Significant Items
Net Earnings of $33.2 Million, or $0.28 Per Diluted ShareStrong Pre-Provision, Pre-Tax Net Revenue (“PPNR”) of $166.2 MillionFunded $1.2 Billion of Paycheck Protection Program Loans (“PPP”) in Q2Core Deposits Up $3.5 Billion or 22% in Q2; Represents 85% of Total DepositsTax Equivalent Net Interest Margin of 4.20% Compared to 4.31% in Q1Cost of Average Total Deposits Decreased 34 Basis Points from Q1 to 25 Basis PointsQuarter Includes $6.6 Million of Prepayment Penalties Related to Early Payoff of FHLB Term Advances and $7.7 Million of Gain on Sale of SecuritiesLOS ANGELES, July 16, 2020 (GLOBE NEWSWIRE) — PacWest Bancorp (Nasdaq: PACW) today announced net earnings for the second quarter of 2020 of $33.2 million, or $0.28 per diluted share, compared to a net loss for the first quarter of 2020 of $1.43 billion, or $12.23 per diluted share. The increase in net earnings in the second quarter was due primarily to a $1.47 billion goodwill impairment charge in the first quarter.Matt Wagner, President and CEO, commented, “Our focus continues to be the health and safety of our employees while assisting our customers during the COVID-19 pandemic. We assisted our customers by funding over 4,100 PPP loans in the second quarter totaling over $1.2 billion, while granting loan payment modifications on approximately $1.8 billion, or 9% of loans and leases, most during May and June. The ultimate resolution of these modified loans is largely dependent on how long the pandemic impacts consumer demand and business activity. ”Mr. Wagner added, “We continued enhanced monitoring of our loan portfolios and saw less loan migration to special mention during the second quarter after being proactive in downgrading loans in the first quarter. We recorded another significant provision for credit losses largely due to deterioration in the macro-economic variables used in our CECL forecast.” Mr. Wagner continued, “Our operations remain healthy and continue to produce increasing revenues while generating internal capital. PPNR increased by $5.3 million in the second quarter to $166.2 million, which resulted in a PPNR return on average assets of 2.51%. These solid operating earnings highlight the resilience of our business as we continue to navigate the challenging economic conditions.” FINANCIAL HIGHLIGHTSINCOME STATEMENT HIGHLIGHTSNet Interest IncomeNet interest income increased by $4.5 million to $254.3 million for the second quarter of 2020 compared to $249.7 million for the first quarter of 2020 due mainly to a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases, partially offset by a lower yield on average loans and leases and securities. The tax equivalent yield on average loans and leases was 5.01% for the second quarter of 2020 compared to 5.54% for the first quarter of 2020. The decrease in the yield on average loans and leases was due principally to lower market rates, a lower rate on loan production from the impact of the PPP loans, and lower loan discount accretion. Excluding the PPP loans, which have a coupon rate of 1%, the tax equivalent yield on average loans and leases was 5.10%.The tax equivalent NIM was 4.20% for the second quarter of 2020 compared to 4.31% for the first quarter of 2020. The decrease in the NIM was due mainly to lower market rates resulting in lower loan and lease and security yields, a lower rate on loan production from the impact of the PPP loans, and lower loan discount accretion, offset partially by the lower cost of average interest-bearing liabilities. Excluding the PPP loans, the tax equivalent NIM was 4.25%.The cost of average total deposits decreased to 0.25% for the second quarter of 2020 from 0.59% for the first quarter of 2020. The lower cost of average interest-bearing deposits reflected actions taken to reduce deposit rates in light of the two emergency interest rate cuts by the Federal Reserve in March of 2020. The cost of deposits at June 30, 2020 was 0.19%.Provision for Credit LossesThe following table presents details of the provision for credit losses for the periods indicated:The provision for credit losses was $120.0 million for the second quarter of 2020, up $8.0 million from the first quarter of 2020, driven by reserve builds that reflected significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and GDP as a result of the impact of COVID-19.Noninterest IncomeThe following table presents details of noninterest income for the periods indicated: Noninterest income increased by $9.8 million to $38.9 million for the second quarter of 2020 compared to $29.1 million for the first quarter of 2020 due primarily to a $7.5 million increase in gain on sale of securities and a $2.9 million increase in dividends and gains on equity investments, partially offset by a $1.6 million decrease in other income. The increase in gain on sale of securities resulted from the sale of $122 million of securities in the second quarter. The increase in dividends and gains on equity investments resulted from increases in the fair value of equity investments still held and a $1.5 million gain on the sale of an equity investment. The decrease in other income was primarily due to $1.1 million of bankruptcy proceeds received on a former credit in the first quarter.
Noninterest ExpenseThe following table presents details of noninterest expense for the periods indicated:Noninterest expense decreased by $1.46 billion to $127.0 million for the second quarter of 2020 compared to $1.59 billion for the first quarter of 2020 attributable primarily to a $1.47 billion goodwill impairment charge in the first quarter. Excluding the goodwill impairment charge, noninterest expense increased by $9.0 million to $127.0 million. This increase was mainly due to a $5.1 million increase in insurance and assessments expense, a $1.6 million increase in other expense, a $0.7 million increase in loan expense, and a $0.6 million increase in data processing expense. The increase in insurance and assessments expense was due to an increase in FDIC assessment expense resulting from an increase in our assessment rate due primarily to the first quarter loss from the goodwill impairment charge. The higher assessment rate will continue for one year. The increase in other expense was due to $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, partially offset by the reversal of a $1.5 million accrual for operational loss contingencies and decreases in various business expenses due to less activity as a result of COVID-19. The FHLB term advances had a weighted average interest rate of 0.96% and the prepayment decision was made after the significant drop in market rates in March and the expectation of continued low rates for an extended time. The increase in loan expense was due primarily to higher loan-related legal and workout expenses. The increase in data processing expense was due to a one-time expense to create systems for the origination and loan documentation submissions necessary for the Paycheck Protection Program.
Income TaxesThe effective income tax rate was 28.1% for the second quarter of 2020 compared to (0.8)% for the first quarter of 2020. Excluding non-deductible goodwill impairment, the effective income tax rate for the first quarter of 2020 was 24.5%. Excluding the non-deductible goodwill impairment, the effective tax rate for the full year 2020 is currently estimated to be in the range of 26-28%. The higher effective tax rate in the second quarter was mainly due to tax expense related to restricted stock vestings combined with benefits recorded in the first quarter related to the filing of amended state returns. BALANCE SHEET HIGHLIGHTSLoans and LeasesThe following table presents roll forwards of loans and leases held for investment, net of deferred fees, for the periods indicated:Loans and leases held for investment, net of deferred fees, decreased by $50.7 million in the second quarter of 2020 to $19.7 billion at June 30, 2020. We funded $1.2 billion of PPP loans in the second quarter and continued ongoing fundings in the construction loan class, however, this was more than offset by paydowns on existing credits in the venture capital and asset-based loan portfolio classes. Many borrowers who drew down on their loans in the first quarter to ensure liquidity during the COVID-19 pandemic paid back the funds in the second quarter as the economy began to reopen. In addition, our venture banking equity funds business saw balances decline $662.7 million in the second quarter after growing $203.2 million in the first quarter, as drawdowns by equity funds in late March were repaid during the second quarter. The weighted average rate on production decreased to 2.33% since most of the loan production related to PPP loans at a coupon rate of 1%. Excluding PPP loans, the weighted average rate on production was 5.39%. The following table presents the composition of loans and leases held for investment by loan portfolio segment and class, net of deferred fees, as of the dates indicated:Allowance for Credit LossesThe following tables present roll forwards of the allowance for credit losses for the periods indicated:The allowance for credit losses increased by $106.8 million in the second quarter of 2020 to $381.6 million at June 30, 2020. Substantially all of the increase in the allowance for credit losses during the second quarter was attributable to deterioration in the macro-economic variables used in our CECL forecast. Net charge-offs decreased from $19.1 million in the first quarter to $13.2 million in the second quarter.The allowance for credit losses as a percentage of loans and leases held for investment was 1.94% at June 30, 2020 and 1.39% at March 31, 2020. The allowance for loan and lease losses as a percentage of loans and leases held for investment was 1.53% at June 30, 2020 and 1.12% at March 31, 2020. The allowance for credit losses and allowance for loan and lease losses as a percentage of loans and leases held for investment, excluding PPP loans that are fully guaranteed and do not carry any allowance, was 2.06% and 1.63% at June 30, 2020, respectively.Gross charge-offs for the second quarter of 2020 were $15.8 million and included $6.5 million for venture capital loans, $5.0 million for other commercial loans, and $4.2 million for commercial real estate mortgage loans compared to gross charge-offs for the first quarter of 2020 of $20.2 million that included $11.5 million for an asset-based oil industry loan and $7.3 million for other commercial loans.Recoveries for the second quarter of 2020 were $2.5 million and included $2.3 million for other commercial loans compared to recoveries for the first quarter of 2020 of $1.1 million that included $0.4 million for other commercial loans and $0.4 million for asset-based loans.For the second quarter of 2020 and first quarter of 2020, annualized net charge-offs to average loans and leases were 0.27% and 0.40%, respectively.Deposits and Client Investment FundsThe following table presents the composition of our deposit portfolio as of the dates indicated:At June 30, 2020, core deposits totaled $19.5 billion, or 85% of total deposits, including $8.6 billion of noninterest-bearing demand deposits, or 38% of total deposits. Core deposits increased by $3.5 billion in the second quarter driven by PPP loan proceeds being deposited into customers’ accounts and venture banking which saw deposits increase by $2.0 billion to a record $8.7 billion as of June 30, 2020.
In addition to deposit products, we also offer alternative non-depository cash investment options for select clients; these alternatives include investments managed by Pacific Western Asset Management Inc. (“PWAM”), our registered investment advisor subsidiary, and third-party sweep products. Total off-balance sheet client investment funds at June 30, 2020 were $1.4 billion, of which $1.1 billion was managed by PWAM.CREDIT QUALITY The following table presents loan and lease credit quality metrics as of the dates indicated:Nonaccrual, classified, and special mention loans and leases fluctuate from period to period as a result of loan repayments and our ongoing active portfolio monitoring, including loan downgrades.
During the second quarter of 2020, classified loans and leases increased by $145.5 million, while special mention loans and leases decreased by $132.3 million. The increase in classified loans and leases and the decrease in special mention loans and leases was due primarily to three security monitoring loans totaling $119.2 million and two retail real estate loans totaling $42.0 million migrating out of special mention and into the classified category. The following table presents nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:During the second quarter of 2020, nonaccrual loans and leases increased by $70.5 million due primarily to two retail real estate loans and one security monitoring loan.
CAPITALThe following table presents certain actual capital ratios and ratios excluding PPP loans:STOCK REPURCHASE PROGRAM
During the second quarter of 2020, there were no stock repurchases. On April 21, 2020, we announced that stock repurchases were suspended indefinitely.ABOUT PACWEST BANCORPPacWest Bancorp (“PacWest”) is a bank holding company with over $27 billion in assets headquartered in Los Angeles, California, with executive offices in Denver, Colorado, with one wholly-owned banking subsidiary, Pacific Western Bank (the “Bank”). The Bank has 74 full-service branches located in California, one branch located in Durham, North Carolina, and one branch located in Denver, Colorado. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovative hubs across the United States. For more information about PacWest Bancorp or Pacific Western Bank, visit www.pacwest.com.FORWARD LOOKING STATEMENTSThis communication contains certain forward-looking information about PacWest Bancorp that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Statements that are not historical or current facts, including statements about future financial and operational results, expectations, or intentions are forward-looking statements. Such statements are based on information available at the time of the communication and are based on current beliefs and expectations of the Company’s management and are subject to significant risks, uncertainties and contingencies, many of which are beyond our control. The COVID-19 pandemic is adversely affecting PacWest Bancorp, its employees, customers and third-party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity and prospects is uncertain. The length of the COVID-19 pandemic and the severity of its impact on key macro-economic indicators such as unemployment and GDP may have a material impact on our allowance for credit losses and related provision for credit losses. Continued deterioration in general business and economic conditions could adversely affect PacWest Bancorp’s revenues and the values of its assets, including goodwill, and liabilities, lead to a tightening of credit, and increase stock price volatility. In addition, PacWest Bancorp’s results could be adversely affected by changes in interest rates, sustained high unemployment rates, deterioration in the credit quality of its loan portfolio or in the value of the collateral securing those loans, deterioration in the value of its investment securities, and legal and regulatory developments. Actual results may differ materially from those set forth or implied in the forward-looking statements due to a variety of factors, including the risk factors described in documents filed by the Company with the U.S. Securities and Exchange Commission.We are under no obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
GAAP TO NON-GAAP RECONCILIATIONS
This press release contains certain non-GAAP financial disclosures for: (1) PPNR, (2) PPNR return on average assets (3) return on average tangible equity, (4) tangible common equity ratio, and (5) tangible book value per share. The Company uses these non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. In particular, the use of return on average tangible equity, tangible common equity ratio, tangible book value per share, and PPNR is prevalent among banking regulators, investors, and analysts. Accordingly, we disclose the non-GAAP measures in addition to the related GAAP measures of: (1) net earnings, (2) return on average assets, (3) return on average equity, (4) equity to assets ratio, and (5) book value per share. The tables below present the reconciliations of these GAAP financial measures to the related non-GAAP financial measures:
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