LOS ANGELES, Jan. 26, 2023 (GLOBE NEWSWIRE) -- PacWest Bancorp (Nasdaq: PACW) -

FOURTH QUARTER 2022 RESULTS

FOURTH QUARTER 2022 HIGHLIGHTS

• Announced leadership transition with Paul Taylor as President and CEO and Kevin Thompson as CFO

• Strategically sold $1 billion of available-for-sale securities for a loss of $49 million to pay down FHLB borrowings and to improve the capital and liquidity position of the Bank

• Recorded goodwill impairment of $29 million related to Civic as part of a strategy to restructure this lending subsidiary

• Shut down Premium Finance and Multi-Family lending groups as part of a strategy to focus on relationship-based community banking, which will result in cost savings and improved capital

• Recorded early retirement benefits and severance expense of $5.7 million as a first step in operational efficiency initiative

• All risk-based capital ratios increased from 3Q22, with CET1 increasing from 8.56% to 8.70%

• Credit metrics remain steady with nonperforming assets ratio of 38 basis points

FULL YEAR 2022 RESULTS

FULL YEAR 2022 HIGHLIGHTS

• Loan growth of $5.7 billion; up 24.7% from 2021

• Net interest income (TE) of $1.3 billion in 2022 vs. $1.1 billion in 2021; up 16.6%

• Strong earnings allowed us to return $140 million to our stockholders through dividends

CEO COMMENTARY

Paul Taylor, President and CEO, commented, “In the fourth quarter, we initiated a new strategic plan designed to maximize shareholder value by strengthening our community bank focus, exiting non-core products, and improving our operational efficiency. The first strategic step we took was to sell $1 billion of available-for-sale securities, resulting in a loss on sale of $49 million. The proceeds were used to pay down FHLB borrowings and to improve the capital and liquidity position of the Bank going forward. Secondly, we recorded goodwill impairment of $29 million related to Civic as part of a strategy to restructure this lending subsidiary. Goodwill is a non-cash charge and has no impact on our regulatory capital ratios, cash flows, or liquidity position. We believe these actions will result in an improvement in the profitability and risk profile of Civic going forward. Next, we are slowing loan growth to preserve capital and strengthen our balance sheet, including shutting down our operations in our Premium Finance and Multi-Family lending groups. Finally, we are working to improve the overall operational efficiency of the Bank. As a first step in this initiative, we recorded early retirement benefits and severance expense of $5.7 million.”

“PacWest is a strong organization with extraordinary clients and has a talented and loyal team. Credit quality remains strong as evidenced by credit metrics such as nonperforming assets of 38 basis points and net charge-offs of four basis points for the quarter and two basis points for the year. As we head into 2023, our priority is to refocus on core relationship-based community banking, which is expected to result in increased core deposits, increased capital ratios, and an improved efficiency ratio, and allow us to maintain our credit quality at the current favorable levels.”

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

NET INTEREST INCOME

Net interest income decreased by $12.2 million to $322.9 million for the fourth quarter of 2022 compared to $335.2 million for the third quarter of 2022 due mainly to higher interest expense on deposits and borrowings, offset partially by higher interest income on loans and leases and deposits in financial institutions. Interest income on loans and leases increased by $58.4 million in the fourth quarter of 2022 due to a 61 basis points increase in the tax equivalent yield on average loans and leases and a $1.2 billion increase in the average balance of loans and leases compared to the third quarter of 2022. Interest income on deposits in financial institutions increased by $7.4 million in the fourth quarter of 2022 due mainly to a 147 basis points increase in the yield on average deposits in financial institutions. The tax equivalent yield on average loans and leases was 5.73% for the fourth quarter of 2022 compared to 5.12% for the third quarter of 2022. The increase in the tax equivalent yield on average loans and leases was due primarily to higher coupon interest attributable to increased rates on production and on existing variable rate loans. Interest expense on deposits increased by $56.3 million in the fourth quarter of 2022 due mainly to increased market rates that contributed to a 67 basis points increase in the cost of average total deposits. Interest expense on borrowings increased by $16.9 million due to a $1.2 billion increase in the average balance and a 231 basis points increase in the cost of average borrowings attributable mainly to having a full quarter of the higher-cost credit-linked notes outstanding.

The tax equivalent NIM was 3.41% for the fourth quarter of 2022 compared to 3.57% for the third quarter of 2022. The decrease in the NIM was due mainly to a higher cost of average interest-bearing liabilities due primarily to a $1.7 billion decrease in the average balance of core deposits and an increase in average time deposits, offset partially by higher yields on average loans and leases and deposits in financial institutions.

The cost of average total deposits was 1.37% for the fourth quarter of 2022 compared to 0.70% for the third quarter of 2022 due mainly to higher market interest rates and an increase in the average balance of time 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 $10.0 million for the fourth quarter of 2022 compared to $3.0 million for the third quarter of 2022. The $7.0 million increase in the loan-related provision was due mainly to net loan growth in portfolios with a higher loss rate, a slight increase in the levels of special mention and classified loans and leases, and an updated economic forecast reflecting management’s expectation of a mild recession ahead.

NONINTEREST INCOME

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

Noninterest income decreased by $57.6 million to a loss of $19.0 million for the fourth quarter of 2022 compared to income of $38.6 million for the third quarter of 2022 due primarily to decreases of $49.4 million in gain on sale of securities, $5.8 million in other income, and $2.6 million in dividends and gains on equity investments. The decrease in gain on sale of securities resulted from the sales of $1.0 billion of securities for a net loss of $49.3 million compared to sales of $440.4 million of securities for a net gain of $86,000 for the third quarter of 2022. The decrease in other income was due primarily to the receipt of a $5.5 million legal settlement, net of current year legal fees, in the third quarter of 2022. The decrease in dividends and gains on equity investments was due mainly to lower fair value gains on SBIC investments and income distributions on equity investments.

NONINTEREST EXPENSE

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

Noninterest expense increased by $31.2 million to $226.8 million for the fourth quarter 2022 compared to $195.6 million for the third quarter of 2022 due primarily to a $29.0 million goodwill impairment charge related to Civic. Excluding the goodwill impairment, noninterest expense increased by $2.2 million to $197.8 million. The $2.2 million increase was due mainly to increases of $5.7 million in acquisition, integration and reorganization costs and $5.5 million in customer related expense, offset partially by decreases of $3.8 million in other expense, $3.8 million in other professional services, and $1.0 million in intangible asset amortization. The increase in acquisition, integration and reorganization costs was due to early retirement benefits and severance expense in the fourth quarter. The increase in customer related expense was due mostly to higher third-party payments for deposit customers on account analysis. The decrease in other expense was due primarily to a non-recurring legal settlement accrual in the third quarter of 2022. The decrease in other professional services was due mostly to non-recurring issuance costs of the credit-linked notes transaction in the third quarter of 2022. The decrease in intangible asset amortization was due primarily to declining amortization expense on the intangible assets added from acquisitions prior to 2021.

INCOME TAXES

The effective income tax rate was 26.3% for the fourth quarter of 2022 compared to 24.9% for the third quarter of 2022. The increase from the third quarter of 2022 was primarily due to a tax benefit recorded in the third quarter resulting from a lapsed statute. The effective tax rate for the full year 2022 was 25.4%. The effective tax rate for the full year 2023 is currently estimated to be in the range of 26% to 28%.

BALANCE SHEET HIGHLIGHTS

DEPOSITS AND CLIENT INVESTMENT FUNDS

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

Total deposits decreased by $259.5 million or 0.8% in the fourth quarter of 2022 due primarily to a $2.0 billion or 7.0% decrease in core deposits, offset partially by a $1.5 billion increase in time deposits and a $269.8 million increase in wholesale non-maturity deposits. At December 31, 2022, core deposits totaled $26.6 billion or 78% of total deposits, including $11.2 billion of noninterest-bearing demand deposits or 33% of total deposits.

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 $1.8 billion as of September 30, 2022 to $1.4 billion as of December 31, 2022, of which $0.9 billion was managed by PWAM.

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, increased by $949.1 million or 3.4% in the fourth quarter of 2022 to $28.6 billion at December 31, 2022. The overall increase in the loans and leases balance for the fourth quarter of 2022 was due primarily to increases in the residential real estate mortgage and residential real estate construction portfolios.

Civic loan production was $713 million for the fourth quarter of 2022 compared to $831 million for the third quarter of 2022. The Civic loan portfolio as of December 31, 2022 totaled $3.3 billion.

The weighted average rate on the $1.3 billion of production for the fourth quarter of 2022 increased to 7.55% from 5.92% for the third quarter of 2022 due primarily to the loan mix (lower percentage of multi-family production and a higher percentage of Civic production) and the increase in market interest rates.

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 increased by $7.4 million in the fourth quarter of 2022 to $291.8 million at December 31, 2022. This increase was attributable mainly to a $10.0 million provision for credit losses, offset partially by $2.6 million in net charge-offs.

Net charge-offs over the trailing twelve months were $4.8 million, which results in net charge-offs to average loans and leases over the trailing twelve months of 0.2%.

CREDIT QUALITY

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