Net Earnings of $3.5 Million
Net Interest Margin of 5.08%
Credit Loss Reserve at 3.05% of Net Non-Covered Loans
Los Padres Bank Acquisition Closed on August 20, 2010
Core Deposits Grow $264.0 Million
SAN DIEGO, Oct. 20, 2010 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq:PACW) today announced net earnings for the third quarter of 2010 of $3.5 million, or $0.10 per diluted share, compared to net earnings of $2.7 million, or $0.07 per diluted share, for the second quarter of 2010. Third quarter earnings include the operating results of Los Padres Bank ("Los Padres"), which was acquired in an FDIC-assisted transaction on August 20, 2010 and added $420,000 in net earnings for the period since the acquisition.
This press release contains non-GAAP financial disclosures for tangible common equity. 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. Because the use of tangible common equity amounts and ratios is becoming more prevalent among banking regulators, investors and analysts, we disclose our tangible common equity ratios in addition to equity-to-assets ratios. Please refer to the table 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.
THIRD QUARTER RESULTS
The $795,000 improvement in third quarter net earnings compared to the prior quarter is due mostly to the combination of higher net interest income offset by higher net credit-related costs and higher noninterest expense. The increase in net interest income was due primarily to the growth in loans from the Los Padres acquisition and the July 1, 2010 purchase of $234.1 million in performing real estate loans. The third quarter includes three items which together reduced pre-tax earnings by $1.5 million: a net impairment loss of $175,000 on an investment security; $900,000 in severance to terminated employees; and $430,000 in legal settlements. There were no such items in the second quarter other than employee severance of $120,000.
Net credit costs on a pre-tax basis are shown in the following table:
The credit loss provision for the third quarter has two components: $17.1 million for non-covered loans and $7.4 million for covered loans. The third quarter non-covered credit loss provision was driven by (a) non-covered loan net charge-offs of $9.2 million and (b) the level of nonaccrual and classified loans. The covered loan credit loss provision was driven by credit deterioration on covered loans since the Affinity acquisition date. The covered loan credit loss provisions are offset by the increase in the FDIC loss sharing asset, which represents the FDIC's 80% share of the provisions.
The $3.4 million increase in noninterest expense in the third quarter over the second quarter was due mostly to the Los Padres acquisition, which added $2.1 million to this expense category in the third quarter. OREO costs increased $1.3 million due to write-downs from updated appraisals.
Matt Wagner, Chief Executive Officer, commented, "Our earnings performance continued to improve in the third quarter due to loan and core deposit growth and the Los Padres acquisition. The Los Padres acquisition, which we closed on August 20, strategically expands our footprint into California's Central Coast and allows for further market expansion."
Mr. Wagner continued, "The credit picture in Southern California continues to be stressed, and we are identifying and resolving problem credits promptly. The reserve build we accomplished in the third quarter improved our overall portfolio and non-accrual coverage ratios to 3.05% and 96%. Although our new nonaccrual loan volume is approximately the same as in the second quarter, we remain cautious on the credit outlook in our portfolio and market areas. Nevertheless, our core earnings, low cost deposit base and strong capital position give us the ability to create operating and strategic flexibility and to grow both organically and through acquisitions. We continue to identify in-market acquisition opportunities, both FDIC-assisted and otherwise, and expect to pursue them when they make sense for us and when economic conditions become more favorable."
Vic Santoro, Executive Vice President and Chief Financial Officer, stated, "We had a positive third quarter, showing an increase in profitability over the second quarter, net interest margin expansion to 5.08%, continued deposit growth and strong on-balance-sheet liquidity. Core deposit growth of $264 million combined with careful pricing contributed to driving our cost of deposits down to 55 basis points. The staff reduction completed at the end of the third quarter will result in annual pre-tax savings of $3.6 million beginning October 1."
YEAR TO DATE RESULTS
The higher net loss for the nine months ended September 30, 2010 compared to the same period last year was due mostly to two factors: the 2009 gain recorded in connection with the Affinity acquisition and the higher credit loss provisions in 2010 from the Company's sale of $323.6 million of classified loans in the first quarter and higher non-covered loan charge-offs. When compared to the same period for 2009, the current 2010 period shows higher net interest income ($15.7 million after-tax), higher provision for credit losses ($42.7 million after-tax), higher FDIC loss sharing income ($17.2 million after-tax) and higher noninterest expense ($3.2 million after-tax). The increases in these categories reflect the inclusion of the operating results for Affinity Bank since its August 2009 acquisition date, and to a lesser extent, the operating results for Los Padres Bank since its acquisition in August 2010.
BALANCE SHEET CHANGES
On August 20, 2010, we acquired Los Padres Bank in an FDIC-assisted acquisition, which added $824.1 million in assets and $752.2 million in deposits. Since the acquisition date and through September 30, 2010, the deposits we acquired from Los Padres have declined by $259.4 million to $492.8 million, and $70.0 million in FHLB advances were repaid. In addition, in a separate transaction on July 1, 2010 we purchased $234.1 million of performing Southern California real estate loans for $228.3 million in cash.
During the third quarter total loans increased $546.6 million on a net basis with the July 1st loan purchase and Los Padres Bank acquisition adding $225 million and $436.5 million, respectively. The loan portfolio continues to decline generally due to repayments, resolution activities and low loan demand. Non-covered loans, net of unearned income, were $3.3 billion at September 30, 2010 and the covered loan portfolio was $966.1 million at September 30, 2010.
Investment securities available-for-sale grew $128.3 million during the third quarter due primarily to the purchase of $144.6 million in government-sponsored entity pass through securities to deploy excess cash. At September 30, 2010 overnight funds held at the Federal Reserve Bank totaled $68.2 million, a decrease of $247.8 million from the balance at June 30, 2010.
The balance of non-covered OREO was $24.6 million at September 30, 2010, relatively unchanged from the June 30, 2010 balance of $24.5 million. Covered OREO increased $27.5 million during the third quarter to $55.2 million at September 30, 2010 due mostly to the Los Padres acquisition. We recorded net gains of $414,000 on the sales of non-covered OREO and $1.5 million on the sales of covered OREO during the third quarter. The activity in non-covered and covered OREO for the third quarter is shown in the following table:
Total deposits increased $579.0 million during the third quarter to $4.8 billion at September 30, 2010. When the Los Padres deposits are excluded, legacy deposits increased $86 million, continuing the trend we have experienced for the last several quarters.
Core deposits, which include noninterest-bearing demand, interest checking, money market, and savings accounts, increased $264.0 million and totaled $3.4 billion at September 30, 2010 and represented 71% of total deposits at that date. Time deposits increased $315.0 million to $1.4 billion at September 30, 2010. Brokered deposits totaled $104.9 million at September 30, 2010, relatively unchanged since June 30, 2010. Noninterest-bearing demand deposits increased $72.4 million during the third quarter to $1.5 billion and represented 31% of total deposits at September 30, 2010.
Acquired Los Padres deposits totaled $492.8 million at September 30, 2010, a $259.4 million decline from the $752.2 million in deposits acquired. The decline in the acquired deposits was centered in time deposits after the rates on Los Padres time deposits were reduced to market rates effective September 1, 2010.
As part of the Los Padres and Affinity acquisitions we entered into loss sharing agreements with the FDIC that cover a substantial portion of losses incurred after the acquisition dates on loans and other real estate owned, and in the case of the Affinity acquisition, certain investment securities. A summary of the covered assets at September 30, 2010 and June 30, 2010 is shown in the following table.
NET INTEREST INCOME
Net interest income was $65.2 million for the third quarter of 2010 compared to $57.6 million for the second quarter of 2010. The $7.6 million net increase is due mostly to a $6.9 million increase in interest income attributable to higher average loans from the Los Padres acquisition and the July 1 real estate loan purchase. Contributing to the increase in net interest income was a reduction in interest expense of $681,000 due mainly to rate reductions on our deposit products implemented during the third quarter.
Net interest income grew by $27.1 million to $180.8 million during the nine months ended September 30, 2010 compared to the same period last year. This growth was due to an $18.1 million increase in interest income and a $9.0 million decline in interest expense. The increase in interest income was due to higher average balances of investment securities from the purchase of $448.8 million of government-sponsored entity pass through securities during 2010, the interest-earning assets from the Los Padres and Affinity acquisitions, and a higher average yield on loans. The decline in interest expense was due mainly to lower rates paid on deposits and borrowings and lower average borrowings.
NET INTEREST MARGIN
Our net interest margin for the third quarter of 2010 was 5.08%, an increase of 23 basis points from the 4.85% posted for the second quarter of 2010. Such improvement reflects higher average loans during the third quarter as a result of the Los Padres acquisition and the July 1, 2010 real estate loan purchase. The yield on average loans was 6.59% for the third quarter of 2010 compared to 6.56% for the prior quarter. The loan yield, earning asset yield and net interest margin are all affected by loans being placed on or removed from nonaccrual status and the acceleration of purchase discounts on covered loan pay-offs: the net interest margin for the third quarter was positively impacted by 10 basis points from the combination of these items. The cost of interest-bearing deposits and all-in deposit cost decreased 18 basis points and 11 basis points to 0.81% and 0.55%, respectively; such decreases resulted primarily from lower rates on our deposit products, offset partially by an increase in time deposit volume attributable mostly to the Los Padres acquisition.
The net interest margin for the first nine months of 2010 was 4.95% compared to 4.78% for the first nine months of 2009. The increase is due mostly to higher average investment securities, a higher average rate on loans, lower funding costs, and lower average borrowings.
Noninterest income for the third quarter of 2010 totaled $10.8 million compared to $12.1 million for the second quarter of 2010. The $1.3 million decline was due mostly to lower FDIC loss sharing income stemming from lower credit-related costs on covered loans and OREO. Noninterest income includes an other-than-temporary impairment charge of $874,000 on one covered investment security, which is offset partially by related FDIC loss sharing income of $699,000.
Noninterest income declined for the nine months ended September 30, 2010 to $44.1 million from the $84.1 million earned during the same period in 2009. The $40.0 million decrease in noninterest income is due mainly to the $67.0 million gain on the Affinity acquisition recorded in August 2009; there is no similar gain in the 2010 period. The 2010 period includes $29.6 million of FDIC loss sharing income; there is no similar income in the 2009 period.
Noninterest expense totaled $46.2 million for the third quarter of 2010 compared to $42.8 million for the second quarter of 2010. The $3.4 million increase was due mostly to addition of the Los Padres operations, employee termination severance costs, and higher OREO expenses. Los Padres noninterest expense totaled $2.1 million, including $1.0 million in compensation and $447,000 in other professional services expense for integration, audit and consulting fees. We reduced our workforce, excluding the Los Padres employees, by approximately 5% and paid $900,000 in severance at the end of September 2010; we expect annual pre-tax savings from these departures to be $3.6 million. OREO costs increased $1.3 million due mostly to write-downs from updated appraisals, offset partially by higher net gains on sales. Other expense decreased $826,000 as the second quarter included a penalty of $726,000 for the early repayment of $125 million in FHLB advances; there was no similar expense in the current period. Third quarter noninterest expense includes $430,000 related to two legal settlements on customer actions.
Noninterest expense includes amortization of time-based restricted stock, which is included in compensation, and intangible asset amortization. Amortization of restricted stock totaled $2.1 million for the third quarter of 2010 compared to $2.2 million for the second quarter of 2010. Amortization expense for restricted stock is estimated to be $8.4 million for 2010. Intangible asset amortization totaled $2.4 million for both the third and second quarters of 2010, and is estimated to be $9.7 million for 2010, which includes amortization of the Los Padres core deposit intangible. The 2010 estimates of both restricted stock award expense and intangible asset amortization are subject to change.
Noninterest expense for the nine months ended September 30, 2010 increased $5.5 million to $139.5 million from $134.0 million for the same period in 2009. The growth in most expense categories was due primarily to higher overhead costs related to the Affinity and Los Padres acquisitions. Compensation increased $5.7 million due to the acquisitions and severance costs. Occupancy costs increased $1.1 million due mostly to the 10 branches added in the Affinity acquisition. Other professional services increased $1.9 million due mostly to higher legal costs related to loan workout activity. Other expense increased $1.2 million due mostly to higher loan-related costs from loan workouts and a $726,000 penalty for early repayment of $125 million of FHLB advances; there were no FHLB prepayment penalties in the first nine months of 2009. OREO costs declined $5.4 million due mostly to higher net gains on sales of OREO recorded in 2010, offset partially by higher OREO write-downs in 2010.
The effective tax rate for the third quarter of 2010 was 34.3% compared to 32.0% for the second quarter of 2010. Both effective rates are lower than the Company's blended Federal and California statutory rate of 42.0% due to resolution and/or lapse of tax contingencies.
LOS PADRES ACQUISITION
On August 20, 2010, Pacific Western Bank acquired certain assets and liabilities of Los Padres from the Federal Deposit Insurance Corporation ("FDIC") in an FDIC-assisted transaction. The FDIC assistance is embodied in a loss sharing agreement with the FDIC that covers a substantial portion of any future losses on loans and other real estate owned. Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss sharing arrangement for single family and commercial (non-single family) loans is in effect for 10 years and 5 years, respectively, from the acquisition date and the loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date.
The acquisition has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 20, 2010 acquisition date. Such fair values are preliminary estimates and are subject to adjustment for up to one-year after the acquisition date. The application of the acquisition method of accounting resulted in goodwill of $46.2 million. Such goodwill includes $9.5 million related to the FDIC's settlement accounting for a Los Padres Bank wholly-owned subsidiary. We disagree with the FDIC's accounting for this item and are in process of negotiating with the FDIC for resolution of this matter. Should we be successful in our negotiations, goodwill would be reduced by a cash payment to us from the FDIC of $9.5 million. No assurance can be given, however, that we will be successful in our efforts.
The statement of assets acquired and liabilities assumed in the Los Padres acquisition at their estimated fair values as of the August 20, 2010 acquisition date is shown below:
Our results of operations for the quarter ended September 30, 2010, include the results from the Los Padres acquisition from its August 20, 2010 acquisition date. The income and expense items attributable to the Los Padres acquisition are summarized below; such amounts and the resultant net earnings are not necessarily indicative of future operating results.
A summary of loans acquired in the Los Padres acquisition as of August 20, 2010 is as follows:
Although our credit risk profile improved through both the classified loan sale and ongoing portfolio workout measures, our loan portfolio, including both non-covered and covered loans, continues to experience pressure from adverse economic conditions in Southern California and other areas where our borrowers and collateral are located. We expect such situation to continue during the remainder of 2010.
Credit Loss Provisions
The third quarter provision for credit losses totaled $24.5 million and was composed of $17.1 million on the non-covered loan portfolio and $7.4 million on the covered loan portfolio. The second quarter provision for credit losses totaled $23.0 million and was composed of $14.1 million on the non-covered loan portfolio and $8.9 million on the covered loan portfolio. The provision on the non-covered portfolio is generated by our allowance methodology and reflects net charge-offs and the levels of nonaccrual and classified loans and the migration of loans into various risk classifications. The covered loan credit loss provision increases the covered loan allowance for credit losses and results from credit deterioration on covered loans since the Affinity acquisition date.
Third quarter net charge-offs on non-covered loans totaled $9.2 million compared to second quarter net charge-offs of $12.0 million. The allowance for credit losses on the non-covered portfolio totaled $101.2 million and $93.4 million at September 30, 2010 and June 30, 2010, respectively, and represented 3.05% and 2.93% of the non-covered loan balances at those respective dates.
Non-covered nonperforming assets include non-covered nonaccrual loans and non-covered OREO and totaled $130.1 million at September 30, 2010 compared to $132.8 million at June 30, 2010. The ratio of non-covered nonperforming assets to non-covered loans and non-covered OREO decreased to 3.89% at September 30, 2010 from 4.14% at June 30, 2010. The $2.7 million reduction in non-covered nonperforming assets is due to lower nonaccrual loans.
The types and balances of non-covered loans included in the categories of nonaccrual and accruing loans past due between 30 and 89 days at September 30, 2010 and June 30, 2010 follow:
The $2.7 million decline in non-covered nonaccrual loans during the third quarter was composed of (a) additions of $26.5 million, (b) reductions, payoffs and returns to accrual status of $10.3 million, (c) foreclosures of $10.7 million, and (d) charge-offs of $8.2 million.
At September 30, 2010, approximately 73% of the nonaccrual loan total was represented by:
- SBA-related loans of $29.7 million.
- Two loans collateralized by land in Ventura County, California totaling $23.5 million. A charge-off of $3.0 million was taken on these loans in the third quarter due to an updated appraisal.
- One loan for $5.7 million secured by an out-of-state shopping center. This loan has been written down to its underlying collateral value based on the most recent appraisal. A receiver is in place to manage the property and foreclosure proceedings have commenced. Protracted collection efforts may result in additional write-downs on this loan and resultant credit loss provisions.
- Two unrelated hotel-secured loans totaling $5.6 million. One loan has been written down to its collateral value based on the most recent appraisal, while a specific reserve has been established on the other loan for the appraisal shortfall.
- Four industrial warehouse loans to the same borrower totaling $5.9 million. Collateral for all four loans is located in Riverside County, California. Write-downs and resultant credit loss provisions may be necessary if economic conditions in this market do not improve in the near future.
- One residential loan for $6.4 million. The loan is collateralized by 2nd trust deeds on two single family residences in Beverly Hills, California.
The details of non-covered OREO follow:
As part of the Los Padres acquisition that occurred on August 20, 2010 and the Affinity acquisition that occurred on August 28, 2009, we entered into loss sharing agreements with the FDIC that cover a substantial portion of losses incurred after the acquisition dates on loans and other real estate owned. The carrying value of loans that would normally be considered nonaccrual except for the accounting requirements regarding purchased impaired loans and other real estate owned covered by the loss sharing agreement ("covered nonaccrual loans" and "covered OREO"; collectively, "covered nonperforming assets") are as follows.
REGULATORY CAPITAL MEASURES ARE ABOVE THE WELL-CAPITALIZED MINIMUMS
PacWest and its wholly-owned banking subsidiary, Pacific Western Bank, each remained well capitalized at September 30, 2010 as shown in the following table.
On March 1, 2010 holders of 1,348,040 warrants to acquire PacWest Bancorp common stock exercised such warrants for net proceeds of $26.6 million. The warrants, which had a strike price of $20.20 per share, represented 99% of the 1,361,656 six-month warrants issued in August 2009. The additional 1,361,657 million warrants that were issued in August 2009 with a strike price of $20.20 expired unexercised during August 2010.
ABOUT PACWEST BANCORP
PacWest Bancorp ("PacWest") is a bank holding company with $5.7 billion in assets as of September 30, 2010, with one wholly-owned banking subsidiary, Pacific Western Bank ("Pacific Western"). Through 82 full-service community banking branches, including 14 branches of the recently acquired Los Padres Bank, Pacific Western provides commercial banking services, including real estate, construction and commercial loans, to small and medium-sized businesses. Pacific Western's branches are located in Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Francisco, San Mateo and Ventura Counties. The branches of the recently acquired Los Padres Bank are located in Santa Barbara and San Luis Obispo counties in California and Maricopa County in Arizona. Through its subsidiary BFI Business Finance and its division First Community Financial, Pacific Western also provides working capital financing to growing companies located throughout the Southwest, primarily in the states of Arizona, California and Texas. 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.
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: 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 loss-sharing arrangement and other adjustments related to the Los Padres Bank and Affinity Bank acquisitions; 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 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 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 war in Iraq and Afghanistan; legislative or regulatory requirements or changes adversely affecting the Company's business; and 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"). 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.
For a more complete discussion of risks and uncertainties, investors and security holders are urged to read PacWest Bancorp's annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed by PacWest with the SEC. The documents filed by PacWest with the SEC may be obtained at PacWest Bancorp's website at or at the SEC's website at . 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.
This press release contains certain non-GAAP financial disclosures for tangible capital. 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. Because the use of tangible capital amounts and ratios is becoming more prevalent among banking regulators, investors and analysts, we disclose our tangible capital ratios in addition to equity-to-assets ratios.
These non-GAAP financial measures are presented for supplemental informational purposes only for understanding the Company's operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles (GAAP). The following table presents performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.
CONTACT: PacWest Bancorp Matthew P. Wagner, Chief Executive Officer 310-728-1020 Victor R. Santoro, Executive Vice President and CFO 310-728-1021 Fax: 310-201-0498 10250 Constellation Boulevard Suite 1640 Los Angeles, CA 90067