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PacWest Telecomm Inc.$35.66($2.00)(5.31%)

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 PacWest Bancorp Announces Results for the Third Quarter 2018
   Tuesday, October 16, 2018 7:00:00 AM ET

Highlights

  • Net Earnings of $116.3 Million, or $0.94 Per Diluted Share
  • Tax Equivalent Net Interest Margin of 4.99% for Q3 and 5.09% YTD 2018
  • New Loan and Lease Production of $1.3 Billion; $345 Million of Net Loan Growth
  • Net Charge-offs 48% Lower for YTD 2018 Compared to Same Period in 2017
  • Core Deposits Steady at 87% of Total Deposits
  • Announced Agreement to Acquire El Dorado Savings Bank, F.S.B.

LOS ANGELES, Oct. 16, 2018 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq: PACW) today announced net earnings for the third quarter of 2018 of $116.3 million, or $0.94 per diluted share, compared to net earnings for the second quarter of 2018 of $115.7 million, or $0.92 per diluted share.  The increase in net earnings from the prior quarter was due primarily to a lower provision for credit losses, offset partially by lower net interest income and lower noninterest income. 



The provision for credit losses decreased by $6.0 million in the third quarter of 2018 compared to the second quarter of 2018 due mainly to a lower level of loans rated special mention.  Net interest income decreased by $2.0 million in the third quarter of 2018 due mostly to higher deposit costs and a lower yield on average loans and leases, offset partially by a higher balance of average loans and leases.  Noninterest income decreased by $2.7 million in the third quarter of 2018 due primarily to a $6.4 million decrease in other income, offset partially by a $2.6 million increase in warrant income and a $0.9 million increase in dividends and gains on equity investments.   

Matt Wagner, President and CEO, commented, “We achieved strong net loan growth across all our business lines along with solid earnings and operating metrics. Our third quarter results produced a return on assets of 1.89% and a return on tangible equity of 21.61%.”

Mr. Wagner continued, “Our third quarter tax equivalent NIM decreased by 19 basis points to 4.99% due to higher rates on deposits from competitive pressures and lower loan yields resulting from lower discount accretion.”

Mr. Wagner continued, “We recently announced our pending acquisition of El Dorado Savings Bank which will expand our Community Banking franchise into Northern California and Northern Nevada and enhance our core funding with approximately $2.0 billion of stable low cost deposits.” 

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  2018   2018  (Decrease)  2018   2017  (Decrease)
  
 (Dollars in thousands, except per share data)
Net earnings$  116,287  $  115,735  $  552  $  350,298  $  273,781  $  76,517 
Diluted earnings per share$  0.94  $  0.92  $  0.02  $  2.79  $  2.26  $  0.53 
Return on average assets 1.89%  1.93%    (0.04)  1.94%  1.67%    0.27 
Return on average           
tangible equity (1)  21.61%  20.98%    0.63   21.22%  15.63%    5.59 
            
Net interest margin ("NIM")           
(tax equivalent) 4.99%  5.18%    (0.19)  5.09%  5.15%    (0.06)
Yield on average loans and            
leases (tax equivalent) 6.20%  6.30%    (0.10)  6.20%  6.01%    0.19 
Cost of average total deposits 0.46%  0.37%    0.09   0.38%  0.26%    0.12 
Efficiency ratio 40.9%  39.8%    1.1   40.8%  40.7%    0.1 
            
Total assets$  24,782,126  $  24,529,557  $  252,569  $  24,782,126  $  22,242,932  $  2,539,194 
Loans and leases held            
for investment,            
net of deferred fees$  17,230,146  $  16,885,192  $  344,954  $  17,230,146  $  15,690,517  $  1,539,629 
Noninterest-bearing deposits$  7,834,480  $  8,126,153  $  (291,673) $  7,834,480  $  6,911,874  $  922,606 
Core deposits$  15,512,742  $  15,586,238  $  (73,496) $  15,512,742  $  13,531,300  $  1,981,442 
Total deposits$  17,879,543  $  17,929,192  $  (49,649) $  17,879,543  $  16,773,245  $  1,106,298 
            
Noninterest-bearing            
deposits as percentage            
of total deposits 44%  45%    (1)  44%  41%    3 
Core deposits as            
percentage of total           
deposits 87%  87%    -   87%  81%    6 
            
Equity to assets ratio  19.13%  19.48%    (0.35)  19.13%  20.73%    (1.60)
Tangible common equity            
ratio (1) 9.61%  9.86%    (0.25)  9.61%  12.02%    (2.41)
Book value per share$  38.46  $  38.36  $  0.10  $  38.46  $  37.96  $  0.50 
Tangible book value per            
share (1)$  17.28  $  17.35  $  (0.07) $  17.28  $  19.84  $  (2.56)
            
(1) Non-GAAP measure.           
            

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased by $2.0 million to $260.3 million for the third quarter of 2018 compared to $262.3 million for the second quarter of 2018 due to interest expense growth exceeding interest income growth.  Interest expense increased due to higher deposit costs and one additional day in the third quarter.  Interest income increased due primarily to a higher balance of average loans and leases and one additional day in the third quarter, offset partially by a lower yield on average loans and leases.  The tax equivalent yield on average loans and leases was 6.20% for the third quarter of 2018 compared to 6.30% for the second quarter of 2018. The decrease in the yield on average loans and leases was due principally to lower discount accretion on acquired loans (14 basis points in the third quarter versus 21 basis points in the second quarter).    

The tax equivalent NIM was 4.99% for the third quarter of 2018 compared to 5.18% for the second quarter of 2018. The decrease in the NIM was due mainly to higher deposit costs and a lower yield on average loans and leases resulting from lower discount accretion on acquired loans.          

The cost of average total deposits increased to 0.46% for the third quarter of 2018 from 0.37% for the second quarter of 2018 due to higher rates paid on deposits in conjunction with increased market interest rates.  

Provision for Credit Losses

A provision for credit losses of $11.5 million was recorded in the third quarter of 2018 compared to $17.5 million in the second quarter of 2018. The lower provision for the third quarter of 2018 was due to a lower level of loans graded special mention at September 30, 2018 compared to June 30, 2018. Loans graded special mention have a higher general reserve amount than loans graded pass.  

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

 Three Months Ended   Nine Months Ended
 September 30, June 30, Increase September 30,
Provision for Credit Losses 2018  2018 (Decrease)  2018
  
 (In thousands)
Addition to allowance for loan       
and lease losses$  11,500 $  15,000 $  (3,500) $  26,274
Addition to reserve for unfunded       
loan commitments   -    2,500    (2,500)    6,726
Total provision for credit losses$  11,500 $  17,500 $  (6,000) $  33,000
        

Noninterest Income

Noninterest income decreased by $2.7 million to $36.9 million for the third quarter of 2018 compared to $39.6 million for the second quarter of 2018 due mainly to decreases in other income and leased equipment income, partially offset by increases in warrant income, dividends and gains on equity investments, and other commissions and fees.  Other income and leased equipment income decreased in the third quarter due to lower gains on early lease terminations. Warrant income increased due to higher realized gains on exercised warrants primarily from a $3.1 million gain on a warrant in a company that completed an IPO. Dividends and gains on equity investments increased due to higher realized gains on investments sold. The increase in other commissions and fees was attributable to higher loan-related fees.

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

 Three Months Ended  
 September 30, June 30, Increase
Noninterest Income 2018  2018 (Decrease)
  
 (In thousands)
Service charges on deposit accounts$  3,979 $  4,265 $  (286)
Other commissions and fees   12,397    11,767    630 
Leased equipment income   9,120    9,790    (670)
Gain on sale of loans and leases   -    106    (106)
Gain on sale of securities   826    253    573 
Other income:     
Dividends and gains on equity investments 2,895
  1,992
  903
 
Warrant income 3,818
  1,225
  2,593
 
Other 3,877
  10,240
    (6,363)
Total noninterest income $  36,912 $  39,638 $  (2,726)
 

Noninterest Expense

Noninterest expense increased by $1.7 million to $128.1 million for the third quarter of 2018 compared to $126.4 million for the second quarter of 2018 attributable primarily to a $2.4 million increase in compensation expense, a $0.8 million increase in other professional expense, and a $0.8 million increase in acquisition costs, partially offset by decreases in most other expense categories. Compensation expense increased due to higher stock compensation expense for our performance-based restricted stock units as we now expect to achieve a higher level of certain performance metrics, and higher commissions expense related to the increased warrant income. Other professional services increased due to higher legal and consulting expense. The increase in acquisition costs relates to the recently announced pending acquisition of El Dorado Savings Bank.

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

 Three Months Ended  
 September 30, June 30, Increase
Noninterest Expense 2018   2018  (Decrease)
 (In thousands)
Compensation$  72,333  $  69,913  $  2,420 
Occupancy    13,069     13,575     (506)
Data processing   6,740     6,896     (156)
Other professional services   6,058     5,257     801 
Insurance and assessments   5,446     5,330     116 
Intangible asset amortization   5,587     5,587     - 
Leased equipment depreciation   5,001     5,237     (236)
Foreclosed assets income, net   (257)    (61)    (196)
Acquisition, integration and reorganization costs   800     -     800 
Loan expense   2,249     3,058     (809)
Other   11,127     11,657     (530)
Total noninterest expense$  128,153  $  126,449  $  1,704 
 

Income Taxes

The overall effective income tax rate was 26.2% for the third quarter of 2018 and 26.8% for the second quarter of 2018. The effective tax rate for the nine months ended September 30, 2018 was 26.9% while the full year 2018 is estimated to be approximately 28%.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Loans and leases held for investment, net of deferred fees, increased by $345.0 million in the third quarter of 2018 to $17.2 billion at September 30, 2018.  The net increase was driven mainly by production of $1.3 billion and disbursements of $966.7 million, offset partially by payoffs of $1.1 billion and paydowns of $795.2 million.

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 Nine Months Ended
Loans and Leases September 30,  June 30,  September 30, 
Held for Investment Roll Forward (1) 2018   2018   2018 
  
 (Dollars in thousands)
Balance, beginning of period$  16,885,192  $  16,455,285  $  16,972,743 
Additions:     
Production   1,315,572     1,256,559     3,317,049 
Disbursements   966,668     1,203,940     2,917,984 
 Total production and disbursements   2,282,240     2,460,499     6,235,033 
Reductions:     
Payoffs   (1,133,233)    (1,154,400)    (3,218,606)
Paydowns   (795,243)    (829,119)    (2,560,364)
 Total payoffs and paydowns   (1,928,476)    (1,983,519)    (5,778,970)
Sales    (3,326)    (27,779)    (161,729)
Transfers to foreclosed assets   (2,176)    (1,059)    (3,235)
Charge-offs   (3,308)    (18,235)    (33,696)
 Total reductions   (1,937,286)    (2,030,592)    (5,977,630)
Balance, end of period$  17,230,146  $  16,885,192  $  17,230,146 
      
Weighted average rate on production (2) 5.17%  5.04%  5.16%
      
(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:

 September 30, June 30, March 31, September 30,
Loan and Lease Portfolio2018 2018 2018 2017
  
 (In thousands)
Real estate mortgage: 
Commercial$  4,932,823 $  5,010,680 $  5,033,006 $  4,338,933
Residential   2,745,837    2,555,695    2,521,237    1,850,324
Total real estate mortgage   7,678,660    7,566,375    7,554,243    6,189,257
Real estate construction and land:       
Commercial   854,346    831,462    789,892    680,950
Residential   1,146,611    1,042,564    887,110    568,273
Total real estate construction and land   2,000,957    1,874,026    1,677,002    1,249,223
Total real estate    9,679,617    9,440,401    9,231,245    7,438,480
Commercial:       
Asset-based   3,222,311    3,184,300    2,957,890    2,792,823
Venture capital   2,031,895    2,008,205    1,920,643    1,959,489
Other commercial   1,897,852    1,873,607    1,947,590    3,113,574
Total commercial   7,152,058    7,066,112    6,826,123    7,865,886
Consumer   398,471    378,679    397,917    386,151
Total loans and leases held for        
investment, net of deferred fees$  17,230,146 $  16,885,192 $  16,455,285 $  15,690,517
        
Total unfunded loan commitments$  7,055,833 $  6,429,587 $  6,352,803 $  5,037,084
            

Allowance for Credit Losses

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

 Three Months Ended September 30, 2018
 Allowance for Reserve for  Total
Allowance for Credit Loan and  Unfunded Loan Allowance for
Losses RollforwardLease 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 
      
      
  
 Three Months Ended June 30, 2018
 Allowance for Reserve for  Total
Allowance for Credit Loan and  Unfunded Loan Allowance for
Losses RollforwardLease Losses Commitments Credit Losses
 (In thousands)
Beginning balance$  134,275  $  32,861 $  167,136 
Charge-offs   (18,235)    -    (18,235)
Recoveries   1,099     -    1,099 
Net charge-offs   (17,136)    -    (17,136)
Provision    15,000     2,500    17,500 
Ending balance$  132,139  $  35,361 $  167,500 
      

The allowance for credit losses as a percentage of loans and leases held for investment increased to 1.03% at September 30, 2018 from 0.99% at June 30, 2018 due primarily to an increase in the level of specific reserves on impaired 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.  Gross charge-offs for the second quarter of 2018 were $18.2 million and included $6.1 million for venture capital loans, $4.7 million for real estate mortgage loans, $4.4 million for other commercial loans, and $2.9 million for asset-based loans.  Recoveries for the third quarter of 2018 were $1.6 million and included $1.0 million for venture capital loans. Recoveries in the second quarter of 2018 were $1.1 million and included $0.8 million for other commercial loans.   

The annualized ratio of net charge-offs to average loans was 0.04% for the third quarter of 2018 compared to 0.41% for the second quarter of 2018. The annualized ratio of net charge-offs to average loans was 0.19% for the nine months ended September 30, 2018 compared to 0.35% for the same period in 2017.

Deposits and Client Investment Funds

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

 September 30, June 30, March 31, September 30,
Deposit Category 2018   2018   2018   2017 
  
 (Dollars in thousands)
Noninterest-bearing demand deposits$  7,834,480  $  8,126,153  $  8,232,140  $  6,911,874 
Interest checking deposits   2,277,537     2,184,785     2,076,152     1,957,485 
Money market deposits   4,782,724     4,631,658     4,676,734     3,967,224 
Savings deposits   618,001     643,642     676,503     694,717 
Total core deposits   15,512,742     15,586,238     15,661,529     13,531,300 
Non-core non-maturity deposits   483,528     607,388     585,399     1,118,694 
Total non-maturity deposits   15,996,270     16,193,626     16,246,928     14,649,994 
Time deposits $250,000 and under   1,509,214     1,394,117     1,482,118     1,770,439 
Time deposits over $250,000   374,059     341,449     349,742     352,812 
Total time deposits   1,883,273     1,735,566     1,831,860     2,123,251 
Total deposits$  17,879,543  $  17,929,192  $  18,078,788  $  16,773,245 
 
Noninterest-bearing demand deposits  
as percentage of total deposits 44%  45%  46%  41%
Core deposits as percentage of total deposits 87%  87%  87%  81%
                

At September 30, 2018, core deposits totaled $15.5 billion, or 87% of total deposits, including $7.8 billion of noninterest-bearing demand deposits, or 44% 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 September 30, 2018 were $2.0 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:

 September 30, June 30, Increase
Credit Quality Metrics2018 2018 (Decrease)
  
 (Dollars in thousands)
Nonaccrual loans and leases held for investment (1)$  112,972  $  113,745  $  (773)
Accruing loans contractually past due      
90 days or more   -     -     - 
Foreclosed assets, net   4,407     2,231     2,176 
  Total nonperforming assets$  117,379  $  115,976  $  1,403 
      
Nonaccrual loans and leases held for investment (1)$  112,972  $  113,745  $