PACW PacWest Bancorp

SECOND QUARTER 2023 HIGHLIGHTS

• Net loss available to common stockholders of $207.4 million, or a loss of $1.75 per diluted share as the quarter was impacted by items related to loan sales and restructuring of our Civic subsidiary
• Adjusted earnings of $36.0 million and adjusted diluted earnings per common share of $0.22, which exclude the effect of loan sales, lower of cost or market held for sale (“LOCOM HFS”) adjustments, and reorganization costs as detailed below
• Executed on strategic plan to divest non-core loan portfolios including selling
  • National Construction portfolio, including $2.6 billion of loans and $2.3 billion of unfunded commitments
  • Lender Finance portfolio, including $2.1 billion of loans and $0.2 billion of unfunded commitments
  • A portion of the Civic portfolio, including $521 million of loans and $24 million of unfunded commitments
• Second quarter results were marked by enhanced liquidity and capital
  • Immediately-available liquidity (on-balance sheet liquidity and unused borrowing capacity) of $17.9 billion, which exceeded uninsured deposits of $5.3 billion, with a coverage ratio of 335% at June 30, 2023
  • Total insured deposits represented approximately 81% of total deposits as of June 30, 2023, up from 48% at December 31, 2022
• All risk-based capital ratios increased from March 31, 2023, with CET1 increasing from 9.21% to 11.16%
• Loans to deposits ratio decreased to 81.5% at June 30, 2023 from 101.0% at March 31, 2023
• Operational efficiency initiative is ongoing with continued optimization of resources, contracts, facilities, and processes

ADJUSTED EARNINGS AND RELATED METRICS

LOS ANGELES, July 25, 2023 (GLOBE NEWSWIRE) -- Financial results for the second quarter of 2023 were impacted by $277.7 million of losses on the sale of loans and unfunded commitments and LOCOM HFS adjustments, Civic loan sale charge-offs of $22.4 million, and $12.4 million of reorganization costs. Financial results for the first quarter of 2023 were impacted by a goodwill impairment of $1.38 billion and reorganization costs of $8.5 million. Excluding these amounts, adjusted earnings were $36.0 million, or $0.22 per diluted share, for the second quarter of 2023 and $89.4 million, or $0.66 per diluted share, for the first quarter of 2023. A reconciliation of adjusted earnings to net (loss) earnings according to generally accepted accounting principles in the United States (“GAAP”) is provided in the financial tables at the end of this press release.

CEO COMMENTARY

Paul Taylor, President and CEO, commented, “At the end of the first quarter, we communicated our strategic plan to exit non-core products and services and strengthen our community banking business which would improve our capital ratios, liquidity, and operational efficiency. We expected to execute this plan over several quarters, however, given that market conditions changed, we pivoted to shrink the balance sheet through the sale of three significant non-core loan portfolios. These loan sales accelerated our balance sheet restructuring, reducing risk in our loan portfolio, and improving our capital ratios and liquidity. The significant reduction in risk-weighted assets resulted in much improved capital ratios, and our CET1 capital ratio improved from 9.21% at March 31, 2023 to 11.16% at June 30, 2023.”

Mr. Taylor continued, “We are continuing the work we started last year to improve the overall efficiency of the Bank, which resulted in severance, asset write-off, and contract termination expense of $12.4 million in the second quarter of 2023. Since the beginning of the year, we have reduced our employee count by 560 employees, primarily at our Civic subsidiary. We have identified many other areas to improve efficiency across the Bank and will be executing on these measures in the coming months.”

Mr. Taylor concluded, “Due to the competitive marketplace for deposits, we are introducing new products and technology solutions to successfully grow customer deposits. At the end of the second quarter, we introduced a digital account opening tool to efficiently gather new deposits. In the third quarter, we expect to implement a new on-line channel for gathering deposits directly from consumers.”

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

NET INTEREST INCOME

Net interest income decreased by $93.2 million to $186.1 million for the second quarter of 2023 compared to $279.3 million for the first quarter of 2023 due mainly to higher interest expense on deposits and borrowings and lower interest income on loans and leases, offset partially by higher interest income on deposits in financial institutions. Interest income on deposits in financial institutions increased by $43.9 million in the second quarter of 2023 due mainly to a $3.2 billion increase in the average balance of deposits in financial institutions and a 37 basis points increase in the yield. Interest income on loans and leases decreased by $21.7 million in the second quarter of 2023 due to a $1.6 billion decrease in the average balance of loans and leases and a six basis points decrease in the tax equivalent yield on loans and leases compared to the first quarter of 2023. The tax equivalent yield on loans and leases was 6.08% in the second quarter of 2023 compared to 6.14% in the first quarter of 2023. The decrease in the tax equivalent yield on loans and leases was due primarily to lower levels of higher-yielding Civic and construction loans and a smaller tax equivalent adjustment in the second quarter. Interest expense on deposits increased by $22.9 million in the second quarter of 2023 due mainly to increased market rates and an increased use of brokered deposits that contributed to a 44 basis points increase in the cost of total deposits. Interest expense on borrowings increased by $91.8 million due to a $6.2 billion increase in the average balance and a 34 basis points increase in the cost of borrowings attributable mainly to the result of the borrowings under the Bank Term Funding Program and repurchase agreement being in effect for a full quarter, as these borrowings were entered into in March 2023.

The tax equivalent NIM was 1.82% for the second quarter of 2023 compared to 2.89% for the first quarter of 2023. The decrease in the NIM was due mainly to a shift in our funding mix during the second quarter of 2023. Average borrowings as a percentage of average interest-bearing liabilities was 34% for the second quarter of 2023 compared to 19% for the first quarter of 2023. The tax-equivalent NIM was further impacted by a higher cost of total deposits and borrowings and a lower yield on loans and leases, offset partially by a higher yield on deposits in financial institutions.

The cost of total deposits was 2.62% for the second quarter of 2023 compared to 1.98% for the first quarter of 2023 due mainly to higher market interest rates and a higher average balance of brokered deposits.

PROVISION FOR CREDIT LOSSES

The following table presents details of the provision for credit losses for the periods indicated:

The provision for credit losses was $2.0 million for the second quarter of 2023 compared to $3.0 million for the first quarter of 2023. The provision for the second quarter of 2023 reflected the impact of an updated forecast, higher net charge-offs and higher reserves for downgraded loans largely offset by lower reserves needed for lower loan and unfunded commitment balances. During the first quarter of 2023, while loans and leases held for investment and unfunded loan commitments declined, a $3.0 million provision was recognized due to an increase in qualitative reserves for loans secured by commercial real estate and higher net charge-offs.

NONINTEREST INCOME

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

Noninterest income decreased by $164.5 million to a loss of $128.1 million for the second quarter of 2023 compared to income of $36.4 million for the first quarter of 2023 due primarily to a decrease of $161.8 million in gain on sale of loans and leases and a $11.9 million LOCOM HFS loss adjustment, offset partially by an increase of $8.5 million in leased equipment income. The second quarter loss on sale of loans and leases resulted from the sale of $5.2 billion of loans for a net loss of $158.9 million in the second quarter of 2023 compared to the sale of $287.3 million of loans for a net gain of $3.0 million in the first quarter of 2023. The $11.9 million LOCOM HFS loss adjustment was related to the lower of cost or market adjustment that we made to our $478.1 million loans held for sale at June 30, 2023. The increase in leased equipment income was due mainly to $8.8 million of early lease termination gains recognized in the second quarter of 2023 compared to the linked quarter.

NONINTEREST EXPENSE

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

Noninterest expense decreased by $1.25 billion to $320.4 million in the second quarter of 2023 compared to $1.57 billion for the first quarter of 2023 due primarily to the $1.38 billion goodwill impairment charge recorded in the first quarter of 2023. Excluding the goodwill impairment and acquisition, integration and reorganization costs, operating expense increased by $120.3 million to $308.0 million. The $120.3 million increase was due mainly to an increase of $106.4 million in other expense and an increase of $13.9 million in insurance and assessments expense. The increase in other expense was due mainly to $106.8 million of unfunded commitments fair value loss adjustments in the second quarter of 2023. The increase in insurance and assessments was due mainly to higher FDIC assessment expense attributable to an increased assessment rate due to lower core earnings, lower core deposits, and a higher level of criticized loans and leases.

INCOME TAXES

The effective income tax rate was 25.3% for the second quarter of 2023 compared to 5.2% for the first quarter of 2023. Excluding goodwill impairment, the effective income tax rate for the first quarter of 2023 was 28.4%. The decrease from the first quarter of 2023 adjusted rate was due primarily to higher disallowed interest expense, higher disallowed FDIC assessment expense, and higher shortfalls from restricted stock vesting in the second quarter of 2023. Excluding goodwill impairment, the effective tax rate for the full year 2023 is currently estimated to be in the range of 22% to 24%.

BALANCE SHEET HIGHLIGHTS

DEPOSITS AND CLIENT INVESTMENT FUNDS

The following tables present the composition of our deposit portfolio as of the dates indicated:

Total deposits decreased by $290.5 million or 1.0% in the second quarter of 2023 due to a $975.4 million decrease in noninterest-bearing deposits, offset partially by a $684.9 million increase in interest-bearing deposits. At June 30, 2023, noninterest-bearing deposits totaled $6.1 billion or 22% of total deposits and interest-bearing deposits totaled $21.8 billion or 78% of total deposits.

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

As of June 30, 2023, FDIC-insured deposits represented approximately 81% of total deposits and FDIC-insured venture-specific deposits accounted for approximately 83% of total venture-specific deposits. The Bank’s spot deposit rates increased from 2.32% at March 31, 2023 to 2.71% at June 30, 2023. Since May 10, 2023 (the date of our last deposit disclosure in our March 31, 2023 Form 10-Q filing) through July 21, 2023, our total non-brokered deposits were up approximately $1.0 billion.

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 decreased from $1.2 billion as of March 31, 2023 to $0.8 billion at June 30, 2023, of which $0.4 billion was managed by PWAM.

BORROWINGS

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

The $5.5 billion decrease in borrowings in the second quarter of 2023 was due mainly to the payoff of FHLB secured advances with the proceeds of the loan sales. Available borrowing capacity was approximately $11.4 billion at June 30, 2023.

LOANS AND LEASES

The 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 $3.4 billion, or 13.3% in the second quarter of 2023 to $22.3 billion at June 30, 2023. The overall decrease in the loans and leases balance for the second quarter of 2023 was due primarily to the sale of the $2.6 billion National Construction portfolio and $521 million of the Civic portfolio in the second quarter.

The weighted average rate on the $189.2 million of production for the second quarter of 2023 decreased to 7.64% from 8.44% for the first quarter of 2023 due primarily to the loan mix (lower percentage of Civic production).

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 LOSSES ON LOANS AND LEASES

The following tables present roll forwards of the allowance for credit losses on loans and leases for the periods indicated:

The following table presents allowance for credit losses information on loans and leases as of and for the dates and periods indicated:

The allowance for credit losses decreased by $28.8 million in the second quarter of 2023 to $256.8 million at June 30, 2023. This decrease was attributable mainly to lower reserves needed due to the decrease in loans and leases held for investment and unfunded loan commitments and $22.4 million of charge-offs related to Civic loan sales, offset partially by the impact of an updated forecast and higher reserves needed for downgraded loans.

Net charge-offs over the trailing twelve months were $45.0 million, which resulted in net charge-offs to average loans and leases over the trailing twelve months of 0.17%.

CREDIT QUALITY

The following table presents loan and lease credit quality metrics as of the dates indicated:

Nonaccrual loans and leases increased by $17.8 million to $104.9 million in the second quarter of 2023 due primarily to an increase in nonaccrual Civic loans and nonaccrual SBA guarantied real estate loans. The increase in classified loans (and subsequent decrease in special mention) was driven by downgrades in Multifamily loans as the result of rising interest rates and the related stress on debt service.  All of the Multifamily loans downgraded remain well collateralized and current at quarter-end.

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:

Loans and leases accruing and 30-89 days past due generally fluctuate from period to period. The $79.5 million decrease to $49.8 million in the second quarter of 2023 was due mainly to a decrease in Civic delinquent loans which included $46.5 million being transferred to held for sale in the second quarter.

CAPITAL

The following table presents capital ratios as of the dates indicated:

CHANGE IN CONFERENCE CALL

As a result of today’s merger announcement, the previously announced PacWest Bancorp conference call scheduled for 8:00 AM PT/ 11:00 AM ET on Wednesday, July 26, 2023, to discuss the Company’s performance for the second quarter of 2023 has been cancelled. PacWest Bancorp and Banc of California, Inc. will conduct a live conference call and webcast to discuss the transaction later today at 2:30 PM PT/ 5:30 PM ET. To listen to the live call, please dial 888-317-6003 and enter 2706567 for the conference ID. The webcast, along with the related slides, will be available on both the PacWest website (www.pacwestbancorp.com) and the Banc of California, Inc. website (www.bancofcal.com). A replay of the conference call will also be available via these websites.

PACWEST BANCORP

PacWest is a bank holding company headquartered in Los Angeles, California, with an executive office in Denver, Colorado, with one wholly-owned banking subsidiary, Pacific Western Bank (the “Bank”). Pacific Western Bank is a relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses. The Bank offers a broad range of loan and lease and deposit products and services through full-service branches throughout California and in Durham, North Carolina and Denver, Colorado, and loan production offices around the country. For more information about PacWest Bancorp or Pacific Western Bank, visit www.pacwest.com.

FORWARD-LOOKING STATEMENTS

This communication 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. 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 often use words such as “anticipates,” “targets,” “expects,” “estimates,” “intends,” “plans,” “believes,” “continue” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” Such statements are based on information available at the time of the communication and are based on current beliefs and expectations of PacWest’s management and are subject to significant risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those expressed in them. Continued deterioration in general business, economic, and political conditions, geopolitical tensions, uncertainty in U.S. fiscal monetary policy, including the interest rate policies of the Federal Reserve Board, and volatility and disruptions in credit and capital markets could lead to a tightening of credit and an increase in credit losses, adversely affect PacWest’s revenues and the values of our assets and liabilities, increase stock price volatility, and adversely impact our ability to raise capital. In addition, PacWest and its results could be adversely affected by changes in interest rates, continued high inflation, and unemployment rates, our ability to attract and retain deposits and other sources of funding and liquidity particularly in a rising or high interest rate environment, the impact of bank failures or other adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks, the safety of deposits, and depositor behavior, the quality and composition of our deposits, deterioration in the credit quality of our loan portfolio or in the value of the collateral securing those loans, especially the risks associated with concentrations in real estate related loans, deterioration in the value of our investment securities as a result of rising interest rates or otherwise, our ability to successfully execute on our strategic plan and digital and innovation initiatives, the effectiveness of our risk management framework and quantitative models, 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 PacWest with the U.S. Securities and Exchange Commission.

All forward-looking statements in this communication are based on information available at the time the statement is made. 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.