Banks have bounced back strong this year, coming off a tough 2020 to rank among the best performers on the stock market in 2021. The average bank stock was up 28% year to date at the end of April, and only a handful of other industries had higher average returns.
The usual suspects -- Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup, to name a few -- get most of the attention, and rightfully so. But there is one bank stock that has blown just about everyone else out of the water with a 75% return as of Wednesday's close: PacWest Bancorp (NASDAQ:PACW). There are a lot of good bank stocks out there right now, but this is one of the best bank stocks that no one is talking about. Hereʻs why.
Get to know PacWest
PacWest, based in Beverly Hills, California, is roughly the 60th-largest bank in the U.S., with about $32.8 billion in assets as of March 31. It offers community banking, with 70 branches throughout California and one each in Denver and Durham, N.C., at the end of 2020.
It also has a national lending arm, providing real estate and construction loans, as well as treasury management services, for businesses across the country with loan production offices in California, New York, Florida, Texas, Illinois, Minnesota, Colorado, Arizona, Tennessee, Georgia, North Carolina, Maryland, Massachusetts, and Connecticut. Furthermore, it has a venture lending arm that lends to start-ups, primarily in technology and life sciences.
The companyʻs stock price surged 16% after a strong first-quarter earnings report, released on April 20, and has continued to rise since then. The company posted $150 million in net income in the first quarter, up from a $1.4 billion net loss in the first quarter of 2020 due to a large provision for credit losses. This past quarter it got a $48 million reserve return from improving economic conditions and credit quality.
For more context, net income is up from $117 million the previous quarter and $116 million pre-pandemic in the fourth quarter of 2019. It was primarily boosted by the reserve return, but deposits were also up 15% in the quarter year over. Loan and lease balances were down 3.5% year over year but buoyed by a surge in real estate and construction lending, as well as Paycheck Protection Program (PPP) loans.
The bank posted solid quarterly increases in return on assets, 1.94% up from 1.58% last quarter, and return of tangible equity, 25.7% up from 19.6% the previous quarter. The efficiency ratio, which measures expenses as a percentage of revenue, was a low 46%, meaning it spends less to generate revenue and is thus more efficient.
Acquisitions will help
The company has also gotten a boost from some recent acquisitions, which will further diversify its revenue streams. In February it acquired Civic Financial Services, a leader in residential business-purpose loans (BPLs). These are primarily loans for residential real estate investors, such as bridge loans and financing for investors looking to flip, rent, or fix up properties. They are typically for distressed properties and they cater to investors seeking non-qualified mortgages.
President and CEO Matt Wagner said Civic originated $231 million in loans since it was acquired in mid-February. "We expect Civic loan production to remain strong and, as their loan portfolio continues to grow, it will help sustain our loan yields and drive loan growth," Wagner said.
In April, it acquired the Homeowners Association Services Division of MUFG Union Bank, which provides banking services for community management companies and homeowners associations. It is another acquisition of a company that is among the leaders in a financing niche.
Building something good
So while PacWest is a regional bank, it will have a national footprint in these niches through these acquisitions. It also has a national profile with its venture banking business for start-ups and entrepreneurs.
But the biggest part of its loan portfolio is real estate and construction lending. PacWest is considered a leader in this space, with loan offices across the country. This segment accounts for $11 billion of its $19 billion loan portfolio. As a percentage of total loans, only a handful of other lenders have a higher percentage of loans in this space. The company's strength in this area comes from its depth of expertise of the real estate development and construction space, which it brings to its underwriting and loan management process.
Given the improving economy and likelihood of federal investment in infrastructure, PacWest should be in a good spot for construction financing. On the real estate side, it's a mixed bag, with residential real estate expected to be stronger than commercial real estate in 2021 (though the outlook for commercial real estate is expected to improve in 2022). But PacWest has done a good job of diversifying its revenue with these acquisitions. Plus, its national profile and infrastructure in some of these niches sets it apart from many of its regional bank competitors who don't have the same national framework, or level of expertise, in these areas.
Analysts are generally bullish on its prospects. Wells Fargo analyst Jared Shaw upgraded PacWest Bancorp to overweight earlier this year and said it could become the "second most profitable" bank he covers by 2022.
The stock price has spiked 75% already this year, but it's still available at a good valuation, with a price-to-earnings ratio of 15 and a price-to-tangible-book-value ratio of 1.4. PacWest also has lots of cash on hand, about $5.7 billion, and relatively little debt. This under-the-radar bank stock is a good buy right now.