Fitch Affirms PacWest Bancorp at 'BB+/B'; Outlook Stable
KEY RATING DRIVERS - IDRs, VRs and SENIOR DEBT
PACW's ratings are supported by its good market position in key business segments, including its national commercial lending platform to middle-market companies. PACW's financial profile is solid and characterized by good earnings, a low volume of NPAs, relatively low net charge-offs and adequate capital levels which appear to be sufficient to support the business mix. This is counterbalanced by the firm's relatively higher risk appetite given its acquisitive history, high balance sheet growth and niche lending focus relative to peers, which constrain PACW's ratings at their current levels.
The Stable Outlook reflects Fitch's view that PACW will continue to generate reasonable earnings and maintain adequate capital levels for its rating category over the medium- to longer-term.
Fitch views PACW's acquisitive strategy as a rating constraint over the near-term given the level of integration risks involved. Most notably, the company acquired CapitalSource, Inc. (CSE) in April 2014, which grew its balance sheet to over \$15.7 billion in assets, or 236%. Most recently, PACW announced the acquisition of Square 1 Financial, which is expected to close later this year. Fitch views the Square 1 acquisition favorably given the way it improves PACW's funding profile by reducing the firm's reliance on higher-cost CDs and diversifies the loan portfolio into complementary businesses and contributes additional sources of fee income. Nonetheless, Fitch considers PACW's acquisitive nature to be a rating constraint.
Core earnings, which adjust for acquisitions and non-recurring revenues and expenses, were solid relative to PACW's rating. The company has posted positive earnings since 2011, supported by strong net interest margins (NIM). Fitch assesses PACW on a core basis to remove distortions created by acquisition accounting. Fitch-calculated adjusted return on average assets (ROAA) was 1.70% at fourth-quarter 2014 (4Q'14), which is consistent with historical averages for the company and higher than peers. PACW's above average profitability metrics are reflective of the firm's niche lending focus and middle-market customer base.
Adjusted asset quality metrics have also remained relatively stable, despite significant loan growth during the year resulting from the CSE acquisition. Still, organic loan growth of 14% is high relative to peer averages of between 8% and 10%. Nonperforming assets (NPAs, inclusive of performing restructured loans, but exclusive of covered loans) were 1.09% of uncovered loans and leases at 4Q'14. PACW's NPA ratio may be somewhat understated due to recent outsized loan growth. Nonetheless, credit costs remain favorable relative to peers, with net charge-offs to average non-covered loans of 0.02% at YE14. Fitch expects asset quality metrics will remain relatively stable over the medium-term given PACW's ability to manage its loan portfolio with relatively low credit costs. That said, Fitch expects recent growth in SQBK's loan portfolio and portfolio seasoning will normalize pro forma asset quality performance over time.
Fitch views PACW's capital levels as adequate relative to its growth and overall risk profile. At Dec. 31, 2014, the company reported ratios of 12.2%, 13.6% and 16.1% for tangible common equity (TCE), Tier 1 risk-based capital (RBC) and total RBC ratios, respectively. The merger with SQBK is expected to be capital-neutral given the stock-for-stock transaction. On a pro forma basis as of YE14, capital is expected to be 11.5%, 12.6% and 15.7%, for TCE, Tier 1 RBC and total RBC, respectively.
RATING SENSITIVITIES - IDRs, VRs and SENIOR DEBT
Fitch believes PACW's ratings have greater upside than downside over the medium-term, This would be predicated by continued stable core earnings performance, loan growth moderation in line with internal capital generation, and maintenance of strong asset quality and adequate capital levels over time.
Conversely, PACW's ratings would be sensitive to further entity or portfolio acquisitions, contraction of core NIM, or sustained decline in capital levels.
KEY RATING DRIVERS - SUBORDINATED DEBT and OTHER HYBRID SECURITIES
PACW's subordinated debt and hybrid issuances are notched two below PACW's VR. The notch differential reflects loss severity and an assessment of increment non-performance risk.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
PACW's subordinated debt and hybrid issuances are sensitive to the changes in PACW's VR. The rating sensitivities for the VR are listed above.
KEY RATING DRIVERS and SENSITIVITIES - HOLDING COMPANY
PACW's IDR and VR are equalized with those of its bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.
Should PACW's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.
KEY RATING DRIVERS and SENSITIVITIES - Support and Support Rating Floors
PACW has a Support Rating of '5' and a Support Rating Floor of 'NF'. In Fitch's view, PACW is not systemically important and therefore, Fitch believes the probability of support unlikely. PACW's IDRs and VR do not incorporate any support. PACW's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support should such support be needed.
Fitch affirms the following ratings:
PacWest Bancorp
--Long-term IDR at 'BB+';
--Short-term IDR at 'B';
--Viability Rating at 'bb+';
--Support at '5';
--Support floor at 'NF'.
Pacific Western Bank
--Long-term IDR at 'BB+';
--Long-term deposits at 'BBB-';
--Short-term IDR at 'B';
--Viability Rating at 'bb+';
--Support at '5';
--Support floor at 'NF'.
The Rating Outlook is Stable.
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