Search the web
Welcome, Guest
[Sign Out, My Account]

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PACW > SEC Filings for PACW > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for PACWEST BANCORP | Request a Trial to NEW EDGAR Online Pro



Quarterly Report

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking information about the Company and its subsidiaries, which statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward- looking statements. Risks and uncertainties include, but are not limited to:

lower than expected revenues;

credit quality deterioration or pronounced and sustained reduction in real estate market values could cause an increase in the allowance for credit losses and a reduction in earnings;

increased competitive pressure among depository institutions;

the Company's ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;

the possibility that personnel changes will not proceed as planned;

the cost of additional capital is more than expected;

a change in the interest rate environment reduces interest margins;

asset/liability repricing risks and liquidity risks;

pending legal matters may take longer or cost more to resolve or may be resolved adversely to the Company;

general economic conditions, either nationally or in the market areas in which the Company does or anticipates doing business, are less favorable than expected;

environmental conditions, including natural disasters, may disrupt our business, impede our operations, negatively impact the values of collateral securing the Company's loans or impair the ability of our borrowers to support their debt obligations;

the economic and regulatory effects of the continuing war on terrorism and other events of war, including the conflicts and uncertainties in the Middle East;

legislative or regulatory requirements or changes adversely affecting the Company's business;

changes in the securities markets; and

regulatory approvals for any capital activities cannot be obtained on the terms expected or on the anticipated schedule.


We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our Los Angeles-based wholly-owned subsidiary bank, Pacific Western Bank, which we refer to as Pacific Western or the Bank.

Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting demand, money market, and time deposits; originating loans, including

Table of Contents

commercial, real estate construction, SBA guaranteed and consumer loans; originating equipment finance leases; and providing other business-oriented products. Our operations are primarily located in Southern California extending from San Diego County to California's Central Coast; we also operate three banking offices in the San Francisco Bay area, a leasing operation based in Utah, and asset-based lending operations based in Arizona as well as San Jose and Santa Monica, California. The Bank focuses on conducting business with small to medium-sized businesses in our marketplace and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. Our asset-based lending function operates in Arizona, California, Texas, Colorado, Minnesota, and the Pacific Northwest. Our equipment leasing function has lease receivables in 45 states.

Pacific Western competes actively for deposits, and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin, as net interest income, on a year-to-date basis, accounted for 96% of our net revenues (net interest income plus noninterest income).

Total assets declined $163.8 million during the first quarter of 2013 due to repayments on non-covered and covered loans, and lower balances of interest-earning deposits in financial institutions. At March 31, 2013, gross non-covered loans and leases totaled $3.0 billion and the covered loan portfolio was $483.1 million. The gross non-covered loan and lease portfolio decreased $91.2 million for the first quarter of 2013, including loan pay-offs of approximately $170 million. Our regional presidents reported that loans having balances of $1.0 million or more and refinanced by other lenders totaled approximately $75 million; we purposely have not competed on these refinancings because of the low rates and long durations offered by other lenders. We experienced net increases in leases and commercial loans of $30.4 million and $6.8 million, respectively. The covered loan portfolio declined $34.2 million due to repayments and resolution activities. Interest-earning deposits in financial institutions declined $34.4 million during the first quarter of 2013 to $41.0 million at March 31, 2013.

Total liabilities declined $164.4 million during the first quarter of 2013 due to lower total deposits. Total deposits decreased $155.9 million during the first quarter to $4.6 billion at March 31, 2013. Core deposits declined $92.4 million during the first quarter due mostly to a decrease of $97.5 million in money market deposits, approximately $80 million of which was expected to occur. Time deposits declined $63.5 million during the first quarter to $756.8 million at March 31, 2013. At March 31, 2013, core deposits totaled $3.8 billion, or 83% of total deposits, and noninterest-bearing demand deposits, which held steady at $1.9 billion, were 43% of total deposits at that date.

Acquisition of First California Financial Group

On November 6, 2012, we announced that we had entered into a definitive agreement and plan of merger whereby we will acquire First California Financial Group, Inc. ("FCAL") for $8.00 per FCAL common share, or approximately $231 million in aggregate consideration, payable in PacWest common stock. We expect to close the acquisition of FCAL in the second quarter of 2013.

The number of shares of PacWest common stock deliverable for each share of FCAL common stock will be determined based on the weighted average price of PacWest common stock over a 20-day measuring period, as defined in the merger agreement, and will fluctuate if such average price is between $20.00 and $27.00 and will be fixed if such average price is below $20.00 or above $27.00. Based on PacWest's 20-day weighted average stock price measured through April 29, 2013 of $27.26, FCAL stockholders would have received 0.2963 of a share of PacWest common stock for each share of FCAL common stock, which would provide FCAL stockholders with aggregate ownership, on a pro forma basis, of approximately 19.0% of the common stock of the combined company.

FCAL, headquartered in Westlake Village, California, is the parent of First California Bank and had approximately $1.9 billion in assets and 15 branches across Los Angeles, Orange, Riverside, San

Table of Contents

Bernardino, San Diego, San Luis Obispo and Ventura Counties at December 31, 2012. In connection with the acquisition, First California Bank will be merged into Pacific Western.

As of March 31, 2013, on a pro forma consolidated basis with FCAL, PacWest would have had approximately $7.0 billion in assets with 82 branches throughout California. The combined institution would be the eighth largest publicly-owned bank headquartered in California, and the eleventh largest commercial bank headquartered in California.

Under the terms of the merger agreement, two individuals currently serving on the board of directors of FCAL will be designated to join the board of directors of PacWest. Such directors must be independent and mutually agreeable to both PacWest and FCAL.

2012 Acquisitions

American Perspective Bank Acquisition

On August 1, 2012, Pacific Western completed the acquisition of American Perspective Bank, or APB, previously headquartered in San Luis Obispo, California. Pacific Western acquired all of the outstanding common stock of APB for $58.1 million in cash and APB was merged with and into Pacific Western; we refer to this transaction as the APB acquisition. APB operated two branches located in San Luis Obispo and Santa Maria, California, and a loan production office located in Paso Robles, California, which has since been converted to a full-service branch. The APB acquisition strengthened our presence in the Central Coast region.

Celtic Capital Corporation Acquisition

On April 3, 2012, Pacific Western completed the acquisition of Celtic Capital Corporation, or Celtic, an asset-based lending company based in Santa Monica, California. Pacific Western acquired all of the capital stock of Celtic for $18 million in cash and Celtic became a wholly-owned subsidiary of Pacific Western; we refer to this transaction as the Celtic acquisition. Celtic focuses on providing asset-based loans to borrowers across the United States for amounts generally up to $5 million. The Celtic acquisition diversified our loan portfolio, expanded our product lines, and deployed excess liquidity into higher yielding assets.

Pacific Western Equipment Finance Acquisition

On January 3, 2012, Pacific Western completed the acquisition of Pacific Western Equipment Finance (formerly known as Marquette Equipment Finance, which we refer to as EQF), an equipment leasing company based in Midvale, Utah. Pacific Western acquired all of the capital stock of EQF for $35 million in cash and EQF became a division of Pacific Western; we refer to this transaction as the EQF acquisition. The EQF acquisition diversified our lending portfolio, expanded our product lines, and deployed excess liquidity into higher yielding assets.

Key Performance Indicators

Among other factors, our operating results depend generally on the following key performance indicators:

The Level of Our Net Interest Income

Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. A sustained low interest rate environment combined with low loan growth and high levels of marketplace liquidity may lower both our net interest income and net interest margin going forward.

Table of Contents

Our primary interest-earning assets are loans and investments. Our primary interest-bearing liabilities are deposits. We attribute our high net interest margin to our high level of noninterest-bearing deposits and low cost of deposits. While our deposit balances will fluctuate depending on deposit holders' perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield.

Loan and Lease Growth

We generally seek new lending opportunities in the $500,000 to $15 million range; try to limit loan maturities to one year for commercial loans, up to 18 months for construction loans, and up to ten years for commercial real estate loans; and price lending products so as to preserve our interest spread and net interest margin. Achieving robust loan growth has been challenging and repayments have outpaced our new loan volume. Net loan growth over the last several quarters would have involved (a) under-pricing competitors in many cases at margins that are not significantly above our securities portfolio yield, and
(b) incurring unacceptable interest rate risk. We continue to selectively make or renew quality loans to our good customers that contribute positively to our profitability and net interest margin and we are focused on building relationships rather than attracting customers at low prices. Nevertheless, our commercial and industrial portfolio grew by $6.8 million in the first quarter of 2013, with our asset financing segment leading the way with $49.2 million in loan and lease growth. Our loan pipeline has built-up nicely due to slowly improving economic conditions in our markets, our focus on existing customers for new business referrals, and the service levels we provide that enable us to attract and retain business from the larger banks.

The Magnitude of Credit Losses

We stress credit quality in originating and monitoring the loans we make and measure our success by the levels of our nonperforming assets, net charge-offs, and allowance for credit losses. We maintain an allowance for credit losses on non-covered loans and leases, which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off-balance sheet credit exposure. Loans and leases which are deemed uncollectible are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the non-covered loan and lease portfolio was based on our allowance methodology and reflected historical and current net charge-offs, the levels and trends of nonaccrual and classified loans and leases, the migration of loans and leases into various risk classifications, and the level of outstanding loans and leases. A provision for credit losses on the covered loan portfolio may be recorded to reflect decreases in expected cash flows on covered loans compared to those previously estimated.

We regularly review our loans and leases to determine whether there has been any deterioration in credit quality stemming from economic conditions or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as inflation, unemployment, increases in the general level of interest rates, declines in real estate values and negative conditions in borrowers' businesses could negatively impact our customers and cause us to adversely classify loans and leases and increase portfolio loss factors. An increase in classified loans and leases generally results in increased provisions for credit losses. Any deterioration in the real estate market may lead to increased provisions for credit losses because of our concentration in real estate loans.

The Level of Our Noninterest Expense

Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, and other professional services. It also includes costs

Table of Contents

that tend to vary based on the volume of activity, such as OREO expense. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio. We calculate the base efficiency ratio by dividing noninterest expense by net revenues (the sum of net interest income plus noninterest income). We also calculate a non-GAAP measure called the "adjusted efficiency ratio." The adjusted efficiency ratio is calculated in the same manner as the base efficiency ratio except that (a) noninterest income is reduced by FDIC loss sharing income and securities gains and losses, and
(b) noninterest expense is reduced by OREO expenses, acquisition and integration costs, and debt termination expense.

The consolidated base and adjusted efficiency ratios have been as follows:

                                           Base        Adjusted
                                        Efficiency    Efficiency
                   Three Months Ended      Ratio         Ratio
                   March 31, 2013              64.5 %        61.7 %
                   December 31, 2012           60.7 %        55.7 %
                   September 30, 2012          67.6 %        56.5 %
                   June 30, 2012               64.9 %        59.7 %
                   March 31, 2012              97.1 %        58.5 %

We disclose the adjusted efficiency ratio as it shows the trend in recurring overhead-related noninterest expense relative to recurring net revenues. See "Results of Operations-Non-GAAP Measurements" for the calculations of the base and adjusted efficiency ratios.

Adjusted Net Earnings

Our reported net earnings for the first quarter of 2013 were $13.5 million. Another measure of earnings used as an indicator of earnings generating capability and ability to absorb credit losses is adjusted net earnings. We calculate adjusted net earnings by excluding credit loss provisions, non-covered and covered OREO expenses, FDIC loss sharing income or expense, securities gains, and acquisition costs. On a pre-tax basis this amounts to $27.3 million. After applying our effective tax rate for the first quarter of 2013, our adjusted net earnings are $17.4 million.

Critical Accounting Policies

The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses, the carrying values of intangible assets, and deferred income tax assets. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2012.

Non-GAAP Measurements

Certain discussion in this Form 10-Q contains non-GAAP financial disclosures for tangible common equity, return on average tangible equity, adjusted earnings before income taxes, and adjusted efficiency ratios. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. Given the use of tangible common equity amounts and ratios and return on average tangible equity is prevalent among banking regulators, investors and analysts, we disclose our tangible common equity ratio in addition to the equity-to-assets ratio and our return on average tangible equity in addition to return on average equity. Also, as analysts and

Table of Contents

investors view adjusted earnings before income taxes as an indicator of the Company's ability to both generate earnings and absorb credit losses, we disclose this amount in addition to pre-tax earnings. We disclose the adjusted efficiency ratio as it shows the trend in recurring overhead-related noninterest expense relative to recurring net revenues. The methodology of determining tangible common equity, return on average tangible equity, adjusted earnings before income taxes, and the adjusted efficiency ratio may differ among companies.

These non-GAAP financial measures are presented for supplemental informational purposes only for understanding the Company's operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles ("GAAP").

The following tables present performance amounts and ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements:

                                                           Three Months Ended
                                                March 31,     December 31,     March 31,
Adjusted Earnings Before Income Taxes             2013            2012           2012
                                                             (In thousands)
Earnings before income taxes                    $   21,213    $      32,468    $    8,121
Plus:           Provision (negative
                provision) for credit losses         3,137           (4,333 )      (6,074 )
                Non-covered OREO expense,
                net                                    313              316         1,821
                Covered OREO (income)
                expense, net                          (813 )           (461 )         822
                Acquisition and integration
                costs                                  692            1,092            25
                Debt termination expense                 -                -        22,598
Less:           FDIC loss sharing income
                (expense), net                      (3,137 )         (6,022 )      (3,579 )
                Gain on sale of securities             409            1,239             -

                Adjusted earnings before
                income taxes                    $   27,270    $      33,865    $   30,892

                                                           Three Months Ended
                                                March 31,     December 31,     March 31,
Adjusted Efficiency Ratio                         2013            2012           2012
                                                         (Dollars in thousands)
Noninterest expense                             $   44,183    $      43,525    $   68,895
Less:       Non-covered OREO expense, net              313              316         1,821
            Covered OREO (income) expense,
            net                                       (813 )           (461 )         822
            Acquisition and integration
            costs                                      692            1,092            25
            Debt termination expense                     -                -        22,598

            Adjusted noninterest expense        $   43,991    $      42,578    $   43,629

Net interest income                             $   65,693    $      69,603    $   67,680
Noninterest income                                   2,840            2,057         3,262

            Net revenues                            68,533           71,660        70,942
Less:       FDIC loss sharing income
            (expense), net                          (3,137 )         (6,022 )      (3,579 )
            Gain on sale of securities                 409            1,239             -

            Adjusted net revenues               $   71,261    $      76,443    $   74,521

Base efficiency ratio(1)                              64.5 %           60.7 %        97.1 %
Adjusted efficiency ratio(2)                          61.7 %           55.7 %        58.5 %


Noninterest expense divided by net revenues.

Adjusted noninterest expense divided by adjusted net revenues.

Table of Contents

                                                            Three Months Ended
                                                 March 31,     December 31,    March 31,
Return on Average Tangible Equity                   2013           2012           2012
                                                          (Dollars in thousands)
PacWest Bancorp Consolidated:
Net earnings (loss)                               $  13,494    $      19,892    $   5,264

Average stockholders' equity                      $ 589,207    $     585,525    $ 552,786
Less:           Average intangible assets            93,786           94,604       73,983

                Average tangible common equity    $ 495,421    $     490,921    $ 478,803

                Annualized return on average
                equity(1)                              9.29 %          13.51 %       3.83 %
                Annualized return on average
                tangible equity(2)                    11.05 %          16.12 %       4.42 %


Calculated as annualized net earnings divided by average stockholders' equity.

Calculated as annualized net earnings divided by average tangible common equity.

                                                   March 31,     December 31,
        Tangible Common Equity                        2013           2012
                                                     (Dollars in thousands)
        PacWest Bancorp Consolidated:
        Stockholders' equity                      $    589,796    $    589,121
        Less:   Intangible assets                       93,220          94,589

                Tangible common equity            $    496,576    $    494,532

        Total assets                              $  5,299,905    $  5,463,658
        Less:   Intangible assets                       93,220          94,589

                Tangible assets                   $  5,206,685    $  5,369,069

                Equity to assets ratio                   11.13 %         10.78 %
                Tangible common equity ratio(1)           9.54 %          9.21 %
        Book value per share                      $      15.91    $      15.74
        Tangible book value per share             $      13.40    $      13.22
        Shares outstanding                          37,071,357      37,420,909
        Pacific Western Bank:
        Stockholders' equity                      $    650,258    $    649,656
        Less:   Intangible assets                       93,220          94,589

                Tangible common equity            $    557,038    $    555,067

        Total assets                              $  5,278,470    $  5,443,484
        Less:   Intangible assets                       93,220          94,589

                Tangible assets                   $  5,185,250    $  5,348,895

                Equity to assets ratio                   12.32 %         11.93 %
                Tangible common equity ratio(1)          10.74 %         10.38 %


Calculated as tangible common equity divided by tangible assets.

Results of Operations

Acquisitions Impact Earnings Performance

The comparability of financial information is affected by our acquisitions. We completed the following three acquisitions during 2012: EQF ($189.8 million in assets), which was acquired on

. . .

  Add PACW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PACW - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now

Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.