PacWest Bancorp Announces Results for the Fourth Quarter of 2009

SAN DIEGO, Jan. 21 /PRNewswire-FirstCall/ -- PacWest Bancorp (Nasdaq: PACW) today announced a net loss for the fourth quarter of 2009 of $7.8 million, or $0.23 per diluted share, compared to net earnings of $2.7 million, or $0.08 per diluted share, for the third quarter of 2009.  The third and fourth quarters were impacted significantly by legacy portfolio credit loss provisions and credit-related transactions from the Affinity acquisition which are discussed further below.  

Net loss for the year ended December 31, 2009 was $9.4 million, or $0.30 per diluted share, compared to a net loss of $728.1 million for 2008, or $26.81 per diluted share.  The 2008 goodwill write-off totaled $761.7 million; there was no such item in 2009.  

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.  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.  

The decrease in net earnings between the third and fourth quarters was $10.5 million.  Net interest income increased $4.7 million after tax due largely to increased interest income from the Affinity acquisition.  The credit loss provision on the legacy loan portfolio decreased to $34.9 million ($20.2 million after tax) compared to $75.0 million ($43.5 million after tax) in the third quarter.  Fourth quarter Affinity-related credit costs of $3.9 million ($2.3 million after tax) include a credit loss provision, income from an increase in the FDIC loss sharing asset and other real estate owned costs.  Although there were no Affinity-related credit transactions in the third quarter, the third quarter includes the gain from the Affinity transaction of $67.0 million ($38.9 million after tax).

Matt Wagner, Chief Executive Officer, commented, "Credit remains volatile and we continue to aggressively manage performing and nonperforming loans.  During the fourth quarter, in addition to our focus on credit, we integrated the Affinity acquisition, both in terms of the branch network and establishing procedures and review mechanisms for covered loans.  We also continued to perform well on the deposit front, with over $83 million in core deposit growth during the fourth quarter.  For 2009, we had over $550 million in core deposit growth, and over $300 million of core deposit growth excluding the Affinity acquisition."

Mr. Wagner continued, "Our portfolio of legacy and covered loans continues to generate significant interest income.  This, combined with our good deposit mix, generates substantial revenue that allows us to absorb credit loss provisions.  Although we remain cautious about the economic environment in which we operate, we are confident in the core strengths of our franchise."

Vic Santoro, Executive Vice President and Chief Financial Officer, stated, "Our fourth quarter showed the benefits of the Affinity acquisition which added approximately $13 million in revenue and $5 million in non-credit operating expenses.  Our strong balance sheet and revenue generating ability allows us to add meaningfully to our allowance for credit losses as needed.  We continue to perform well in this difficult economic environment with high levels of net interest income, strong capital levels in excess of the regulatory well-capitalized minimums, and with an appropriate allowance for credit losses."  

The lower net loss for the year ended December 31, 2009 compared to the same period last year was due mostly to the $761.7 million goodwill write-off recorded in 2008.  When compared to 2008, the 2009 period shows lower net interest income ($1.9 million after tax), higher provision for credit losses ($66.2 million after tax), higher OREO costs ($12.2 million after tax) and higher FDIC insurance assessments ($3.4 million after tax) partially offset by the gain from the Affinity acquisition ($38.9 million after tax) and income from an increase in the FDIC loss sharing asset ($9.5 million after tax).  The gain from the Affinity acquisition reduced the 2009 efficiency ratio to 55.7% from 70.3%.  The goodwill write-off increased the 2008 efficiency ratio from 59.2% to 371.7%.  

BALANCE SHEET CHANGES

Gross loans decreased $142.4 million during the fourth quarter, including a $115.8 million decrease in non-covered loans.  The legacy loan portfolio declined $283.1 million in 2009.  The legacy portfolio continues to decline as a result of repayments, charge-offs and the stagnant economy which causes both a low demand for loans and fewer acceptable lending opportunities.  The covered loan portfolio will also continue to decline from resolutions of problem assets.  

Total deposits increased $47.0 million during the fourth quarter and $619.4 million for 2009.  Core deposits, which include noninterest-bearing demand, interest checking, savings and money market deposits, totaled $3.0 billion at December 31, 2009 and increased $83.3 million during the fourth quarter and $552.4 million for 2009.  During the fourth quarter we added $87.6 million in brokered deposits, net of maturities and used them together with excess liquidity to repay $185.0 million in Federal Home Loan Bank advances.  Brokered and acquired money desk deposits totaled $111.1 million at December 31, 2009.  Noninterest-bearing demand deposits totaled $1.3 billion and represented 32% of total deposits at year end.

COVERED ASSETS

As part of the Affinity acquisition on August 28, 2009, we entered into a loss sharing agreement with the FDIC that covers a substantial portion of losses on loans, other real estate owned and certain investment securities incurred after the acquisition date.  A summary of the covered assets at December 31, 2009 and September 30, 2009 are shown in the following table.

NET INTEREST INCOME

Net interest income was $62.3 million for the fourth quarter of 2009 compared to $54.2 million for the third quarter.  The $8.1 million net increase is largely from interest income on higher average loan and investment balances.  Overall deposit interest expense declined $279,000 during the fourth quarter; interest on time deposits declined $753,000 due mostly to lower offering rates while interest on demand, money market and savings increased $474,000 due mostly to higher average balances.    Borrowing costs increased $311,000 due mainly to higher average balances.  

Net interest income decreased $3.3 million for 2009 compared to 2008.  The decrease is due mostly to reduced loan interest income from lower yields.  Loan yields are down year-over-year due to the higher level of nonaccrual loans coupled with the lower level of market interest rates.  The decline in market interest rates also contributed to lower interest expense.

NET INTEREST MARGIN

Our net interest margin for the fourth quarter of 2009 was 4.79%, an increase of 6 basis points when compared to the third quarter of 2009 net interest margin of 4.73%.  The yield on average loans was 6.29% for the fourth quarter of 2009 compared to 6.20% for the third quarter.  Net reversals of interest income on nonaccrual loans negatively impacted the fourth quarter's net interest margin by 7 basis points and loan yield by 8 basis points.  

Deposit pricing and improved deposit mix led to a 25 basis point decrease in the cost of interest-bearing deposits to 1.06% for the fourth quarter and a 13 basis point decrease in our all-in deposit cost to 0.72%.  Our relatively low cost of deposits is driven by demand deposit balances, which averaged 32% of average total deposits during the fourth quarter of 2009.  Average core deposits increased $267.1 million for the linked quarters.  The overall cost of interest-bearing liabilities was 1.44% for the fourth quarter of 2009, down 28 basis points from the third quarter due mostly to lower time deposit costs.  

The net interest margin for 2009 was 4.79%, a decrease of 51 basis points when compared to 2008.  The decrease is due mostly to increased nonaccrual loans and lower market interest rates.

NONINTEREST INCOME

Noninterest income for the fourth quarter of 2009 totaled $21.8 million compared to $72.6 million in the third quarter of 2009.  During the third quarter of 2009, the Company recorded a $67.0 million gain from the Affinity acquisition; there was no such gain in the fourth quarter.  Fourth quarter noninterest income includes $16.3 million from an increase in the FDIC loss sharing asset due to credit deterioration on covered loans and OREO subsequent to the acquisition date. Such income mostly represents the FDIC's share of the current period's credit loss provision on covered loans and writedowns on covered OREO under the terms of the loss sharing agreement.

Noninterest income increased $81.5 million for 2009 compared to the amount earned in 2008 due mostly to the 2009 gain from the Affinity acquisition coupled with the other income of $16.3 million related to the loss-sharing arrangement with the FDIC on covered assets.

NONINTEREST EXPENSE

Noninterest expense decreased $1.9 million to $45.2 million in the fourth quarter of 2009 from $47.1 million in the third quarter.  Such decrease is due mostly to the combination of lower OREO costs and a full quarter's costs from the acquired Affinity Bank operations.  The fourth quarter OREO expenses include holding costs of $1.0 million, carrying value write-downs and loss provisions of $4.1 million and net realized gains on sales of $12,000.  Other expense includes a $481,000 penalty related to the early repayment of $85 million in acquired FHLB advances.

Noninterest expense includes amortization of time-based and performance-based restricted stock, which is included in compensation, and intangible asset amortization.  Amortization of restricted stock totaled $1.9 million for the fourth quarter of 2009, $2.2 million for the third quarter of 2009 and $8.2 million for the year ended December 31, 2009.  Intangible asset amortization totaled $2.4 million for the fourth quarter of 2009, $2.6 million for the third quarter of 2009 and $9.5 million for the year ended December 31, 2009.

Noninterest expense decreased $726.7 million year over year due mostly to the $761.7 million goodwill write-off in 2008.  The remaining $35.0 million increase in noninterest expense is due to higher OREO costs of $21.1 million, higher deposit insurance costs of $5.8 million and higher compensation costs of $6.0 million.  The increased deposit insurance costs relate to higher FDIC deposit insurance premiums, including the cost to participate in the Temporary Liquidity Guarantee Program, and the second quarter of 2009 special FDIC deposit insurance assessment.  Compensation costs increased year-over-year due to increased staff levels from the Affinity acquisition and higher compensation expense on restricted stock awards.  

TAXES

The effective tax rate for the fourth quarter of 2009 was 44.3% compared to 42.9% for the third quarter of 2009.  The increase in the effective tax rate for the forth quarter compared to the third quarter is due to changes in estimates for certain non-deductible expenses.  The Company's blended Federal and State statutory rate is 42.0%.

CREDIT QUALITY

Our loan portfolio, including both non-covered and covered loans, continues to experience pressure from adverse economic trends in Southern California and other areas where our borrowers and collateral are located, which we expect will continue during 2010.

Provision for Credit Losses

The fourth quarter provision for credit losses totaled $52.9 million and is composed of $34.9 million on the legacy portfolio and $18.0 million on the covered loan portfolio.  The provision on the legacy portfolio is generated by our methodology and reflects the levels of net charge-offs and adversely classified loans.  The provision on the covered loan portfolio reflects an increase in the covered loan allowance for credit losses and results from further credit deterioration since the acquisition date.

Net charge-offs on non-covered legacy loans totaled $31.2 million in both the third and fourth quarters of 2009.  These elevated charge-offs reflect the aggressive actions we are taking in promptly identifying and resolving problem credits.

The allowance for credit losses on the legacy portfolio totaled $124.3 million at December 31, 2009, and represented 3.35% of the non-covered legacy loan balances at that date.  

Non-covered Nonaccrual Loans and Other Real Estate Owned

Non-covered nonperforming assets include non-covered nonaccrual loans and non-covered OREO and totaled $283.4 million at the end of December compared to $232.8 million at the end of September. The ratio of non-covered nonperforming assets to non-covered loans and non-covered OREO increased to 7.56% at December 31, 2009 from 6.03% at September 30, 2009.  The increase in non-covered nonperforming assets is primarily due to higher non-covered 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 December 31, 2009 and September 30, 2009 follow:

The $46.5 million net increase in nonaccrual loans during the fourth quarter is composed of additions of $120.4 million, reductions, payoffs and returns to accrual status of $32.2 million, charge-offs of $27.6 million, and foreclosures of $14.1 million. The additions to nonaccrual loans include six hotel loans totaling $25.7 million, two retail mall loans totaling $19.4 million, two loans totaling $30.6 million on undeveloped land, and a $12.7 million construction loan on a recently completed office building.  Reductions include the sale of a note on a residential condominium project for $11.5 million.

The most significant loans which have remained on nonaccrual status during the fourth quarter include a $13.1 million residential loan for an 85 lot in-fill development south of Los Angeles, a loan on a golf course in our Desert Region for $14.7 million, three loans on operating hotels totaling $10.0 million, and a $17.7 million "residential other" loan secured by five exclusive residential properties in San Diego.  Subsequent to December 31, 2009, the golf course loan was foreclosed and is currently in other real estate owned.

Included in the non-covered nonaccrual loans at the end of December are $34.9 million of SBA related loans representing 15% of total non-covered nonaccrual loans at that date.  The SBA 504 loans are secured by first trust deeds on owner-occupied commercial real estate with loan-to-value ratios of generally 50% or less at the time of origination.  SBA 7(a) loans are secured by borrowers' real estate and/or business assets and are covered by an SBA guarantee of up to 85% of the loan amount.  The SBA guaranteed portion on the 7(a) and Express loans shown above is $10.3 million.  At December 31, 2009, the SBA loan portfolio totaled $157.2 million and was composed of $114.9 million in SBA 504 loans and $42.3 million in SBA 7(a) and Express loans.

The details of non-covered OREO as of December 31, 2009 and September 30, 2009 follow:

Our exposure to non-covered nonowner-occupied residential construction loans was reduced by $28.3 million during the fourth quarter to $159.7 million at the end of December.  The reduction was due mostly to $14.0 million in payoffs, the sale of an $11.5 million note on a residential condominium project and $9.4 million in foreclosures offset by $6.6 million in new loans.

The details of the non-covered nonowner-occupied residential construction loan portfolio as of the dates indicated follow:

Our largest non-covered loan portfolio concentration is the real estate mortgage category, which includes loans secured by commercial and residential real estate.  The following table presents our non-covered real estate mortgage loan portfolio as of the dates indicated.  

Covered Loans and Other Real Estate Owned

As part of the Affinity acquisition that occurred on August 28, 2009, we entered into a loss sharing agreement with the FDIC that covers a substantial portion of losses on loans, other real estate owned and certain investment securities incurred after the acquisition date.  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") at December 31, 2009 follows:

STOCKHOLDERS' EQUITY

On December 22, 2009, PacWest Bancorp filed a registration statement with the SEC to offer to sell, from time to time, shares of common stock, preferred stock, and other equity-linked securities for an aggregate initial offering price of up to $350 million.  The registration statement was declared effective on January 8, 2010.  Proceeds from any offering under this registration statement are anticipated to be used to fund future acquisitions of banks and financial institutions and for general corporate purposes.

EARNINGS PER SHARE

New accounting guidance adopted on January 1, 2009 clarified that all outstanding unvested sharebased payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of such nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. All of our unvested restricted stock participates with common stockholders in dividends declared and paid by the Company.  Application of the guidance generally results in a reduction of net earnings available to common stockholders and lower earnings per share when compared to the previous requirements.  The effect of the application of the guidance on both basic and diluted earnings per share for the fourth quarter of 2008 was a reduction of $0.01 to $0.34 from $0.35.   The effect on the net loss per share for the year ended December 31, 2008 was an increase of $0.02 to $26.81 from $26.79.   

ABOUT PACWEST BANCORP

PacWest Bancorp is a bank holding company with $5.3 billion in assets as of December 31, 2009, with one wholly-owned banking subsidiary, Pacific Western Bank. Through 68 full-service community banking branches, 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.  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.

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: lower than expected revenues; credit quality deterioration or a pronounced and sustained 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 Affinity Bank acquisition; 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 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.

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.

SOURCE PacWest Bancorp