Net Earnings of $116.3 Million, or $0.94 Per Diluted ShareTax Equivalent Net Interest Margin of 4.99% for Q3 and 5.09% YTD 2018New Loan and Lease Production of $1.3 Billion; $345 Million of Net Loan GrowthNet Charge-offs 48% Lower for YTD 2018 Compared to Same Period in 2017Core Deposits Steady at 87% of Total DepositsAnnounced 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 HIGHLIGHTSINCOME STATEMENT HIGHLIGHTS
Net Interest IncomeNet 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 LossesA 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: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: 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: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 HIGHLIGHTSLoans and LeasesLoans 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:The following table presents the composition of loans and leases held for investment, net of deferred fees, as of the dates indicated:
Allowance for Credit Losses
The following tables show roll forwards of the allowance for credit losses for the periods indicated: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 FundsThe following table presents the composition of our deposit portfolio as of the dates indicated: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:Nonaccrual loans and leases decreased by $0.8 million in the third quarter due to net changes in the population of nonaccrual loans which included collections applied to loans and leases, the full repayment of a $10.5 million nonaccrual residential real estate construction loan, and an $11.9 million venture capital loan that was placed on nonaccrual status during the quarter. The decrease in nonaccrual loans and leases by loan category was attributable primarily to a $10.5 million decrease in nonaccrual residential real estate construction and land loans and a $3.4 million decrease in nonaccrual commercial real estate mortgage loans, offset partially by a $7.6 million increase in nonaccrual venture capital loans and a $4.9 million increase in nonaccrual asset-based loans.
Special mention loans and leases decreased by $146.8 million in the third quarter due to net changes in the population of these loans which included a $47.8 million special mention commercial real estate loan being upgraded to pass status and the full repayment of a $33.4 million special mention healthcare real estate loan.Classified loans and leases increased by $24.2 million in the third quarter due to net changes in the population of these loans which included a $34.4 million security cash flow loan being downgraded to classified status, offset partially by the full repayment of a $10.5 million classified nonaccrual residential real estate construction loan. The following table presents nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by portfolio segment and class as of the dates indicated:EL DORADO SAVINGS BANK MERGER ANNOUNCEMENT
On September 12, 2018, PacWest announced the signing of a definitive agreement and plan of merger (the “Agreement”) whereby PacWest will acquire El Dorado Savings Bank, F.S.B. (“El Dorado”) in a transaction valued at approximately $466.7 million. El Dorado, headquartered in Placerville, California, is a federally chartered savings bank founded in 1958, with approximately $2.2 billion in assets and 35 branches located primarily in eight Northern California counties and two Northern Nevada counties. In connection with the transaction, El Dorado will be merged into Pacific Western Bank, the principal operating subsidiary of PacWest Bancorp.The transaction, which was approved by the PacWest and El Dorado boards of directors, is expected to close in the first quarter of 2019 and is subject to customary closing conditions, including obtaining approval by bank regulatory authorities and El Dorado’s stockholders.As of June 30, 2018, on a pro forma consolidated basis, the combined company would have approximately $26.7 billion in assets and 110 branches. No El Dorado branches are expected to be consolidated as a result of the Agreement.Under terms of the Agreement, El Dorado stockholders will receive 58.2209 shares of PacWest common stock and $427.92 in cash for each share of El Dorado, subject to adjustment in certain circumstances as set forth in the Agreement. Based on PacWest’s September 11, 2018 closing price of $50.04, the total value of the merger consideration is $3,341.29 per El Dorado share. The consideration mix would result in a total of approximately $59.8 million in cash and $406.9 million in PacWest shares. STOCK REPURCHASE PROGRAMDuring the third quarter of 2018, we repurchased 1,276,498 shares at an average price of $50.59 and a total cost of $64.6 million. At September 30, 2018, the remaining amount that could be used to repurchase shares under the $350 million Stock Repurchase Program was $110.1 million.ABOUT PACWEST BANCORPPacWest Bancorp (“PacWest”) is a bank holding company with over $24 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (the “Bank”). The Bank has 74 full-service branches located throughout the state of California and one branch in Durham, North Carolina. Our Community Banking group provides lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices. We offer additional products and services through our National Lending and Venture Banking business groups. National Lending provides asset-based, equipment, real estate and security cash flow loans and treasury management services to established middle-market businesses on a national basis. Venture Banking offers a comprehensive suite of financial services focused on entrepreneurial 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, visit www.pacwestbancorp.com, or to learn more about Pacific Western Bank, visit www.pacificwesternbank.com.FORWARD LOOKING STATEMENTSThis communication contains certain forward-looking information about PacWest, El Dorado, and the combined company after the close of the transaction that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical facts such as our future effective tax rate; the ability to complete the proposed El Dorado transaction, including obtaining required regulatory approvals and approval by the stockholders of El Dorado, or any future transaction, successfully integrate such acquired entities, or achieve expected beneficial synergies and/or operating efficiencies, in each case within expected time-frames or at all; and the possibility that personnel changes/retention will not proceed as planned. Such statements are based on information available at the time of this 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. Actual results may differ materially from those set forth in the forward-looking statements due to a variety of factors, including the risk factors described in documents filed by the Company with the 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.ADDITIONAL INFORMATION ABOUT THE PROPOSED TRANSACTION AND WHERE TO FIND ITStockholders of El Dorado are urged to carefully review and consider each of PacWest’s public filings with the SEC, including but not limited to its Annual Reports on Form 10-K, its proxy statements, its Current Reports on Form 8-K and its Quarterly Reports on Form 10-Q. The documents filed by PacWest with the SEC may be obtained free of charge at PacWest’s website at www.pacwestbancorp.com or at the SEC’s website at www.sec.gov. These documents may also be obtained free of charge from PacWest by requesting them in writing to PacWest Bancorp, 9701 Wilshire Boulevard, Suite 700, Beverly Hills, CA 90212; Attention: Investor Relations, by submitting an email request to [email protected] or by telephone at (310) 887-8521.PacWest intends to file a registration statement with the SEC which will include a proxy statement of El Dorado and a prospectus of PacWest, and will file other documents regarding the proposed transaction with the SEC. Before making any voting or investment decision, stockholders of El Dorado are urged to carefully read the entire registration statement and proxy statement/prospectus, when they become available, as well as any amendments or supplements to these documents, because they will contain important information about the proposed transaction. A definitive proxy statement/prospectus will be sent to the stockholders of El Dorado seeking any required stockholder approvals. Stockholders of El Dorado will be able to obtain the registration statement and the proxy statement/prospectus free of charge from the SEC’s website or from PacWest by writing to the address provided in the paragraph above.
GAAP TO NON-GAAP RECONCILIATIONS
This press release contains certain non-GAAP financial disclosures for: (1) return on average tangible equity, (2) tangible common equity ratio, and (3) 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, and tangible book value per share is prevalent among banking regulators, investors and analysts. Accordingly, we disclose the non-GAAP measures in addition to the related GAAP measures of: (1) return on average equity, (2) equity to assets ratio, and (3) book value per share. The tables below present the reconciliations of these GAAP financial measures to the related non-GAAP financial measures: