternative non-depository cash investment options for select clients; these alternatives include investments managed by Square 1 Asset Management, Inc. (“S1AM”), our registered investment advisor subsidiary, and third-party sweep products.  Total off-balance sheet client investment funds at December 31, 2018 were $1.9 billion, of which $1.5 billion was managed by S1AM.

CREDIT QUALITY

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

...
December 31, September 30, Increase
Credit Quality Metrics 2018 2018 (Decrease)
(Dollars in thousands)
Nonaccrual loans and leases held for investment (1) $ 79,333 $ 112,972 $ (33,639 )
Accruing loans contractually past due 90 days or more - - -
Foreclosed assets, net 5,299 4,407 892
Total nonperforming assets $ 84,632 $ 117,379 $ (32,747 )
Nonaccrual loans and leases held for investment (1) $ 79,333 $ 112,972 $ (33,639 )
Performing troubled debt restructured loans
held for investment 17,701 22,106 (4,405 )