PacWest’s loans jitter, deposits dwindle in race towards merger

Merging partner Banc of California also sees deposit base slip further

PacWest Bancorp’s loans and deposit position continued to deteriorate in the third quarter, raising the stakes in its impending merger with Banc of California.

The bank’s non-accrual loans – excluding those held for sale – hit $125 million at end-September, up 24% on end-June and 39% on end-March, driven by residential mortgages and the ‘venture capital’ division catering to equity backers and start-ups.

 

This pushed the proportion of non-accrual exposures to 0.57% of a shrinking loan book, compared with 0.47% and 0.34% three and six months prior. Within residential mortgages, the rate hit 1.69%, all but doubling over six months.

PacWest also had to contend with a deposit base that continued to dwindle, if not at the dramatic rate it did in Q2. Non-interest-bearing deposits dropped 8% to $5.6 billion, while interest-bearing balances slipped 4% to $21 billion. The latter resulted from a one-fourth cut to brokered deposits, which sat in line with the merger roadmap.

 

The picture looked similar at Banc of California, which in July agreed to a rescue merger with PacWest.

The $9 billion asset lender, whose brand will carry over to the combined edifice, reported 0.87% of its loans as non-performing at end-September, an improvement on 0.94% at end-June but rising from 0.80% at end-March.

Its deposit base, meanwhile, slid 3% to $6.6 billion, with drops across interest-bearing and unremunerated accounts alike.

What is it?

Although US accounting rules do not prescribe a specific use of the terminology, non-accrual loans are generally interpreted as loans on which interest is not being paid. If non-accrual status persists for 90 days or more, or full recovery of the principal is doubtful, the loan is classified as non-performing.

Bank deposits are typically a lender’s primary funding base. Zero-interest balances, such as most checking accounts, are a lender’s cheapest source of funding. Other types of deposits – like some checking accounts, time and demand deposits, money market funds and other savings products – are remunerated, in exchange for depositors having more restrictions on when or how they can be withdrawn.

Why it matters

PacWest’s salvation may already be predicated on a leap of faith that abstracts from balance-sheet trends.

Deposits’ trajectory, for one, is already out of kilter with one of the assumptions that underpinned pre-merger due diligence of $1 billion in deposits returning to PacWest between June and December of this year, returning to growth the next.

Banc of California’s chief executive Jared Wolff, while sanguine about PacWest’s ability to bring back depositors, told analysts last week that “they [PacWest] have some deposits that probably need to be moved off balance sheet … Higher cost deposits as well as deposits that might be more flexible” and shouldn’t be relied upon as a stable source of balance-sheet funding.

Meanwhile, rising mortgage delinquencies may not be bank-breaking just yet but could complicate post-merger repositioning. The two lenders intend to sell $3.4 billion out of Banc of California’s residential mortgage book and an aggregate $3.5 billion out of its securities books, which are laden with mortgage-backed securities. Deterioration in both its individual loan books and the wider market could mean the sales net less than expected – and cast a further pall on the combined bank’s future.

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