PacWest Bancorp Announces Results for the Third Quarter 2020
Significant ItemsNet Earnings of $45.5 Million, or $0.38 Per Diluted ShareStrong Pre-Provision, Pre-Tax Net Revenue (“PPNR”) of $156.2 MillionStrong Capital Position – CET1 Ratio up 49 Basis Points to 10.46%Core Deposits Up $1.6 Billion or 10% in Q3; Represents 88% of Total DepositsTax Equivalent Net Interest Margin of 3.90% Compared to 4.20% in Q2Cost of Average Total Deposits Decreased to 17 Basis PointsLOS ANGELES, Oct. 14, 2020 (GLOBE NEWSWIRE) — PacWest Bancorp (Nasdaq: PACW) today announced net earnings for the third quarter of 2020 of $45.5 million, or $0.38 per diluted share, compared to net earnings for the second quarter of 2020 of $33.2 million, or $0.28 per diluted share. The increase in net earnings for the third quarter was due primarily to a $23 million decrease in the provision for credit losses.Matt Wagner, President and CEO, commented, “Our operations continue to produce strong revenues and internal capital as evidenced by $156.2 million in PPNR during the third quarter, which resulted in a PPNR return on average assets of 2.22%. These solid operating earnings highlight the resilience of our business as we navigate the challenging economic conditions.”Mr. Wagner continued, “We experienced strong deposit growth again in the third quarter, resulting in a significant increase in liquidity. Our average deposits in financial institutions balance was $2.6 billion in the third quarter with a yield of 10 basis points. While our focus is on managing net interest income, this excess liquidity had a negative impact on our third quarter NIM of 32 basis points.”Mr. Wagner added, “Our priority continues to be on mitigating potential credit losses in our portfolios, especially those portfolios impacted most by COVID-19. We were proactive in downgrading loans in the first quarter at the start of the pandemic, and the net loan migration to the special mention and classified categories during the second and third quarters was minimal. As of September 30, 2020, only 3.3% of loans are on deferral with the vast majority of those expiring in November 2020, while only 13% of loans previously granted a deferral received a second modification.”FINANCIAL HIGHLIGHTSINCOME STATEMENT HIGHLIGHTSNet Interest IncomeNet interest income decreased by $3.0 million to $251.3 million for the third quarter of 2020 compared to $254.3 million for the second quarter of 2020 due mainly to a lower balance of average loans and leases. The tax equivalent yield on average loans and leases was 5.01% for both the third and second quarters of 2020.The tax equivalent NIM was 3.90% for the third quarter of 2020 compared to 4.20% for the second quarter of 2020. The decrease in the NIM was due mostly to the change in the earning asset mix. Average loans and leases decreased by $756 million, while the average balance of deposits in financial institutions increased by $1.8 billion in the third quarter of 2020. This excess liquidity had a negative impact on the third quarter tax equivalent NIM of 32 basis points, while the PPP loans, which have a coupon rate of 1%, had a negative impact of seven basis points.The cost of average total deposits decreased to 0.17% for the third quarter of 2020 from 0.25% for the second quarter of 2020. The lower cost of average total deposits was due primarily to the repricing of maturing time deposits. The cost of deposits at September 30, 2020 was 0.13%.Provision for Credit LossesThe following table presents details of the provision for credit losses for the periods indicated:The provision for credit losses was $97.0 million for the third quarter of 2020, down $23.0 million from the second quarter of 2020. This reduction reflected improvement in certain key macro-economic forecast variables (unemployment and real GDP growth), partially offset by deterioration in other key macro-economic variables, including CRE price index and BBB spreads, and increased provisions for individually evaluated loans and leases.Noninterest IncomeThe following table presents details of noninterest income for the periods indicated:Noninterest income decreased by $0.6 million to $38.3 million for the third quarter of 2020 compared to $38.9 million for the second quarter of 2020 due primarily to decreases of $2.4 million in gain on sale of securities, $2.1 million in leased equipment income, and $1.5 million in warrant income, offset partially by a $4.0 million increase in dividends and gains on equity investments. The decrease in gain on sale of securities resulted from the sale of $17 million of securities for a gain of $5.3 million in the third quarter compared to sales of $122 million of securities for a gain of $7.7 million in the second quarter. The decrease in leased equipment income was due to lower gains from early lease terminations and lower rental income due to an operating lease placed on nonaccrual status in the third quarter. The decrease in warrant income was due to lower gains from exercised warrants. The increase in dividends and gains on equity investments resulted primarily from net fair value gains of $5.9 million on equity investments still held.Noninterest ExpenseThe following table presents details of noninterest expense for the periods indicated:Noninterest expense increased by $6.4 million to $133.4 million for the third quarter of 2020 compared to $127.0 million for the second quarter of 2020 attributable primarily to a $13.2 million increase in compensation expense, offset partially by decreases of $5.4 million in insurance and assessments expense and $2.4 million in other expense. The increase in compensation expense was due mainly to higher bonus accruals of $12.4 million and stock compensation expense of $1.4 million. The decrease in insurance and assessments expense was due to a decrease in the FDIC assessment expense due primarily to increases in liquidity and uninsured deposits during the last two quarters. The decrease in other expense was due primarily to $6.6 million in prepayment penalties incurred in the second quarter from the early payoff of $750 million of FHLB term advances, which was offset partially by higher legal accruals in the third quarter.Income TaxesThe effective income tax rate was 23.1% for the third quarter compared to 28.1% for the second quarter of 2020. Excluding non-deductible goodwill impairment, the effective tax rate for the full year 2020 is currently estimated to be in the range of 25-27%. The lower effective tax rate in the third quarter was due mainly to higher shortfall amounts from restricted stock vestings in the second quarter that elevated the second quarter effective tax rate.BALANCE SHEET HIGHLIGHTSLoans and LeasesThe 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, decreased by $668.4 million in the third quarter of 2020 to $19.0 billion at September 30, 2020. The majority of the decrease in the loans and leases balance in the third quarter of 2020 was in the commercial category as business lending demand has decreased during the COVID-19 pandemic. Total revolving balances declined by approximately $350 million in the third quarter due to a lower line utilization rate. The largest decreases were in the lender finance, equipment finance, venture capital, and security monitoring portfolios. The weighted average rate on third quarter production increased to 4.95%. The increase was due to the unusually low rate on second quarter production since $1.2 billion, or 69%, of second quarter loan production related to PPP loans at a coupon rate of 1%. Excluding PPP loans, the weighted average rate on second quarter production was 5.39%.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 LossesThe following tables present roll forwards of the allowance for credit losses for the periods indicated:The allowance for credit losses increased by $60.9 million in the third quarter of 2020 to $442.5 million. The increase in the allowance for credit losses during the third quarter was attributable to changes in the economic forecast and changes to modeling assumptions. Net charge-offs increased from $13.2 million in the second quarter to $36.1 million in the third quarter due primarily to one security monitoring loan with a charge-off of $32.8 million. This loan was the only junior lien exposure in the security monitoring portfolio and, accordingly, additional losses of this magnitude are not expected.Gross charge-offs for the third quarter of 2020 were $37.3 million and included $35.4 million for other commercial loans and $1.5 million for commercial real estate mortgage loans compared to gross charge-offs for the second quarter of 2020 of $15.8 million that included $6.5 million for venture capital loans, $5.0 million for other commercial loans, and $4.2 million for commercial real estate mortgage loans.Recoveries for the third quarter of 2020 were $1.2 million and included $0.6 million for venture capital loans and $0.3 million for other commercial loans compared to recoveries for the second quarter of 2020 of $2.5 million that included $2.3 million for other commercial loans.For the three and nine months ended September 30, 2020, annualized net charge-offs to average loans and leases were 0.75% and 0.47%, respectively.The allowance for credit losses as a percentage of loans and leases held for investment was 2.33% at September 30, 2020 and 1.94% at June 30, 2020. The allowance for loan and lease losses as a percentage of loans and leases held for investment was 1.82% at September 30, 2020 and 1.53% at June 30, 2020. The allowance for credit losses and allowance for loan and lease losses as a percentage of loans and leases held for investment, excluding PPP loans that are fully guaranteed and do not carry any allowance, was 2.48% and 1.94% at September 30, 2020, respectively, compared to 2.06% and 1.63% at June 30, 2020, respectively.Deposits and Client Investment FundsThe following table presents the composition of our deposit portfolio as of the dates indicated:At September 30, 2020, core deposits totaled $21.1 billion, or 88% of total deposits, including $9.3 billion of noninterest-bearing demand deposits, or 39% of total deposits. Core deposits increased by $1.6 billion in the third quarter driven by continued strong deposit growth from our venture banking clients.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 September 30, 2020 were $1.2 billion, of which $1.0 billion was managed by PWAM.CREDIT QUALITYThe following table presents loan and lease credit quality metrics as of the dates indicated:During the third quarter of 2020, classified loans and leases decreased by $18.7 million driven mostly by payoffs, paydowns, and other reductions of $55.0 million, charge-offs of $35.7 million, and the transfer to other real estate owned of $12.6 million, offset partially by the migration of $66.0 million in loans and leases from special mention and downgrades from pass of $19.4 million. Special mention loans and leases increased by $17.4 million driven mainly by downgrades from pass of $167.3 million, offset partially by upgrades to pass of $39.4 million, payoffs, paydowns, and other reductions of $44.5 million, and the migration of $66.0 million in loans and leases to classified.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:During the third quarter of 2020, nonaccrual loans and leases decreased by $80.5 million due primarily to charge-offs of $35 million, payoffs of $29 million, and transfers to foreclosed assets of $12.6 million.CAPITALThe following table presents certain actual capital ratios and ratios excluding PPP loans:STOCK REPURCHASE PROGRAMDuring the third quarter of 2020, there were no stock repurchases. On April 21, 2020, we announced that stock repurchases were suspended indefinitely.ABOUT PACWEST BANCORPPacWest Bancorp (“PacWest”) is a bank holding company with over $28 billion in assets headquartered in Los Angeles, California, with executive offices in Denver, Colorado, with one wholly-owned banking subsidiary, Pacific Western Bank (the “Bank”). The Bank has 72 full-service branches located in California, one branch located in Durham, North Carolina, and one branch located in Denver, Colorado. The Bank provides community banking products including 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. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and 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 STATEMENTSThis communication contains certain forward-looking information about PacWest Bancorp that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Statements that are not historical or current facts, including statements about future financial and operational results, expectations, or intentions are forward-looking statements. Such statements are based on information available at the time of the 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. The COVID-19 pandemic is adversely affecting PacWest Bancorp, its employees, customers and third-party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity and prospects is uncertain. The length of the COVID-19 pandemic and the severity of its impact on key macro-economic indicators such as unemployment and GDP may have a material impact on our allowance for credit losses and related provision for credit losses. Continued deterioration in general business and economic conditions could adversely affect PacWest Bancorp’s revenues and the values of its assets, including goodwill, and liabilities, lead to a tightening of credit, and increase stock price volatility. In addition, PacWest Bancorp’s results could be adversely affected by changes in interest rates, sustained high unemployment rates, deterioration in the credit quality of its loan portfolio or in the value of the collateral securing those loans, deterioration in the value of its investment securities, the magnitude of individual loan losses on security monitoring loans, and legal and regulatory developments. Actual results may differ materially from those set forth or implied in the forward-looking statements due to a variety of factors, including the risk factors described in documents filed by the Company with the U.S. 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.
GAAP TO NON-GAAP RECONCILIATIONS
This press release contains certain non-GAAP financial disclosures for: (1) PPNR, (2) PPNR return on average assets (3) return on average tangible equity, (4) tangible common equity ratio, and (5) tangible book value per share. The Company uses these non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. In particular, the use of return on average tangible equity, tangible common equity ratio, tangible book value per share, and PPNR is prevalent among banking regulators, investors, and analysts. Accordingly, we disclose the non-GAAP measures in addition to the related GAAP measures of: (1) net earnings, (2) return on average assets, (3) return on average equity, (4) equity to assets ratio, and (5) book value per share.The tables below present the reconciliations of these GAAP financial measures to the related non-GAAP financial measures:
GAAP TO NON-GAAP RECONCILIATIONS
This press release contains certain non-GAAP financial disclosures for: (1) PPNR, (2) PPNR return on average assets (3) return on average tangible equity, (4) tangible common equity ratio, and (5) tangible book value per share. The Company uses these non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. In particular, the use of return on average tangible equity, tangible common equity ratio, tangible book value per share, and PPNR is prevalent among banking regulators, investors, and analysts. Accordingly, we disclose the non-GAAP measures in addition to the related GAAP measures of: (1) net earnings, (2) return on average assets, (3) return on average equity, (4) equity to assets ratio, and (5) book value per share.The tables below present the reconciliations of these GAAP financial measures to the related non-GAAP financial measures: