PACW: Castle Creek Sales Related To Square 1 & Fund Distributions. Reiterate Recommendation

PDF ATTACHEDPACW Update 8-30-16

Close $42.35  / “Outperform” / Price Target: $47.50  / HQ= Beverly Hills, CA / $5 Bil. Mkt. Cap.

  • Recent Form 4 filings show 1.0 million shares sold by Castle Creek Capital or 65% of prior holdings
  • We understand these shares are related to Square 1 Bank acquired by PACW in Fall 2015. Chairman John Eggemeyer continues to hold nearly $11 Mil. of personal shares in PACW
  • Company remains on-track for a solid 3Q and remains a favorite idea given ROA/ROTCE & capital

We reiterate our “Outperform” rating on PACW shares with EPS estimates of $2.84 in 2016 and $3.00 in 2017 (no change from our past report on 8/10).  Our Price Target of $47.50 is also unchanged with conviction that the stock can earn a stronger P/E from its industry-leading ROA and ROTCE.

Investors should recognize that recent insider sales by Castle Creek Capital are related to the fund’s intended distribution needs by year-end 2016 and that the shares sold this month originated from PACW’s acquisition of Square 1 Bank in Fall 2015.  John Eggemeyer, Chairman of the Board, remains a large personal shareholder.  We also understand that a separate institutional investor with similar holdings from Square 1 is liquidating its shares (or has already done so).

Separately, we reiterate our recent analysis that 67% of variable rate Loans (including ARMs switching from initial fixed rate terms  in the next year) are tied to LIBOR which signals potential benefit from higher short-term rates.  In fact, in recent weeks, short-term LIBOR has advanced meaningfully which underscores the importance of PACW’s 10-Q language.  Effectively, PACW has 52% of its entire portfolio in LIBOR-rate Loans (i.e., $14.6 Bil. portfolio with $11.2 Bil. in variable and $126 Mil. of ARMs switching from fixed to variable by June-17, of which 67% are LIBOR-based).  Since the Brexit vote in late June, LIBOR rates have moved upward from the low 60-basis point mark on 6/27 to 83bps today.  This rally is key for any Bank with a healthy degree of Loans tied to LIBOR.  PACW is a good example and the level of impact is greater than many investors may understand.  In our view, this is a positive catalyst for the stock and it underscores our confidence that NIM-Net Interest Margin remains above 5.00% and that our near-term EPS estimates are realistic.

PACW is a highly-profitable, highly-capitalized financial institution with nationwide Deposit and Loan generation which has numerous levers to positive EPS progression.  We are confident on the stock’s future success and suggest that investors examine the PACW story from the angles of PROs vs CONs which we outline in Page 4.