PacWest Bancorp Announces Results for the First Quarter 2022
LOS ANGELES, April 19, 2022 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq: PACW) -
FIRST QUARTER 2022 RESULTS
$120.1M | $1.01 | $162.1M | 20.93% | ||||||||
Net Earnings | Diluted Earnings | PPNR | ROATE |
FIRST QUARTER 2022 HIGHLIGHTS
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CEO COMMENTARY
Matt Wagner, President and CEO, commented, “Although external events and the resulting volatility in the capital market negatively impacted the first quarter, we continued to make progress on our strategic priorities of increasing earning assets through loan growth and growing net interest income while continuing to improve asset quality. The increase in average loans and leases of nearly $2.1 billion and decreasing higher-rate wholesale deposits during the first quarter resulted in an $8.3 million increase in net interest income and helped drive a 19 basis point increase in our net interest margin compared to the fourth quarter. Loans grew by $1.4 billion in the first quarter to an all-time high of $24.4 billion. With the 25 basis point increase by the Federal Reserve in market rates occurring late in the quarter, the increase had a minimal impact on first quarter results. Total deposits decreased by $1.8 billion driven by a decrease of $1.5 billion in venture banking due to declines in capital market activity, along with the planned reduction in maturing wholesale deposits of $0.5 billion, offset by deposit growth of $180 million in community banking.”
“Credit quality continues the improvement seen throughout 2021 with a $14.3 million decrease in special mention loans and leases in 1Q22 and a $34.0 million decrease in classified loans and leases in 1Q22, which, combined with changes in our loan portfolio composition, resulted in no provision for credit losses for the quarter.”
“The loan growth particularly over the last three quarters has increased risk-weighted assets resulting in a decrease in capital ratios, which remain well above regulatory thresholds. Capital and balance sheet management remain a focus area as we look to grow our capital levels to keep pace with our growth expectations.”
FINANCIAL HIGHLIGHTS
At or For the | At or For the | ||||||||||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||||||||||
March 31, | December 31, | Increase | March 31, | Increase | |||||||||||||||||||
Financial Highlights (1) | 2022 | 2021 | (Decrease) | 2022 | 2021 | (Decrease) | |||||||||||||||||
(Dollars in thousands, except per share data) | |||||||||||||||||||||||
Net earnings | $ | 120,128 | $ | 136,045 | $ | (15,917 | ) | $ | 120,128 | $ | 150,406 | $ | (30,278 | ) | |||||||||
Diluted earnings per share | $ | 1.01 | $ | 1.14 | $ | (0.13 | ) | $ | 1.01 | $ | 1.27 | $ | (0.26 | ) | |||||||||
Pre-provision, pre-tax net revenue ("PPNR") (2) | $ | 162,109 | $ | 181,677 | $ | (19,568 | ) | $ | 162,109 | $ | 155,962 | $ | 6,147 | ||||||||||
Return on average assets | 1.22% | 1.34% | (0.12 | ) | 1.22% | 1.94% | (0.72 | ) | |||||||||||||||
PPNR return on average assets (2) | 1.65% | 1.79% | (0.14 | ) | 1.65% | 2.01% | (0.36 | ) | |||||||||||||||
Return on average tangible equity (2) | 20.93% | 22.06% | (1.13 | ) | 20.93% | 25.67% | (4.74 | ) | |||||||||||||||
Yield on average loans and leases (tax equivalent) | 4.66% | 4.93% | (0.27 | ) | 4.66% | 5.20% | (0.54 | ) | |||||||||||||||
Cost of average total deposits | 0.07% | 0.08% | (0.01 | ) | 0.07% | 0.11% | (0.04 | ) | |||||||||||||||
Net interest margin ("NIM") (tax equivalent) | 3.43% | 3.24% | 0.19 | 3.43% | 3.69% | (0.26 | ) | ||||||||||||||||
Efficiency ratio | 50.1% | 46.2% | 3.9 | 50.1% | 46.4% | 3.7 | |||||||||||||||||
Total assets | $ | 39,249,639 | $ | 40,443,344 | $ | (1,193,705 | ) | $ | 39,249,639 | $ | 32,856,533 | $ | 6,393,106 | ||||||||||
Loans and leases held for investment, net of deferred fees | $ | 24,352,072 | $ | 22,941,548 | $ | 1,410,524 | $ | 24,352,072 | $ | 18,979,228 | $ | 5,372,844 | |||||||||||
Noninterest-bearing demand deposits | $ | 14,057,051 | $ | 14,543,133 | $ | (486,082 | ) | $ | 14,057,051 | $ | 11,017,462 | $ | 3,039,589 | ||||||||||
Core deposits | $ | 31,676,404 | $ | 32,734,949 | $ | (1,058,545 | ) | $ | 31,676,404 | $ | 25,576,348 | $ | 6,100,056 | ||||||||||
Total deposits | $ | 33,224,895 | $ | 34,997,757 | $ | (1,772,862 | ) | $ | 33,224,895 | $ | 28,223,291 | $ | 5,001,604 | ||||||||||
As percentage of total deposits: | |||||||||||||||||||||||
Noninterest-bearing demand deposits | 42% | 41% | 1 | 42% | 39% | 3 | |||||||||||||||||
Core deposits | 95% | 93% | 2 | 95% | 91% | 4 | |||||||||||||||||
Equity to assets ratio | 9.30% | 9.89% | (0.59 | ) | 9.30% | 11.12% | (1.82 | ) | |||||||||||||||
Common equity tier 1 capital ratio | 8.64% | 8.86% | (0.22 | ) | 8.64% | 10.39% | (1.75 | ) | |||||||||||||||
Total capital ratio | 12.27% | 12.69% | (0.42 | ) | 12.27% | 13.60% | (1.33 | ) | |||||||||||||||
Tangible common equity ratio (2) | 5.83% | 6.54% | (0.71 | ) | 5.83% | 7.68% | (1.85 | ) | |||||||||||||||
Book value per share | $ | 30.52 | $ | 33.45 | $ | (2.93 | ) | $ | 30.52 | $ | 30.68 | $ | (0.16 | ) | |||||||||
Tangible book value per share (2) | $ | 18.42 | $ | 21.31 | $ | (2.89 | ) | $ | 18.42 | $ | 20.39 | $ | (1.97 | ) | |||||||||
(1) The operations of the HOA Business are included from its October 8, 2021 acquisition date and the operations of Civic are included from its February 1, 2021 acquisition date. | |||||||||||||||||||||||
(2) Non-GAAP measure. | |||||||||||||||||||||||
INCOME STATEMENT HIGHLIGHTS
NET INTEREST INCOME
Net interest income increased by $8.3 million to $308.7 million for the first quarter of 2022 compared to $300.4 million for the fourth quarter of 2021 due mainly to higher income on investment securities and loans and leases primarily resulting from higher average balances as we deployed our excess liquidity. Income on investment securities increased by $5.0 million in the first quarter of 2022 due to a $433 million increase in the average balance of investment securities and a 15 basis point increase in the yield on average investment securities. Income on loans and leases increased by $4.1 million in the first quarter of 2022 due to a $2.1 billion increase in the average balance of loans and leases, offset partially by a 27 basis point decrease in the yield on average loans and leases and two fewer days compared to the fourth quarter of 2021. The tax equivalent yield on average loans and leases was 4.66% for the first quarter of 2022 compared to 4.93% for the fourth quarter of 2021. The decrease in the tax equivalent yield on average loans and leases was due primarily to loan prepayment fees being lower by $5.8 million and amortized loan fees being lower by $4.0 million.
The tax equivalent NIM was 3.43% for the first quarter of 2022 compared to 3.24% for the fourth quarter of 2021. The increase in the NIM was due mainly to the change in the interest-earning assets mix driven by the increase in the balance of average loans and leases and investment securities as a percentage of average interest-earning assets from 84% to 92% and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets from 16% to 8%, partially offset by a lower yield on average loans and leases. The average balance of loans and leases increased by $2.1 billion, the average balance of investment securities increased by $433 million, and the average balance of deposits in financial institutions decreased by $2.9 billion to $3.1 billion. The increase in the average balances of loans and leases and investment securities was the result of the Company’s effort to deploy our excess liquidity efficiently.
The cost of average total deposits was 0.07% in the first quarter of 2022 compared to 0.08% in the fourth quarter of 2021.
PROVISION FOR CREDIT LOSSES
The following table presents details of the provision for credit losses for the periods indicated:
Three Months Ended | ||||||||||
March 31, | December 31, | Increase | ||||||||
Provision for Credit Losses | 2022 | 2021 | (Decrease) | |||||||
(In thousands) | ||||||||||
Reduction in allowance for loan and lease losses | $ | (2,000 | ) | $ | (3,000 | ) | $ | 1,000 | ||
Addition to (reduction in) reserve for unfunded loan commitments | 2,000 | (3,000 | ) | 5,000 | ||||||
Total provision for credit losses | $ | - | $ | (6,000 | ) | $ | 6,000 | |||
There was no provision for credit losses for the first quarter of 2022 compared to a benefit of $6.0 million for the fourth quarter of 2021. In the first quarter of 2022, the continued credit quality improvement combined with changes in our loan portfolio composition, offset by the provision needed for growth in loans and unfunded commitments, resulted in no provision for the quarter.
NONINTEREST INCOME
The following table presents details of noninterest income for the periods indicated:
Three Months Ended | |||||||||||
March 31, | December 31, | Increase | |||||||||
Noninterest Income | 2022 | 2021 | (Decrease) | ||||||||
(In thousands) | |||||||||||
Service charges on deposit accounts | $ | 3,571 | $ | 3,476 | $ | 95 | |||||
Other commissions and fees | 11,580 | 10,633 | 947 | ||||||||
Leased equipment income | 13,094 | 12,602 | 492 | ||||||||
Gain on sale of loans and leases | 60 | 172 | (112 | ) | |||||||
Gain on sale of securities | 104 | 999 | (895 | ) | |||||||
Dividends and (losses) gains on equity investments | (11,375 | ) | (1,570 | ) | (9,805 | ) | |||||
Warrant income | 629 | 23,990 | (23,361 | ) | |||||||
Other income | 3,155 | 7,080 | (3,925 | ) | |||||||
Total noninterest income | $ | 20,818 | $ | 57,382 | $ | (36,564 | ) | ||||
Noninterest income decreased by $36.6 million to $20.8 million for the first quarter of 2022 compared to $57.4 million for the fourth quarter of 2021 due primarily to decreases of $23.4 million in warrant income, $9.8 million in dividends and gains on equity investments, and $3.9 million in other income. Warrant income decreased to $0.6 million in the first quarter of 2022 from a record quarterly high of $24.0 million in the fourth quarter of 2021 due to decreased capital market activity and volatility resulting from geopolitical tensions and inflationary pressures. The capital market volatility also impacted the fair values of our equity investments in the first quarter of 2022. Dividends and gains on equity investments decreased due primarily to lower gains on sales of equity investments, higher fair value losses on equity investments still held, and lower income distributions and fair value marks on SBIC investments. The net realized and unrealized losses on equity investments were $12.2 million in the first quarter of 2022, with one equity investment accounting for $7.5 million of the total net losses. As of March 31, 2022, we held six equity investments with a carrying value of $8.8 million, two of which were sold in April reducing the balance to $0.1 million. Other income decreased due to an early lease termination of $4.9 million recorded in the fourth quarter of 2021, partially offset by a $1.0 million increase in foreign currency translation gains.
NONINTEREST EXPENSE
The following table presents details of noninterest expense for the periods indicated:
Three Months Ended | |||||||||||
March 31, | December 31, | Increase | |||||||||
Noninterest Expense | 2022 | 2021 | (Decrease) | ||||||||
(In thousands) | |||||||||||
Compensation | $ | 92,240 | $ | 99,700 | $ | (7,460 | ) | ||||
Occupancy | 15,200 | 14,656 | 544 | ||||||||
Data processing | 9,629 | 8,171 | 1,458 | ||||||||
Other professional services | 5,954 | 5,946 | 8 | ||||||||
Insurance and assessments | 5,490 | 5,032 | 458 | ||||||||
Intangible asset amortization | 3,649 | 3,876 | (227 | ) | |||||||
Leased equipment depreciation | 9,189 | 9,569 | (380 | ) | |||||||
Foreclosed assets (income) expense, net | (3,353 | ) | (260 | ) | (3,093 | ) | |||||
Acquisition, integration and reorganization costs | - | 5,590 | (5,590 | ) | |||||||
Customer related expense | 12,655 | 6,175 | 6,480 | ||||||||
Loan expense | 5,157 | 5,627 | (470 | ) | |||||||
Other | 11,616 | 12,028 | (412 | ) | |||||||
Total noninterest expense | $ | 167,426 | $ | 176,110 | $ | (8,684 | ) | ||||
Noninterest expense decreased by $8.7 million to $167.4 million for the first quarter of 2022 compared to $176.1 million for the fourth quarter of 2021 due primarily to a decrease in compensation expense of $7.5 million, a decrease in acquisition, integration and reorganization costs of $5.6 million, and an increase in foreclosed assets income of $3.1 million, partially offset by an increase in customer related expense of $6.5 million. The decrease in compensation expense was due mainly to lower commissions and bonus expense, partially offset by a seasonal increase in payroll taxes. There were no acquisition, integration and reorganization costs in the first quarter of 2022 compared to $5.6 million in the fourth quarter of 2021 related to the October 8, 2021 HOA Business acquisition. The increase in foreclosed assets income was due to a $3.2 million gain on the sale of our largest foreclosed property. The increase in customer related expense was due to increased third-party expenses related to the HOA Business.
INCOME TAXES
The effective income tax rate was 25.9% for the first quarter of 2022 compared to 27.5% for the fourth quarter of 2021. The decrease was due primarily to a lower blended state tax rate. The effective tax rate for the full year 2022 is currently estimated to be in the range of 25% to 27%.
BALANCE SHEET HIGHLIGHTS
DEPOSITS AND CLIENT INVESTMENT FUNDS
The following table presents the composition of our deposit portfolio as of the dates indicated:
March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||
% of | % of | % of | |||||||||||||||
Deposit Composition | Balance | Total | Balance | Total | Balance | Total | |||||||||||
(Dollars in thousands) | |||||||||||||||||
Noninterest-bearing demand | $ | 14,057,051 | 42 | % | $ | 14,543,133 | 41 | % | $ | 11,017,462 | 39 | % | |||||
Interest checking | 6,673,696 | 20 | % | 7,319,898 | 21 | % | 6,862,398 | 25 | % | ||||||||
Money market | 10,301,996 | 31 | % | 10,241,265 | 29 | % | 7,112,610 | 25 | % | ||||||||
Savings | 643,661 | 2 | % | 630,653 | 2 | % | 583,878 | 2 | % | ||||||||
Total core deposits | 31,676,404 | 95 | % | 32,734,949 | 93 | % | 25,576,348 | 91 | % | ||||||||
Non-core non-maturity deposits | 322,732 | 1 | % | 889,976 | 3 | % | 1,162,590 | 4 | % | ||||||||
Total non-maturity deposits | 31,999,136 | 96 | % | 33,624,925 | 96 | % | 26,738,938 | 95 | % | ||||||||
Time deposits $250,000 and under | 878,383 | 3 | % | 885,938 | 3 | % | 940,340 | 3 | % | ||||||||
Time deposits over $250,000 | 347,376 | 1 | % | 486,894 | 1 | % | 544,013 | 2 | % | ||||||||
Total time deposits | 1,225,759 | 4 | % | 1,372,832 | 4 | % | 1,484,353 | 5 | % | ||||||||
Total deposits | $ | 33,224,895 | 100 | % | $ | 34,997,757 | 100 | % | $ | 28,223,291 | 100 | % | |||||
At March 31, 2022, core deposits totaled $31.7 billion or 95% of total deposits, including $14.1 billion of noninterest-bearing demand deposits or 42% of total deposits. Core deposits decreased by $1.1 billion or 3.2% in the first quarter of 2022 driven primarily by a decrease in balances from our venture banking clients, offset partially by an increase in community banking deposits. Total deposits decreased by $1.8 billion or 5.1% in the first quarter of 2022 due to the $1.5 billion decrease in venture banking deposits and a $0.6 billion decrease in non-core non-maturity deposits, of which $0.5 billion was scheduled for maturity during the quarter, offset partially by an increase of $180 million in community banking deposits. Total venture banking deposits decreased from $15.5 billion as of December 31, 2021 to $14.0 billion as of March 31, 2022.
In addition to deposit products, we also offer alternative, non-depository cash investment options for select clients. These alternative options 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 increased from $1.4 billion as of December 31, 2021 to $1.7 billion as of March 31, 2022, of which $1.0 billion was managed by PWAM. The increase was primarily attributable to our venture banking clients.
LOANS AND LEASES
The following table presents roll forwards of loans and leases held for investment, net of deferred fees, for the periods indicated:
Three Months Ended | |||||||
Roll Forward of Loans and Leases Held | March 31, | December 31, | |||||
for Investment, Net of Deferred Fees | 2022 | 2021 | |||||
(Dollars in thousands) | |||||||
Balance, beginning of period | $ | 22,941,548 | $ | 20,511,020 | |||
Additions: | |||||||
Production | 2,574,860 | 3,372,815 | |||||
Disbursements | 1,589,152 | 1,917,195 | |||||
Total production and disbursements | 4,164,012 | 5,290,010 | |||||
Reductions: | |||||||
Payoffs | (1,448,680 | ) | (2,000,293 | ) | |||
Paydowns | (1,264,571 | ) | (845,443 | ) | |||
Total payoffs and paydowns | (2,713,251 | ) | (2,845,736 | ) | |||
Sales | (36,698 | ) | (15,837 | ) | |||
Transfers to foreclosed assets | (305 | ) | - | ||||
Charge-offs | (3,234 | ) | (4,395 | ) | |||
Total reductions | (2,753,488 | ) | (2,865,968 | ) | |||
Loans acquired through acquisitions | - | 6,486 | |||||
Net increase (decrease) | 1,410,524 | 2,430,528 | |||||
Balance, end of period | $ | 24,352,072 | $ | 22,941,548 | |||
Weighted average rate on production (1) | 4.31 | % | 3.89 | % | |||
(1) The weighted average rate on production presents contractual rates on a tax equivalent basis and excludes amortized fees. Amortized fees added approximately 24 basis points to loan yields in 2022. | |||||||
Loans and leases held for investment, net of deferred fees, increased by $1.4 billion or 6.1% in the first quarter of 2022 to $24.4 billion at March 31, 2022. The overall increase in the loans and leases balance for the first quarter of 2022 was due primarily to increases in the income producing and other residential, asset-based, and residential real estate construction portfolios, offset partially by reductions in the venture capital and other commercial portfolios.
Civic loan production was $559 million in the first quarter of 2022 compared to $480 million in the fourth quarter of 2021. The Civic loan portfolio as of March 31, 2022 totaled $1.7 billion.
PPP loans declined by $86.3 million in the first quarter of 2022, as the program continues to wind down. Net fees for PPP loans were $2.5 million in the first quarter of 2022, down from $3.6 million in the fourth quarter of 2021. Remaining PPP loans totaled $70.4 million as of March 31, 2022, with $1.7 million of net fees to amortize over the remaining life of the loans.
The weighted average rate on the $2.6 billion of production for the first quarter of 2022 increased to 4.31% from 3.89% in the fourth quarter of 2021 due primarily to the loan mix (lower levels of single-family loan pool purchases and higher level of Civic fundings). In the first quarter of 2022, we purchased $587 million of single-family loan pools compared to $1.1 billion in the fourth quarter of 2021. The single-family loan pool purchase portfolio as of March 31, 2022 totaled $2.9 billion.
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:
March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||
% of | % of | % of | |||||||||||||||
Loan and Lease Portfolio | Balance | Total | Balance | Total | Balance | Total | |||||||||||
(Dollars in thousands) | |||||||||||||||||
Real estate mortgage: | |||||||||||||||||
Commercial | $ | 3,669,741 | 15 | % | $ | 3,762,299 | 17 | % | $ | 3,941,610 | 21 | % | |||||
Residential | 8,369,550 | 35 | % | 7,416,421 | 32 | % | 4,045,603 | 21 | % | ||||||||
Total real estate mortgage | 12,039,291 | 50 | % | 11,178,720 | 49 | % | 7,987,213 | 42 | % | ||||||||
Real estate construction and land: | |||||||||||||||||
Commercial | 802,022 | 3 | % | 832,591 | 4 | % | 990,035 | 5 | % | ||||||||
Residential | 2,891,467 | 12 | % | 2,604,536 | 11 | % | 2,575,788 | 14 | % | ||||||||
Total real estate construction and land | 3,693,489 | 15 | % | 3,437,127 | 15 | % | 3,565,823 | 19 | % | ||||||||
Total real estate | 15,732,780 | 65 | % | 14,615,847 | 64 | % | 11,553,036 | 61 | % | ||||||||
Commercial: | |||||||||||||||||
Asset-based | 4,739,220 | 19 | % | 4,075,477 | 18 | % | 3,383,403 | 18 | % | ||||||||
Venture capital | 2,077,339 | 9 | % | 2,320,593 | 10 | % | 1,495,798 | 8 | % | ||||||||
Other commercial | 1,298,136 | 5 | % | 1,471,981 | 6 | % | 2,206,639 | 11 | % | ||||||||
Total commercial | 8,114,695 | 33 | % | 7,868,051 | 34 | % | 7,085,840 | 37 | % | ||||||||
Consumer | 504,597 | 2 | % | 457,650 | 2 | % | 340,352 | 2 | % | ||||||||
Total loans and leases held for investment, net of deferred fees | $ | 24,352,072 | 100 | % | $ | 22,941,548 | 100 | % | $ | 18,979,228 | 100 | % | |||||
Total unfunded loan commitments | $ | 9,899,345 | $ | 9,006,350 | $ | 8,127,999 | |||||||||||
ALLOWANCE FOR CREDIT LOSSES
The following tables present roll forwards of the allowance for credit losses for the periods indicated:
Three Months Ended March 31, 2022 | |||||||||||
Allowance for | Reserve for | Total | |||||||||
Allowance for Credit | Loan and | Unfunded Loan | Allowance for | ||||||||
Losses Rollforward | Lease Losses | Commitments | Credit Losses | ||||||||
(In thousands) | |||||||||||
Beginning balance | $ | 200,564 | $ | 73,071 | $ | 273,635 | |||||
Charge-offs | (3,234 | ) | - | (3,234 | ) | ||||||
Recoveries | 2,068 | - | 2,068 | ||||||||
Net charge-offs | (1,166 | ) | - | (1,166 | ) | ||||||
Provision | (2,000 | ) | 2,000 | - | |||||||
Ending balance | $ | 197,398 | $ | 75,071 | $ | 272,469 | |||||
Three Months Ended December 31, 2021 | |||||||||||
Allowance for | Reserve for | Total | |||||||||
Allowance for Credit | Loan and | Unfunded Loan | Allowance for | ||||||||
Losses Rollforward | Lease Losses | Commitments | Credit Losses | ||||||||
(In thousands) | |||||||||||
Beginning balance | $ | 203,733 | $ | 76,071 | $ |