October 15, 2015 - 7:01 AM EDT
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PacWest Bancorp Announces Results for the Third Quarter of 2015

Highlights

  • Net Earnings of $69.6 Million, or $0.68 Per Diluted Share; Adjusted Net Earnings of $65.2 Million, or $0.63 Per Diluted Share
  • New Loan and Lease Production of $1.1 Billion; Annualized Growth Rate of 14%
  • Core Deposits Increased $230.6 Million in the Quarter and Represent 56% of Total Deposits
  • Core Tax Equivalent Net Interest Margin of 5.19%
  • Square 1 Merger Closed October 6, 2015

LOS ANGELES, Oct. 15, 2015 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) (“PacWest”) today announced net earnings for the third quarter of 2015 of $69.6 million, or $0.68 per diluted share, compared to net earnings for the second quarter of 2015 of $85.1 million, or $0.83 per diluted share.  When certain income and expense items described below are excluded, adjusted net earnings were $65.2 million, or $0.63 per diluted share, for the third quarter of 2015 compared to $73.1 million, or $0.71 per diluted share, for the second quarter of 2015.  The decrease in adjusted net earnings is largely the result of higher foreclosed assets expense, lower adjusted noninterest income, and a higher provision for credit losses as compared to the second quarter.

Matt Wagner, President and CEO, commented, “As expected, the loan and lease production and growth rebounded strongly in the third quarter and will have a positive impact on revenues in the fourth quarter. We remain confident with our outlook for upper single-digits annual growth for the near term, bearing in mind there may be some volatility between quarters in the growth rate due to payoff activity.”

“The decline in our adjusted earnings on a linked-quarter basis was mostly due to a few discrete items, including an increase in foreclosed assets expense and a decline in equity investment income. Even with the noise from these items, our profitability levels remained solid with an adjusted ROA and ROTE for the third quarter of 1.55% and 14.1%.”

Mr. Wagner continued, “Our Non-PCI credit metrics improved during the third quarter, with meaningful reductions in the level of classified and nonperforming assets.  In addition, our credit exposure to the oil and gas services industry also improved, with reductions in both outstandings and nonaccrual balances of 14% and 25%, respectively.”

Mr. Wagner commented on the Square 1 merger stating, “With the completion of the Square 1 merger, PacWest has a substantially improved core deposit base and a proven platform for generating profitable loan, deposit and noninterest income growth in the venture capital banking space.  We welcome our new director, Mr. Paul Burke, and all of the Square 1 clients and employees.” 

Patrick Rusnak, Executive Vice President and CFO stated, “Third quarter core deposit growth was very good, totaling over $230 million of which about one third was generated by the CapitalSource Division.  While we have continued to make progress towards our goal of remixing the Bank’s deposit base, the Square 1 merger will significantly accelerate that process.”

Mr. Rusnak continued, “Our core tax equivalent net interest margin remains very strong at 5.19%.  We continue to control operating expenses as shown by the adjusted efficiency ratio of 40.6% in the third quarter.  Our focus for the remainder of 2015 will be loan and lease growth, core deposit growth, expense control and the successful integration of Square 1.” 

FINANCIAL HIGHLIGHTS

 At or For the Three Months EndedAt or For the Nine Months Ended
 September 30,June 30, September 30, 
  2015  2015 Change 2015  2014 Change
 (Dollars in thousands, except per share data)
Financial Highlights:      
Net Earnings$  69,616 $  85,083 $  (15,467)$  227,778 $  97,906 $  129,872 
Diluted Earnings Per Share$  0.68 $  0.83 $  (0.15)$  2.21 $  1.18 $  1.03 
Return on Average Assets (1) 1.65% 2.07%   (0.42) 1.85% 1.05%   0.80 
Return on Average      
Tangible Equity (1) (2) 15.09% 18.90%   (3.81) 16.82% 10.01%   6.81 
       
Adjusted Net Earnings (2)$  65,167 $  73,088 $  (7,921)$  203,821 $  151,683 $  52,138 
Adjusted Diluted Earnings      
Per Share (2)$  0.63 $  0.71 $  (0.08)$  1.98 $  1.82 $  0.16 
Adjusted Return on Average     
Assets (1) (2) 1.55% 1.78%   (0.23) 1.65% 1.63%   0.02 
Adjusted Return on Average     
Tangible Equity (1) (2) 14.12% 16.24%   (2.12) 15.05% 15.51%   (0.46)
       
Net Interest Margin     
(tax equivalent) 5.46% 5.89%   (0.43) 5.76% 6.05%   (0.29)
Core Net Interest Margin      
(tax equivalent) (2) 5.19% 5.33%   (0.14) 5.31% 5.70%   (0.39)
Efficiency Ratio 39.6% 38.0%   1.6  38.1% 42.9%   (4.8)
Adjusted Efficiency Ratio (2) 40.6% 40.5%   0.1  40.1% 42.9%   (2.8)
       
Total Assets$  16,814,105 $  16,697,020 $  117,085 $  16,814,105 $  15,938,150 $  875,955 
Loans and Leases, Net of      
Deferred Fees$  12,452,205 $  12,034,189 $  418,016 $  12,452,205 $  11,574,885 $  877,320 
Total Deposits$  12,115,763 $  12,581,816 $  (466,053)$  12,115,763 $  11,523,437 $  592,326 
       
Noninterest-Bearing Deposits     
as Percentage of Total      
Deposits 29% 26%   3  29% 25%   4 
Core Deposits as Percentage      
of Total Deposits 56% 52%   4  56% 52%   4 
Tangible Common Equity      
Ratio (2) 12.21% 12.10%   0.11  12.21% 12.24%   (0.03)
Tangible Book Value Per      
Share (2)$  17.86 $  17.55 $  0.31 $  17.86 $  16.86 $  1.00 
       
(1) Annualized.      
(2) Non-GAAP measure.     

ADJUSTED NET EARNINGS

In evaluating its earnings, the Company removes certain items to arrive at adjusted net earnings and adjusted diluted earnings per share, as detailed below:

  Three Months Ended Nine Months Ended
  September 30, June 30, September 30, September 30,
   2015   2015   2014   2015   2014 
  (Dollars in thousands)
           
Net earnings $  69,616  $  85,083  $  62,271  $  227,778  $  97,906 
Less: Tax benefit on discontinued operations   -     -     (3)    -     (1,067)
Add: Tax expense on continuing operations   39,777     45,287     42,911     131,137     73,744 
Pre-tax earnings    109,393     130,370     105,179     358,915     170,583 
Add: Acquisition, integration, and           
reorganization costs    747     900     5,193     3,647     93,635 
Less: FDIC loss sharing expense, net    (4,449)    (5,107)    (7,415)    (13,955)    (27,370)
Gain on sale of loans and leases    27     163     973     190     594 
Gain (loss) on securities    655     (186)    -     3,744     4,841 
Covered OREO (expense) income, net    (20)    12     (452)    11     1,348 
Gain on sale of owned office building    -     -     -     -     1,570 
Adjusted pre-tax earnings before accelerated         
 discount accretion    113,927     136,388     117,266     372,572     283,235 
Less: Accelerated discount accretion from          
early payoffs of acquired loans    9,659     19,447     4,501     46,458     27,446 
Adjusted pre-tax earnings    104,268     116,941     112,765     326,114     255,789 
Tax expense (1)    (39,101)    (43,853)    (45,895)    (122,293)    (104,106)
Adjusted net earnings  $  65,167  $  73,088  $  66,870  $  203,821  $  151,683 
           
Adjusted diluted earnings per share $  0.63  $  0.71  $  0.65  $  1.98  $  1.82 
Adjusted return on average assets  1.55%  1.78%  1.69%  1.65%  1.63%
           
(1) Full-year expected effective rate of 37.5% used for 2015 periods and actual effective rate of 40.7% used for 2014 periods.
           

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased $10.1 million to $192.5 million for the third quarter of 2015 compared to $202.6 million for the second quarter of 2015 due to lower discount accretion on acquired loans and lower FHLB dividends, offset by one more day in the third quarter.  The loan and lease yield for the third quarter of 2015 was 6.34% compared to 6.75% for the second quarter of 2015.  The decrease in the loan and lease yield was due to lower discount accretion on acquired loans and the yield on new originations being lower than the current portfolio yield. Discount accretion on acquired loans was $17.1 million in the third quarter of 2015 (57 basis points on the loan and lease yield) compared to $28.0 million in the second quarter of 2015 (92 basis points on the loan and lease yield). The decrease in discount accretion was due primarily to lower accelerated accretion from early payoffs.

The tax equivalent net interest margin (“NIM”) for the third quarter of 2015 was 5.46% compared to 5.89% for the second quarter of 2015. The decrease in the NIM was due to lower discount accretion on acquired loans, lower FHLB dividends and a higher percentage of average lower-yielding assets in the mix. Discount accretion on acquired loans contributed 48 basis points to the NIM in the third quarter of 2015 and 81 basis points in the second quarter of 2015. A $1.4 million special dividend received from the FHLB in the second quarter of 2015 contributed four basis points to the second quarter NIM.  

The cost of total deposits decreased to 0.33% in the third quarter from 0.37% in the prior quarter due primarily to a lower level of higher-cost time deposits and the increased balance of noninterest-bearing deposits.  The repricing of maturing time deposits at current rates and new time deposit production resulted in the decline in the weighted average contractual interest rate on time deposits to 0.67% at September 30, 2015 from 0.71% at June 30, 2015.

Net interest margin information is presented in the following table for the periods indicated:

 Three Months Ended
 September 30, June 30,
Net Interest Margin - Tax Equivalent 2015   2015 
 (Dollars in thousands)
Average Assets:   
Loans and leases$  12,112,881  $  12,108,016 
Investment securities   1,806,628     1,672,590 
Deposits in financial institutions   278,973     161,683 
Interest-earning assets   14,198,482     13,942,289 
Other assets   2,491,695     2,521,022 
Total assets$  16,690,177  $  16,463,311 
    
Average Liabilities and Stockholders' Equity: 
Interest-bearing deposits$  8,993,681  $  9,107,937 
Borrowings   70,171     81,164 
Subordinated debentures   434,420     432,656 
Interest-bearing liabilities   9,498,272     9,621,757 
Noninterest-bearing demand deposits   3,486,780     3,157,129 
Other liabilities   132,360     135,677 
Total liabilities   13,117,412     12,914,563 
Stockholders' equity   3,572,765     3,548,748 
Liabilities and stockholders' equity$  16,690,177  $  16,463,311 
    
Time deposits$  5,042,768  $  5,559,903 
Total deposits$  12,480,461  $  12,265,066 
Funding sources$  12,985,052  $  12,778,886 
    
Yields on Average Assets:  
Loans and leases 6.34%  6.75%
Investment securities (1) 3.67%  4.01%
Interest-earning assets (1) 5.88%  6.35%
    
Costs of Average Liabilities:  
Total deposits  0.33%  0.37%
Time deposits 0.66%  0.68%
Interest-bearing deposits 0.46%  0.49%
Borrowings 0.41%  0.43%
Subordinated debentures 4.27%  4.25%
Interest-bearing liabilities 0.63%  0.66%
Funding sources 0.46%  0.50%
    
Net interest rate spread (1) 5.25%  5.69%
Net interest margin (1) 5.46%  5.89%
    
(1) Tax equivalent    

The tax equivalent NIM and loan and lease yield are impacted by volatility in accelerated accretion of acquisition discounts due to the prepayment of acquired loans and leases. The effects of this item are shown in the following table for the periods indicated:

  Three Months Ended Three Months Ended
  September 30, 2015 June 30, 2015
   Loan and   Loan and 
  NIMLease Yield NIMLease Yield
Reported  5.46% 6.34%  5.89% 6.75%
Less: Accelerated accretion of acquisition discounts     
from early payoffs of acquired loans   (0.27)% (0.32)%  (0.56)% (0.64)%
Core (non-GAAP measure)  5.19% 6.02%  5.33% 6.11%
 

The impact on the tax equivalent net interest income and NIM from all purchase accounting items is set forth in the table below for the periods indicated:

  Three Months Ended Three Months Ended
 September 30, 2015 June 30, 2015
  Impact on  Impact on
 AmountNIM AmountNIM
 (Dollars in thousands)
      
Net interest income/NIM (TE) $  195,274  5.46% $  204,721  5.89%
Less: Accelerated accretion of acquisition discounts      
from early payoffs of acquired loans     (9,659) (0.27)%    (19,447) (0.56)%
Remaining accretion of Non-PCI loan       
acquisition discounts    (7,485) (0.21)%    (8,575) (0.25)%
Total accretion of loan acquisition discounts    (17,144) (0.48)%    (28,022) (0.81)%
Amortization of TruPS discount    1,399  0.04%    1,400  0.04%
Accretion of time deposits premium    (576) (0.02)%    (799) (0.02)%
     (16,321) (0.46)%    (27,421) (0.79)%
Net interest income/NIM - excluding purchase      
accounting (non-GAAP measure) $  178,953  5.00% $  177,300  5.10%
 

Noninterest Income

Noninterest income decreased by $3.8 million to $15.8 million for the third quarter of 2015 compared to $19.6 million for the second quarter of 2015 due mostly to lower realized gains and dividends on equity investments and lower income recognized as a result of loan and lease prepayments, offset by lower foreign currency translation net losses and higher net gains on sale of securities. Realized gains and dividends on equity investments tend to fluctuate from period to period based upon sales activity and actual dividends received. The second quarter of 2015 included the sale of three equity investments at a net gain of $6.0 million compared to one sale in the third quarter at a gain of $0.1 million and dividends on equity investments increased $2.2 million in the third quarter. Foreign currency translation net losses decreased $1.0 million from the prior quarter as the result of movement of the U.S. Dollar against various foreign currencies, principally the Euro. In June 2015, PacWest hedged its Euro-denominated trust preferred issuance with a cross currency swap to reduce the related foreign currency translation volatility. 

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

 Three Months Ended
 September 30, June 30, Increase
Noninterest Income 2015   2015  (Decrease)
 (In thousands)
      
Service charges on deposit accounts$  2,601  $  2,612  $  (11)
Other commissions and fees   6,376     7,123     (747)
Leased equipment income   5,475     5,375     100 
Gain on sale of loans and leases   27     163     (136)
Gain (loss) on securities   655     (186)    841 
FDIC loss sharing expense, net   (4,449)    (5,107)    658 
Other income:     
Dividends and realized gains on equity investments   4,357     8,169     (3,812)
Foreign currency translation net losses   (373)    (1,377)    1,004 
Income recognized on early repayment of leases   12     1,648     (1,636)
Other   1,077     1,203     (126)
Total noninterest income $  15,758  $  19,623  $  (3,865)
 

The following table presents the details of FDIC loss sharing expense for the periods indicated:

 Three Months Ended
 September 30, June 30, Increase
FDIC Loss Sharing Expense, Net 2015   2015  (Decrease)
 (In thousands)
      
Loss on FDIC loss sharing asset$  (846) $  (725) $  (121)
FDIC loss sharing asset amortization, net   (3,484)    (4,286)    802 
Net reimbursement from (to) FDIC for     
covered OREOs   (11)    7     (18)
Other   (108)    (103)    (5)
FDIC loss sharing expense, net$  (4,449) $  (5,107) $  658 
 

Noninterest Expense

Noninterest expense increased by $4.8 million to $90.1 million for the third quarter of 2015 compared to $85.3 million for the second quarter of 2015.  The increase was due mostly to higher foreclosed assets expense of $6.9 million, offset by lower insurance and assessments expense of $0.9 million and lower compensation expense of $0.9 million.  The increase in foreclosed assets expense was due mostly to a write-down of $4.6 million on an existing foreclosed property in the third quarter, while the second quarter included gains related to foreclosed asset sales of $2.8 million. Insurance and assessments expense decreased due to lower FDIC insurance assessment expense. The reduction in compensation expense was principally due to lower stock-based compensation expense.

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

 Three Months Ended
 September 30, June 30, Increase
Noninterest Expense 2015   2015  (Decrease)
 (In thousands)
      
Compensation$  48,152  $  49,033  $  (881)
Occupancy    10,762     10,588     174 
Data processing   4,322     4,402     (80)
Other professional services   3,396     3,332     64 
Insurance and assessments   3,805     4,716     (911)
Intangible asset amortization   1,497     1,502     (5)
Leased equipment depreciation   3,162     3,103     59 
Foreclosed assets expense (income), net   4,521     (2,340)    6,861 
Acquisition, integration and reorganization costs   747     900     (153)
Other expense:     
Loan expense   1,494     1,486     8 
Other   8,281     8,554     (273)
Total noninterest expense$  90,139  $  85,276  $  4,863 
 

Income Taxes

Our overall effective income tax rate was 36.4% for the third quarter of 2015 and 34.7% for the second quarter of 2015.  The effective rate for the second quarter was lower due to the utilization of a portion of the capital loss carryforward and adjustments to certain deferred tax assets. The effective tax rate for calendar year 2015 is expected to be 37.5%. 

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases increased $418.0 million in the third quarter to $12.5 billion at September 30, 2015.   The net increase was driven by third quarter originations and purchases of $1.1 billion, offset partially by principal repayments of $630.3 million.   For the twelve months ended September 30, 2015, total loans and leases increased $877 million, or approximately 8%.

The following table presents a roll forward of the loan and lease portfolio for the periods indicated:

 Three Months Ended
 September 30, June 30,
Loan and Lease Roll Forward (1) 2015   2015 
 (In thousands)
    
Beginning balance$  12,034,189  $  12,272,166 
New production   1,070,986     658,669 
Existing loans and leases:   
Principal repayments, net (2)   (630,292)    (889,708)
Loan and lease sales   (6,864)    (3,621)
Transfers to foreclosed assets   (10,383)    (2,694)
Charge-offs   (5,431)    (623)
Ending balance$  12,452,205  $  12,034,189 
    
(1) Includes direct financing leases but excludes equipment leased to others under operating leases.
(2) Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), loan participation sales and other changes within the loan portfolio. 
 

The following table presents a roll forward of the loan and lease portfolio by business division for the period indicated:

  Three Months Ended September 30, 2015
  CommunityNational 
Loan and Lease Roll Forward by DivisionBankingLendingTotal
  (In thousands)
     
Beginning balance $  3,101,834 $  8,932,355 $  12,034,189 
New production    267,560    803,426    1,070,986 
Existing loans and leases:   
Principal repayments, net    (226,451)   (403,841)   (630,292)
Loan and lease sales   -    (6,864)   (6,864)
Transfers to foreclosed assets   (378)   (10,005)   (10,383)
Charge-offs    (989)   (4,442)   (5,431)
Ending balance $  3,141,576 $  9,310,629 $  12,452,205 
     
Weighted average yields on new production       
for the quarters ended:   
September 30, 2015 4.33% 5.47% 5.16%
June 30, 2015  5.17% 6.00% 5.89%
March 31, 2015  5.28% 5.84% 5.76%
December 31, 2014 5.09% 5.76% 5.67%

The Company identified an $82 million group of multi-family loans during the third quarter and re-underwrote and acquired them in anticipation of launching a multi-family loan origination group later this year that will initially focus on the Los Angeles, Orange County and Bay Area metropolitan markets.  The Company expects this initiative will reduce its overall portfolio credit risk, especially in an adverse economic environment.

The Company’s portfolio of student loans has repaid rapidly. In order to replace such runoff and to further diversify the loan and lease portfolio by product and geography, the Company purchased a $50 million pool of student loans in the third quarter. These multi-family and student loans, which are included under “Community Banking” in the above table, reduced the third quarter new production yield by 23 basis points.

The following table presents the composition of our loan and lease portfolio as of the dates indicated:

 September 30, June 30, December 31, September 30,
Loan and Lease Portfolio 2015   2015   2014   2014 
 (In thousands)
Real estate mortgage:      
Hospitality$  635,160  $  619,510  $  570,634  $  530,628 
SBA   402,382     401,832     380,890     357,923 
Commercial real estate   2,334,497     2,414,464     2,583,965     2,649,503 
Healthcare real estate   1,140,450     1,127,111     1,051,491     1,024,474 
Multi-family   992,325     883,083     789,271     906,528 
Other   184,977     193,821     220,751     244,059 
Total real estate mortgage   5,689,791     5,639,821     5,597,002     5,713,115 
Real estate construction and land:      
Residential   145,262     119,825     96,749     72,881 
Commercial   229,904     213,091     217,297     218,389 
Total real estate construction and land   375,166     332,916     314,046     291,270 
Total real estate loans   6,064,957     5,972,737     5,911,048     6,004,385 
Commercial:       
Collateralized   359,214     371,954     439,567     429,011 
Unsecured   126,726     120,415     131,939     127,150 
Asset-based   2,022,492     1,840,514     1,794,907     1,594,488 
Cash flow   2,805,817     2,691,743     2,486,411     2,341,511 
Equipment finance   894,777     904,488     969,489     928,460 
SBA   48,107     45,769     47,304     41,129 
Total commercial   6,257,133     5,974,883     5,869,617     5,461,749 
Consumer   130,115     86,569     101,767     108,751 
Total loans and leases, net of       
deferred fees$  12,452,205  $  12,034,189  $  11,882,432  $  11,574,885 
        
Total unfunded loan commitments$  2,022,046  $  2,111,637  $  1,921,067  $  1,818,694 

Credit Exposure Affected by Low Oil Prices

At September 30, 2015, PacWest had 27 outstanding loan and lease relationships totaling $152.3 million to borrowers involved in the oil and gas services industry, down from $177.2 million at June 30, 2015.  The collateral for these loans and leases primarily includes equipment, such as drilling equipment and transportation vehicles.  At September 30, 2015, four relationships totaling $47.9 million were on nonaccrual status and were classified, down from $64.2 million at June 30, 2015.   The largest of these relationships had an aggregate outstanding balance of $40 million at September 30, 2015, for which a current collateral appraisal indicated a liquidation value significantly in excess of the carrying value.

Deposits

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

 September 30, June 30, December 31, September 30,
Deposit Category 2015   2015   2014   2014 
 (Dollars in thousands)
        
Noninterest-bearing demand deposits$  3,508,682  $  3,396,688  $  2,931,352  $  2,842,488 
Interest checking deposits   693,632     722,231     732,196     683,014 
Money market deposits   1,860,983     1,722,633     1,709,068     1,721,563 
Savings deposits   751,955     743,054     762,961     759,893 
Total core deposits   6,815,252     6,584,606     6,135,577     6,006,958 
Brokered non-maturity deposits   713,215     651,925     120,613     - 
Total non-maturity deposits   7,528,467     7,236,531     6,256,190     6,006,958 
Time deposits under $100,000   1,951,938     2,328,109     2,467,338     2,267,013 
Time deposits of $100,000 and over   2,635,358     3,017,176     3,031,600     3,249,466 
Total time deposits   4,587,296     5,345,285     5,498,938     5,516,479 
Total deposits$  12,115,763  $  12,581,816  $  11,755,128  $  11,523,437 
        
Noninterest-bearing demand deposits       
as percentage of total deposits 29%  26%  25%  25%
Core deposits as percentage of total deposits 56%  52%  52%  52%

At September 30, 2015, core deposits totaled $6.8 billion, or 56% of total deposits, including $3.5 billion of noninterest-bearing demand deposits, or 29% of total deposits.  Deposits obtained from the CapitalSource Division totaled $527.8 million at September 30, 2015, of which $514.1 million were core deposits. 

The following table summarizes the maturities of our time deposits as of the date indicated:

 September 30, 2015
 Time DepositsTime DepositsTotal  Estimated
 Under$100,000  Time ContractualEffective 
Time Deposit Maturities$100,000  or MoreDepositsRateRate
 (Dollars in thousands)
      
Due in three months or less$  456,408 $  394,312 $  850,720  0.54% 0.49%
Due in over three months through six months   572,782    757,604    1,330,386  0.63% 0.61%
Due in over six months through twelve months   745,563    1,258,958    2,004,521  0.74% 0.72%
Due in over 12 months through 24 months   136,844    195,105    331,949  0.72% 0.64%
Due in over 24 months    40,341    29,379    69,720  1.03% 0.81%
Total$  1,951,938 $  2,635,358 $  4,587,296  0.67% 0.65%
      
At June 30, 2015$  2,328,109 $  3,017,176 $  5,345,285  0.71% 0.69%
 

The remaining purchase accounting premium on acquired CapitalSource time deposits was $1.2 million at September 30, 2015, of which $0.4 million will be recognized as a reduction of interest expense during the fourth quarter of 2015.   

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

A provision for credit losses of $8.7 million was recorded in the third quarter of 2015 as compared to $6.5 million in the second quarter of 2015. The third quarter provision was comprised of an $11.0 million provision for Non-PCI loans and leases and a negative provision of $2.3 million for PCI loans.  For the Non-PCI portfolio, the $11.0 million provision, combined with net charge-offs of $3.2 million, resulted in an increase in the allowance for credit losses of $7.8 million.  The allowance for Non-PCI credit losses to Non-PCI loans and leases coverage ratio increased to 0.82% at September 30 from 0.78% at June 30.  The negative provision for PCI loans resulted from increases in expected cash flows on such loans, mostly due to payoffs.

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

 Three Months Ended September 30, 2015
 Non-PCI         
Allowance for Credit Loans and  Unfunded  Total  PCI  
Losses RollforwardLeases Commitments Non-PCI Loans Total
 (In thousands)
          
Beginning balance$  85,047  $  7,874  $  92,921  $  14,328  $  107,249 
Charge-offs   (4,312)    -     (4,312)    (1,119)    (5,431)
Recoveries   1,081     -     1,081     -     1,081 
Net charge-offs   (3,231)    -     (3,231)    (1,119)    (4,350)
Provision (negative provision)   10,500     500     11,000     (2,254)    8,746 
Ending balance$  92,316  $  8,374  $  100,690  $  10,955  $  111,645 
 
 Three Months Ended June 30, 2015
 Non-PCI         
Allowance for Credit Loans and  Unfunded  Total  PCI  
Losses RollforwardLeases Commitments Non-PCI Loans Total
 (In thousands)
          
Beginning balance$  79,680  $  6,874  $  86,554  $  12,698  $  99,252 
Charge-offs   (623)    -     (623)    -     (623)
Recoveries   1,990     -     1,990     101     2,091 
Net recoveries   1,367     -     1,367     101     1,468 
Provision    4,000     1,000     5,000     1,529     6,529 
Ending balance$  85,047  $  7,874  $  92,921  $  14,328  $  107,249 
 

Non-PCI loans and leases at September 30, 2015 included $7.1 billion of originated loans and leases that were not obtained through acquisitions. The allowance for loan and lease losses related to these loans and leases totaled $80.1 million, or 1.13% of the outstanding balance.

All acquired loans are recorded initially at their estimated fair value including an estimate of credit losses. The table below presents two alternative views of credit risk coverage ratios for Non-PCI loans reflecting adjustments for acquired loans and associated purchase accounting discounts:

 September 30, 2015 June 30, 2015
 Non-PCI   Non-PCI  
 Loans andAllowance/Coverage Loans andAllowance/Coverage
Credit Risk Coverage RatiosLeasesDiscountRatio LeasesDiscountRatio
 (Dollars in thousands)
        
Ending balance$  12,300,057 $  100,690  0.82% $  11,846,314 $  92,921  0.78%
Acquired loans   (5,180,808)   (12,173)  (1)       (5,587,662)   (12,697) (1)   
Adjusted balance$  7,119,249 $  88,517  1.24% $  6,258,652 $  80,224  1.28%
        
Ending balance$  12,300,057 $  100,690  0.82% $  11,846,314 $  92,921  0.78%
Unamortized net discount   88,690    88,690  (2)       103,302    103,302  (2)   
Adjusted balance$  12,388,747 $  189,380  1.53% $  11,949,616 $  196,223  1.64%
        
(1) Allowance attributed to $5.2 billion and $5.6 billion of acquired Non-PCI loans at September 30, 2015 and June 30, 2015, based on the allowance calculation that includes an amount for credit deterioration on acquired loans and leases since their acquisition dates.
(2) Unamortized net discount relates to $5.2 billion and $5.6 billion of acquired Non-PCI loans at September 30, 2015 and June 30, 2015, and is assigned specifically to those loans only.  Such discount represents the acquisition date fair value adjustment based on market, liquidity, interest rate risk and credit risk and is being accreted to interest income over the remaining life of the respective loans using the interest method.  Use of the interest method results in steadily declining amounts being taken into income in each reporting period.  The remaining discount of $88.7 million at September 30, 2015, is expected to be substantially accreted to income by the end of 2018.
 

The decrease in adjusted coverage ratios reflected in the table above resulted from the combination of newly originated loans being provided for at a rate lower than the current coverage ratio and normal and accelerated accretion of unamortized discount.

CREDIT QUALITY

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

 September 30, June 30,
Non-PCI Credit Quality Metrics 2015   2015 
 (Dollars in thousands)
    
Allowance for credit losses$  100,690  $  92,921 
Nonaccrual loans and leases (1)   107,190     131,178 
Classified loans and leases    328,038     379,988 
Performing restructured loans   39,956     38,203 
Net charge-offs (recoveries) (for the quarter)   3,231     (1,367)
Provision for credit losses (for the quarter)   11,000     5,000 
Allowance for credit losses to loans and leases 0.82%  0.78%
Allowance for credit losses to nonaccrual loans   
and leases (1) 93.9%  70.8%
Nonaccrual loans and leases to loans and leases  0.87%  1.11%
Nonperforming assets to loans and leases and   
foreclosed assets 1.14%  1.37%
Classified loans and leases to loans and leases 2.67%  3.21%
    
(1) At September 30, 2015 and June 30, 2015 includes $54.9 million and $56.1 million of acquired loans and leases with no allowance due to the effects of fair value accounting.
 

The following table presents Non-PCI 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:

 Nonaccrual Loans and Leases Accruing and
 September 30, 2015 June 30, 2015 30-89 Days Past Due
  % of   % of  September 30, June 30,
  Loan   Loan   2015   2015 
 AmountCategory AmountCategory Amount Amount
 (Dollars in thousands)
Real estate mortgage:         
Hospitality$  1,845  -  $  7,894  1% $  779  $  - 
SBA   11,682  3%    10,141  3%    233     2,272 
Other   18,294    -     16,213    -     2,090     2,482 
Total real estate mortgage   31,821  1%    34,248  1%    3,102     4,754 
Real estate construction and land:         
Residential   374    -     377    -     -     - 
Commercial   -    -     -    -     -     - 
Total real estate          
 construction and land   374    -     377    -     -     - 
Commercial:         
Collateralized   2,771  1%    3,761  1%    82     131 
Unsecured   923   1%    537    -     11     - 
Asset-based   90    -     40    -     -     - 
Cash flow   11,761  -     14,605  1%    -     - 
Equipment finance (1)   53,153  6%    71,130  8%    -     915 
SBA   2,918  6%    3,068  7%    -     - 
Total commercial   71,616  1%    93,141  2%    93     1,046 
Consumer   3,379  3%    3,412  4%    88     1 
Total Non-PCI loans and          
leases $  107,190  1% $  131,178  1% $  3,283  $  5,801 
          
(1) Includes nonaccrual leases and loans to companies involved in the oil and gas industries of $47.9 million and $64.2 million at September 30, 2015 and June 30, 2015, respectively. 
 

The following table presents nonperforming assets as of the dates indicated:

 September 30, June 30,
Nonperforming Assets 2015   2015 
 (Dollars in thousands)
    
Nonaccrual Non-PCI loans and leases$  107,190  $  131,178 
Nonaccrual PCI Loans (1)   4,823     6,016 
Total nonaccrual loans and leases   112,013     137,194 
Foreclosed assets, net   33,216     31,668 
Total nonperforming assets$  145,229  $  168,862 
    
Nonaccrual loans and leases to loans and leases 0.90%  1.14%
Nonperforming assets to loans and leases  
and foreclosed assets 1.16%  1.40%
    
(1) Represents legacy CapitalSource borrowing relationships placed on nonaccrual status as of the acquisition date. 
 

SQUARE 1 FINANCIAL, INC. MERGER

On October 6, 2015, PacWest completed the merger with Square 1 Financial, Inc. (“Square 1”) in a transaction valued at approximately $815 million.  The combined company is called PacWest Bancorp and the combined subsidiary bank is called Pacific Western Bank, with the banking operations of Square 1 conducted under the trade name of Square 1 Bank, a division of Pacific Western Bank.

Under the terms of the merger agreement, Square 1 stockholders received 0.5997 shares of PacWest common stock for each share of Square 1 common stock and holders of stock options and restricted stock units received cash consideration as described in the merger agreement. The total value of the per share merger consideration was $26.37, based on the closing price of PacWest common stock of $43.97 on October 6, 2015.

As of September 30, 2015, on a pro forma combined basis with Square 1 and excluding purchase accounting adjustments, PacWest would have had approximately $21 billion in assets with 80 branches throughout California and one in North Carolina.

Summary unaudited financial information for Square 1 for the third quarter of 2015 follows:

 At or For the
 Three Months Ended
 September 30, 2015
 (Dollars in thousands)
Net interest income$  34,079 
Provision for loan and lease losses   4,564 
Noninterest income   7,313 
Noninterest expense   20,638 
Pre-tax earnings $  16,190 
  
Loans receivable, net (at quarter-end)$  1,574,357 
Deposits (at quarter-end)$  3,675,805 
Client investment funds (at quarter-end)$  2,264,096 
  
Loan yield 5.81%
Deposit cost 0.02%
Net interest margin 3.54%

ABOUT PACWEST BANCORP

PacWest Bancorp (“PacWest”) is a bank holding company with over $21 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (“Pacific Western”). With 80 full-service branches located throughout the state of California, Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses.  Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions.  The CapitalSource Division provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle market businesses on a national basis.  The Square 1 Bank Division, headquartered at Pacific Western’s Durham, North Carolina branch, offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in all key innovation 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 STATEMENTS

This release contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our merger with Square 1, credit loss exposure, profitability, deposit growth, loan and lease portfolio growth, operating expenses, intentions to expand Pacific Western’s lending business, and effective tax rates. All statements contained in this release that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements.   All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:

  • the Company’s ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
  • business disruption following the Square 1 merger;
  • the reaction to the Square 1 merger of the companies’ customers, employees and counterparties;
  • credit quality deterioration or pronounced and sustained reduction in market values or other economic factors which adversely affect our borrowers’ ability to repay loans and leases;
  • higher than anticipated loan losses;
  • continued or worsening credit losses or charge-offs;
  • higher than anticipated delinquencies and reserves;
  • compression of spreads on newly originated loans;
  • asset/liability repricing risks and liquidity risks reduces interest margins and the value of investments;
  • increased costs to manage and sell foreclosed assets;
  • changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;
  • reduced demand for our services due to strategic or regulatory reasons;
  • our ability to grow deposits and access wholesale funding sources;
  • legislative or regulatory requirements or changes adversely affected the Company’s business including an increase to capital requirements;
  • loan repayments higher than expected;
  • higher than anticipated increases in operating expenses;
  • increased litigation;
  • increased asset workout or loan servicing expenses;
  • higher compensation costs and professional fees to retain and/or incent employees;
  • inability to attract qualified professionals;
  • the success and timing of other business strategies;
  • changes in tax laws or regulations affecting our business;
  • our inability to generate sufficient earnings;
  • tax planning or disallowance of tax benefits by tax authorities;
  • changes in tax filing jurisdictions or entity classifications; and
  • other risk factors described in documents filed by PacWest with the U.S. Securities and Exchange Commission (“SEC”).

All forward-looking statements included in this release are based on information available at the time of the release. We are under no obligation to (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.

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
 
 September 30, June 30, December 31,
  2015   2015   2014 
 (Dollars in thousands, except per share data)
ASSETS:     
Cash and due from banks$  154,652  $  207,598  $  164,757 
Interest-earning deposits in financial institutions   81,642     433,033     148,469 
Total cash and cash equivalents    236,294     640,631     313,226 
      
Securities available-for-sale, at estimated fair value   1,809,364     1,698,158     1,567,177 
Federal Home Loan Bank stock, at cost   17,250     17,250     40,609 
Total investment securities   1,826,614     1,715,408     1,607,786 
      
Non-PCI loans and leases   12,300,057     11,846,314     11,613,832 
PCI loans   193,340     222,691     290,852 
Total gross loans and leases   12,493,397     12,069,005     11,904,684 
Deferred fees and costs   (41,192)    (34,816)    (22,252)
Total loans and leases, net of deferred fees   12,452,205     12,034,189     11,882,432 
Allowance for loan and lease losses   (103,271)    (99,375)    (84,455)
Total loans and leases, net   12,348,934     11,934,814     11,797,977 
      
Equipment leased to others under operating leases   161,508     117,182     122,506 
Premises and equipment, net   36,475     35,984     36,551 
Foreclosed assets, net   33,216     31,668     43,721 
Deferred tax asset, net   169,760     211,556     284,411 
Goodwill   1,728,380     1,728,380     1,720,479 
Core deposit and customer     
relationship intangibles, net   12,704     14,201     17,204 
Other assets   260,220     267,196     290,744 
Total assets$  16,814,105  $  16,697,020  $  16,234,605 
      
LIABILITIES:     
Noninterest-bearing deposits$  3,508,682  $  3,396,688  $  2,931,352 
Interest-bearing deposits   8,607,081     9,185,128     8,823,776 
Total deposits   12,115,763     12,581,816     11,755,128 
Borrowings   552,497     2,751     383,402 
Subordinated debentures   435,417     433,944     433,583 
Accrued interest payable and other liabilities   128,724     127,019     156,262 
Total liabilities   13,232,401     13,145,530     12,728,375 
STOCKHOLDERS' EQUITY (1)   3,581,704     3,551,490     3,506,230 
Total liabilities and stockholders’ equity$  16,814,105  $  16,697,020  $  16,234,605 
      
(1) Includes net unrealized gain on securities     
available-for-sale, net$  24,459  $  16,255  $  26,380 
      
Book value per share$  34.76  $  34.46  $  34.03 
Tangible book value per share$  17.86  $  17.55  $  17.17 
      
Shares outstanding (includes unvested restricted shares     
of 988,825 at September 30, 2015, 990,259 at     
June 30, 2015, and 1,108,505 at December 31, 2014)   103,053,694     103,051,989   103,022,017 


PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
 
 Three Months Ended Nine Months Ended
 September 30, June 30, September 30, September 30,
  2015   2015   2014   2015   2014 
 (Dollars in thousands, except per share data)
Interest income:         
Loans and leases$  193,539  $  203,781  $  189,961  $  599,417  $  459,625 
Investment securities   13,955     14,570     12,331     40,720     35,140 
Deposits in financial institutions   178     104     64     304     314 
Total interest income   207,672     218,455     202,356     640,441     495,079 
          
Interest expense:        
Deposits   10,400     11,233     8,822     32,112     17,360 
Borrowings   72     88     74     395     352 
Subordinated debentures   4,680     4,582     4,614     13,787     9,973 
Total interest expense   15,152     15,903     13,510     46,294     27,685 
          
Net interest income   192,520     202,552     188,846     594,147     467,394 
Provision for credit losses   8,746     6,529     5,050     31,709     9,436 
Net interest income after provision        
for credit losses   183,774     196,023     183,796     562,438     457,958 
          
Noninterest income:        
Service charges on deposit accounts   2,601     2,612     2,725     7,787     8,446 
Other commissions and fees   6,376     7,123     6,371     18,895     14,046 
Leased equipment income   5,475     5,375     5,615     16,232     11,287 
Gain on sale of loans and leases   27     163     973     190     594 
Gain (loss) on securities   655     (186)    -     3,744     4,841 
FDIC loss sharing expense, net   (4,449)    (5,107)    (7,415)    (13,955)    (27,370)
Other income   5,073     9,643     8,045     23,359     17,640 
Total noninterest income   15,758     19,623     16,314     56,252     29,484 
          
Noninterest expense:        
Compensation    48,152     49,033     45,861     144,922     119,569 
Occupancy   10,762     10,588     11,188     31,950     29,861 
Data processing   4,322     4,402     3,929     13,032     10,568 
Other professional services   3,396     3,332     3,687     9,949     8,053 
Insurance and assessments   3,805     4,716     3,020     11,546     7,792 
Intangible asset amortization   1,497     1,502     1,608     4,500     4,649 
Leased equipment depreciation   3,162     3,103     2,961     9,368     6,056 
Foreclosed assets expense (income), net   4,521     (2,340)    4,827     2,517     3,463 
Acquisition, integration and reorganization costs   747     900     5,193     3,647     93,635 
Other expense   9,775     10,040     12,649     28,344     30,641 
Total noninterest expense   90,139     85,276     94,923     259,775     314,287 
          
Earnings from continuing operations before       
taxes   109,393     130,370     105,187     358,915     173,155 
Income tax expense    (39,777)    (45,287)    (42,911)    (131,137)    (73,744)
Net earnings from continuing operations    69,616     85,083     62,276     227,778     99,411 
          
Loss from discontinued operations before taxes   -     -     (8)    -     (2,572)
Income tax benefit    -     -     3     -     1,067 
Net loss from discontinued operations   -     -     (5)    -     (1,505)
          
Net earnings $  69,616  $  85,083  $  62,271  $  227,778  $  97,906 
          
Basic and diluted earnings per share:       
Net earnings from continuing operations$  0.68  $  0.83  $  0.60  $  2.21  $  1.20 
Net earnings $  0.68  $  0.83  $  0.60  $  2.21  $  1.18 


PACWEST BANCORP AND SUBSIDIARIES
AVERAGE BALANCE SHEET AND YIELD ANALYSIS
 
 Three Months Ended
 September 30, 2015 June 30, 2015 September 30, 2014
  InterestAverage  InterestAverage  InterestAverage
 Average Income/Yield/ Average Income/Yield/ Average Income/Yield/
 BalanceExpenseCost BalanceExpenseCost BalanceExpenseCost
 (Dollars in thousands) 
Assets:           
PCI loans$  193,094 $  7,505  15.42% $  228,217 $  7,894  13.87% $  363,049 $  13,490  14.74%
Non-PCI loans and leases   11,919,787    186,034  6.19%    11,879,799    195,887  6.61%    10,922,640    176,471  6.41%
Total loans and leases 12,112,881  193,539  6.34%  12,108,016  203,781  6.75%  11,285,689  189,961  6.68%
Investment securities (1)   1,806,628    16,709  3.67%    1,672,590    16,739  4.01%    1,584,811    13,858  3.47%
Deposits in financial            
institutions   278,973    178  0.25%    161,683    104  0.26%    99,276    64  0.26%
Total interest-earning            
assets 14,198,482  210,426  5.88%   13,942,289   220,624  6.35%   12,969,776   203,883  6.24%
Other assets   2,491,695       2,521,022       2,746,763   
Total assets$16,690,177    $16,463,311    $15,716,539   
            
Liabilities and            
Stockholders' Equity:           
Interest checking$  787,271    300  0.15% $  741,966    202  0.11% $  605,288    86  0.06%
Money market   2,417,280    1,218  0.20%    2,065,190    1,088  0.21%    1,733,445    908  0.21%
Savings   746,362    449  0.24%    740,878    555  0.30%    759,177    575  0.30%
Time   5,042,768    8,433  0.66%    5,559,903    9,388  0.68%    5,680,732    7,253  0.51%
Total interest-bearing            
deposits   8,993,681    10,400  0.46%    9,107,937    11,233  0.49%    8,778,642    8,822  0.40%
Borrowings   70,171    72  0.41%    81,164    88  0.43%    96,711    74  0.30%
Subordinated debentures   434,420    4,680  4.27%    432,656    4,582  4.25%    434,625    4,614  4.21%
Total interest-bearing            
liabilities   9,498,272    15,152  0.63%    9,621,757    15,903  0.66%    9,309,978    13,510  0.58%
Noninterest-bearing            
demand deposits   3,486,780       3,157,129       2,778,260   
Other liabilities   132,360       135,677       163,182   
Total liabilities  13,117,412      12,914,563      12,251,420   
Stockholders' equity   3,572,765       3,548,748       3,465,119   
Total liabilities and            
stockholders' equity$ 16,690,177    $ 16,463,311    $ 15,716,539   
Net interest income (2) $ 195,274    $ 204,721    $ 190,373  
Net interest spread (2)   5.25%    5.69%    5.66%
Net interest margin (2)   5.46%    5.89%    5.82%
            
Total deposits (3)$12,480,461 $10,400  0.33% $12,265,066 $11,233  0.37% $11,556,902 $  8,822  0.30%
Funding sources (4)$12,985,052 $15,152  0.46% $12,778,886 $15,903  0.50% $12,088,238 $  13,510  0.44%
 
(1) Includes tax equivalent adjustments of $2.8 million, $2.2 million, and $1.5 million for the three months ended September 30, 2015, June 30, 2015, and September 30, 2014 related to tax exempt income on municipal securities.  The federal statutory tax rate utilized was 35% for the periods.
(2) Tax equivalent.
(3) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits.  The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(4) Funding sources is the sum of interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources. 


PACWEST BANCORP AND SUBSIDIARIES
FIVE QUARTER BALANCE SHEET
          
 September 30, June 30, March 31, December 31, September 30,
  2015   2015   2015   2014   2014 
 (Dollars in thousands, except per share data)
ASSETS:         
Cash and due from banks$  154,652  $  207,598  $  140,873  $  164,757  $  145,463 
Interest-earning deposits in financial        
institutions   81,642     433,033     250,981     148,469     115,399 
Total cash and cash equivalents    236,294     640,631     391,854     313,226     260,862 
          
Securities available-for-sale   1,809,364     1,698,158     1,595,409     1,567,177     1,539,681 
Federal Home Loan Bank stock, at cost   17,250     17,250     28,905     40,609     45,602 
Total investment securities   1,826,614     1,715,408     1,624,314     1,607,786     1,585,283 
          
Non-PCI loans and leases   12,300,057     11,846,314     12,047,946     11,613,832     11,239,964 
PCI loans   193,340     222,691     254,346     290,852     351,431 
Total gross loans and leases   12,493,397     12,069,005     12,302,292     11,904,684     11,591,395 
Deferred fees and costs   (41,192)    (34,816)    (30,126)    (22,252)    (16,510)
Total loans and leases, net of         
deferred fees   12,452,205     12,034,189     12,272,166     11,882,432     11,574,885 
Allowance for loan and lease losses   (103,271)    (99,375)    (92,378)    (84,455)    (81,899)
Total loans and leases, net   12,348,934     11,934,814     12,179,788     11,797,977     11,492,986 
          
Equipment leased to others under         
operating leases   161,508     117,182     119,959     122,506     125,119 
Premises and equipment, net   36,475     35,984     36,022     36,551     38,368 
Foreclosed assets, net   33,216     31,668     35,940     43,721     40,524 
Deferred tax asset, net   169,760     211,556     236,065     284,411     331,176 
Goodwill   1,728,380     1,728,380     1,728,380     1,720,479     1,722,129 
Core deposit and customer         
relationship intangibles, net   12,704     14,201     15,703     17,204     18,823 
Other assets   260,220     267,196     275,915     290,744     322,880 
Total assets$  16,814,105  $  16,697,020  $  16,643,940  $  16,234,605  $  15,938,150 
          
LIABILITIES:         
Noninterest-bearing deposits$  3,508,682  $  3,396,688  $  3,029,463  $  2,931,352  $  2,842,488 
Interest-bearing deposits   8,607,081     9,185,128     8,904,712     8,823,776     8,680,949 
Total deposits   12,115,763     12,581,816     11,934,175     11,755,128     11,523,437 
Borrowings   552,497     2,751     618,156     383,402     363,672 
Subordinated debentures   435,417     433,944     431,448     433,583     433,545 
Accrued interest payable and other        
liabilities   128,724     127,019     126,800     156,262     139,445 
Total liabilities   13,232,401     13,145,530     13,110,579     12,728,375     12,460,099 
STOCKHOLDERS' EQUITY (1)   3,581,704     3,551,490     3,533,361     3,506,230     3,478,051 
Total liabilities and stockholders’        
equity$  16,814,105  $  16,697,020  $  16,643,940  $  16,234,605  $  15,938,150 
          
(1) Includes net unrealized gain         
on securities available-for-sale, net$  24,459  $  16,255  $  28,744  $  26,380  $  20,821 
          
Book value per share$  34.76  $  34.46  $  34.29  $  34.03  $  33.76 
Tangible book value per share$  17.86  $  17.55  $  17.36  $  17.17  $  16.86 
          
Shares outstanding (includes unvested        
restricted shares)   103,053,694     103,051,989     103,044,257   103,022,017     103,027,830 


PACWEST BANCORP AND SUBSIDIARIES
FIVE QUARTER STATEMENT OF EARNINGS
 
 Three Months Ended
 September 30, June 30, March 31, December 31, September 30,
  2015   2015   2015   2014   2014 
 (Dollars in thousands, except per share data)
Interest income:         
Loans and leases$  193,539  $  203,781  $  202,097  $  197,472  $  189,961 
Investment securities   13,955     14,570     12,195     12,205     12,331 
Deposits in financial institutions   178     104     22     19     64 
Total interest income   207,672     218,455     214,314     209,696     202,356 
          
Interest expense:         
Deposits   10,400     11,233     10,479     9,972     8,822 
Borrowings   72     88     235     144     74 
Subordinated debentures   4,680     4,582     4,525     4,597     4,614 
Total interest expense   15,152     15,903     15,239     14,713     13,510 
          
Net interest income   192,520     202,552     199,075     194,983     188,846 
Provision for credit losses   8,746     6,529     16,434     2,063     5,050 
Net interest income after provision         
for credit losses   183,774     196,023     182,641     192,920     183,796 
          
Noninterest income:         
Service charges on deposit accounts   2,601     2,612     2,574     2,787     2,725 
Other commissions and fees   6,376     7,123     5,396     4,556     6,371 
Leased equipment income   5,475     5,375     5,382     5,382     5,615 
Gain on sale of loans and leases   27     163     -     7     973 
Gain (loss) on securities   655     (186)    3,275     -     -  
FDIC loss sharing expense, net   (4,449)    (5,107)    (4,399)    (4,360)    (7,415)
Other income   5,073     9,643     8,643     4,331     8,045 
Total noninterest income   15,758     19,623     20,871     12,703     16,314 
          
Noninterest expense:         
Compensation    48,152     49,033     47,737     45,930     45,861 
Occupancy   10,762     10,588     10,600     10,745     11,188 
Data processing   4,322     4,402     4,308     4,050     3,929 
Other professional services   3,396     3,332     3,221     3,181     3,687 
Insurance and assessments   3,805     4,716     3,025     3,115     3,020 
Intangible asset amortization   1,497     1,502     1,501     1,619     1,608 
Leased equipment depreciation   3,162     3,103     3,103     3,103     2,961 
Foreclosed assets expense (income), net   4,521     (2,340)    336     1,938     4,827 
Acquisition, integration and reorganization costs    747     900     2,000     7,381     5,193 
Other expense   9,775     10,040     8,529     10,243     12,649 
Total noninterest expense   90,139     85,276     84,360     91,305     94,923 
          
Earnings from continuing operations before        
taxes   109,393     130,370     119,152     114,318     105,187 
Income tax expense    (39,777)    (45,287)    (46,073)    (43,261)    (42,911)
Net earnings from continuing operations    69,616     85,083     73,079     71,057     62,276 
          
Loss from discontinued operations before taxes   -     -     -     (105)    (8)
Income tax benefit   -     -     -     47     3 
Net loss from discontinued operations   -     -     -     (58)    (5)
          
Net earnings $  69,616  $  85,083  $  73,079  $  70,999  $  62,271 
          
Basic and diluted earnings per share:        
Net earnings from continuing operations$  0.68  $  0.83  $  0.71  $  0.69  $  0.60 
Net earnings $  0.68  $  0.83  $  0.71  $  0.69  $  0.60 


PACWEST BANCORP AND SUBSIDIARIES
FIVE QUARTER SELECTED FINANCIAL DATA
  
 At or For the Three Months Ended
 September 30, June 30, March 31, December 31, September 30,
  2015   2015   2015   2014   2014 
 (Dollars in thousands)
Performance Ratios - GAAP:        
Return on average assets (1) 1.65%  2.07%  1.82%  1.77%  1.57%
Return on average equity (1) 7.73%  9.62%  8.39%  8.05%  7.13%
Yield on average loans and leases 6.34%  6.75%  6.80%  6.76%  6.68%
Yield on average interest-earning         
assets (2) 5.88%  6.35%  6.40%  6.35%  6.24%
Cost of average total deposits 0.33%  0.37%  0.36%  0.34%  0.30%
Cost of average time deposits 0.66%  0.68%  0.65%  0.60%  0.51%
Cost of average interest-bearing         
liabilities 0.63%  0.66%  0.64%  0.63%  0.58%
Cost of average funding sources 0.46%  0.50%  0.49%  0.48%  0.44%
Net interest rate spread (2) 5.25%  5.69%  5.76%  5.72%  5.66%
Net interest margin (2) 5.46%  5.89%  5.95%  5.91%  5.82%
Noninterest expense as a percentage        
of average assets (1) 2.14%  2.08%  2.10%  2.28%  2.40%
Efficiency ratio 39.6%  38.0%  36.9%  38.4%  40.3%
          
Performance Ratios - Non-GAAP:        
Adjusted return on average assets (1) 1.55%  1.78%  1.62%  1.70%  1.69%
Adjusted return on average equity (1) 7.24%  8.26%  7.47%  7.71%  7.66%
Return on average tangible equity (1) 15.09%  18.90%  16.50%  16.00%  14.36%
Adjusted return on average         
tangible equity (1) 14.12%  16.24%  14.69%  15.33%  15.42%
Core net interest margin (2) 5.19%  5.33%  5.44%  5.57%  5.68%
Adjusted efficiency ratio 40.6%  40.5%  39.2%  39.7%  39.7%
          
Average Balances:         
Loans and leases$  12,112,881  $  12,108,016  $  12,055,682  $  11,586,573  $  11,285,689 
Interest-earning assets   14,198,482     13,942,289     13,701,865     13,205,383     12,969,776 
Total assets   16,690,177     16,463,311     16,296,640     15,892,761     15,716,539 
Noninterest-bearing deposits   3,486,780     3,157,129     2,949,719     2,900,388     2,778,260 
Interest-bearing deposits   8,993,681     9,107,937     8,801,306     8,679,599     8,778,642 
Total deposits   12,480,461     12,265,066     11,751,025     11,579,987     11,556,902 
Borrowings and subordinated         
debentures   504,591     513,820     856,664     647,912     531,336 
Interest-bearing liabilities   9,498,272     9,621,757     9,657,970     9,327,511     9,309,978 
Funding sources   12,985,052     12,778,886     12,607,689     12,227,899     12,088,238 
Stockholders' equity   3,572,765     3,548,748     3,533,343     3,500,291     3,465,119 
          
(1) Annualized.         
(2) Tax equivalent.         


PACWEST BANCORP AND SUBSIDIARIES
FIVE QUARTER SELECTED FINANCIAL DATA
 
 At or For the Three Months Ended
 September 30, June 30, March 31, December 31, September 30,
  2015   2015   2015   2014   2014 
 (Dollars in thousands)
Non-PCI Credit Quality:        
Allowance for credit losses to loans        
and leases 0.82%  0.78%  0.72%  0.66%  0.61%
Allowance for credit losses to         
nonaccrual loans and leases 94%  71%  62%  92%  78%
Nonaccrual loans and leases to loans        
and leases 0.87%  1.11%  1.16%  0.72%  0.79%
Nonperforming assets to loans and         
leases and foreclosed assets 1.14%  1.37%  1.45%  1.09%  1.15%
Nonperforming assets to total assets 0.84%  0.98%  1.05%  0.78%  0.81%
Trailing twelve month net charge-offs        
to average loans and leases 0.04%  0.06%  0.07%  0.02%  0.09%
          
PacWest Bancorp Consolidated         
Capital Ratios:         
Tier 1 leverage capital ratio (1) 12.08%  11.96%  11.74%  12.34%  12.17%
Common equity tier 1 capital ratio (1) 12.75%  12.87%  12.27% N/A N/A
Tier 1 risk-based capital ratio (1) 12.75%  12.87%  12.27%  13.16%  13.24%
Total risk-based capital ratio (1) 16.33%  16.53%  15.80%  16.07%  16.24%
Tangible common equity ratio         
(non-GAAP measure) 12.21%  12.10%  12.01%  12.20%  12.24%
          
Pacific Western Bank Capital Ratios:       
Tier 1 leverage capital ratio (1) 11.56%  11.65%  11.53%  11.70%  11.74%
Common equity tier 1 capital ratio (1) 12.26%  12.55%  12.07% N/A N/A
Tier 1 risk-based capital ratio (1) 12.26%  12.55%  12.07%  12.46%  12.74%
Total risk-based capital ratio (1) 13.06%  13.35%  12.80%  13.16%  13.44%
Tangible common equity ratio         
(non-GAAP measure) 11.53%  11.46%  11.32%  11.51%  11.60%
          
(1) Capital ratios for September 30, 2015 are preliminary.


PACWEST BANCORP AND SUBSIDIARIES
NET EARNINGS PER SHARE CALCULATIONS
 
 Three Months Ended Nine Months Ended
 September 30, June 30, September 30, September 30,
  2015   2015   2014   2015   2014 
 (Dollars in thousands, except per share data)
Basic Earnings Per Share:        
Net earnings from continuing operations$  69,616  $  85,083  $  62,276  $  227,778  $  99,411 
Less: earnings allocated to unvested         
restricted stock (1)   (649)    (807)    (685)    (2,213)    (1,147)
Net earnings from continuing operations         
allocated to common shares   68,967     84,276     61,591     225,565     98,264 
Net earnings from discontinued operations         
allocated to common shares   -     -     (5)    -     (1,487)
Net earnings allocated to common shares$  68,967  $  84,276  $  61,586  $  225,565  $  96,777 
          
Weighted-average basic shares and         
unvested restricted stock outstanding   103,048     103,030     103,029     103,038     82,758 
Less: weighted-average unvested         
restricted stock outstanding   (985)    (1,060)    (1,117)    (1,055)    (981)
Weighted-average basic shares outstanding   102,063     101,970     101,912     101,983     81,777 
          
Basic earnings per share:        
Net earnings from continuing operations$  0.68  $  0.83  $  0.60  $  2.21  $  1.20 
Net earnings from discontinued operations   -      -      -      -      (0.02)
Net earnings$  0.68  $  0.83  $  0.60  $  2.21  $  1.18 
          
Diluted Earnings Per Share:        
Net earnings from continuing operations         
allocated to common shares$  68,967  $  84,276  $  61,591  $  225,565  $  98,264 
Net earnings from discontinued operations         
allocated to common shares   -     -     (5)    -     (1,487)
Net earnings allocated to common shares$  68,967  $  84,276  $  61,586  $  225,565  $  96,777 
          
Weighted-average basic shares outstanding   102,063     101,970     101,912     101,983     81,777 
          
Diluted earnings per share:        
Net earnings from continuing operations$  0.68  $  0.83  $  0.60  $  2.21  $  1.20 
Net earnings from discontinued operations   -      -      -      -      (0.02)
Net earnings$  0.68  $  0.83  $  0.60  $  2.21  $  1.18 
          
(1) Represents cash dividends paid to holders of unvested stock, net of estimated forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
 

GAAP TO NON-GAAP RECONCILIATION

This press release contains certain non-GAAP financial disclosures for adjusted net earnings, adjusted return on average assets, adjusted return on average equity, return on average tangible equity, adjusted return on average tangible equity, tangible common equity amounts and ratios, tangible book value per share, adjusted efficiency ratio, core net interest margin, and operating expense as a percentage of average assets. The Company uses certain 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:

  • Adjusted net earnings: To calculate adjusted net earnings, we exclude from net earnings primarily income statement items for which the related assets or liabilities have been completely resolved and are no longer on the balance sheet.  As analysts and investors view this measure as an indicator of the Company’s ability to generate recurring earnings, we disclose this amount in addition to net earnings.
  • Adjusted return on average assets, adjusted return on average equity, return on average tangible equity, adjusted return on average tangible equity, tangible common equity amounts and ratios, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to return on average assets, return on average equity, equity-to-assets ratio, and book value per share, respectively.
  • Adjusted efficiency ratio: We disclose this measure in addition to efficiency ratio as it shows the trend in recurring overhead-related noninterest expense relative to recurring net revenues.

Please refer to the tables on the following pages for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.

PACWEST BANCORP AND SUBSIDIARIES
GAAP TO NON-GAAP RECONCILIATION
(Unaudited)
 
  Three Months Ended Nine Months Ended
Adjusted Net Earnings and September 30, June 30, September 30, September 30,
Related Ratios  2015   2015   2014   2015   2014 
  (Dollars in thousands)
           
Net earnings $  69,616  $  85,083  $  62,271