PacWest Bancorp Announces Results for the Fourth Quarter and Calendar Year 2014

Fourth Quarter of 2014 Highlights

• Net Earnings of $71.0 Million, or $0.69 Per Diluted Share; Adjusted Net Earnings of $68.2 Million, or $0.66 Per Diluted Share
• Core Net Interest Margin at 5.52%
• $307.5 Million of Loan and Lease Growth in the Quarter Driven by $950.4 Million of Production
• Demand Deposits Increased $88.9 Million in the Quarter and are 25% of Total Deposits
• Core Deposits Increased $128.6 Million in the Quarter and are 52% of Total Deposits

Calendar Year 2014 Highlights

• Net Earnings of $168.9 Million, or $1.92 Per Diluted Share; Adjusted Net Earnings of $220.4 Million, or $2.50 Per Diluted Share
• Core Net Interest Margin at 5.60%
• $684.0 Million of Organic Loan and Lease Growth in the Year Driven by $3.0 Billion of Production
• Demand Deposits Increased $612.9 Million
• Organic Core Deposit Growth of $700.3 Million

LOS ANGELES, Jan. 22, 2015 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) today announced net earnings for the fourth quarter of 2014 of $71.0 million, or $0.69 per diluted share, compared to net earnings for the third quarter of 2014 of $62.3 million, or $0.60 per diluted share. Net earnings for calendar year 2014 are $168.9 million, or $1.92 per diluted share, compared to net earnings of $45.1 million for calendar year 2013, or $1.08 per diluted share. The significant increase in annual net earnings is largely the result of the CapitalSource merger that closed on April 7, 2014.

When certain income and expense items described below are excluded, adjusted net earnings are $68.2 million, or $0.66 per diluted share, for the fourth quarter of 2014 and $67.2 million, or $0.65 per diluted share, for the third quarter of 2014. Adjusted net earnings are $220.4 million, or $2.50 per diluted share, for calendar year 2014 and $77.5 million, or $1.86 per diluted share, for calendar year 2013.

Matt Wagner, President and CEO, commented, "2014 was truly a transformative year for the Company with the completion of the CapitalSource merger on April 7. We more than doubled our asset size and combined a national lending platform with our California-based deposit franchise. Our teams originated $3.0 billion of loans and leases in 2014 and increased core deposits by $700 million, of which $265 million are new accounts from CapitalSource division borrowers. Our 2014 net earnings almost quadrupled to $168.9 million from $45.1 million in 2013, and our adjusted net earnings for 2014 almost tripled to $220.4 million from $77.5 million in 2013. These strong operating results allowed us to distribute more than $114 million of cash dividends to our stockholders in 2014, with last quarter's regular cash dividend being increased 100% to $0.50 per share."

Mr. Wagner continued, "Our loan and lease portfolio has been diversified along product and geographical lines, and overall credit quality has improved as demonstrated by a 1.09% nonperforming asset ratio and a 92% coverage ratio on nonaccruals. The Company's capital position remains quite strong, with tangible capital at 12.2%. We steadily improved tangible book value per share, which increased $4.44 per share during the year and reached $17.17 per share at year end. Overall, the Company and the Bank are well positioned for continued success."

Vic Santoro, Executive Vice President and CFO, stated "Our fourth quarter results are equally as good as those for the full year. Reported and adjusted net earnings of $71.0 million and $68.2 million resulted in returns on tangible equity of 16.0% and 15.4%. Our core net interest margin remains quite strong at 5.52%, and our NIM, when adjusted for all the effects of purchase accounting, increased to 5.10% in the fourth quarter. We continue to closely control operating expenses as shown by the adjusted efficiency ratio, which declined to 42.3% in the fourth quarter. Our focus in 2015 will continue to be on loan and lease growth, core deposit growth and expense control."

FINANCIAL HIGHLIGHTS

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:

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased $6.2 million to $195.0 million for the fourth quarter of 2014 compared to $188.8 million for the third quarter of 2014 due to higher accelerated discount accretion resulting from early payoffs of acquired loans. Net interest margin ("NIM") for the fourth quarter of 2014 was 5.86% compared to 5.78% for the third quarter of 2014, and loan yield was 6.76% compared to 6.68% for the third quarter of 2014. The increase in the NIM and loan yield are both due to higher accelerated discount accretion from early payoffs of acquired loans. Accelerated accretion resulting from early payoffs of acquired loans was $11.4 million in the fourth quarter (39 basis points on the loan and lease yield) compared to $4.5 million in the third quarter (16 basis points on the loan and lease yield), an increase of $6.9 million.

The total cost of deposits increased to 0.34% from 0.30% in the prior quarter due primarily to a lower amount of premium accretion on the time deposits acquired in the CapitalSource merger. The outflow of maturing higher-rate time deposits, and the retention of a portion of these deposits at current rates, resulted in the decline in the weighted average contractual rate of time deposits to 0.75% at December 31 from 0.80% at September 30. 

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

The NIM and loan and lease yield are impacted by volatility caused by accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans. The effects of this item are shown in the following table for the periods indicated:

The impact on the NIM from all purchase accounting items is detailed in the table below for the period indicated:

Noninterest Income

Noninterest income decreased by $3.6 million to $12.7 million for the fourth quarter of 2014 compared to $16.3 million for the third quarter of 2014 due mostly to lower other commissions and fees, lower dividends and gains on equity investments and lower foreign currency translation net gains, offset by lower FDIC loss sharing expense. The decrease in other commissions and fees is due to lower prepayment fees and other loan-related fees. Dividends and gains on equity investments and foreign currency translation net gains tend to fluctuate from period to period based upon dividends received, sales of equity investments and the movement of the U.S. Dollar against various foreign currencies. FDIC loss sharing expense decreased $3.1 million due mostly to lower amortization of the FDIC loss sharing asset as one of the Bank's loss sharing agreements reached the end of its initial indemnification period during the previous quarter.

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

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

Noninterest Expense

Noninterest expense decreased by $3.3 million to $92.3 million for the fourth quarter of 2014 compared to $95.6 million for the third quarter of 2014. The decrease was due mostly to lower foreclosed assets expense of $2.9 million and lower operating expenses of $2.7 million, offset by higher acquisition, integration, reorganization and severance costs of $2.2 million. The decrease in foreclosed assets expense was mostly due to lower write-downs on existing properties.

Operating expenses decreased to $79.9 million for the fourth quarter of 2014 compared to $82.6 million for the third quarter of 2014 due to decreases in other expenses and other professional services. Other expenses decreased due to lower loan-related expenses related to origination and work-out activities and the prior quarter included an accrual for loan-related litigation. Other professional services decreased due to lower legal and consulting expenses.

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

Income Taxes

Our overall effective income tax rate was 37.3% for the fourth quarter of 2014 and 40.4% for the third quarter of 2014.

BALANCE SHEET HIGHLIGHTS

Loans and Leases

Total loans and leases increased $307.5 million in the fourth quarter to $11.9 billion at December 31, 2014. The loan and lease growth in the fourth quarter represents an annualized growth rate of 11%. 

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

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

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

Energy-Related Credit Exposure

At December 31, 2014, we had 45 outstanding loan and lease relationships totaling $288.0 million to borrowers broadly involved in the energy industry. The obligors under these loans and leases either conduct mining, quarrying, oil and gas extraction or provide industrial support services to such types of businesses. The collateral for these loans and leases primarily includes equipment, such as drilling and mining equipment and transportation vehicles, used directly and indirectly in these activities. At December 31, 2014, four of these loans totaling $6.8 million were on nonaccrual status. These loans and leases are subject to our normal review procedures and allowance for credit losses methodology.

Deposits

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

At December 31, 2014, core deposits totaled $6.1 billion, or 52% of total deposits, and noninterest-bearing demand deposits, which totaled $2.9 billion, were 25% of total deposits. Core deposits obtained from CapitalSource Division borrowers totaled $264.8 million at December 31, 2014, of which $246.1 million were noninterest-bearing.

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

The remaining purchase accounting premium on acquired CapitalSource time deposits was $3.6 million at December 31, 2014 with a weighted average life of 15 months.

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

We made a provision for credit losses of $2.1 million in the fourth quarter of 2014 and $5.1 million in the third quarter of 2014 in accordance with our loan methodology, which takes into consideration new loan and lease fundings, commitments to make loans and leases, and underlying credit quality trends. The fourth quarter provision is comprised of $2.7 million for Non-PCI loans and a negative provision of $0.6 million for PCI loans. The negative provision for PCI loans results from increases in expected cash flows on such loans, which have a net carrying value of $290.9 million at December 31.

The following tables show roll forwards of the allowance for credit losses for the third and fourth quarters:

Non-PCI loans and leases include $5.0 billion of originated loans and leases that were not obtained through acquisitions. The allowance related to these loans and leases totals $66.3 million, or 1.31% of the outstanding balance.

All acquired loans are recorded initially at their estimated fair value with such initial fair value including an estimate of credit losses. The two additional credit coverage ratios shown in the table below are presented to give an indication of overall credit risk coverage:

The decrease in coverage ratios results 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 our Non-PCI loan and lease credit quality metrics as of the dates indicated:

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

PCI loans, regardless of the underlying payment status of the borrower, are generally considered accruing and performing when reasonably estimable cash flows support the carrying amount of the loans. As of December 31, 2014, there are $25.3 million of PCI loans on nonaccrual status and included in the table above as the timing and amount of future cash flows is not reasonably estimable.

ABOUT PACWEST BANCORP

PacWest Bancorp is a bank holding company with over $16 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank ("Pacific Western"). Through 80 full-service branches located throughout the state of California, Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, to small and medium-sized businesses. Its CapitalSource and Community Banking divisions, and its subsidiary CapitalSource Business Finance Group (formerly known as BFI Business Finance), deliver the full spectrum of financing solutions nationwide across numerous industries and property types. 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 loan and lease portfolio growth and production, deposit growth, and operating expenses. 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:

• changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;
• legislative or regulatory requirements or changes adversely affected the Company's business, including an increase to capital requirements;
• loan repayments higher than expected;
• reduced demand for our services due to strategic or regulatory reasons;
• our inability to grow deposits and access wholesale funding sources;
• higher than anticipated increases in operating expenses;
• increased litigation;
• higher asset workout or loan servicing expenses;
• higher compensation costs and professional fees to retain and/or incent employees; 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.

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 - as analysts and investors view this measure as an indicator of the Company's ability to both generate earnings and absorb credit losses, 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.