PacWest Bancorp Announces Results for the First Quarter of 2014

Highlights

• Net Earnings of $25.1 Million or $0.55 Per Diluted Share
• Net Interest Margin at 5.95%
• Credit Loss Reserve at 1.75% of Loans and Leases (excludes PCI loans)
• Credit Loss Reserve at 115% of Nonaccrual Loans and Leases (excludes PCI loans)
• Demand Deposits Reach 45% of Total Deposits
• Core Deposits at 88% of Total Deposits
• CapitalSource Merger Closed April 7, 2014; Deposit System Converted April 12, 2014

LOS ANGELES, April 23, 2014 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) today announced net earnings for the first quarter of 2014 of $25.1 million, or $0.55 per diluted share, compared to net earnings for the fourth quarter of 2013 of $3.1 million, or $0.06 per diluted share. For the fourth quarter of 2013, net earnings included a $12.2 million, or $0.28 per diluted share, after-tax charge for accelerated restricted stock vesting.

This press release contains certain non-GAAP financial disclosures for adjusted earnings from continuing operations before income taxes, adjusted efficiency ratio, adjusted allowance for credit losses to loans and leases, return on average tangible equity, and tangible common equity ratio. 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. As analysts and investors view adjusted earnings from continuing operations before income taxes as an indicator of the Company's ability to both generate earnings and absorb credit losses, we disclose this amount in addition to pre-tax earnings. We disclose the adjusted efficiency ratio as it shows the trend in recurring overhead-related noninterest expense relative to recurring net revenues. As the allowance for credit losses takes into account credit deterioration on acquired loans and leases, which include an estimate of credit losses in their initial fair values, we disclose the adjusted allowance for credit losses to loans and leases in addition to the allowance for credit losses to loans and leases. The adjusted allowance for credit losses to loans and leases excludes acquired loans and leases and the related allowance. Given that the use of return on average tangible equity, tangible common equity amounts and ratios, and tangible book value per share is prevalent among banking regulators, investors and analysts, we disclose our return on average tangible equity in addition to return on average equity, our tangible common equity ratio in addition to the equity-to-assets ratio, and tangible book value per share in addition to book value per share. Please refer to the tables at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.

The comparability of financial information is affected by our acquisitions. Operating results include the operations of acquired entities from the dates of acquisition. The operations of First California Financial Group, Inc. ("FCAL") have been included since its acquisition date of May 31, 2013. The CapitalSource merger closed on April 7, 2014. Accordingly, CapitalSource operations will be included in second quarter 2014 results from that date.

FIRST QUARTER RESULTS

The quarter-over-quarter increase in net earnings of $22.0 million was due mostly to: (a) the $12.4 million ($12.2 million after tax) accelerated vesting of restricted stock that occurred during the fourth quarter of 2013 and not repeated in the first quarter of 2014; (b) the $4.7 million ($2.8 million after tax) increase in net interest income; (c) the $5.0 million ($2.9 million after tax) increase in gain on sale of securities; and (d) the $5.4 million ($3.1 million after tax) increase in other income.          

Matt Wagner, President and CEO, commented "We had a very successful first quarter, posting net earnings of $25.1 million and a net interest margin of 5.95%. Although loan and lease growth was moderated in the first quarter to augment liquidity in anticipation of the CapitalSource merger, we were able to maintain our core loan yield at 6.68% due to the structure and mix of new loan originations. Our credit quality metrics remain at high levels. The slight increase in classified and nonaccrual non-PCI loans and leases results from our conservative evaluations and presents no expected loss content. The Company's allowance for credit loss coverage ratio increased 2 basis points to 1.75% at the end of March."

Mr. Wagner continued, "Crowning the end of the first quarter was final regulatory approval of our merger with CapitalSource in early April and closing on April 7. The branch office consolidation, core deposit system conversion and general ledger cutover were completed flawlessly over the April 12 weekend. We have already begun executing on our business plan for the new Company, which focuses on loan growth in all markets and attracting and retaining low-cost core deposits. We welcome all of our new customers, employees, and directors and look forward to a successful 2014 and beyond."

Vic Santoro, Executive Vice President and CFO, stated "The hallmark of this Company has been its earning power supported by its net interest margin and expense control. Our adjusted net earnings reached $28.2 million in the first quarter, exceeding reported net earnings of $25.1 million that included $4.1 million in after-tax gains from asset sales. Our core net interest margin remains strong, reaching 5.42% for the first quarter from a combination of higher interest income on loans and leases and a low all-in deposit cost of 9 basis points. Our efficiency ratios, both reported and adjusted, declined quarter-over-quarter, with the adjusted efficiency ratio reaching 52.7%. This earning power, along with a strong capital base, positions us well to integrate the CapitalSource operation and be successful in 2014."  

BALANCE SHEET CHANGES

Total assets decreased $15.5 million during the first quarter of 2014 to $6.5 billion due mainly to decreases in total loans and leases, securities available-for-sale, the FDIC loss sharing asset, and other assets, offset partially by an increase in cash and cash equivalents. At March 31, 2014, gross loans and leases totaled $4.2 billion, a decrease of $152.3 million since December 31, 2013. The gross Non-PCI loan and lease portfolio totaled $3.8 billion, a decrease of $102.0 million during the first quarter reflecting $320.2 million in net pay downs offset by $168.0 million in originations and purchases. The PCI loan portfolio, which is mostly covered loans, totaled $332.5 million, down $50.3 million during the first quarter due to repayments and resolution activities. Securities available-for-sale declined $17.3 million, due mainly to the sale of $137.3 million in government sponsored enterprise ("GSE") pass through securities that resulted in a net gain of $4.8 million. Cash and cash equivalents increased $194.7 million to $342.1 million at quarter-end in anticipation of the CapitalSource merger, which closed April 7, 2014.

The following tables present our loan portfolio activity for the first quarter of 2014 and the fourth quarter of 2013:

Total liabilities decreased $40.1 million during the first quarter of 2014 to $5.7 billion due to decreases in FHLB advances, liabilities of discontinued operations, and accrued interest payable and other liabilities, offset partially by an increase in total deposits. The increase in total deposits of $88.4 million was represented by an increase in core deposits of $103.2 million, offset partially by a decrease of $14.8 million in time deposits. The increase in core deposits was composed of increases of $73.2 million, $30.2 million, and $7.4 million in noninterest-bearing demand deposits, money market deposits, and savings deposits, respectively, offset by a decrease of $7.5 million in interest checking deposits. At March 31, 2014, core deposits totaled $4.7 billion, or 88% of total deposits, and noninterest-bearing demand deposits totaled $2.4 billion, or 45% of total deposits. 

SECURITIES AVAILABLE-FOR-SALE

The following table presents the components, yields, and durations of our securities available-for-sale as of the date indicated:

The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:

COVERED ASSETS

We are party to four loss sharing agreements with the FDIC. Such agreements cover a substantial portion of losses incurred on covered loans, other real estate owned, and certain investment securities.

A summary of covered assets is shown in the following table as of the dates indicated:

NET INTEREST INCOME

Net interest income increased by $4.7 million to $86.0 million for the first quarter of 2014 compared to $81.3 million for the fourth quarter of 2013 due primarily to higher interest income on loans and leases. Interest income on loans and leases increased $4.1 million due mostly to higher accelerated accretion of acquisition discounts resulting from PCI loan payoffs, offset partially by two fewer days in the current quarter. Interest income on investment securities increased $401,000 due to purchases of higher yielding securities during the first quarter, offset partially by the sale of $137.3 million in lower yielding GSE securities and reduced discount accretion on our covered private label mortgage-backed securities due to slower prepayments.   Interest expense declined by $253,000 due mainly to a lower average rate and average balance for time deposits, as well as a lower average balance for money market deposits and two fewer days in the current quarter. 

NET INTEREST MARGIN

Our net interest margin ("NIM") for the first quarter of 2014 was 5.95%, compared to 5.41% for the fourth quarter of 2013. The 54 basis point increase in NIM was driven by a 53 basis point increase in our earning asset yield. The increase in the earning asset yield was due to the 65 basis point increase in the loan and lease yield.   

The NIM and loan and lease yield are impacted by accelerated accretion of acquisition discounts resulting from PCI loan payoffs that cause volatility.  The effects of this item on the NIM and loan yield are shown in the following table for the periods indicated:

The following table presents the loan and lease yields and related average balances for our Non-PCI loans and leases, PCI loans, and total loan and lease portfolio for the periods indicated:

The yield on loans and leases increased to 7.42% for the first quarter of 2014 from 6.77% for the fourth quarter of 2013 due to higher accelerated accretion of acquisition discounts resulting from PCI loan payoffs. The accelerated accretion of acquisition discounts resulting from PCI loan payoffs totaled $7.7 million for the first quarter and $1.4 million for the fourth quarter. When accelerated accretion is excluded, the core yield on loans and leases was 6.68% for the first quarter and 6.64% for the fourth quarter. 

The yield on PCI loans increased to 21.83% for the first quarter of 2014 from 13.15% for the fourth quarter of 2013 due mainly to the $6.3 million increase in accelerated accretion of acquisition discounts resulting from PCI loan payoffs. When accelerated accretion is excluded, the core yield on PCI loans increased to 12.68% for the first quarter from 11.67% for the fourth quarter due to improved performance on the underlying loans.

The cost of average funding sources declined one basis point to 0.17% for the first quarter of 2014 from 0.18% for the fourth quarter of 2013. This includes all-in deposit cost which declined two basis points to 0.09% for the current quarter compared to the prior quarter. The cost of total interest-bearing deposits and total interest-bearing liabilities each declined two basis points to 0.17% and 0.30% for the first quarter. Such declines are due mainly to a lower average rate on time deposits.  

NONINTEREST INCOME

Noninterest income increased by $8.6 million to a positive $4.7 million for the first quarter of 2014 from a negative $3.9 million for the fourth quarter of 2013. The increase was due mostly to the $5.0 million increase in gain on sales of securities during the first quarter and a $5.4 million increase in other income, offset by an increase of $837,000 in FDIC loss sharing expense and a decrease of $577,000 in gain on sales of leases. During the first quarter we sold $137.3 million in GSE pass through securities that resulted in a gain of $4.8 million.   We sold these securities to take advantage of favorable market conditions for premium coupon seasoned GSE securities, and redeployed the proceeds into single-maturity investments that are expected to perform better under current market conditions. During the fourth quarter we sold $10.0 million in collateralized loan obligation ("CLO") securities, which resulted in a net loss of $272,000.   We sold the CLO securities in order to minimize our risk in holding these securities subject to the then proposed regulations referred to as the Volcker rule. The increase in other income was due to $3.5 million in income recognized on the early repayment of leases and a $1.6 million gain on the sale of an owned office building. The increase in FDIC loss sharing expense was due to lower covered OREO expense attributable mainly to higher gain on sales of covered OREO and higher losses on the FDIC loss sharing asset.

The following table presents the details of FDIC loss sharing income (expense), net for the periods indicated: 

NONINTEREST EXPENSE

Noninterest expense decreased by $15.2 million to $50.9 million for the first quarter of 2014 compared to $66.1 million for the fourth quarter of 2013. The decline was due to the $12.4 million of expense from accelerated vesting of restricted stock incurred in the fourth quarter and not repeated in the first quarter, as well as decreases of $2.1 million and $1.0 million in acquisition and integration costs and covered OREO expense, respectively. The decrease in covered OREO expense was due mainly to a higher gain on sales of covered OREO of $650,000, lower write-downs of $244,000, and lower maintenance costs of $127,000. Compensation expense increased $930,000 due mainly to the timing of payroll taxes and lower cost deferral on loan originations, offset partially by lower restricted stock amortization, excluding the accelerated vesting of restricted stock. 

Noninterest expense includes: (a) amortization of restricted stock, which is included in compensation, and (b) intangible asset amortization. Amortization of restricted stock, excluding the accelerated vesting of restricted stock, totaled $1.6 million for the first quarter of 2014 and $2.3 million for the fourth quarter of 2013. Intangible asset amortization totaled $1.4 million for each of the first quarter and fourth quarter. 

In December 2013, the Company accelerated the vesting of certain restricted stock awards that resulted in a pre‑tax charge of $12.4 million ($12.2 million after tax). This action was taken by the Company in order to eliminate an additional $21.0 million of compensation and tax expense related to change in control payments that the Company would have otherwise incurred upon consummation of the CapitalSource merger. Such eliminated expenses relate to tax gross‑up payments and the value of lost tax deductions, in each case due to the impact of Sections 280G and 4999 of the Internal Revenue Code as they apply to change in control payments that would have become payable to certain PacWest employees in conjunction with the CapitalSource merger. The restricted stock awards that were vested on an accelerated basis in 2013 would have otherwise vested upon consummation of the CapitalSource merger, and the $12.2 million after‑tax charge to earnings that we recorded in December 2013 would have been incurred at that time.    

INCOME TAXES

Our overall effective income tax rate was 35.8% for the first quarter of 2014 and 74.1% for the fourth quarter of 2013. The fourth quarter effective tax rate was driven higher than normal by the non-deductibility of most of the $12.4 million accelerated vesting of restricted stock. When this item is excluded, our adjusted effective tax rate was 36.4% for the fourth quarter. 

NET CREDIT COSTS

Net credit costs on a pre-tax basis are shown in the following table:

CREDIT QUALITY

Credit quality metrics declined somewhat quarter over quarter due to slightly elevated levels of classified and nonaccrual loans and leases. Economic trends in our markets will cause periodic movements in nonaccrual and classified loan and lease balances. However, losses on such nonaccrual and classified loans and leases are not expected to be material.

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

Non-PCI loans and leases at March 31, 2014, include $1.0 billion in loans and leases acquired in acquisitions. These acquired loans and leases were initially recorded at their estimated fair values and such initial fair values included an estimate of credit losses. The allowance calculation for Non-PCI loans and leases includes an amount for credit deterioration on acquired loans and leases since their acquisition dates.  At March 31, 2014, the allowance for credit losses includes $737,000 attributed to these acquired loans and leases. When these acquired loans and leases are excluded from the total of Non-PCI loans and leases and the related allowance of $737,000 is excluded from the allowance for credit losses, the result is an adjusted coverage ratio of our allowance for credit losses for Non-PCI loans and leases of 2.34% at March 31, 2014; the comparable ratio at December 31, 2013 was 2.34%.

Credit Loss Provisions

The Company recorded a negative provision for credit losses of $644,000 for the first quarter of 2014 compared to a negative provision for credit losses of $1.3 million for the fourth quarter of 2013; such provisions relate to PCI loans only.

The provision, or negative provision, for credit losses on PCI loans results from decreases, or increases, in expected cash flows on such loans compared to those previously estimated. Cash flows on PCI loans are estimated quarterly and are subject to change based on varying conditions with the underlying borrowers and collateral. The negative provisions for credit losses on PCI loans in the first and fourth quarters were due to increases in both actual cash flows from early pay-offs and expected cash flows on PCI loans generally.

The provision level on Non-PCI loans and leases is generated by our allowance methodology, which reflects the level and trends of net charge-offs, the levels of nonaccrual and classified loans and leases, the migration of loans and leases into various risk classifications, and the level of outstanding loans and leases. Based on such methodology, there was no provision for credit losses on Non-PCI loans and leases for the first quarter of 2014 and fourth quarter of 2013.

Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases (excluding PCI loans, which are accounted for based on expected cash flows and considered accruing regardless of the payment status of the underlying loans) and OREO and totaled $105.0 million at March 31, 2014 compared to $98.6 million at December 31, 2013. The ratio of nonperforming assets to Non-PCI loans and leases and OREO increased to 2.71% at March 31, 2014 from 2.48% at December 31, 2013. 

The following table presents our 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:

The $11.3 million increase in nonaccrual loans and leases (excluding PCI loans) during the first quarter of 2014 was attributable to (a) additions of $18.4 million, (b) charge-offs of $1.5 million, and (c) other reductions, payoffs and returns to accrual status of $5.6 million.   

Below is a summary of the ten largest Non-PCI lending relationships on nonaccrual status, excluding SBA-related loans, as of the date indicated:

The following table presents the details of OREO as of the dates indicated:

The following table presents OREO activity for the period indicated:

REGULATORY CAPITAL MEASURES ARE ABOVE THE WELL-CAPITALIZED MINIMUMS

PacWest Bancorp and its wholly-owned banking subsidiary, Pacific Western Bank, each remained well capitalized as of the date indicated as shown in the following table:

CAPITALSOURCE MERGER    

On April 7, 2014, PacWest Bancorp ("PacWest") completed the merger with CapitalSource Inc. ("CapitalSource"). The combined company is called PacWest Bancorp. As part of the merger, CapitalSource Bank, ("CSB"), a wholly‑owned subsidiary of CapitalSource, merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank, and the combined subsidiary bank is called Pacific Western Bank.   

The merger, which was first announced on July 22, 2013, was concluded following receipt of shareholder approval from both institutions and all required regulatory approvals. As of March 31, 2014, CapitalSource had $9.1 billion in assets and PacWest had $6.5 billion in assets.  On a pro forma combined basis with CapitalSource and excluding purchase accounting adjustments, PacWest would have had approximately $15.6 billion in assets as of March 31, 2014.

Upon closing, PacWest created the CapitalSource division of Pacific Western Bank. This division, which will operate under the CapitalSource name, will continue to serve businesses nationwide with a full spectrum of middle-market lending. Pacific Western Bank, through its combined network of 81 branches throughout California, will continue to serve small and medium-sized businesses with financing solutions, cash management and deposit services.

In the merger with CapitalSource, each share of CapitalSource common stock was converted into the right to receive $2.47 in cash and 0.2837 of a share of PacWest Bancorp common stock. PacWest issued an aggregate of approximately 56.7 million shares of PacWest common stock to CapitalSource stockholders. Based on the closing price of PacWest's common stock on April 7, 2014 of $45.83 per share, the aggregate consideration paid to CapitalSource common stockholders and holders of equity awards to acquire CapitalSource common stock was approximately $3.1 billion.

Former holders of CapitalSource common stock and equity awards to acquire CapitalSource common stock as a group received shares of PacWest common stock in the merger constituting approximately 55% of the outstanding shares of PacWest common stock immediately after the merger. As a result, holders of PacWest common stock immediately prior to the merger, as a group, own approximately 45% of the outstanding shares of the PacWest common stock immediately after the merger.

The integration of CapitalSource Bank's deposit system and the conversion of CapitalSource Bank's branches to Pacific Western Bank's operating platform were completed over the weekend of April 12, 2014. CapitalSource had 21 branches, 12 of which were closed in the consolidation with Pacific Western Bank at the close of business on April 11, 2014. One overlapping Pacific Western branch was closed at the close of business on April 11, 2014 as well. All remaining branches re-opened on Monday April 14, 2014 as Pacific Western Bank branches.

Summary unaudited financial information for CapitalSource for the first quarter of 2014 follows:

CapitalSource's consolidated net income for the first quarter of 2014 was negatively impacted compared to its prior quarter by several items including a lease abandonment charge of $6.3 million ($3.2 million after-tax), a $9.3 million write-down of equity investments due to the Volcker Rule (no tax benefit due to full tax valuation allowance on capital losses) and a $3.5 million valuation charge on an REO property ($1.7 million after-tax).   Additionally, these items were offset partially by a $2.1 million gain on the sale of equity investments (no tax expense due to full tax valuation allowance on capital losses) and $1.7 million negative provision for loan and lease losses ($836,000 after-tax). Excluding these items, adjusted net income for the first quarter of 2014 would have been $34.8 million.  At March 31, 2014, total assets were $9.1 billion, gross loans were $7.1 billion, and total deposits were $6.2 billion.  Net loan growth at CapitalSource Bank was $288 million or 4.2% for the first quarter of 2014.

ABOUT PACWEST BANCORP

PacWest Bancorp ("PacWest") is a bank holding company with $6.5 billion in assets as of March 31, 2014, with one wholly-owned banking subsidiary. On a pro forma combined basis with CapitalSource and excluding purchase accounting adjustments, PacWest would have had approximately $15.6 billion in assets as of March 31, 2014. Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, to small and medium-sized businesses through 81 full-service branches, including the nine retained CapitalSource Bank branches, located throughout the state of California. Pacific Western's divisions (CapitalSource, First Community Financial and Pacific Western Equipment Finance), and subsidiaries (BFI Business Finance and Celtic Capital Corporation), deliver the full spectrum of financing solutions nationwide across all industries and property types. Additional information regarding PacWest Bancorp is available on the Internet at www.pacwestbancorp.com. Information regarding Pacific Western Bank is also available on the Internet at www.pacificwesternbank.com.

FORWARD-LOOKING STATEMENTS

This press release contains certain forward-looking information about PacWest that is intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements.

Risks and uncertainties include, but are not limited to: failure to obtain regulatory or other required approvals; an inability to achieve expected cost savings in the amounts or timeframes discussed if at all, or the costs associated with transactions or the time needed to complete transactions being greater than expected;  lower than expected revenues; credit quality deterioration or a reduction in real estate values could cause an increase in the allowance for credit losses and a reduction in net earnings; increased competitive pressure among depository institutions; the Company's ability to complete future acquisitions, successfully integrate such acquired entities, or achieve expected beneficial synergies and/or operating efficiencies within expected time-frames or at all; settlements with the FDIC related to our four loss-sharing arrangements; the possibility that personnel changes will not proceed as planned; the cost of additional capital is more than expected; a change in the interest rate environment reduces net interest margins; asset/liability repricing risks and liquidity risks; pending legal matters may take longer or cost more to resolve or may be resolved adversely to the Company; general economic conditions, either nationally or in the market areas in which the Company does or anticipates doing business, are less favorable than expected; environmental conditions, including natural disasters, may disrupt our business, impede our operations, negatively impact the values of collateral securing the Company's loans and leases or impair the ability of our borrowers to support their debt obligations; the economic and regulatory effects of the continuing war on terrorism and other events of war, including the conflicts in the Middle East; legislative or regulatory requirements or changes adversely affecting the Company's business; changes in the securities markets; regulatory approvals for any capital activities cannot be obtained on the terms expected or on the anticipated schedule; and, other risks that are described in PacWest's public filings with the U.S. Securities and Exchange Commission (the "SEC").

Additional risks and uncertainties relating to the transaction with CapitalSource include, but are not limited to the ability to successfully integrate the two institutions and achieve expected synergies and operating efficiencies on the expected timeframe. For a discussion of risks and uncertainties relating to PacWest's and CapitalSource's businesses, investors and security holders are urged to read PacWest's annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed by PacWest with the SEC. 

If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be incorrect, PacWest's results could differ materially from those expressed in, implied or projected by such forward-looking statements. PacWest assumes no obligation to update such forward-looking statements.

The documents filed by PacWest with the SEC may be obtained at PacWest Bancorp'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 directing a request to: PacWest Bancorp c/o Pacific Western Bank, 275 North Brea Boulevard, Brea, CA 92821. Attention: Investor Relations. Telephone 714-671-6800.