PACW 10-K 12/31/2013
Section 1: 10-K (10-K)
Use these links to rapidly review the document
TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
o
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2013
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 00-30747
PACWEST BANCORP
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
33-0885320
(I.R.S. Employer
Identification No.)
10250 Constellation Blvd., Suite 1640
Los Angeles, California
(Address of Principal Executive
Offices)
90067
(Zip Code)
Registrant's telephone number, including area code: (310) 286-1144
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common stock, $.01 par value per share
Name of Each Exchange on Which Registered
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated filer
ý
Accelerated filer
o
Non-Accelerated filer
o
(Do not check if a
smaller reporting company)
Smaller reporting
company o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) Yes o No ý
As of June 30, 2013, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to
the average high and low sales prices on The Nasdaq Global Select Market as of the close of business on June 28, 2013, was approximately
$1.2 billion. Registrant does not have any nonvoting common equities.
As of February 24, 2014, there were 44,690,144 shares of registrant's common stock outstanding, excluding treasury shares and 1,087,436
shares of unvested restricted stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive
proxy statement for its 2014 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, and such information is incorporated herein by this reference.
Table of Contents
PACWEST BANCORP
2013 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
Business
General
Recent Transactions
Banking Business
Strategic Evolution and Acquisition Strategy
Competition
Employees
Financial and Statistical Disclosure
Supervision and Regulation
Available Information
Forward-Looking Information
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Market For Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Marketplace Designation, Sales Price Information and Holders
Dividends
Securities Authorized for Issuance under Equity Compensation Plans
Recent Sales of Unregistered Securities and Use of Proceeds
Repurchases of Common Stock
Five-Year Stock Performance Graph
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Key Performance Indicators
Critical Accounting Policies
Non-GAAP Measurements
Results of Operations
Business Segments
Financial Condition
Borrowings
Capital Resources
Liquidity
Contractual Obligations
Off-Balance Sheet Arrangements
Recent Accounting Pronouncements
Quantitative and Qualitative Disclosures About Market Risk
1
3
3
3
5
10
11
12
12
12
23
24
25
39
39
39
42
43
43
43
45
45
45
46
47
49
49
53
55
59
62
77
82
99
99
101
104
104
104
105
Table of Contents
ITEM 8.
Financial Statements and Supplementary Data
Contents
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Earnings for the Years Ended December 31, 2013,
2012, and 2011
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013,
2012, and 2011
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
SIGNATURES
CERTIFICATIONS
2
109
109
110
111
112
113
114
115
116
117
194
194
194
195
195
195
195
195
196
201
Table of Contents
ITEM 1. BUSINESS
General
PART I
PacWest Bancorp is 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 banking subsidiary, Pacific Western Bank, which we refer to as Pacific
Western or the Bank. When we say "we," "our" or the "Company," we mean the Company on a consolidated basis with the Bank. When we refer to
"PacWest" or to the holding company, we are referring to the parent company on a stand-alone basis.
PacWest Bancorp was formerly known as First Community Bancorp, which was organized on October 22, 1999 as a California corporation. At a
special meeting of the Company's stockholders held on April 23, 2008, the stockholders approved the reincorporation of the Company in Delaware
from California and the change of the Company's name to PacWest Bancorp from First Community Bancorp. The reincorporation became effective
on May 14, 2008. In connection with the reincorporation and name change, the Company also changed its ticker symbol on the NASDAQ Global
Select Market to "PACW."
Recent Transactions
CapitalSource Merger Announcement
On July 22, 2013, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest and
CapitalSource, Inc. ("CapitalSource") will merge in a transaction valued at approximately $2.8 billion based on the closing price of PacWest common
stock on February 13, 2014 of $40.11. The combined company will be called PacWest Bancorp. As part of the merger, CapitalSource Bank, a wholly-
owned subsidiary of CapitalSource, will merge with and into Pacific Western, and the combined subsidiary bank will be called Pacific Western Bank.
The CapitalSource national lending operation will continue to do business under the name CapitalSource as a division of Pacific Western Bank.
Under the terms of the Agreement, CapitalSource shareholders will receive $2.47 in cash and 0.2837 shares of PacWest common stock for each
share of CapitalSource common stock. The total value of the CapitalSource per share merger consideration was $13.85 based on the closing price of
PacWest common stock on February 13, 2014 of $40.11.
As of December 31, 2013, on a pro forma consolidated basis, the combined company would have had approximately $15.4 billion in assets with
94 branches throughout California. The combined institution would be the 6th largest publicly-owned bank headquartered in California, and the
8th largest commercial bank headquartered in California (out of more than 214 financial institutions in the state).
We currently expect to receive final regulatory approval in the first quarter of 2014 and to close the merger on April 1, 2014.
First California Financial Group Acquisition
On May 31, 2013, we completed the acquisition of First California Financial Group, Inc., or FCAL, following receipt of shareholder approval from
both institutions and all required regulatory approvals. As part of the acquisition, First California Bank, or FCB, a wholly-owned subsidiary of
FCAL, merged with and into Pacific Western.
3
Table of Contents
In the FCAL acquisition, each share of FCAL common stock was converted into the right to receive 0.2966 of a share of PacWest common
stock. The exchange ratio was calculated based on the volume-weighted average share price of PacWest common stock for the 20 consecutive
trading days ending on the second full trading day prior to the receipt of the last of the regulatory approvals required under the merger agreement.
PacWest issued an aggregate of approximately 8.4 million shares of PacWest common stock to FCAL stockholders. In addition, 1,094,000 shares of
FCAL common stock previously owned by PacWest at a cost of $4.1 million were cancelled in the transaction. These shares were carried in our
securities available-for-sale portfolio at their estimated market value with their unrealized gain of $5.2 million included in stockholders' equity at
May 31, 2013. Under acquisition accounting, this unrealized gain was recognized in earnings. Based on the closing price of PacWest's common
stock on May 31, 2013 of $28.83 per share, the aggregate consideration paid to FCAL common stockholders, including the 1,094,000 shares of FCAL
common stock owned by us and cancelled in the merger, was $251.6 million. The application of the acquisition method of accounting resulted in
goodwill of $129.1 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.
FCB was a full-service commercial bank headquartered in Westlake Village, California. FCB provided a full range of banking services, including
revolving lines of credit, term loans, commercial real estate loans, construction loans, consumer loans and home equity loans to individuals,
professionals, and small to mid-sized businesses. FCB operated 15 branches throughout Southern California in the Los Angeles, Orange, Riverside,
San Bernardino, San Diego, Ventura, and San Luis Obispo Counties. We made this acquisition to expand our presence in Southern California. We
completed the conversion and integration of the FCB branches to PWB's operating platform in June 2013 and as a result, we added seven locations
to our branch network.
2012 Transactions
Sale of Branches
On September 21, 2012, Pacific Western completed the sale of 10 branches. The branches were located in Los Angeles, San Bernardino,
Riverside, and San Diego Counties. The branch sale resulted in the transfer of $125.2 million of deposits; no loans were sold in this transaction. The
buyer paid a blended deposit premium of 2.5% and we recognized a net gain of $297,000 on this transaction.
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.
4
Table of Contents
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, and 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. EQF focuses on
providing equipment and specialty leasing to customers across the United States for amounts up to $50 million. The EQF acquisition diversified our
lending portfolio, expanded our product lines, and deployed excess liquidity into higher yielding assets.
See "—Strategic Evolution and Acquisition Strategy," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations—Overview," and Note 4, Acquisitions, and Note 5, Goodwill and Other Intangible Assets, of the Notes to Consolidated Financial
Statements contained in "Item 8. Financial Statements and Supplementary Data" for further information regarding recent transactions.
Banking Business
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 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.
Special services, including international banking services, multi-state deposit services and investment services, and requests for services
beyond our current service area or product offerings are arranged through correspondent banks. The Bank also offers remote deposit capture
services and issues ATM and debit cards. The Bank has a network of branded ATMs and offers access to ATM networks through other major
service providers. We provide access to customer accounts via a 24-hour seven day a week toll-free automated telephone customer service and
secure online banking services.
We are committed to providing premier, relationship-based community banking in the California markets we serve, meeting the credit needs of
established businesses in our marketplace, as well as extending credit to growing businesses that may not yet meet the credit standards of the Bank
through tightly controlled asset-based lending and factoring of accounts receivable. We compete actively for deposits, and emphasize solicitation
of noninterest-bearing deposits. In managing the top line of our business, we focus on making quality loans and gathering low-cost deposits to
maximize our net interest margin. The strategy for serving our target markets is the delivery of a finely-focused set of value-added products and
services that satisfy the primary needs of our customers, emphasizing superior service and relationships over transaction volume or low pricing.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment
securities, and fees received in connection with deposit services, extending credit, and other services offered, including foreign exchange services.
Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation and general operating expenses. The
Bank relies on a foundation of locally generated and relationship-
5
Table of Contents
based deposits. The Bank has a relatively low cost of funds due to a high percentage of noninterest-bearing and low cost deposits.
Our operations, similar to other financial institutions with operations predominantly focused in Southern California, are significantly influenced
by economic conditions in Southern California, including the strength of the real estate market, the fiscal and regulatory policies of the federal and
state governments and the regulatory authorities that govern financial institutions. See "—Supervision and Regulation." Through our offices
located in Northern California, our asset-based lending operations with production and marketing offices located in Arizona, Northern California,
Texas, Colorado, Minnesota and the Pacific Northwest, and our equipment leasing operations based in Utah, we are also subject to the economic
conditions affecting these markets.
Lending Activities
Through the Bank, the Company concentrates its lending activities in five principal areas:
(1) Real Estate Loans. Real estate loans are comprised of construction loans, miniperm loans collateralized by first or junior deeds of trust
on specific commercial properties and equity lines of credit. The properties collateralizing real estate loans are principally located in our primary
market areas of Los Angeles, Orange, San Bernardino, Riverside, San Diego, Ventura, Santa Barbara and San Luis Obispo counties in California and
the neighboring communities. Construction loans are comprised of loans on commercial, residential and income producing properties that generally
have terms of less than two years and typically bear an interest rate that floats with the Bank's base rate or another established index. Miniperm
loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income producing properties. Miniperm loans
are generally made with an amortization schedule ranging from 15 to 25 years with a lump sum balloon payment due in one to ten years. Equity lines
of credit are revolving lines of credit collateralized by junior deeds of trust on residential real estate properties. They generally bear a rate of interest
that floats with the Bank's base rate or the prime rate and have maturities of ten years. From time to time, we purchase participation interests in loans
originated by other financial institutions. These loans are subject generally to the same underwriting criteria and approval process as loans
originated directly by us.
The Bank's real estate portfolio is subject to certain risks, including, but not limited to: (i) the effects of economic downturns in the Southern
California economy and in general; (ii) interest rate increases; (iii) reduction in real estate values in Southern California and in general; (iv) increased
competition in pricing and loan structure; (v) the borrower's ability to refinance or payoff the balloon or line of credit at maturity; and
(vi) environmental risks, including natural disasters. In addition to the foregoing, construction loans are also subject to project specific risks
including, but not limited to: (a) construction costs being more than anticipated; (b) construction taking longer than anticipated; (c) failure by
developers and contractors to meet project specifications; (d) disagreement between contractors, subcontractors and developers; (e) demand for
completed projects being less than anticipated; (f) buyers being unable to secure financing; and (g) loss through foreclosure.
When underwriting loans, we strive to reduce the exposure to such risks by (i) reviewing each loan request and renewal individually, (ii) using
a dual signature approval system for the approval of each loan request for loans over a certain dollar amount, (iii) adhering to written loan policies,
including, among other factors, minimum collateral requirements, maximum loan-to-value ratio requirements, cash flow requirements and personal
guarantees, (iv) obtaining independent third party appraisals which are reviewed by the Bank's appraisal department, (v) obtaining external
independent credit reviews, (vi) evaluating concentrations as a percentage of capital and loans, and (vii) conducting environmental reviews, where
appropriate. With respect to construction loans, in addition to the foregoing, we attempt to mitigate project specific risks by: (a) implementing a
controlled disbursement process for loan proceeds in accordance with an agreed upon schedule; (b) conducting project site visits; and
6
Table of Contents
(c) adhering to release-price schedules to ensure the prices for which newly-built units to be sold are sufficient to repay the Bank. The risks related
to buyer inability to secure financing and loss through foreclosure are not controllable. We review each loan request on the basis of our ability to
recover both principal and interest in view of the inherent risks.
(2) Commercial Loans. Commercial loans, both domestic and foreign, are made to finance operations, to provide working capital, or for
specific purposes such as to finance the purchase of assets, equipment or inventory. Since a borrower's cash flow from operations is generally the
primary source of repayment, our policies provide specific guidelines regarding required debt coverage and other important financial ratios.
Commercial loans include lines of credit and commercial term loans. Lines of credit are extended to businesses or individuals based on the financial
strength and integrity of the borrower and guarantor(s) and generally (with some exceptions) are collateralized by short-term assets such as
accounts receivable, inventory, equipment or real estate and have a maturity of one year or less. Such lines of credit generally bear an interest rate
that floats with the Bank's base rate. Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debt
originally used to purchase fixed assets or, in rare cases, to finance the purchase of businesses. Commercial term loans generally have terms of one
to five years. They may be collateralized by the asset being acquired or other available assets and bear interest rates which either float with the
Bank's base rate, LIBOR or another established index or remain fixed for the term of the loan.
The Bank's portfolio of commercial loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns in the
Southern California economy; (ii) interest rate increases; (iii) deterioration of the value of the underlying collateral; (iv) increased competition in
pricing and loan structure; (v) the deterioration of a borrower's or guarantor's financial capabilities: and (vi) environmental risks, including natural
disasters, which can negatively affect a borrower's business. We strive to reduce the exposure to such risks through: (a) reviewing each loan
request and renewal individually; (b) using a dual signature approval system; (c) adhering to written loan policies; and (d) obtaining external
independent credit reviews. In addition, loans based on short-term asset values and factoring arrangements are monitored on a daily, weekly,
monthly or quarterly basis and may include lockbox or control account arrangements. In general, the Bank receives and reviews financial statements
and other documents of borrowing customers on an ongoing basis during the term of the relationship and responds to any deterioration noted.
(3) SBA Loans. SBA loans are made through programs designed by the federal government to assist the small business community in
obtaining financing from financial institutions that are given government guarantees as an incentive to make the loans. Our SBA loans fall into two
categories, loans originated under the SBA's 7(a) Program ("7(a) Loans") and loans originated under the SBA's 504 Program ("504 Loans"). SBA 7
(a) Loans are commercial business loans generally made for the purpose of purchasing real estate to be occupied by the business owner, providing
working capital, and/or purchasing equipment, accounts receivable or inventory. SBA 504 Loans are collateralized by commercial real estate and are
generally made to business owners for the purpose of purchasing or improving real estate or equipment for use in their business.
SBA lending is subject to federal legislation that can affect the availability and funding of the program. From time to time, this dependence on
legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an
adverse financial impact on our business.
The Bank's portfolio of SBA loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns on the
Southern California economy; (ii) interest rate increases; (iii) deterioration of the value of the underlying collateral; and (iv) deterioration of a
borrower's or guarantor's financial capabilities. We strive to reduce the exposure of such risks through: (a) reviewing
7
Table of Contents
each loan request and renewal individually; (b) using a dual signature approval system; (c) adhering to written loan policies; (d) adhering to SBA
written policies and regulations; (e) obtaining independent third party appraisals which are reviewed by the Bank's appraisal department; and
(f) obtaining external independent credit reviews. In addition, SBA loans normally require monthly installment payments of principal and interest
and therefore are continually monitored for past due conditions. In general, the Bank receives and reviews financial statements and other
documents of borrowing customers on an ongoing basis during the term of the relationship and responds to any deterioration noted.
(4) Consumer Loans. Consumer loans include personal loans, auto loans, boat loans, home improvement loans, revolving lines of credit,
other loans typically made by banks to individual borrowers, and purchased 95% participation interests in student loans originated and serviced by
a third-party lender. The Bank does not currently originate first trust deed home mortgage loans. The student loans that we purchase are not
guaranteed by any program of the U.S. Government, and are made to refinance the outstanding student loan debt of borrowers who meet certain
underwriting criteria, and having terms that fully amortize the debt over five, ten or fifteen years. The Bank's consumer loan portfolio is subject to
certain risks, including: (i) amount of credit offered to consumers in the market; (ii) interest rate increases; and (iii) (with the exception of the
purchased student loan portfolio), consumer bankruptcy laws which allow consumers to discharge certain debts. The Bank's student loan
participation interests are also subject to further risks, including (i) the ability of the originator and sub-servicer to originate and service the loans in
accordance with the terms of the loan purchase agreement; and (ii) compliance with consumer lending regulations and oversight by the Consumer
Financial Protection Bureau. We strive to reduce the exposure to such risks through the direct approval of all internally originated consumer loans
by: (a) reviewing each loan request and renewal individually; (b) using a dual signature approval system; (c) adhering to written credit policies; and
(d) obtaining external independent credit reviews, and for all purchased consumer loan participation interests through the monitoring of the
performance of the originator and sub-servicer and the enforcement of our rights under the loan purchase agreement.
(5) Leases. Leases include leases and lease financing transactions. Leases are originated by our in-house sales force and purchased
through a network of brokers. The types of equipment leased include; (i) technology; (ii) manufacturing; (iii) software; (iv) transportation; and
(v) mining. The main industries served with our lease portfolio are; (i) finance and insurance; (ii) health care; (iii) manufacturing; and
(iv) transportation. Leases are fixed-rate contracts with a one to six year term and any back-end exposure being secured with documented options
controlled by the Bank. No residual risk is taken on the future value of the leased equipment. Lease transactions are done with lessees that meet our
credit criteria based on their cash flow and ability to make their lease payments.
The Bank's lease portfolio is subject to certain risks, including but not limited to: (i) the effects of economic downturns in the national
economy; (ii) interest rate increases; and, (iii) the deterioration of lessees' financial capabilities. When underwriting leases, we strive to reduce the
exposure to such risks by: (i) reviewing each lease request individually; (ii) using a dual signature approval system; (iii) following the guidelines of
our credit policies, with special attention to cash flow and profitability; and (iv) diversifying our exposure between industries, equipment types, and
geographic locations in the United States.
Business Concentrations
One of the ways that we present our loans and leases is by "covered" and "non-covered" loan categories. Covered loans represent loans
covered by loss sharing agreements with the Federal Deposit Insurance Corporation ("FDIC") for which we will be reimbursed for a substantial
portion of any future losses under the terms of the agreements. Non-covered loans and leases represent loans and leases not covered by FDIC loss
sharing agreements.
8
Table of Contents
The following tables present the composition of our loan portfolio by segment and class, showing the non-covered and covered components,
as of the dates indicated:
Real estate mortgage:
Hospitality
SBA 504
Other
Total real estate mortgage
Real estate construction:
Residential
Commercial
Total real estate
construction
Total real estate loans
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total commercial
Leases
Consumer
Total gross loans and leases $
Non-Covered Loans
and Leases
Amount
% of
Total
December 31, 2013
Covered Loans
% of
Amount
Total
(Dollars in thousands)
Total Loans
and Leases
Amount
% of
Total
$
179,340
45,166
2,153,519
2,378,025
5% $
1%
56%
62%
2,395
—
415,578
417,973
1% $
—
92%
93%
181,735
45,166
2,569,097
2,795,998
58,881
142,842
1%
4%
17
17,777
—
4%
58,898
160,619
201,723
2,579,748
5%
67%
17,794
435,767
4%
97%
219,517
3,015,515
581,097
150,985
202,428
28,642
963,152
269,769
52,248
3,864,917
15%
4%
5%
1%
25%
7%
1%
100% $
6,934
2,895
—
—
9,829
—
2,822
448,418
1%
1%
—
—
2%
—
1%
100% $
588,031
153,880
202,428
28,642
972,981
269,769
55,070
4,313,335
9
4%
1%
60%
65%
1%
4%
5%
70%
13%
4%
5%
1%
23%
6%
1%
100%
Table of Contents
Real estate mortgage:
Hospitality
SBA 504
Other
Total real estate mortgage
Real estate construction:
Residential
Commercial
Total real estate
construction
Total real estate loans
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total commercial
Leases
Consumer
Total gross loans and leases $
Non-Covered Loans
and Leases
Amount
% of
Total
December 31, 2012
Covered Loans
% of
Amount
Total
(Dollars in thousands)
Total Loans
and Leases
Amount
% of
Total
$
181,144
54,158
1,684,008
1,919,310
6% $
2%
55%
63%
2,644
—
502,256
504,900
1% $
—
92%
93%
183,788
54,158
2,186,264
2,424,210
48,629
81,330
1%
3%
5,973
18,672
1%
4%
54,602
100,002
129,959
2,049,269
4%
67%
24,645
529,545
5%
98%
154,604
2,578,814
458,206
80,381
239,430
25,325
803,342
174,373
22,521
3,049,505
15%
2%
8%
1%
26%
6%
1%
100% $
12,655
529
—
—
13,184
—
598
543,327
2%
—
—
—
2%
—
—
100% $
470,861
80,910
239,430
25,325
816,526
174,373
23,119
3,592,832
5%
1%
61%
67%
1%
3%
4%
71%
13%
2%
7%
1%
23%
5%
1%
100%
No individual or single group of related accounts is considered material in relation to our total assets or deposits of the Bank, or in relation to
the overall business of the Company. However, approximately 70% of our total loan and lease portfolio at December 31, 2013 consisted of real estate
loans, including miniperm loans, SBA 504 loans, and construction loans. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations—Financial Condition—Non-Covered Loans," and also "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations—Financial Condition—Covered Loans." Since our business activities are currently focused primarily
in Southern California, with the majority of our business concentrated in Los Angeles, Orange, Riverside, San Bernardino, San Diego, Ventura,
Santa Barbara and San Luis Obispo Counties, our results of operations and financial condition are dependent upon the general trends in the
Southern California economies and, in particular, the residential and commercial real estate markets. The concentration of our operations in Southern
California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes,
fires and floods in this region.
Strategic Evolution and Acquisition Strategy
The Company was organized on October 22, 1999 as a California corporation for the purpose of becoming a bank holding company and to
acquire all the outstanding capital stock of Rancho Santa Fe National Bank. Since that time, we have grown through a series of business
acquisitions.
10
Table of Contents
The following chart summarizes the acquisitions completed since our inception, some of which are described in more detail below. See also
Note 4, Acquisitions, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for
further details regarding recent acquisitions.
Date
(1) May 2000
(2) May 2000
(3) January 2001
(4) October 2001
(5) January 2002
(6) March 2002
(7) August 2002
(8) August 2002
(9) September 2002
(10) January 2003
(11) August 2003
(12) March 2004
(13) April 2004
(14) August 2005
(15) October 2005
(16) January 2006
(17) May 2006
(18) October 2006
(19) June 2007
(20) November 2008
(21) August 2009
(22) August 2010
(23) January 2012
(24) April 2012
(25) August 2012
(26) May 2013
Institution/Company Acquired
Rancho Santa Fe National Bank
First Community Bank of the Desert
Professional Bancorp, Inc.
First Charter Bank
Pacific Western National Bank
W.H.E.C., Inc.
Upland Bank
Marathon Bancorp
First National Bank
Bank of Coronado
Verdugo Banking Company
First Community Financial Corporation
Harbor National Bank
First American Bank
Pacific Liberty Bank
Cedars Bank
Foothill Independent Bancorp
Community Bancorp Inc.
Business Finance Capital Corporation
Security Pacific Bank (deposits only)(1)
Affinity Bank(1)
Los Padres Bank(1)
Pacific Western Equipment Finance (formerly
Marquette Equipment Finance)
Celtic Capital Corporation
American Perspective Bank
First California Financial Group, Inc.(2)
(1)
(2)
FDIC assisted.
Includes assets covered by two FDIC loss sharing agreements.
Our acquisitions focused generally on increasing our banking presence in California and increasing earning assets. In addition to the
acquisitions mentioned previously under "—Recent Transactions," we made two FDIC-assisted banking acquisitions, Affinity Bank ("Affinity")
and Los Padres Bank ("Los Padres'), which expanded our operations and branch banking network in California. For information regarding the
Affinity and Los Padres acquisitions, see "Item 8. Management's Discussion and Analysis of Financial Condition and Results of Operations—
Overview—FDIC-Assisted Acquisitions."
Competition
The banking business in California, and specifically in the Bank's primary service areas, is highly competitive with respect to originating loans,
acquiring deposits and providing other banking services. The market is dominated by commercial banks in Southern California with assets between
$500 million and $25 billion, including ourselves, and a few banking giants with a large number of offices and full-service operations over a wide
geographic area. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and
bank holding
11
Table of Contents
companies. Those competitors include savings and loan associations, brokerage houses, insurance companies, mortgage companies, credit unions,
credit card companies, and other financial and non-financial institutions and entities.
Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the
financial services industry. We work to anticipate and adapt to dynamic competitive conditions whether it is by developing and marketing
innovative products and services, adopting or developing new technologies that differentiate our products and services, cross marketing, or
providing highly personalized banking services. We strive to distinguish ourselves from other community banks and financial services providers in
our marketplace by providing an extremely high level of service to enhance customer loyalty and to attract and retain business. However, we can
provide no assurance as to the effectiveness of these efforts on our future business or results of operations, as to our continued ability to
anticipate and adapt to changing conditions, and as to sufficiently improving our services and/or banking products in order to successfully
compete in our primary service areas.
Employees
As of January 31, 2014, we had 1,110 full time equivalent employees.
Financial and Statistical Disclosure
Certain of our statistical information are presented within "Item 6. Selected Financial Data," "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Item 7A. Qualitative and Quantitative Disclosure About Market Risk." This information
should be read in conjunction with the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data."
Supervision and Regulation
General
The banking and financial services businesses in which we engage are highly regulated. Such regulation is intended, among other things, to
protect the interests of customers, including depositors, and the federal deposit insurance fund, as well as to minimize risk to the banking system as
a whole. These regulations are not, however, generally charged with protecting the interests of our stockholders or creditors. Described below are
the material elements of selected laws and regulations applicable to our Company. The descriptions are not intended to be complete and are
qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulations, and in their
application by regulatory agencies, cannot be predicted, but they may have a material effect on the business and results of our Company.
The commercial banking business is also influenced by the monetary and fiscal policies of the federal government and the policies of the Board
of Governors of the Federal Reserve System, or FRB. The FRB implements national monetary policies (with the dual mandate of price stability and
maximum employment) by its open-market operations in United States Government securities, by adjusting the required level of and paying interest
on reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. Indirectly, such actions may also impact the ability of non-bank financial institutions to compete with
the Bank. The nature and impact of any future changes in monetary policies cannot be predicted.
12
Table of Contents
The events of the past few years have led to numerous new laws in the United States and internationally for financial institutions. The Dodd-
Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act" or "Dodd-Frank"), which was enacted in July 2010, significantly
restructured the financial regulatory regime in the United States, including the creation of a new systemic risk oversight body, the Financial Stability
Oversight Council (the "FSOC"). The FSOC oversees and coordinates the efforts of the primary U.S. financial regulatory agencies (including the
FRB, the Securities and Exchange Commission ("SEC"), the Commodity Futures Trading Commission and the FDIC) in establishing regulations to
address financial stability concerns. In addition to the systemic risk oversight framework implemented through the FSOC, the Dodd-Frank Act
broadly affected the financial services industry by creating a resolution authority, mandating higher capital and liquidity requirements, requiring
banks to pay increased fees to regulatory agencies, and establishing numerous other provisions aimed at strengthening the sound operation of the
financial services sector. As discussed further throughout this section, many aspects of Dodd-Frank continue to be subject to rulemaking and will
take effect over several additional years, making it difficult to anticipate the overall financial impact on PacWest or across the industry.
Bank Holding Company Regulation
As a bank holding company, PacWest is registered with and subject to regulation by the FRB under the Bank Holding Company Act of 1956,
as amended, or the BHCA. FRB policy historically has required bank holding companies to act as a source of financial strength to their bank
subsidiaries and to commit capital and financial resources to support those subsidiaries in circumstances where it might not otherwise do so. The
Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support
the Bank, including at times when we may not be in a financial position to do so. Similarly, under the cross-guarantee provisions of the Federal
Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to such a
commonly controlled institution. Under the BHCA, we are subject to periodic examination by the FRB. We are also required to file with the FRB
periodic reports of our operations and such additional information regarding the Company and its subsidiaries as the FRB may require. Pursuant to
the BHCA, we are required to obtain the prior approval of the FRB before we acquire all or substantially all of the assets of any bank or ownership
or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent
of such bank.
Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries and
such other activities that the FRB deems to be so closely related to banking as "to be a proper incident thereto." We are also prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the
company is engaged in banking activities or the FRB determines that the activity is so closely related to banking as to be a proper incident to
banking. The FRB's approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved
company can open new offices.
The BHCA and regulations of the FRB also impose certain constraints on the redemption or purchase by a bank holding company of its own
shares of stock.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial
holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and
insurance activities and any other activity that the FRB, in consultation with the Secretary of the Treasury, determines by regulation or order is
financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to
the safety or soundness of depository
13
Table of Contents
institutions or the financial system generally. As of the date of this filing, we do not operate as a financial holding company.
Our earnings and activities are affected by legislation, by regulations and by local legislative and administrative bodies and by decisions of
courts in the jurisdictions in which we and the Bank conduct business. For example, these activities include limitations on the ability of the Bank to
pay dividends to us and our ability to pay dividends to our stockholders. It is the policy of the FRB that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the
organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash
dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Various federal and state
statutory provisions limit the amount of dividends that our subsidiary Bank can pay to us without regulatory approval.
In addition to these explicit limitations, the federal regulatory agencies have general authority to prohibit a banking subsidiary or bank holding
company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that
paying a dividend would constitute an unsafe or unsound banking practice. Further, as discussed below under "—Capital Requirements", a bank
holding company, such as the Company, is required to maintain minimum ratios of Tier 1 capital and total capital to total risk-weighted assets, and a
minimum ratio of Tier 1 capital to total adjusted quarterly average assets as defined in such regulations. The level of our capital ratios may affect our
ability to pay dividends. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters—Dividends" and Note 20, Dividend
Availability and Regulatory Matters, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an
affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral for a loan or
extension of credit to any person or company, issue a guarantee or accept letters of credit on behalf of an affiliate only if the aggregate amount of
the above transactions of such subsidiary does not exceed 10 percent of such subsidiary's capital stock and surplus on an individual basis or
20 percent of such subsidiary's capital stock and surplus on an aggregate basis. Such transactions must be on terms and conditions that are
consistent with safe and sound banking practices. A bank holding company and its subsidiaries generally may not purchase a "low-quality asset,"
as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from
borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral. The Dodd-Frank Act significantly
expanded the coverage and scope of the limitations on affiliate transactions within a banking organization.
The FRB has cease and desist powers over parent bank holding companies and non-banking subsidiaries where the action of a parent bank
holding company or its non-financial institutions represents an unsafe or unsound practice or violation of law. The FRB has the authority to
regulate debt obligations, other than commercial paper, issued by bank holding companies by imposing interest ceilings and reserve requirements
on such debt obligations.
The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in
proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds).
The statutory provision is commonly called the "Volcker Rule". On December 10, 2013, the federal financial regulatory agencies adopted final rules
implementing the Volcker Rule and granted a blanket one-year extension of the Volcker Rule conformance period so that banking organizations have
until July 21,
14
Table of Contents
2015 to fully comply with most requirements of the Volcker Rule. The final rules are highly complex, and many aspects of their application remain
uncertain. We do not currently anticipate that the Volcker Rule will have a material effect on our operations since we do not engage in the
businesses prohibited by the Volcker Rule. We may incur costs if we are required to adopt additional policies and systems to ensure compliance
with the Volcker Rule, but any such costs are not expected to be material. Because many of the effects of the Volcker Rule may become apparent
only over several years as the federal financial regulatory agencies apply the rule in practice, the precise financial impact of the rule on the
Company, its customers or the financial industry more generally cannot currently be determined.
Capital Requirements
General Risk Based Capital Rules. The Company is subject to consolidated regulatory capital requirements administered by the FRB, and
the Bank is subject to similar capital requirements administered by the FDIC. The Dodd-Frank Act applies the same leverage and risk-based capital
requirements that apply to insured depository institutions to bank holding companies, such as the Company. The guidelines of the FRB and FDIC
are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments.
Under the guidelines, banking organizations are required to maintain minimum ratios of Tier 1 capital and total capital to total risk-weighted assets
(including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization's assets and some
of its specified off-balance sheet commitments and obligations are assigned to various risk categories.
A depository institution's or holding company's capital, in turn, is classified in one of three tiers, depending on type:
•
•
•
Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred
stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts
of consolidated subsidiaries, and qualifying trust preferred securities (subject to phase-out as described under "—Basel III Capital
Rules" below) less goodwill, most intangible assets and certain other assets.
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities
not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for
possible credit losses, subject to limitations.
Market Risk Capital (Tier 3). Tier 3 capital includes qualifying unsecured subordinated debt.
As a bank holding company, the Company currently is required to maintain Tier 1 capital and total capital equal to at least 4.0% and 8.0%,
respectively, of its total risk-weighted assets (including various off-balance sheet items, such as letters of credit). The Bank is required to maintain
equivalent capital levels under capital adequacy guidelines. In addition, as a depository institution, the Bank is subject to minimum capital ratios
under the regulatory framework for prompt corrective action discussed under "—Prompt Corrective Action."
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a
banking organization's Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). Bank holding companies and
FDIC-supervised banks, such as the Company and the Bank, respectively, are required to maintain a minimum leverage ratio of 4.0%, unless a
different minimum is specified by an appropriate regulatory authority. In addition, for a depository institution to be considered "well capitalized"
under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%.
Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital.
Deferred tax asset amounts in excess of the calculated
15
Table of Contents
limit are deducted from regulatory capital. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—
Capital Resources—Capital" for further information on regulatory capital requirements, capital ratios, and deferred tax asset limits as of
December 31, 2013 for Pacific Western and the Company.
The Company issued subordinated debentures to trusts that were established by us or entities we have acquired, which, in turn, issued trust
preferred securities, which totaled $131.0 million at December 31, 2013. The Company includes in Tier 1 capital an amount of trust preferred
securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity less goodwill, net of
any related deferred income tax liability. At December 31, 2013, the amount of trust preferred securities included in Tier 1 capital was $131.0 million.
While our existing trust preferred securities are currently grandfathered as Tier 1 capital under the Dodd-Frank Act, recently approved regulatory
capital rules discussed further below under "—Basel III Capital Rules" would phase them out of Tier 1 capital assuming the completion of the
CapitalSource merger or any subsequent acquisition and that, upon the completion of any such transaction, the Company exceeds $15 billion in
consolidated total assets. However, under such rules, trust preferred securities no longer included in Tier 1 capital may be included in Tier 2 capital
on a permanent basis. If trust preferred securities are excluded from regulatory capital, we remain "well capitalized" at December 31, 2013.
The FDIC and FRB risk-based capital guidelines currently applicable to us are based upon the 1988 Capital Accord ("Basel I") of the Basel
Committee on Banking Supervision (the "Basel Committee"). The Basel Committee is a committee of central banks and bank supervisors/regulators
from the major industrialized countries that develops broad policy guidelines that each country's supervisors can use to determine the supervisory
policies they apply. After working on revisions for a number of years, in June 2004, the Basel Committee released the final version of a proposed
new capital framework, with an update in November 2005 ("Basel II"). Basel II proposes two approaches for setting capital standards for credit
risk—an internal ratings-based approach tailored to individual institutions' circumstances (which for many asset classes is itself broken into a
"foundation" approach and an "advanced" or "A-IRB" approach, the availability of which is subject to additional restrictions) and a standardized
approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines.
Basel II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures.
A definitive final rule for implementing the advanced approaches of Basel II in the United States, which applies only to internationally active
banking organizations—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures
of $10 billion or more—became effective on April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this rule, subject
to their meeting applicable qualification requirements.
The Company is not required to comply with Basel II and we have not adopted the Basel II approach.
Basel III Capital Rules. In July 2013, the Company's primary federal regulator, the FRB, and the Bank's primary federal regulator, the FDIC,
approved final rules (the "New Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital
Rules generally implement the Basel Committee on Banking Supervision's (the "Basel Committee") December 2010 final capital framework referred to
as "Basel III" for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements
applicable to bank holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to the
current U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as
address other issues affecting the numerator in banking institutions' regulatory capital ratios. The New Capital Rules
16
Table of Contents
also address asset risk weights and other matters affecting the denominator in banking institutions' regulatory capital ratios and replace the existing
general risk-weighting approach, which was derived from the Basel Committee's 1988 "Basel I" capital accords, with a more risk-sensitive approach
based, in part, on the "standardized approach" in the Basel Committee's 2004 "Basel II" capital accords. In addition, the New Capital Rules
implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the
federal agencies' rules. The New Capital Rules are effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain
of their components and other provisions.
Among other matters, the New Capital Rules: (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1") and related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments
meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the
other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations.
Under the New Capital Rules, for most banking organizations the most common form of Additional Tier 1 capital is non-cumulative perpetual
preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each
case, subject to the New Capital Rules' specific requirements.
Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").
The New Capital Rules also introduce a new "capital conservation buffer", composed entirely of CET1, on top of these minimum risk-weighted
asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of
CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases
and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the Company and the Bank will be required
to maintain such additional capital conservation buffer of 2.5%, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least
7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that
mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks
and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of
CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss ("AOCI") items
included in shareholders' equity (for example, unrealized gains and losses of securities held in the available for sale portfolio) under U.S. GAAP are
reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not
excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent
election to continue to exclude these items. This election must be made concurrently with the first filing of certain of the Company's
17
Table of Contents
and the Bank's periodic regulatory reports in the beginning of 2015. The Company and the Bank expect to make this election in order to avoid
significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our securities portfolio.
The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies'
Tier 1 capital, subject to phase-out in the case of bank holding companies that had $15 billion or more in total consolidated assets as of
December 31, 2009. While our existing trust preferred securities are currently grandfathered as Tier 1 capital, the New Capital Rules would phase
them out of Tier 1 capital assuming the completion of the CapitalSource merger or any subsequent acquisition and that, upon the completion of any
such transaction, the Company exceeds $15 billion in consolidated total assets. If the Company completes the CapitalSource merger or any
subsequent acquisition such that, upon completion of such transaction, the Company exceeds $15 billion in consolidated total assets, beginning in
2015, only 25% of the Company's $131.0 million of trust preferred securities currently outstanding and expected to be outstanding on the effective
date of the New Capital Rules (which is the date of publication in the Federal Register) will be included in Tier 1 capital, and in 2016, none of the
Company's trust preferred securities will be included in Tier 1 capital. Trust preferred securities no longer included in the Company's Tier 1 capital
may nonetheless be included as a component of our Tier 2 capital on a permanent basis without phase-out and irrespective of whether such
securities otherwise meet the revised definition of Tier 2 capital set forth in the New Capital Rules.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period
(beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on
January 1, 2016 at a 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
With respect to the Bank, the New Capital Rules revise the prompt corrective action regulations as described below under "—Prompt
Corrective Action".
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current
four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the
assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk
weights for a variety of asset classes.
We are currently evaluating the impact of the New Capital Rules, including the capital conservation buffer, on our capital ratios and related
calculations.
Liquidity Requirements. Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a
supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III framework requires banks and bank
holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically
applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test, referred to as
the liquidity coverage ratio ("LCR"), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid
assets equal to the entity's expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute
liquidity stress scenario. In January 2013, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, approved
amendments to the LCR to expand the range of eligible assets and refine assumed inflow and outflow rates to reflect actual experience in times of
stress. The other test, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium- and long-term funding of the
assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings
of U.S. Treasury securities and
18
Table of Contents
other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.
In October 2013, the federal banking agencies proposed rules implementing the LCR for advanced approaches banks and a modified version of
the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banks, neither of which
would apply to the Company. The Federal banking agencies have not yet proposed rules to implement the NSFR.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum
capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under the prompt corrective action provisions of FDICIA ("PCA"), an insured depository
institution generally will be classified as undercapitalized if its total risk-based capital is less than 8% or its Tier 1 risk-based capital or leverage ratio
is less than 4%. The New Capital Rules revise the PCA regulations by: (i) introducing a CET1 ratio requirement at each PCA category (other than
critically undercapitalized), with the required CET1 ratio being 6.5% for well capitalized status; (ii) increasing the minimum Tier 1 capital ratio
requirement for each category, with the minimum Tier 1 capital ratio for well capitalized status being 8% (as compared to the current 6%); and
(iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be
adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category. See "—Prompt
Corrective Action" for more information on these topics. An institution that, based upon its capital levels, is classified as "well capitalized",
"adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including
restrictions on growth, restrictions on interest rates paid on deposits, prohibitions on payment of dividends and restrictions on the acceptance of
brokered deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to
the federal bank regulator, and the holding company must guarantee the performance of that plan.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal or state banking agencies for unsafe or unsound practices in conducting their businesses or for violations of
any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of
insurance for deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The
enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed
if such equitable relief was not granted.
19
Table of Contents
Deposit Insurance
Pacific Western is a state-chartered, "non-member" bank and therefore is regulated by the California Department of Business Oversight,
Division of Financial Institutions, or DBO, and the FDIC. Pacific Western accepts deposits, and those deposits have the benefit of FDIC insurance
up to the applicable limits. The applicable limit for FDIC insurance for most types of accounts is $250,000.
The Bank, as is the case with all FDIC insured banks, is subject to deposit insurance assessments as determined by the FDIC. Historically, the
FDIC imposed insurance premiums based on the amount of deposits held and a risk matrix took into account, among other factors, a bank's capital
level and supervisory rating. Pursuant to the Dodd-Frank Act, the FDIC amended its regulations to determine insurance assessments based on the
average consolidated assets less the average tangible equity of the insured depository institution during the assessment period. In addition, in
October 2010, the FDIC adopted a new Deposit Insurance Fund restoration plan to ensure that the fund reserve ratio reaches 1.35% by
September 30, 2020. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or
decrease assessment rates, following notice-and-comment rulemaking if required.
Incentive Compensation
The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting
incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank, having at least $1 billion in total assets
that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees,
or benefits that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring
enhanced disclosure of incentive-based compensation arrangements to regulators. The agencies proposed such regulations in April 2011, but these
regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in
which we may structure compensation for our executives.
In June 2010, the FRB and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the
incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging
excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either
individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should
(i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible
with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective
oversight by the organization's board of directors. These three principles are incorporated into the proposed joint compensation regulations under
Dodd-Frank, discussed above. The FRB will review, as part of its regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." These reviews will be tailored to
each organization based on the scope and complexity of the organization's activities and the prevalence of incentive compensation arrangements.
The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization's
supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken
against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk
to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiency.
20
Table of Contents
Consumer Regulation
The Dodd-Frank Act established the Consumer Financial Protection Bureau ("CFPB") with broad powers to supervise and enforce consumer
protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. While the CFPB's examination and enforcement
authority only extends to banking organizations with more than $10 billion in assets, banks with less than $10 billion in assets, such as the Bank,
will be examined for compliance with the CFPB's rules and regulations by their primary federal banking agency. If the merger with CapitalSource
Bank is completed, the Bank will be subject to direct oversight and examination by the CFPB. Given the recent establishment of the CFPB, there is
still uncertainty surrounding the expected impact of this bureau on us and other banks. The Dodd-Frank Act also weakens the federal preemption
rules that have been applicable for national banks and gives state attorneys general the ability to enforce federal consumer protection laws.
Depositor Preference
The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the
claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative
expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution
fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the
parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
USA PATRIOT Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the
PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications
for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various
federal regulatory agencies, requires financial institutions, including the Company, to establish and implement policies and procedures with respect
to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on
customers. The PATRIOT Act and its underlying regulations permit information sharing for counter-terrorist purposes between federal law
enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC
and other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering
applications filed under Section 3 of the BHCA or the Bank Merger Act.
We regularly evaluate and continue to augment our systems and procedures to continue to comply with the PATRIOT Act and other anti-
money laundering initiatives. We believe that the ongoing cost of compliance with the PATRIOT Act is not likely to be material to the Company.
Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply
with all of the relevant laws or regulations, could have serious legal, strategic, and reputational consequences for the institution.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals and
others. These are typically known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets
Control ("OFAC"). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they
21
Table of Contents
contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against
direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to
making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the
government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S.
jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out,
withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal,
strategic, and reputational consequences, and result in civil money penalties on the Bank.
Community Reinvestment Act
The Community Reinvestment Act of 1977, or the CRA, generally requires insured depository institutions to identify the communities they
serve and to make loans and investments, offer products, make donations in, and provide services designed to meet the credit needs of these
communities. The CRA also requires banks to maintain comprehensive records of its CRA activities to demonstrate how it is meeting the credit
needs of their communities; these documents are subject to periodic examination by the FDIC. During these examinations, the FDIC rates such
institutions' compliance with CRA as "Outstanding," "Satisfactory," "Needs to Improve" or "Substantial Noncompliance." The CRA requires the
FDIC to take into account the record of a bank in meeting the credit needs of all of the communities served, including low- and moderate-income
neighborhoods, in determining such rating. Failure of an institution to receive at least a "Satisfactory" rating could inhibit such institution or its
holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of "Satisfactory" as of its most recent
examination.
Customer Information Security
The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, non-public customer
information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an
appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the
security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such
information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any
customer. We have adopted a customer information security program to comply with such requirements.
Privacy
The Gramm-Leach-Bliley Act of 1999 and the California Financial Information Privacy Act require financial institutions to implement policies
and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statutes
require explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as
otherwise required by law, prohibit disclosing such information except as provided in the Bank's policies and procedures. Pacific Western has
implemented privacy policies addressing these restrictions, which are distributed regularly to all existing and new customers of the Bank.
Legislative and Regulatory Initiatives
From time to time, various legislative and regulatory initiatives are introduced in the U.S. Congress and state legislatures, as well as by
regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository
institutions or proposals to
22
Table of Contents
substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in
substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict
whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial
condition, results of operations or cash flows. A change in statutes, regulations or regulatory policies applicable to the Company or any of its
subsidiaries could have a material effect on our business.
Hazardous Waste Clean-Up and Climate-Related Risk
Our primary exposure to environmental laws is through our lending activities and through properties or businesses we may own, lease or
acquire, or which are collateral for our loans, since we are not involved in any business that manufactures, uses or transports chemicals, waste,
pollutants or toxins that might have a material adverse effect on the environment. Based on a general survey of the Bank's loan portfolio,
conversations with local appraisers and the type of lending currently and historically done by the Bank, we are not presently aware of any actual
liability for hazardous waste contamination that would be reasonably likely to have a material adverse effect on the Company as of February 21,
2014. The Bank is aware of environmental contamination which affects a Bank-owned property acquired in the FCAL acquisition. However, a
remediation plan has been in place for a number of years and the expense associated with the remediation is presently being borne by the adjacent
property owner from whence the contamination originates. Finally, we are not aware of any physical or regulatory consequence resulting from
climate change that would have a material adverse effect upon the Company.
Available Information
We maintain an Internet website at www.pacwestbancorp.com, and a website for Pacific Western at www.pacificwesternbank.com. At
www.pacwestbancorp.com and via the "Investor Relations" link at the Bank's website, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may
read and copy any materials we file with the SEC at the SEC's Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. You may obtain copies of the Company's filings on the SEC site. These documents may also be obtained in print upon
request by our stockholders to our Investor Relations Department.
We have adopted a written code of ethics that applies to all directors, officers and employees of the Company, including our principal executive
officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange
Commission promulgated thereunder. The code of ethics, which we call our Code of Business Conduct and Ethics, is available on our corporate
website, www.pacwestbancorp.com in the section entitled "Corporate Governance." In the event that we make changes in, or provide waivers from,
the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our corporate website in such
section. In the Corporate Governance section of our corporate website, we have also posted the charters for our Audit Committee and our
Compensation, Nominating and Governance Committee, as well as our Corporate Governance Guidelines. In addition, information concerning
purchases and sales of our equity securities by our executive officers and directors is posted on our website.
23
Table of Contents
Our Investor Relations Department can be contacted at PacWest Bancorp, 275 N. Brea Blvd., Brea, CA 92821, Attention: Investor Relations,
telephone (714) 671-6800, or via e-mail to investor-relations@pacwestbancorp.com.
All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website
information into this document.
Forward-Looking Information
This Annual Report on Form 10-K contains certain forward-looking information about the Company, 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 resulting in 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, including the CapitalSource merger, and to successfully integrate such
acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time-frames or at all;
the Company's ability to obtain regulatory approvals and meet other closing conditions to the CapitalSource merger, on the expected
terms and schedule;
difficulties and delays in integrating the Company and CapitalSource businesses or fully realizing cost savings and other benefits;
business disruption following the proposed CapitalSource merger;
if the CapitalSource merger is completed, additional regulatory requirements associated with being a bank and bank holding
company with assets in excess of $10 billion;
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;
24
Table of Contents
•
•
changes in the securities markets; and
regulatory approvals for any capital activities or payment of dividends cannot be obtained, or are not obtained on terms expected or
on the anticipated schedule.
If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be
incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. Therefore, readers
should be mindful that forward-looking statements are not guarantees of future performance and that they are subject to known and unknown risks
and uncertainties that are difficult to predict. Except as required by law, we undertake no, and hereby disclaim any, obligation to update any
forward-looking statements, whether as a result of new information, changed circumstances or otherwise. For additional information concerning
risks and uncertainties related to us and our operations, please refer to Items 1 through 7A of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Ownership of our common stock involves risk. You should carefully consider, in addition to the other information set forth herein, the following
risk factors.
Risks Related to Our Business
Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions
generally.
From December 2007 through June 2009, the U.S. economy was in recession and economic recovery through 2013 has been sluggish. As a
result, the global financial markets have undergone and may continue to experience pervasive and fundamental disruptions. In some cases, the
markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying
financial strength. While economic conditions have shown signs of improvement, the sustainability of an economic recovery is uncertain as
business activity across a wide range of industries continues to face difficulties due to cautious business spending, a general lack of consumer
spending, and sustained high levels of unemployment.
A sustained weakness or further weakening in business and economic conditions generally or specifically in the principal markets in which we
do business could have one or more of the following adverse effects on our business:
•
•
•
•
•
•
a decrease in the demand for loans and other products and services offered by us;
a decrease in deposit balances due to overall reductions in the accounts of customers;
a decrease in the value of our loans or other assets secured by consumer or commercial real estate;
a decrease in net interest income derived from our lending and deposit gathering activities;
an impairment of certain intangible assets; or
an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or
other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of
nonperforming assets, net charge-offs and provision for credit losses.
Overall, the economic downturn has had an adverse effect on our business, and there can be no assurance that the economic recovery will be
sustainable in the near term. If economic conditions worsen or remain volatile, we expect our business, financial condition and results of operations
to be adversely affected.
25
Table of Contents
Changes in economic conditions, in particular a reversal of the economic recovery in Southern California, could materially and adversely
affect our business.
Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative
and regulatory changes, and changes in government monetary and fiscal policies and inflation, all of which are beyond our control. Although the
Southern California economy continues to recover from the 2008 - 2009 recession, the region's recovery has lagged the rate of recovery of the
national economy. The California unemployment rate remains elevated compared to the national rate and the state's overall economy continues to
be negatively impacted by weaknesses in housing and employment in the inland regions. If there is a reversal of the the current fragile economic
recovery, the Company could experience an increase in nonaccrual and classified loans, which generally results in a provision for credit losses and
in turn reduces the Company's net earnings. Any further deterioration in the economic conditions, whether caused by national or local concerns,
could materially and adversely affect our business. In particular, deterioration of the economic conditions in Southern California could result in the
following consequences, any of which could materially and adversely affect our business: loan delinquencies may increase; problem assets and
foreclosures may increase; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and
collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers' borrowing power, and reducing the value of
assets and collateral associated with our existing loans. Until conditions provide for sustained improvement, our business, financial condition and
results of operations may be adversely affected.
Further disruptions in the real estate market could materially and adversely affect our business.
In conjunction with the recent financial crisis, the real estate market experienced a slow-down due to negative economic trends and credit
market disruption, the impacts of which are not yet completely known or quantified. At December 31, 2013, 65% and 5% of our total gross loans,
both non-covered and covered, were comprised of real estate mortgage loans and real estate construction loans, respectively. While the real estate
market has shown signs of recovery, we continue to observe in the marketplace tighter credit underwriting and higher premiums on liquidity, both
of which may continue to place downward pressure on real estate values. Any further downturn in the real estate market could materially and
adversely affect our business because a significant portion of our non-covered loans is secured by real estate. Our ability to recover on defaulted
non-covered loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted non-
covered loans. Substantially all of our real property collateral is located in Southern California. If there were a further decline in real estate values,
especially in Southern California, the collateral for our non-covered loans would provide less security. Real estate values could be affected by,
among other things, a worsening of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates,
continued high levels of unemployment, earthquakes, droughts, wild fires and other natural disasters particular to California.
Our business is subject to interest rate risk, and variations in interest rates may materially and adversely affect our financial performance.
Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or
"spread" between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning
assets and interest-bearing liabilities. Changes in market interest rates generally affect loan volume, loan yields, funding sources and funding costs.
Our net interest spread depends on many factors that are partly or completely out of our control, including competition, federal economic monetary
and fiscal policies, and general economic conditions.
26
Table of Contents
While an increase in the general level of interest rates may increase our loan yield, it may adversely affect the ability of certain borrowers with
variable-rate loans to pay the interest on and principal of their obligations. In addition, an increase in market interest rates on loans is generally
associated with a lower volume of loan originations, which may reduce earnings. Following an increase in the general level of interest rates, our
ability to maintain a positive net interest spread is dependent on our ability to increase our loan offering rates, replace loan maturities with new
originations, minimize increases on our deposit rates, and maintain an acceptable level and mix of funding. We cannot provide assurances that we
will be able to increase our loan offering rates and continue to originate loans due to the competitive landscape in which we operate. Additionally,
we cannot provide assurances that we can minimize the increases in our deposit rates while maintaining an acceptable level of deposits. Finally, we
cannot provide any assurances that we can maintain our current levels of noninterest bearing deposits as customers may seek higher yielding
products when rates increase.
Following a decline in the general level of interest rates, our ability to maintain a positive net interest spread is dependent on our ability to
reduce the interest paid on deposits, borrowings, and other interest-bearing liabilities. We cannot provide assurance that we would be able to lower
the rates paid on deposit accounts to support our liquidity requirements as lower rates may result in deposit outflows.
Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan
origination volume, liquidity, and overall profitability. We cannot assure you that we can minimize our interest rate risk.
We face strong competition from financial services companies and other companies that offer banking services, which could materially and
adversely affect our business.
We conduct our banking operations primarily in Southern California. Increased competition in our market may result in reduced loans and
deposits or less favorable loan and deposit terms. Ultimately, we may not be able to compete successfully against current and future competitors.
Many competitors offer the same banking services that we offer in our service areas. These competitors include national banks, regional banks and
other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan
institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In
particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling
them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates
for loans and deposits, efforts to obtain deposits, and the range and quality of products and services provided, including new technology driven
products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services
markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial
intermediaries that have opened production offices or that solicit deposits in our market areas. Should competition in the financial services industry
intensify, our ability to market our products and services may be adversely affected. If we are unable to attract and retain banking customers, we
may be unable to grow or maintain the levels of our loans and deposits and our results of operations and financial condition may be adversely
affected.
Competition from financial institutions seeking to maintain adequate liquidity places upward pressure on the rates paid on certain deposit
accounts relative to the level of market interest rates during times of both decreasing and increasing market liquidity. To maintain both attractive
and
27
Table of Contents
adequate levels of liquidity, without exhausting secondary sources of liquidity, we may incur increased deposit costs.
Several rating agencies publish unsolicited ratings of the financial performance and relative financial health of many banks, including Pacific
Western, based on publicly available data. As these ratings are publicly available, a decline in the Bank's ratings may result in deposit outflows or
the inability of the Bank to raise deposits in the secondary market as broker-dealers and depositors may use such ratings in deciding where to
deposit their funds.
We may need to raise additional capital in the future and such capital may not be available when needed or at all.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and
business needs. As a publicly traded company, a likely source of additional funds is the capital markets, accomplished generally through the
issuance of equity, both common and preferred stock, and the issuance of subordinated debentures. Our ability to raise additional capital, if needed,
will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.
The current economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit our access to some
of our customary sources of liquidity, including, but not limited to, the capital markets, inter-bank borrowings, repurchase agreements and
borrowings from the discount window of the FRB.
We cannot assure you that access to such capital and liquidity will be available to us on acceptable terms or at all. Any occurrence that may
limit our access to the capital markets, such as a decline in the confidence of debt purchasers, or depositors of the Bank or counterparties
participating in the capital markets, may materially and adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. An
inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business.
We are subject to extensive regulation, which could materially and adversely affect our business.
Our operations are subject to extensive regulation by federal and state governmental authorities, and we are subject to various laws and judicial
and administrative decisions imposing requirements and restrictions on part or all of our operations. The Dodd-Frank Act, enacted in July 2010,
instituted major changes to the banking and financial institutions regulatory regimes. Regulations affecting banks and other financial institutions,
such as the Dodd-Frank Act, are undergoing continuous review and change frequently; the ultimate effect of such changes cannot be predicted.
Because our business is highly regulated, compliance with such regulations and laws may increase our costs and limit our ability to pursue
business opportunities. Also, participation in specific government stabilization programs may subject us to additional restrictions. There can be no
assurance that laws, rules and regulations will not be proposed or adopted in the future, which could (i) make compliance much more difficult or
expensive, (ii) restrict our ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions,
interest or other charges earned on loans originated or sold by us, or (iv) otherwise materially and adversely affect our business or prospects for
business.
The Dodd-Frank Act has had and will continue to have material implications for the Company and the entire financial services industry. Among
other things it has had or will or potentially could have the following effects:
•
together with regulations implementing Basel reforms, affect the levels of capital and liquidity with which we must operate and how
we plan capital and liquidity levels;
28
Table of Contents
•
•
•
•
•
subject us to new and/or higher fees paid to various regulatory entities, including but not limited to deposit insurance fees to the
FDIC;
impact our ability to invest in certain types of entities or engage in certain activities;
restrict the nature of our incentive compensation programs for executive officers;
subject us to the new Consumer Financial Protection Bureau, with its very broad rule-making and enforcement authorities; and
subject us to new and different litigation and regulatory enforcement risks.
As the Dodd-Frank Act requires that many studies be conducted and that hundreds of regulations be written in order to fully implement it, the
full impact of this legislation on us, our business strategies, and financial performance cannot be known at this time, and may not be known for a
number of years. However, these impacts are expected to be substantial and some of them are likely to adversely affect us and our financial
performance. The Dodd-Frank Act and related regulations may also require us to invest significant management attention and resources to make
any necessary changes, and could therefore also adversely affect our business, financial condition and results of operations. Furthermore, if the
CapitalSource merger is consummated, we will be subject to substantial additional regulation. See "Risk Factors—Risks Relating to the Pending
Merger with CapitalSource—If the CapitalSource merger is consummated, we will be subject to substantial additional regulation."
Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no
assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us. For more information,
please see "Item 1. Business—Supervision and Regulation."
We are subject to capital adequacy standards, and a failure to meet these standards could adversely affect our financial condition.
The Company and the Bank are each subject to capital adequacy and liquidity guidelines and other regulatory requirements specifying
minimum amounts and types of capital that must be maintained. From time to time, the regulators implement changes to these regulatory capital
adequacy and liquidity guidelines. If we fail to meet these minimum capital and liquidity guidelines and other regulatory requirements, we or our
subsidiaries may be restricted in the types of activities we may conduct and may be prohibited from taking certain capital actions, such as paying
dividends and repurchasing or redeeming capital securities.
In particular, the capital requirements applicable to the Company and the Bank under the recently adopted Basel III capital rules are in the
process of being phased-in. Once these new rules take effect, we will be required to satisfy additional and more stringent capital adequacy and
liquidity standards than we have in the past. Additionally, stress testing requirements may have the effect of requiring us to comply with the
requirements of the Basel III capital rules, or potentially even greater capital requirements, sooner than expected. While we expect to meet the
requirements of the Basel III capital rules, inclusive of the capital conservation buffer, as phased in by the Federal Reserve, these requirements
could have a negative impact on our ability to lend, grow deposit balances, make acquisitions and make capital distributions in the form of increased
dividends or share repurchases. Higher capital levels could also lower our return on equity.
For more information concerning our compliance with capital and liquidity requirements, see "Item 1. Business—Supervision and Regulation—
Capital Requirements."
29
Table of Contents
The Dodd-Frank repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-
Frank Act. As a result, financial institutions can offer interest on demand deposits to compete for clients. Our interest expense will increase and our
net interest margin will decrease if the Bank begins offering interest on demand deposits to attract additional customers or maintain current
customers, which could have a material adverse effect on our business, financial condition and results of operations.
Emergency measures designed to stabilize the U.S. financial system are beginning to wind down.
Since the middle of 2008, in addition to the programs initiated under the Emergency Economic Stabilization Act of 2008, other regulators and
federal agencies have taken steps to attempt to stabilize and add liquidity to the financial markets. Some of these programs have begun to expire and
the impact of the expiration of these programs on the financial industry and the economic recovery is unknown. A slowdown in or reversal of the
economic recovery could have a material adverse effect on our business, financial condition and results of operations.
Increases in or required prepayments of FDIC insurance premiums may adversely affect our earnings.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance and premiums may be increased or
accelerated in the future. Since 2008, higher levels of bank failures dramatically increased resolution costs of the FDIC and depleted the deposit
insurance fund. In addition, the FDIC instituted temporary programs, some of which were made permanent by the Dodd-Frank Act, to further insure
customer deposits at FDIC insured banks, which have placed additional stress on the deposit insurance fund.
In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC increased assessment rates of
insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years' worth of premiums to
replenish the depleted insurance fund.
Historically, the FDIC utilized a risk-based assessment system that imposed insurance premiums based upon a risk matrix that takes into
account several components including but not limited to the bank's capital level and supervisory rating. Pursuant to the Dodd-Frank Act, the FDIC
amended its regulations to base insurance assessments on the average consolidated assets less the average tangible equity of the insured
depository institution during the assessment period.
Any future increases in or required prepayments of FDIC insurance premiums may adversely affect our financial condition or results of
operations.
Our information systems may experience an interruption or security breach.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we
have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information
systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be
adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result
in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.
30
Table of Contents
We are exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with
respect to these properties. We may be held liable by a governmental entity or to third parties for property damage, personal injury, investigation
and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be
substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant
environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
We may not pay dividends on common stock.
Our stockholders are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such
payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate
our common stock dividend in the future. Our ability to pay dividends to our stockholders is subject to the restrictions set forth in Delaware law, by
our federal regulator, and by certain covenants contained in the indentures governing the trust preferred securities issued by us or entities we have
acquired. Notification to the FRB is also required prior to our declaring and paying a cash dividend to our stockholders during any period in which
our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. We may not
pay a dividend should the FRB object until such time as we receive approval from the FRB or we no longer need to provide notice under applicable
regulations. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters—Dividends" for more information on these
restrictions. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, or as a result of our participation in
any specific government stabilization programs, now or in the future, from paying dividends to our stockholders. Accordingly, we cannot assure
you that we will continue paying dividends on our common stock at current levels or at all. Our failure to pay dividends on our common stock could
have a material adverse effect on the market price of our common stock.
The primary source of the holding company's liquidity from which, among other things, we pay dividends is the receipt of dividends from the
Bank.
The holding company, PacWest, is a legal entity separate and distinct from the Bank and our other subsidiaries. The availability of dividends
from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors,
that the FRB, the FDIC and/or the DBO could assert that payment of dividends or other payments is an unsafe or unsound practice, or that such
regulatory authority may impose restrictions on the Bank's ability to pay dividends as a condition to the Bank's participation in any stabilization
program. In the event the Bank is unable to pay dividends to the holding company, it is likely that we, in turn, would have to stop paying dividends
on our common stock and may have difficulty meeting our other financial obligations, including payments in respect of any outstanding
indebtedness or trust preferred securities. The inability of the Bank to pay dividends to us could have a material adverse effect on the market price
of our common stock. See "Item 1. Business—Supervision and Regulation" for additional information on the regulatory restrictions to which we and
the Bank are subject.
Only a limited trading market exists for our common stock, which could lead to price volatility.
Our common stock trades on The NASDAQ Global Select Market under the symbol "PACW" and our trading volume is generally modest. The
limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price
volatility in
31
Table of Contents
excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common
stock develops, we cannot assure you that such a market will continue or that stockholders will be able to sell their shares.
Our allowance for credit losses may not be adequate to cover actual losses.
In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan and lease losses to
provide for loan and lease defaults and non-performance and a reserve for unfunded loan commitments, which, when combined, we refer to as the
allowance for credit losses. Our allowance for credit losses may not be adequate to address actual credit losses, and future provisions for credit
losses could materially and adversely affect our operating results. Our allowance for credit losses is based on prior experience and an evaluation of
the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including
changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Our federal and state regulators, as an
integral part of their examination process, review our loans and leases and allowance for credit losses. While we believe our allowance for credit
losses is appropriate for the risk identified in the Company's loan and lease portfolio, we cannot assure you that we will not further increase the
allowance for credit losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. Any of these
occurrences could materially and adversely affect our earnings. See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information.
Our acquisitions may subject us to unknown risks.
We have completed 26 acquisitions since May 2000. In addition, the CapitalSource merger is pending. Certain events may arise after the date of
an acquisition, or we may learn of certain facts, events or circumstances after the closing of an acquisition, that may affect our financial condition or
performance or subject us to risk of loss. These events include, but are not limited to: litigation resulting from circumstances occurring at the
acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans
determined not to meet our credit standards; personnel changes that cause instability within a department; delays in implementing new policies or
procedures or the failure to apply new policies or procedures; and other events relating to the performance of our business. Acquisitions involve
inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss or give assurances that our
investigation or mitigation efforts will be sufficient to protect against any such loss.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
We currently depend heavily on the services of our chairman, John Eggemeyer, our chief executive officer, Matthew Wagner, and a number of
other key management personnel. The loss of Mr. Eggemeyer's or Mr. Wagner's services or that of other key personnel could materially and
adversely affect our results of operations and financial condition. Our success also depends, in part, on our ability to attract and retain additional
qualified management personnel. Competition for such personnel is strong in the banking industry, and we may not be successful in attracting or
retaining the personnel we require.
Concentrated ownership of our common stock creates a risk of sudden changes in our share price.
As of February 18, 2014, directors and members of our executive management team owned or controlled approximately 4% of our common
stock, excluding shares that may be issued to executive officers upon vesting of restricted stock awards. Investors who purchase our common
stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large stockholders of a
significant portion of that stockholder's holdings could have a material adverse
32
Table of Contents
effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will
have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common
stock to decline or fluctuate significantly.
Our largest stockholder is a registered bank holding company, and the activities and regulation of such stockholder may materially and
adversely affect the permissible activities of the Company.
CapGen Capital Group II LP, which we refer to as CapGen, beneficially owned approximately 9% of the Company as of February 18, 2014.
CapGen is a registered bank holding company under the BHCA and is regulated by the FRB. Under the Dodd-Frank Act and related regulations,
bank holding companies must be a "source of strength" for their subsidiaries. See "Item 1. Business—Supervision and Regulation—Bank Holding
Company Regulation" for more information. Regulation of CapGen by the FRB may materially and adversely affect the activities and strategic plans
of the Company should the FRB determine that CapGen or any other company in which either has invested has engaged in any unsafe or unsound
banking practices or activities. While we have no reason to believe that the FRB is proposing to take any action with respect to CapGen that would
adversely affect the Company, we remain subject to such risk.
A natural disaster could harm the Company's business.
Historically, California, in which a substantial portion of our business is located, has been susceptible to natural disasters, such as
earthquakes, floods, droughts and wild fires and is currently in the midst of an ongoing drought. The nature and level of natural disasters cannot be
predicted and may be exacerbated by global climate change. These natural disasters could harm our operations through interference with
communications, including the interruption or loss of our computer systems, which could prevent or impede the Company from gathering deposits,
originating loans and processing and controlling its flow of business, as well as through the destruction of facilities and our operational, financial
and management information systems. Additionally, natural disasters could negatively impact the values of collateral securing our loans and
interrupt our borrowers' abilities to conduct their business in a manner to support their debt obligations, either of which could result in losses and
increased provisions for credit losses.
Our decisions regarding the fair value of assets acquired, including the realization of the FDIC loss sharing asset, could be inaccurate which
could materially and adversely affect our business, financial condition, results of operations, and future prospects.
Management makes various assumptions and judgments about the collectability of acquired loans, including the creditworthiness of borrowers
and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include
loss sharing agreements, we may record a loss sharing asset that we consider adequate to absorb future losses, which may occur in the acquired
loan portfolio. In determining the realization of the loss sharing asset, we analyze the expected cash flows, volume and classification of loans,
volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information. If our assumptions are incorrect,
the balance of the FDIC loss sharing asset may at any time be insufficient to cover future loan losses or subject to accelerated amortization. Any
increase in future losses on loans and other assets covered by loss sharing agreements as well as any decrease in the expected cash flows from the
FDIC could have a negative effect on our operating results.
33
Table of Contents
Our ability to obtain reimbursement under the loss sharing agreements on covered assets depends on our compliance with the terms of the loss
sharing agreements.
Management must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss sharing agreements as a prerequisite
to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreements are extensive and failure to
comply with any of the guidelines could result in a specific asset or group of assets temporarily or permanently losing their loss sharing coverage.
Additionally, management may decide to forgo loss share coverage on certain assets to allow greater flexibility over the management of certain
assets. As of December 31, 2013, $473.6 million, or 7.2%, of the Company's assets, were covered by FDIC loss sharing agreements.
Under the terms of the FDIC loss sharing agreements, the assignment or transfer of the loss sharing agreement to another entity generally
requires the written consent of the FDIC. Based on the manner in which assignment is defined in the agreements, the following events require the
prior written consent of the FDIC for the applicable loss sharing agreements to continue:
1.
2.
3.
4.
a merger or consolidation of the Bank with or into another financial institution if the stockholders of the Bank will own less than
66.66% of the equity of the consolidated entity;
a merger or consolidation of the Company with or into another company if the stockholders of the Company will own less than
66.66% of the equity of the consolidated entity;
the sale of all or substantially all of the Bank's assets to another financial institution; and
a sale of shares by any one or more stockholders that will effect a change in control of the Bank, as determined by the FDIC with
reference to the standards set forth in the Change in Bank Control Act, 12 U.S.C. 1817(j).
No assurances can be given that we will manage the covered assets in such a way as to always maintain loss share coverage on all such
assets.
Risks Related to the Pending Merger with CapitalSource
On July 22, 2013, the Company announced it had entered into the CapitalSource merger agreement. The Company may be subject to the
following risk factors in connection with the pending merger with CapitalSource:
Combining the Company and CapitalSource may be more difficult, costly or time consuming than expected and the anticipated benefits and
cost savings of the merger may not be realized.
The success of the CapitalSource merger will depend on, among other things, the Company's ability to combine the businesses of PacWest and
CapitalSource. If the Company is not able to successfully achieve this objective, the anticipated benefits of the CapitalSource merger may not be
realized fully, or at all, or may take longer to realize than expected.
The Company and CapitalSource have operated and, until the consummation of the CapitalSource merger, will continue to operate
independently. To realize the anticipated benefits and cost savings, after the completion of the CapitalSource merger, the Company expects to
integrate CapitalSource's business into its own. It is possible that the integration process or other factors could result in the loss or departure of key
employees, the disruption of the ongoing business of the Company or CapitalSource or inconsistencies in standards, controls, procedures and
policies. The loss of key employees could have an adverse effect on the Company's financial results and the value of our common stock. It is also
possible that clients, customers, depositors and counterparties of the Company or CapitalSource could choose to discontinue their relationships
with the Company post-merger because they prefer doing business with an independent company or for any other reason, which would adversely
affect the future performance of the Company. These transition matters could have an
34
Table of Contents
adverse effect on the Company during the pre-merger period and for an undetermined amount of time after the consummation of the CapitalSource
merger.
The Company expects to incur substantial expenses related to the CapitalSource merger.
The Company expects to incur substantial expenses in connection with consummation of the CapitalSource merger and combining the
business, operations, networks, systems, technologies, policies and procedures of CapitalSource with those of the Company. Although the
Company has assumed that a certain level of transaction and combination expenses would be incurred, there are a number of factors beyond our
control that could affect the total amount or the timing of such combination expenses. Many of the expenses that will be incurred, by their nature,
are difficult to estimate accurately at the present time. Due to these factors, the transaction and combination expenses associated with the
CapitalSource merger could, particularly in the near term, exceed the savings that the Company expects to achieve from the elimination of
duplicative expenses and the realization of economies of scale and cost savings related to the combination of the businesses following the
consummation of the CapitalSource merger. As a result of these expenses, the Company expects to take charges against our earnings before and
after the completion of the CapitalSource merger. The charges taken in connection with the CapitalSource merger are expected to be significant,
although the aggregate amount and timing of such charges are uncertain at present.
Failure of the CapitalSource merger to be completed, termination of the merger agreement or a significant delay in the consummation of the
CapitalSource merger could negatively impact the Company.
The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the CapitalSource merger. Remaining
conditions include: (i) receipt of requisite regulatory approvals subject to certain limitations set forth in the merger agreement and (ii) absence of
any governmental order or law prohibiting completion of the CapitalSource merger.
The obligation of each party to consummate the CapitalSource merger is also conditioned upon: (i) subject to certain exceptions, the accuracy
of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the
merger agreement, (iii) the adjusted stockholders' equity of the other party being in excess of a specified level, (iv) receipt by such party of a tax
opinion to the effect that the CapitalSource merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code and (v) the absence of a material adverse effect with respect to the other party since the date of the merger agreement. The Company and
CapitalSource have agreed to use their respective reasonable best efforts to obtain all necessary regulatory approvals for the CapitalSource merger.
The parties will not be required to take any action, or agree to any condition or restriction, in connection with obtaining any regulatory permits,
consents, approvals and authorizations of governmental authorities that would reasonably be likely, in each case following the effective time (but
regardless when the action, condition or restriction is to be taken or implemented), to (i) have a material adverse effect with respect to the combined
company and its subsidiaries, taken as a whole or (ii) require the Company or the Bank to raise additional capital in an amount that would materially
reduce the economic benefits of the CapitalSource merger to the holders of Company common stock (including the CapitalSource stockholders in
respect of the shares of Company common stock received by them in the CapitalSource merger).
The remaining conditions to the consummation of the CapitalSource merger may not be fulfilled and, accordingly, the CapitalSource merger may
not be completed. In addition, if the CapitalSource merger is not completed by July 31, 2014, either the Company or CapitalSource may choose not to
proceed with the CapitalSource merger, and the parties can mutually decide to terminate the merger agreement at any time.
35
Table of Contents
If the CapitalSource merger is not consummated, the ongoing business, financial condition and results of operations of the Company may be
materially adversely affected and the market price of the Company's common stock may decline significantly, particularly to the extent that the
current market price reflects a market assumption that the CapitalSource merger will be consummated. If the consummation of the CapitalSource
merger is delayed, the business, financial condition and results of operations of the Company may be materially adversely affected. Additionally, if
the merger agreement is terminated, under certain circumstances, the Company may be required to pay a termination fee to CapitalSource in the
amount of $59 million.
In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the
transactions contemplated by the merger agreement. If the CapitalSource merger were not completed, the Company would have to recognize these
expenses without realizing the expected benefits of the transaction. Any of the foregoing, or other risks arising in connection with the failure of or
delay in consummating the CapitalSource merger, including the diversion of management attention from pursuing other opportunities and the
constraints in the merger agreement on the ability to make significant changes to the Company's ongoing business during the pendency of the
CapitalSource merger, could have a material adverse effect on the Company's business, financial condition and results of operations.
Additionally, the Company's business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the
focus of management on the CapitalSource merger, without realizing any of the anticipated benefits of completing the CapitalSource merger, and the
market price of the Company's common stock might decline to the extent that the current market price reflects a market assumption that the
CapitalSource merger will be completed. If the merger agreement is terminated and the board of directors seeks another merger or business
combination, our stockholders cannot be certain that the Company will be able to find a party willing to engage in a transaction on more attractive
terms than the CapitalSource merger.
We are subject to business uncertainties and contractual restrictions while the CapitalSource merger is pending.
Uncertainty about the effect of the CapitalSource merger on employees, customers, suppliers and vendors may have an adverse effect on the
business, financial condition and results of operations of the Company. These uncertainties may impair the Company's ability to attract, retain and
motivate key personnel, depositors and borrowers pending the consummation of the CapitalSource merger, as such personnel, depositors and
borrowers may experience uncertainty about their future roles following the consummation of the CapitalSource merger. Additionally, these
uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek to change
existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target the Company's existing
customers by highlighting potential uncertainties and integration difficulties that may result from the CapitalSource merger.
The Company has a small number of key personnel. The pursuit of the CapitalSource merger and the preparation for the integration may place a
burden on the Company's management and internal resources. Any significant diversion of management attention away from ongoing business
concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the merger agreement restricts the Company from taking certain actions without CapitalSource's consent while the CapitalSource
merger is pending. These restrictions may, among other matters, prevent the Company from pursuing otherwise attractive business opportunities,
selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the merger agreement,
entering into other transactions or making other changes to the
36
Table of Contents
Company's business prior to consummation of the CapitalSource merger or termination of the merger agreement. These restrictions could have a
material adverse effect on the Company's business, financial condition and results of operations.
The per share cash consideration to be paid in the CapitalSource merger and the exchange ratio are fixed and will not be adjusted for changes
in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, or in the event of any change in our stock
price.
The merger consideration of $2.47 per share and the exchange ratio of 0.2837 of a share of PacWest common stock are fixed in the CapitalSource
merger agreement and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of
operations, or changes in the market price of, analyst estimates of, or projections relating to, PacWest common stock. Any change in the market
price of our common stock prior to the completion of the CapitalSource merger may affect the value of the stock component of the merger
consideration that CapitalSource stockholders will receive upon completion of the CapitalSource merger. Stock price changes may result from a
variety of factors, including general market and economic conditions, changes in our business, operations and prospects, and regulatory
considerations, among other things. Many of these factors are beyond our control.
If the CapitalSource merger is consummated, we will be subject to substantial additional regulation.
If the CapitalSource merger is consummated, we will be subject to substantial additional regulation. Areas of additional regulation will include,
but not be limited to, more sophisticated stress testing, additional capital requirements, including potentially the phase out of our trust preferred
securities as Tier 1 capital that otherwise would have been grandfathered, more rigorous capital planning, enhanced governance standards,
including those relating to risk management, higher FDIC deposit insurance assessments and direct oversight and examination by the Consumer
Financial Protection Bureau. These additional regulatory requirements could divert management's attention away from ongoing business concerns,
place a burden on internal resources, impose additional costs or limitations on the Company and affect our profitability.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or
cannot be met.
Before the CapitalSource merger and the bank merger in connection therewith, may be completed, various approvals must be obtained from
bank regulatory authorities. These governmental entities may impose conditions on the granting of such approvals. Such conditions or changes
and the process of obtaining regulatory approvals could have the effect of delaying completion of the CapitalSource merger or of imposing
additional costs or limitations on the Company following the CapitalSource merger. The regulatory approvals may not be received at all, may not be
received in a timely fashion, and may contain conditions on the completion of the CapitalSource merger that are not anticipated or cannot be met. If
the consummation of the CapitalSource merger is delayed, including by a delay in receipt of necessary governmental approvals, the business,
financial condition and results of operations of the Company may also be materially adversely affected.
The CapitalSource merger will result in changes to the board of directors of the Company.
Upon completion of the CapitalSource merger, the composition of the board of directors of the Company will be different from the current board
composition. The Company's board of directors currently consists of 15 directors. Upon the completion of the CapitalSource merger, the board of
directors of the Company will consist of 13 members, eight of whom will be designated by the Company, and five of whom will be designated by
CapitalSource, each of whom will be mutually
37
Table of Contents
agreeable to the Company and CapitalSource. This new composition of the board of directors of the Company may affect the future decisions of the
Company.
In connection with the announcement of the CapitalSource merger agreement, 11 lawsuits have been filed and are pending, seeking, among
other things, to enjoin the CapitalSource merger, and an adverse judgment in this lawsuit may prevent the CapitalSource merger from
becoming effective within the expected time frame (if at all).
Since July 24, 2013, 11 putative stockholder class action lawsuits, referred to as the merger litigations, were filed against CapitalSource,
PacWest and certain other defendants in connection with the CapitalSource merger agreement. Five of the 11 actions were filed in Superior Court of
California, Los Angeles County: (1) Engel v. CapitalSource Inc. et al., Case No. BC516267, filed on July 24, 2013; (2) Miller v. Fremder et al., Case No.
BC516590, filed on July 29, 2013; (3) Basu v. CapitalSource Inc. et al., Case No. BC516775, filed on July 31, 2013; (4) Holliday v. PacWest Bancorp et
al., Case No. BC517209, filed on August 5, 2013; and (5) Iron Workers Mid-South Pension Fund v. CapitalSource Inc. et al., Case No. BC517698, filed
on August 8, 2013, referred to as the California actions. The other six actions were filed in the Court of Chancery of the State of Delaware:
(1) Fosket v. Byrnes et al., Case No. 8765, filed on August 1, 2013; (2) Bennett v. CapitalSource Inc. et al., Case No. 8770, filed on August 2, 2013;
(3) Chalfant v. CapitalSource et al., Case No. 8777, filed on August 6, 2013; (4) Oliveira v. CapitalSource Inc. et al., Case No. 8779, filed on August 7,
2013; (5) Desai v. CapitalSource Inc. et al., Case No. 8804, filed on August 13, 2013; and (6) Fattore v. CapitalSource Inc. et al., Case No. 8927, filed
on September 19, 2013, referred to as the Delaware actions.
The merger litigations allege variously that the members of the CapitalSource board of directors breached its fiduciary duties to CapitalSource
stockholders by approving the CapitalSource merger for inadequate consideration; approving the transaction in order to obtain benefits not equally
shared by other CapitalSource stockholders; entering into the CapitalSource merger agreement containing preclusive deal protection devices;
failing to take steps to maximize the value to be paid to the CapitalSource stockholders; and failing to disclose material information regarding the
proposed transaction. Each of the merger litigations also alleges claims against CapitalSource and PacWest for aiding and abetting these alleged
breaches of fiduciary duties. Plaintiffs generally seek, among other things, declaratory and injunctive relief concerning the alleged breaches of
fiduciary duties, injunctive relief prohibiting consummation of the CapitalSource merger, rescission, an accounting by defendants, damages and
attorneys' fees and costs, and other and further relief.
On December 20, 2013, the parties in the California and Delaware actions entered into a Memorandum of Understanding setting forth the terms
of an agreement in principle to settle both the California and Delaware Actions, subject to certain conditions and future occurrences. A further
status conference is set in the California Actions for May 5, 2014. The Company expects to appear in the Delaware actions for Court approval in the
event a settlement is finalized by the parties. At this stage, it is not possible to predict the outcome of the proceedings or their impact on
CapitalSource or the Company. If final settlement is not reached and the plaintiffs are successful in enjoining the consummation of the
CapitalSource merger, the lawsuit may prevent the CapitalSource merger from becoming effective within the expected timeframe (or at all).
The Company may not be able to realize the Company's and CapitalSource's deferred income tax assets.
CapitalSource has substantial operating losses for federal and state income tax purposes that can generally be utilized to offset future taxable
income of CapitalSource, and, under certain circumstances, the Company after the consummation of the CapitalSource merger.
38
Table of Contents
If CapitalSource or the combined company were to undergo a change in ownership of more than 50% of its capital stock over a three-year
period as measured under Section 382 of the Internal Revenue Code, the ability to utilize such net operating loss carryforwards and other tax
attributes to offset future taxable income would be substantially limited. The annual limit would generally equal the product of the applicable long
term tax exempt interest rate and the value of the relevant entity's capital stock immediately before the ownership change. These changes of
ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more of a company's
outstanding stock, including certain public groups of stockholders as set forth under Section 382, and those arising from new stock issuances and
other equity transactions. The determination of whether an ownership change occurs is complex and not entirely within CapitalSource's or the
combined company's control.
To preserve CapitalSource's ability to utilize its net operating losses, CapitalSource has adopted a tax benefit preservation plan, which is
triggered upon certain transfers of CapitalSource securities. The Company plans to adopt a substantially similar tax benefit preservation plan upon
consummation of the merger. The tax benefit preservation plan is generally designed to deter direct and indirect acquisitions of common stock if
such acquisition would result in a stockholder becoming a "5-percent shareholder" (as defined by Section 382 and the related Treasury regulations)
or increases the percentage ownership of common stock that is treated as owned by an existing 5-percent shareholder. CapitalSource's and the
combined company's ability to utilize NOLs to offset its future taxable income would be limited if CapitalSource or the combined company were to
undergo an "ownership change" within the meaning of Section 382 of the Internal Revenue Code.
Although the tax benefit preservation plans are intended to reduce the likelihood of an ownership change that could adversely affect
CapitalSource or the combined company, there can be no assurance that such restrictions would prevent all transfers that could result in such an
ownership change and thus no assurance can be given as to whether CapitalSource or the combined company could utilize the net operating losses
to offset future taxable income. Additionally, because the tax benefit preservation plans may have the effect of restricting a stockholder's ability to
dispose of or acquire the common stock of the Company, the liquidity and market value of common stock might suffer.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of February 22, 2014, we had a total of 108 properties consisting of 73 operating branch offices, four annex offices, four operations centers,
16 loan production offices, and 11 other properties. We own seven locations and the remaining properties are leased. Almost all properties are
located in Southern California. Pacific Western's principal office is located at 10250 Constellation Blvd., Suite 1640, Los Angeles, CA 90067.
For additional information regarding properties of the Company and Pacific Western, see Note 10, Premises and Equipment, Net, of the Notes
to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business.
The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon
information currently available to us, any resulting liability, in addition to amounts already accrued,
39
Table of Contents
taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company's financial statements or
operations.
FCAL-Related Litigation
As set forth below, there are a number of litigation matters pending against FCB, the defense of which PacWest has assumed.
Fourteen lawsuits have been filed in the Superior Court of the State of California, County of Los Angeles against FCB, among others, by
various former clients of political campaign and non-profit organization treasurer Kinde Durkee. The lawsuits are entitled (i) Wardlaw, et al. v. First
California Bank, et al. (Case No. SC 114232), filed September 23, 2011; (ii) Lou Correa for State Senate, Orange County's Youth et al. v. First
California Bank, et al. (Case No. BC 479872), filed February 29, 2012; (iii) Committee(s) to Re-elect Lorreta Sanchez, Linda Sanchez and Susan
Davis, et al. v. First California Bank, et al. (Case No. BC 479873), filed February 29, 2012; (iv) Holden for Assembly v. First California Bank, et al.
(Case No. BC 489604), filed August 3, 2012; (v) Latino Diabetes Ass'n v. First California Bank, et al. (Case No. BC 489605), filed August 3, 2012;
(vi) Jose Solorio Assembly Officeholder Committee, et al. v. First California Bank, et al. (Case No. 492855), filed September 27, 2012; (vii) Foster
for Treasurer 2014, et al. v. First California Bank, et al. (Case No. BC 492878), filed September 27, 2012; (viii) Los Angeles County Democratic
Central Committee, et al. v. First California Bank, et al. (Case No. BC 492854), filed September 27, 2012; (ix) FCAL v. 68th AD Democratic PAC, et
al. (Case No. : BC470812), filed September 23, 2011(the "Interpleader Action"); (x) First California Bank v. Shallman, John, Shallman
Communication/John D. Shallman v. FCB (Case No. LC099226), filed December 11, 2012; (xi) National Popular Vote, et al. v. First California
Bank, et al. (Case No. BC501213) filed February 19, 2013; (xii) Zine v. First California Bank, et al. (Case No. BC 504476), filed April 2, 2013;
(xiii) Rothman, Elliott v. FCAL (Case No. BC511180), filed June 5, 2013; and (xiv) Ted Lieu as Treasurer for Ted Lieu for Assembly 2008 v. First
California Bank (Case No. BC470182), filed November 18, 2011.
Plaintiffs in each of the cases claim, among other things, that FCB aided and abetted a fraud and unlawful conversion by Ms. Durkee and/or her
affiliated company of funds held in accounts at FCB. Based largely on the same alleged conduct, plaintiffs also assert claims for an alleged violation
of California Business & Professions Code Section 17200 and for declaratory relief. Plaintiffs seek compensatory and punitive damages, as well as
various forms of equitable and declaratory relief.
Each of the cases is pending before the same judge, who is coordinating their progress. FCB has answered each of the complaints, and the
parties are engaged in discovery.
On September 23, 2011, FCB filed a Complaint-in-Interpleader in the Superior Court of the State of California, County of Los Angeles (Case
No. BC 470182), pursuant to which FCB interpleaded the sum of $2,539,049 as the amounts on deposit in accounts at FCB that were controlled by
Ms. Durkee on behalf of the several hundred named defendants (the "Interpleader Action"). FCB seeks an order requiring the defendants to
interplead and litigate their respective claims, discharging FCB from liability, and restraining proceedings or actions against FCB by the defendants
with respect to those amounts. On December 6, 2011, the Interpleader Action was designated as complex and transferred to the Superior Court's
complex litigation division. It has been related to the other pending actions that relate to the conduct of Ms. Durkee.
On June 18, 2012, FCB moved for summary judgment in the Interpleader Action. At hearings held in late 2012 and early 2013, the Superior Court
entered summary judgment with respect to a majority of the accounts at issue. Those sums have been paid by the Superior Court to the former
accountholders. There still remains a total of $99,884.79 on deposit with the Court in the Interpleader Action.
40
Table of Contents
In September 2013, Durkee pled guilty to mail fraud resulting in a judgment of $9.7 million being entered against her. The parties participated in
a mediation on October 16, 2013, which did not result in settlement of any claims. Thereafter, at a Further Status Conference on December 19, 2013,
the Court scheduled a jury trial on August 13, 2014 as to the following cases: Orange County's Youth, Latino Diabetes Association, Jose Solorio
Assembly Officeholder Committee, Holden for Assembly, and Committee(s) to Re-elect Lorreta Sanchez, Linda Sanchez, and Susan Davis.
CapitalSource Merger-Related Litigation
Since July 24, 2013, 11 putative stockholder class action lawsuits (the "Merger Litigations") were filed against PacWest and certain other
defendants in connection with PacWest entering into the CapitalSource Merger Agreement in which PacWest agreed to acquire CapitalSource. The
CapitalSource Merger Agreement was publicly announced on July 22, 2013. Five of the 11 actions were filed in Superior Court of California, Los
Angeles County: (1) Engel v. CapitalSource, Inc. et al., Case No. BC516267, filed on July 24, 2013; (2) Miller v. Fremder et al., Case No. BC516590,
filed on July 29, 2013; (3) Basu v. CapitalSource, Inc. et al., Case No. BC516775, filed on July 31, 2013; (4) Holliday v. PacWest Bancorp et al., Case
No. BC517209, filed on August 5, 2013 and (5) Iron Workers Mid-South Pension Fund v. CapitalSource Inc. et al., Case No. BC517698, filed on
August 8, 2013 (collectively, the "California Actions"). The other six actions were filed in the Court of Chancery of the State of Delaware: (1) Fosket
v. Byrnes et al., Case No. 8765, filed on August 1, 2013; (2) Bennett v. CapitalSource, Inc. et al., Case No. 8770, filed on August 2, 2013;
(3) Chalfant v. CapitalSource et al., Case No. 8777, filed on August 6, 2013; (4) Oliveira v. CapitalSource, Inc. et al., Case No. 8779, filed on
August 7, 2013; (5) Desai v. CapitalSource, Inc. et al., Case No. 8804, filed on August 13, 2013; and (6) Fattore v. CapitalSource, Inc. et al., Case
No. 8927, filed on September 19, 2013 (collectively, the "Delaware Actions").
On August 15, 2013, the Delaware Actions were consolidated into a single action, captioned In re CapitalSource Inc. Stockholder Litigation,
Consol. C.A. No. 8765-CS, and assigned to Chancellor Leo E. Strine. On September 25, 2013, plaintiffs in the Delaware Actions filed a Verified
Consolidated Amended Class Action Complaint (the "Delaware Consolidated Complaint"). On September 17, 2013, the California Actions were
consolidated into a single action, captioned In re CapitalSource Inc. Shareholder Litigation, Lead Case No. BC516267, and assigned to Judge
Elihu M. Berle. On October 2, 2013, plaintiffs in the California Actions filed an Amended Consolidated Complaint (the "California Consolidated
Complaint").
The Delaware Consolidated Complaint and the California Consolidated Complaint each allege that the members of the CapitalSource board of
directors breached their fiduciary duties to CapitalSource stockholders by approving the proposed merger for inadequate consideration; approving
the transaction in order to obtain benefits not equally shared by other CapitalSource stockholders; entering into the merger agreement containing
preclusive deal protection devices; and failing to take steps to maximize the value to be paid to the CapitalSource stockholders. The Delaware
Consolidated Complaint and the California Consolidated Complaint also each allege claims against CapitalSource and PacWest for aiding and
abetting these alleged breaches of fiduciary duties. Plaintiffs in these actions seek, among other things, declaratory and injunctive relief concerning
the alleged breaches of fiduciary duties, injunctive relief prohibiting consummation of the merger, rescission, an accounting by defendants,
damages and attorneys' fees and costs, and other and further relief. The judge in the Delaware Actions ruled on October 23, 2013, that discovery
would proceed in the Delaware Actions and that it would be shared with the plaintiffs in the California Actions and that the California Actions
would be stayed while that process takes place. Thereafter, on October 28, 2013, the California Actions' plaintiffs stipulated in the California Actions
that they would participate in the discovery process in the Delaware Actions and the administrative stay in the California Actions will remain in
place unless and until the Delaware Actions are abandoned.
41
Table of Contents
On December 20, 2013, the parties in the California and Delaware Actions entered into a Memorandum of Understanding setting forth the terms
of an agreement in principle to settle both the California and Delaware Actions, subject to certain conditions and future occurrences. A further
status conference is set in the California Actions for May 5, 2014. The Company expects to appear in the Delaware Actions for Court approval in the
event a settlement is finalized by the parties. At this stage, it is not possible to predict the outcome of the proceedings or their impact on
CapitalSource or the Company.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
42
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Marketplace Designation, Sales Price Information and Holders
Our common stock is listed on The Nasdaq Global Select Market and is traded under the symbol "PACW." The following table summarizes the
high and low sale prices for each quarterly period during the last two years for our common stock, as quoted and reported by The Nasdaq Stock
Market, or Nasdaq:
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2013
First quarter
Second quarter
Third quarter
Fourth quarter
Stock Sales Prices
High
Low
Dividends
Declared
During
Quarter
$
$
$
$
$
$
$
$
24.79 $
25.50 $
25.50 $
25.29 $
19.57 $
20.82 $
22.20 $
21.50 $
29.20 $
31.02 $
36.31 $
42.96 $
24.96 $
25.81 $
30.58 $
34.14 $
0.18
0.18
0.18
0.25
0.25
0.25
0.25
0.25
As of February 24, 2014, the closing price of our common stock on Nasdaq was $40.50 per share. As of that date, based on the records of our
transfer agent, there were approximately 1,588 record holders of our common stock.
Dividends
Our ability to pay dividends to our stockholders is subject to the restrictions set forth in the Delaware General Corporation Law, or the DGCL.
The DGCL provides that a corporation, unless otherwise restricted by its certificate of incorporation, may declare and pay dividends out of its
surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year, as long
as the amount of capital of the corporation is not less than the aggregate amount of the capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. Surplus is defined as the excess of a corporation's net assets (i.e., its total assets
minus its total liabilities) over the capital associated with issuances of its common stock. Moreover, DGCL permits a board of directors to reduce its
capital and transfer such amount to its surplus. In determining the amount of surplus of a Delaware corporation, the assets of the corporation,
including stock of subsidiaries owned by the corporation, must be valued at their fair market value as determined by the board of directors,
regardless of their historical book value. Our ability to pay dividends is also subject to certain other limitations. See "Item 1. Business—Supervision
and Regulation" and Note 20, Dividend Availability and Regulatory Matters, of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data."
Set forth in the table above are the dividends declared and paid by the Company during the two most recent fiscal years. Our ability to pay
cash dividends to our stockholders is also limited by certain covenants contained in the indentures governing trust preferred securities issued by
us or entities that we have acquired, and the debentures underlying the trust preferred securities. Generally the
43
Table of Contents
indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if we are in default with respect to
any obligations under our guarantee agreement which covers payments of the obligations on the trust preferred securities, or if we give notice of
any intention to defer payments of interest on the debentures underlying the trust preferred securities, then we may not, among other restrictions,
declare or pay any dividends with respect to our common stock. Notification to the FRB is also required prior to our declaring and paying a cash
dividend to our stockholders during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the
dividend amount, among other requirements. Under such circumstances, we may not pay a dividend should the FRB object until such time as we
receive approval from the FRB or no longer need to provide notice under applicable regulations.
Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available under
state law governing the Company and certain federal laws and regulations governing the banking and financial services business. During 2013,
2012, and 2011, the Company paid $41.0 million, $28.8 million, and $7.6 million, respectively, in cash dividends on common stock.
We can provide no assurance that we will continue to declare dividends on a quarterly basis or otherwise. The declaration of dividends by the
Company is subject to the discretion of our Board of Directors. Our Board of Directors will take into account such matters as general business
conditions; our financial results; projected cash flows; capital requirements; contractual, legal and regulatory restrictions on the payment of
dividends by us to our stockholders or by our subsidiary to the holding company; and such other factors as our Board of Directors may deem
relevant.
PacWest's primary source of liquidity is the receipt of cash dividends from Pacific Western. Various statutes and regulations limit the
availability of cash dividends from Pacific Western. It is possible, depending upon the financial condition of the bank in question, and other factors,
that the FRB, the FDIC or the DBO could assert that payment of dividends or other payments is an unsafe or unsound practice. Pacific Western is
subject to restrictions under certain federal and state laws and regulations governing banks which limit its ability to transfer funds to the holding
company through intercompany loans, advances or cash dividends.
Dividends paid by state banks, such as Pacific Western, are regulated by the DBO under its general supervisory authority as it relates to a
bank's capital requirements. A state bank may declare a dividend without the approval of the DBO as long as the total dividends declared in a
calendar year do not exceed either the retained earnings or the total of net earnings for three previous fiscal years less any dividend paid during
such period. During 2013, 2012 and 2011, the Bank paid $48.0 million, $50.0 million, and $25.5 million, respectively, in dividends to the Company. For
the foreseeable future, any further cash dividends from the Bank to the Company will require DBO approval. See "Item 1. Business—Supervision
and Regulation," for further discussion of potential regulatory limitations on the holding company's receipt of funds from the Bank, as well as
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity" and Note 20, Dividend Availability
and Regulatory Matters, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data"
for a discussion of other factors affecting the availability of dividends and limitations on the ability to declare dividends.
44
Table of Contents
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2013, regarding securities issued and to be issued under our equity compensation
plans that were in effect during fiscal 2013:
Plan Category
Plan Name
Equity compensation
plans approved by
security holders
The PacWest
Bancorp 2003
Stock Incentive
Plan(1)
Equity compensation
plans not approved
by security holders None
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
(b)
Number of Securities
Remaining Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
—(2) $
—
1,433,647(3)
—
—
—
(1)
(2)
(3)
The PacWest Bancorp 2003 Stock Incentive Plan (the "Incentive Plan") was last approved by the stockholders of the Company at our 2009 Annual Stockholders
Meeting and the authorized number of shares available for issuance under the Incentive Plan was increased to 9,000,000 shares at our 2014 Special Stockholders
Meeting.
Amount does not include the 1,216,524 shares of unvested time-based and performance-based restricted stock outstanding as of December 31, 2013 with an exercise
price of zero.
The Incentive Plan permits these remaining shares to be issued in the form of options, restricted stock, or SARs.
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Repurchases of Common Stock
The following table presents stock purchases made during the fourth quarter of 2013:
Purchase Dates
October 1 - October 31, 2013
November 1 - November 30, 2013
December 1 - December 31, 2013
Total
Total
Number of
Shares
Purchased(1)
Average
Price Paid
Per Share
— $
10,424
255,318
265,742 $
—
38.01
42.01
41.85
(1)
Shares repurchased pursuant to net settlement by employees, in satisfaction of financial obligations incurred through the vesting of the Company's restricted
stock.
45
Table of Contents
Five-Year Stock Performance Graph
The following chart compares the yearly percentage change in the cumulative stockholder return on our common stock based on the closing
price during the five years ended December 31, 2013, with (1) the Total Return Index for U.S. companies traded on The Nasdaq Stock Market (the
"NASDAQ Composite Index"), and (2) the Total Return Index for the KBW Regional Bank Stocks (the "KBW Regional Banking Index"). This
comparison assumes $100 was invested on December 31, 2008, in our common stock and the comparison groups and assumes the reinvestment of
all cash dividends prior to any tax effect and retention of all stock dividends. PacWest's total cumulative gain was 73.6% over the five year period
ending December 31, 2013 compared to gains of 183.4% and 41.5% for the NASDAQ Composite Index and KBW Regional Banking Index,
respectively.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among PacWest Bancorp, the NASDAQ Composite Index,
and the KBW Regional Banking Index
*
$100 invested on December 31, 2008 in stock or index, including reinvestment of dividends.
Index
PacWest Bancorp
NASDAQ Composite
KBW Regional Banking
$
2008
100.00 $
100.00
100.00
2009
2010
2011
2012
76.50 $
144.88
86.90
81.34 $
170.58
98.66
72.91 $
171.30
87.35
98.61 $
199.99
98.48
2013
173.56
283.39
141.49
Year Ended December 31,
46
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain of our financial and statistical information for each of the years in the five-year period ended December 31,
2013. This data should be read in conjunction with our audited consolidated financial statements as of December 31, 2013 and 2012, and for each of
the years in the three-year period ended December 31, 2013 and related Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data."
Results of Operations(1):
Interest income
Interest expense
Net interest income
Total negative provision (provision) for credit
losses
FDIC loss sharing income (expense), net
Acquisition-related securities gain
Gain from Affinity acquisition
Other noninterest income
Total noninterest income
Accelerated vesting of restricted stock
Acquisition and integration costs
OREO income (expense), net
Debt termination expense
Other noninterest expense
Total noninterest expense
Earnings (loss) from continuing operations
before income tax (expense) benefit
Income tax (expense) benefit
Net earnings (loss) from continuing
operations
Loss from discontinued operations before
income tax benefit
Income tax benefit
Net loss from discontinued operations
Net earnings (loss)
Adjusted earnings from continuing operations
before income taxes(2)
Per Common Share Data:
Basic earnings (loss) per share (EPS):
Diluted (loss) per share (EPS):
Net earnings from continuing operations
Net earnings
Net earnings from continuing operations
Net earnings
Dividends declared during year
Book value per share(2)(3)
Tangible book value per share(2)(3)
Shares outstanding at year-end(3)
Average shares outstanding:
Basic EPS
Diluted EPS
2013
At or For the Year Ended December 31,
2011
2012
(In thousands, except per share amounts and percentages)
2010
2009
$
$
309,914
(12,201)
297,713
$
296,115
(19,648)
276,467
295,284
(32,643)
262,641
$
$
290,284
(40,957)
249,327
269,874
(53,828)
216,046
4,210
(26,172)
5,222
—
25,194
4,244
(12,420)
(28,392)
1,503
—
(191,378)
(230,687)
75,480
(30,003)
12,819
(10,070)
—
—
25,942
15,872
—
(4,089)
(10,931)
(22,598)
(174,044)
(211,662)
93,496
(36,695)
(26,570)
7,776
—
—
23,650
31,426
—
(600)
(10,676)
—
(168,717)
(179,993)
87,504
(36,800)
(212,492)
22,784
—
—
20,454
43,238
—
(732)
(14,770)
(2,660)
(170,641)
(188,803)
(108,730)
46,714
(159,900)
16,314
—
66,989
22,604
105,907
—
(600)
(23,322)
(481)
(154,801)
(179,204)
(17,151)
7,801
45,477
56,801
50,704
(62,016)
(9,350)
$
$
$
$
$
$
$
$
$
(620)
258
(362)
45,115
131,392
1.09
1.08
1.09
1.08
1.00
17.66
12.73
$
$
$
$
$
$
$
$
$
—
—
—
56,801
128,241
1.54
1.54
1.54
1.54
0.79
15.74
13.22
$
$
$
$
$
$
$
$
$
—
—
—
50,704
117,574
1.37
1.37
1.37
1.37
0.21
14.66
13.14
45,823
37,421
37,254
40,823
40,823
35,684
35,684
35,491
35,491
$
$
$
$
$
$
$
$
$
—
—
—
(62,016)
100,014
(1.77)
(1.77)
(1.77)
(1.77)
0.04
13.06
11.06
36,672
35,108
35,108
$
$
$
$
$
$
$
$
$
—
—
—
(9,350)
83,849
(0.30)
(0.30)
(0.30)
(0.30)
0.35
14.47
13.52
35,015
31,899
31,899
47
Table of Contents
Balance Sheet Data:
Total assets
Cash and cash equivalents
Investment securities
Non-purchased credit impaired (Non-PCI)
loans and leases(4)
Allowance for credit losses, Non-PCI loans and
leases(4)
Purchased credit impaired (PCI) loans
FDIC loss sharing asset
Goodwill
Core deposit and customer relationship
intangibles
Deposits
Borrowings
Subordinated debentures
Liabilities of discontinued operations
Stockholders' equity
Performance Ratios:
Return on average assets
Return on average equity
Return on average tangible equity(2)
Net interest margin
Efficiency ratio(2)(5)
Adjusted efficiency ratio(2)(5)
Stockholders' equity to total assets ratio(2)
Tangible common equity ratio(2)
Average equity to average assets
Loans to deposits ratio
Dividend payout ratio(6)
Tier 1 leverage capital ratio(7)
Tier 1 risk-based capital ratio(7)
Total risk-based capital ratio(7)
2013
At or For the Year Ended December 31,
2011
2012
(In thousands, except per share amounts and percentages)
2010
2009
$ 6,533,363
147,422
1,522,684
$ 5,463,658
164,404
1,392,511
$ 5,528,237
295,617
1,372,464
$ 5,529,021
108,552
929,056
$ 5,324,079
211,048
474,129
3,930,539
3,074,947
2,841,071
3,196,881
3,716,444
67,816
382,796
45,524
208,743
17,248
5,280,987
113,726
132,645
123,028
809,093
72,119
517,885
57,475
79,866
14,723
4,709,121
12,591
108,250
—
589,121
93,783
705,332
95,187
39,141
17,415
4,577,453
225,000
129,271
—
546,203
104,328
910,394
116,352
47,301
25,843
4,649,698
225,000
129,572
—
478,797
124,278
636,624
112,817
—
33,296
4,094,569
542,763
129,798
—
506,773
0.74%
6.28%
8.25%
5.37%
1.04%
10.01%
11.76%
5.52%
0.92%
9.92%
11.33%
5.26%
(1.14)%
(12.56)%
(14.15)%
5.02%
76.40%
72.40%
61.21%
64.53%
59.29%
57.58%
58.93%
63.05%
12.38%
10.78%
9.88%
8.66%
9.24%
11.75%
81.68%
9.21%
10.36%
76.30%
8.95%
9.32%
77.48%
7.44%
9.10%
88.33%
90.89%
50.68%
15.04%
NM
11.22%
10.53%
10.42%
8.54%
15.12%
15.17%
15.97%
12.68%
16.38%
16.43%
17.25%
13.96%
(0.19)%
(1.93)%
(2.08)%
4.79%
55.66%
64.87%
9.52%
8.95%
10.06%
106.31%
NM
10.85%
14.31%
15.58%
Asset Quality:
Non-PCI nonaccrual loans and leases(3)
Other real estate owned
Total nonperforming assets
Asset Quality Ratios:
Non-PCI nonaccrual loans to Non-PCI loans
and leases(3)
Nonperforming assets to Non-PCI loans and
leases and OREO(3)
Allowance for credit losses to Non-PCI
nonaccrual loans and leases
Allowance for credit losses to Non-PCI loans
and leases
Net charge-offs to average gross Non-PCI loans
and leases
$
$
46,774
51,837
98,611
$
$
41,762
56,414
98,176
$
$
61,619
81,918
143,537
$
$
95,509
81,414
176,923
$
$
240,717
70,943
311,660
1.19%
1.36%
2.17%
2.99%
6.48%
2.48%
3.14%
4.91%
5.40%
8.23%
145.0%
172.7%
152.2%
109.2%
51.6%
1.73%
2.35%
3.30%
3.26%
3.34%
0.12%
0.33%
0.80%
5.88%
2.22%
(1)
(2)
(3)
(4)
(5)
Operating results of acquired companies are included from the respective acquisition dates. See Note 4, Acquisitions, of the Notes to Consolidated Financial
Statements contained in "Item 8. Financial Statements and Supplementary Data."
For information regarding this calculation, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP
Measurements."
Includes 1,216,524 shares, 1,698,281 shares, 1,675,730 shares, 1,230,582 shares, and 1,095,417 shares of unvested restricted stock outstanding at December 31,
2013, 2012, 2011, 2010, and 2009, respectively.
During 2010, the Bank executed two sales of adversely classified loans totaling $398.5 million that included a total of $128.1 million in nonaccrual loans.
The 2009 efficiency ratio includes the gain from the Affinity acquisition. The 2009 adjusted efficiency ratio excludes this gain.
(6)
(7)
Not meaningful for 2010 and 2009.
Capital ratios presented are for PacWest Bancorp consolidated.
48
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with the disclosure regarding "Forward-Looking Statements" set forth in "Item 1. Business—
Forward-Looking Statements,"as well as the discussion set forth in "Item 1. Business—Certain Business Risks" and "Item 8. Financial
Statements and Supplementary Data," including the notes to consolidated financial statements.
Overview
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 banking subsidiary, Pacific Western Bank, which we refer to as Pacific Western or
the Bank. When we say "we," "our" or the "Company," we mean the Company on a consolidated basis with the Bank. When we refer to "PacWest"
or to the holding company, we are referring to the parent company on a stand-alone basis.
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 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.
We have completed 26 business acquisitions since the Company's inception in 1999, including the following four acquisitions during the three
years ended December 31, 2013: (1) Pacific Western Equipment Finance, or EQF, on January 3, 2012; (2) Celtic Capital Corporation, or Celtic, on
April 3, 2012; (3) American Perspective Bank, or APB, on August 1, 2012, and (4) First California Financial Group, Inc., or FCAL, on May 31, 2013.
These acquisitions affect the comparability of our reported financial information as the operating results of the acquired entities are included in our
operating results only from their respective acquisition dates. For further information on our acquisitions, see Note 4, Acquisitions, and Note 5,
Goodwill and Other Intangible Assets, of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statement and
Supplementary Data."
Over the last year, the Company's assets have increased $1.1 billion to $6.5 billion at December 31, 2013 due to our 2013 acquisition. Gross non-
covered loan and leases increased $815.4 million, securities available-for-sale increased $139.4 million, goodwill increased $128.9 million, and other
assets increased $87.6 million, offset by a decline in covered loans of $94.9 million. The non-covered loans and leases increase includes
$903.1 million of loans acquired in the FCAL acquisition and $765.3 million in originations and other purchases, offset by net paydowns of
$853.0 million. The covered loans decline includes repayments and resolutions of $198.9 million, offset by $104.0 million of covered loans acquired in
the FCAL acquisition. The increase in securities available-for-sale was attributable to ongoing purchases. The increase in goodwill was due to the
FCAL acquisition.
Total liabilities increased $849.7 million during the year to $5.7 billion at December 31, 2013, due primarily to the FCAL acquisition. Total
deposits increased $571.9 million to $5.3 billion at December 31, 2013 due to $1.1 billion of deposits acquired in the FCAL acquisition. During 2013,
core deposits increased $727.8 million, while time deposits declined $155.9 million. At December 31, 2013,
49
Table of Contents
core deposits totaled $4.6 billion, or 88% of total deposits, and noninterest-bearing deposits totaled $2.3 billion, or 44% of total deposits.
Borrowings increased $101.1 million to $113.7 million due mainly to an increase of $106.6 million in overnight Federal Home Loan Bank of San
Francisco ("FHLB") advances. Subordinated debentures increased $24.4 million due to additional debt assumed in the FCAL acquisition. In
connection with the FCAL acquisition, we acquired Electronic Payment Services ("EPS"), a division of the Bank that is being discontinued;
liabilities of the EPS discontinued operations, which consisted primarily of noninterest-bearing deposits, totaled $123.0 million at December 31, 2013.
Net earnings for 2013 were $45.1 million, a decline of $11.7 million compared to 2012. The decline in profitability was due mainly to: (a) the
$24.3 million ($14.7 million after tax) increase in acquisition and integration costs, (b) the $12.3 million ($7.1 million after tax) increase in net credit
costs (provision, FDIC loss sharing expense, and OREO expense), (c) the $12.4 million ($12.2 million after tax) accelerated vesting of restricted stock,
and (d) the $12.1 million ($7.0 million after tax) increase, mostly from acquisitions, in compensation expense. These items were offset by: (a) the
$22.6 million ($13.1 million after tax) decrease in debt termination expense and (b) the $21.2 million ($12.3 million after tax) increase in net interest
income.
In December 2013, the Company accelerated the vesting of certain restricted stock awards that resulted in a pre-tax charge of $12.4 million
($12.2 million after tax). This action was taken by the Company in order to eliminate an additional $21.0 million of compensation and tax expense
related to change in control payments that the Company would have otherwise incurred upon consummation of the CapitalSource merger. Such
eliminated expenses relate to tax gross-up payments and the value of lost tax deductions, in each case due to the impact of Sections 280G and 4999
of the Internal Revenue Code as they apply to change in control payments that would have become payable to certain PacWest employees in
conjunction with the CapitalSource merger. The restricted stock awards that were vested on an accelerated basis in 2013 would have otherwise
vested upon consummation of the CapitalSource merger, and the $12.2 million after-tax charge to earnings that we recorded in December 2013 would
have been incurred at that time.
During 2013, stockholders' equity increased $220.0 million, due mainly to the issuance of $242.3 in common stock in connection with the FCAL
acquisition, net of $41.0 million in dividends paid. Stockholders' equity remained strong with Tier 1 risk-based capital and total risk-based capital
ratios of 15.1% and 16.4%, respectively, at December 31, 2013.
In managing the top line of our business, the focus is on earning-asset growth, loan yield, deposit cost, and net interest margin, as net interest
income accounted for 99% of our net revenues (net interest income plus noninterest income) for 2013.
CapitalSource Merger Announcement
On July 22, 2013, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest and
CapitalSource, Inc. ("CapitalSource") will merge in a transaction valued at approximately $2.8 billion based on the closing price of PacWest common
stock on February 13, 2014 of $40.11. The combined company will be called PacWest Bancorp. As part of the merger, CapitalSource Bank, a wholly-
owned subsidiary of CapitalSource, will merge with and into Pacific Western, and the combined subsidiary bank will be called Pacific Western Bank.
The CapitalSource national lending operation will continue to do business under the name CapitalSource as a division of Pacific Western Bank.
Under the terms of the Agreement, CapitalSource shareholders will receive $2.47 in cash and 0.2837 shares of PacWest common stock for each
share of CapitalSource common stock. The total value of the CapitalSource per share merger consideration was $13.85 based on the closing price of
PacWest shares on February 13, 2014 of $40.11.
50
Table of Contents
As of December 31, 2013, on a pro forma consolidated basis, the combined company would have had approximately $15.4 billion in assets with
94 branches throughout California. The combined institution would be the 6th largest publicly-owned bank headquartered in California, and the
8th largest commercial bank headquartered in California (out of more than 214 financial institutions in the state).
We currently expect to receive final regulatory approval in the first quarter of 2014 and to close the merger on April 1, 2014.
First California Financial Group Acquisition
On May 31, 2013, we completed the acquisition of First California Financial Group, Inc., or FCAL, following receipt of shareholder approval from
both institutions and all required regulatory approvals. As part of the acquisition, First California Bank, or FCB, a wholly-owned subsidiary of
FCAL, merged with and into Pacific Western.
In the FCAL acquisition, each share of FCAL common stock was converted into the right to receive 0.2966 of a share of PacWest common
stock. The exchange ratio was calculated based on the volume-weighted average share price of PacWest common stock for the 20 consecutive
trading days ending on the second full trading day prior to the receipt of the last of the regulatory approvals required under the merger agreement.
PacWest issued an aggregate of approximately 8.4 million shares of PacWest common stock to FCAL stockholders. In addition, 1,094,000 shares of
FCAL common stock previously owned by PacWest at a cost of $4.1 million were cancelled in the transaction. These shares were carried in our
securities available-for-sale portfolio at their estimated market value with their unrealized gain of $5.2 million included in stockholders' equity at
May 31, 2013. Under acquisition accounting, this unrealized gain was recognized in earnings. Based on the closing price of PacWest's common
stock on May 31, 2013 of $28.83 per share, the aggregate consideration paid to FCAL common stockholders, including the 1,094,000 shares of FCAL
common stock owned by us and cancelled in the merger, was $251.6 million. The application of the acquisition method of accounting resulted in
goodwill of $129.1 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.
FCB was a full-service commercial bank headquartered in Westlake Village, California. FCB provided a full range of banking services, including
revolving lines of credit, term loans, commercial real estate loans, construction loans, consumer loans and home equity loans to individuals,
professionals, and small to mid-sized businesses. FCB operated 15 branches throughout Southern California in the Los Angeles, Orange, Riverside,
San Bernardino, San Diego, Ventura, and San Luis Obispo Counties. We made this acquisition to expand our presence in Southern California. We
completed the conversion and integration of the FCB branches to PWB's operating platform in June 2013 and as a result, we added seven locations
to our branch network.
2012 Transactions
Sale of Branches
On September 21, 2012, Pacific Western completed the sale of 10 branches. The branches were located in Los Angeles, San Bernardino,
Riverside, and San Diego Counties. The 2012 branch sale resulted in the transfer of $125.2 million of deposits; no loans were sold in this transaction.
The buyer paid a blended deposit premium of 2.5% and we recognized a net gain of $297,000 on this transaction.
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
51
Table of Contents
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, and 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.
FDIC-Assisted Acquisitions
Affinity Bank Acquisition
On August 28, 2009, we acquired substantially all of the assets of Affinity Bank, or Affinity, including all loans, and assumed substantially all
of its liabilities, including the insured and uninsured deposits and excluding certain brokered deposits, from the Federal Deposit Insurance
Corporation ("FDIC") in an FDIC-assisted transaction. In connection with the Affinity acquisition, the FDIC made a cash payment to Pacific
Western of $87.2 million.
We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on
acquired loans, other real estate owned, or OREO, and certain investment securities. Under the terms of such loss sharing agreement, the FDIC will
absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on covered assets and absorb 95% of losses and receive
95% of loss recoveries on covered assets exceeding $234 million. The loss sharing provisions are in effect for 5 years for commercial (non-single
family) assets (non-residential loans, OREO and certain securities) and 10 years for residential (single family) loans from the August 28, 2009
acquisition date. The loss recovery provisions are in effect for 8 years for commercial (non-single family) assets and 10 years for residential (single
family) loans from the acquisition date. Accordingly, the loss sharing provisions expire in the third quarters of 2014 and 2019 for non-single family
and single family covered assets, respectively, while the related loss recovery provisions expire in the third quarters of 2017 and 2019, respectively.
Los Padres Bank Acquisition
On August 20, 2010, we acquired certain assets of Los Padres Bank, or Los Padres, including all loans, and assumed substantially all of its
liabilities, including all deposits, from the FDIC in an FDIC-assisted acquisition, which we refer to as the Los Padres acquisition. In connection with
the Los Padres acquisition, the FDIC made a cash payment to Pacific Western of $144.0 million. Other than a deposit premium of $3.4 million, we
paid no cash or other consideration to acquire Los Padres.
52
Table of Contents
We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on
acquired loans, with the exception of acquired consumer loans, and other real estate owned. Under the terms of such loss sharing agreement, the
FDIC is obligated to reimburse the Bank for 80% of losses with respect to the covered assets. The Bank will reimburse the FDIC for 80% of
recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement under the loss sharing agreement. The loss sharing
provisions for commercial (non-single family) and single family covered assets are in effect for 5 years and 10 years, respectively, from the
acquisition date, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the August 20, 2010 acquisition date.
Accordingly, the loss sharing provisions expire in the third quarters of 2015 and 2020 for non-single family and single family covered assets,
respectively, while the related loss recovery provisions expire in the third quarters of 2018 and 2020, respectively. We refer to the acquired assets
subject to any loss sharing agreement collectively as "covered assets."
Key Performance Indicators
Among other factors, our operating results depend generally on the following:
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.
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. At December 31, 2013, approximately 44% of our total deposits were noninterest-bearing.
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 new loan volume. Net
loan growth over the last year 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. 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. During
2013, exclusive of loans acquired in the FCAL acquisition, we originated and purchased $765.3 million in non-covered loans and leases, which
included $232.2 million in commercial loans and leases from our Asset Financing segment. See "—Results of Operations—Business Segments" for
more information regarding our Asset-Financing segment.
53
Table of Contents
The Magnitude of Credit Losses
We stress credit quality in originating and monitoring the loans that 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 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 uncollectable 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 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. For acquired non-impaired loans, a provision for credit losses may be recorded to
reflect credit deterioration after the acquisition date. For purchased credit impaired loans, a provision for credit losses may be recorded to reflect
decreases in expected cash flows on such 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 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, accelerated vesting of restricted stock, and debt termination expense.
The consolidated base and adjusted efficiency ratios have been as follows:
Quarterly Period in 2013
First
Second
Third
Fourth
Base
Efficiency
Ratio
Adjusted
Efficiency
Ratio
64.5%
93.5%
64.3%
85.5%
61.7%
62.4%
57.3%
56.7%
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.
54
Table of Contents
Adjusted Net Earnings From Continuing Operations
Our net earnings from continuing operations for 2013 totaled $45.5 million. Another measure of earnings used as an indicator of earnings
generating capability and ability to absorb credit losses is adjusted net earnings from continuing operations. We calculate adjusted net earnings
from continuing operations by excluding credit loss provisions, FDIC loss sharing income or expense, securities gains and losses, OREO expenses,
acquisition and integration costs, and accelerated vesting of restricted stock. On a pre-tax basis, before loss from discontinued operations, this
amounted to $131.4 million for 2013. After applying our 2013 effective tax rate of 39.7%, our adjusted net earnings from continuing operations were
$79.2 million.
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements
and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and
disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical
experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results
may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at
the balance sheet dates and on our results of operations for the reporting periods.
Our significant accounting policies and practices are described in Note 1, Nature of Operations and Summary of Significant Accounting
Policies, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." The accounting
policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets
and liabilities, are considered critical accounting policies. We have identified our policies for the allowances for credit losses, the carrying values of
intangible assets, and deferred income tax assets as critical accounting policies.
Allowance for Credit Losses on Non-Purchased Credit Impaired Loans and Leases
The allowance for credit losses on non-purchased credit impaired ("Non-PCI") loans and leases is the combination of the allowance for loan
and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding
loan and lease balances and the reserve for unfunded loan commitments is included within other liabilities. Generally, as loans are funded, the
amount of the commitment reserve applicable to such funded loans is transferred from the reserve for unfunded loan commitments to the allowance
for loan and lease losses based on our allowance methodology. The following discussion is for Non-PCI loans and leases and the allowance for
credit losses thereon. Refer to "—Allowance for Credit Losses on Purchased Credit Impaired Loans" for the policy on purchased credit impaired
loans.
The allowance for loan and lease losses is maintained at a level deemed appropriate by management to adequately provide for known and
inherent risks in the loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon a continuing
review of the portfolio, past loan and lease loss experience, current economic conditions that may affect the borrowers' ability to pay, and the
underlying collateral value of the loans and leases. Loans and leases, which are deemed to be uncollectable, are charged off and deducted from the
allowance. The provision for loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.
55
Table of Contents
The methodology we use to estimate the amount of our allowance for credit losses is based on both objective and subjective criteria. While
some criteria are formula driven, other criteria are subjective inputs included to capture environmental and general economic risk elements which
may trigger losses in the loan and lease portfolios, and to account for the varying levels of credit quality in the loan and lease portfolios of the
entities we have acquired that have not yet been captured in our objective loss factors.
Specifically, our allowance methodology contains three key elements: (i) amounts based on specific evaluations of impaired loans and leases;
(ii) amounts of estimated losses on several pools of loans categorized by risk rating and loan and lease type; and (iii) amounts for environmental
and general economic factors that indicate probable losses incurred but not captured through the other elements of our allowance process. In
addition, for loans and leases measured at fair value on the acquisition date and deemed to be non-impaired, our allowance methodology captures
deterioration in credit quality and other inherent risks of such acquired assets experienced after the purchase date.
Impaired loans and leases are identified at each reporting date based on certain criteria and the majority of which are individually reviewed for
impairment. Non-PCI nonaccrual loans and leases with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed
individually for the amount of impairment. Non-PCI nonaccrual loans and leases with an unpaid principal balance of $250,000 or less are evaluated
for impairment collectively. A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to
the original contractual terms of the agreement. We measure impairment of a loan based upon the fair value of the loan's collateral if the loan is
collateral-dependent or the present value of cash flows, discounted at the loan's effective interest rate, if the loan is not collateral-dependent. The
impairment amount on a collateral-dependent loan is charged-off to the allowance, and the impairment amount on a loan that is not collateral-
dependent is set up as a specific reserve within the allowance. We measure impairment of a lease based upon the present value of the scheduled
lease and residual cash flows, discounted at the lease's effective interest rate. Increased charge-offs or additions to specific reserves generally
result in increased provisions for credit losses.
Our loan and lease portfolio, excluding impaired loans and leases, which are evaluated individually, is categorized into several pools for
purposes of determining allowance amounts by pool. The pools we currently evaluate are: commercial real estate construction, residential real estate
construction, SBA real estate, hospitality real estate, real estate other, commercial collateralized, commercial unsecured, SBA commercial, consumer,
asset-based and leasing. Within these pools, we then evaluate loans and leases not adversely classified, which we refer to as "pass" credits,
separately from adversely classified loans and leases. The adversely classified loans and leases are further grouped into three credit risk rating
categories: "special mention," "substandard," and "doubtful," which we define as follows:
•
•
•
Special Mention: Loans and leases classified as "special mention" have a potential weakness that requires management's attention.
If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
Substandard: Loans and leases classified as "substandard" have a well-defined weakness or weaknesses that jeopardize the
collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
Doubtful: Loans and leases classified as "doubtful" have all the weaknesses of those classified as "substandard," with the
additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
56
Table of Contents
In addition, we may refer to the loans and leases classified as "substandard" and "doubtful" together as "classified" loans and leases. For
further information on classified loans and leases, see Note 7, Loans and Leases, of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data."
The allowance amounts for "pass" rated loans and leases and those loans and leases adversely classified, which are not reviewed individually,
are determined using historical loss rates developed through migration analysis. The migration analysis is updated quarterly based on historic
losses and movement of loans between ratings. As a result of this migration analysis and its quarterly updating, decreases we experience in both
charge-offs and adverse classifications generally result in lower loss factors.
Finally, in order to ensure our allowance methodology is incorporating recent trends and economic conditions, we apply environmental and
general economic factors to our allowance methodology including: credit concentrations; delinquency trends; economic and business conditions;
the quality of lending management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio;
nonaccrual and problem loan trends; usage trends of unfunded commitments; and other adjustments for items not covered by other factors.
Management believes that the allowance for loan and lease losses is adequate and appropriate for the known and inherent risks in our Non-PCI
loan and lease portfolio. In making its evaluation, management considers certain quantitative and qualitative factors including the Company's
historical loss experience; the volume and type of lending conducted by the Company; the results of our credit review process; the levels of
classified and criticized loans and leases; the levels of impaired loans and leases, including nonperforming loans and leases and performing
restructured loans; regulatory policies; general economic conditions; underlying collateral values; and other factors regarding collectability and
impairment. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes in collateral values, or
negative changes in economic and business conditions, which adversely affect our borrowers, our classified loans and leases may increase. Higher
levels of classified loans and leases generally result in higher allowances for loan and lease losses.
We recognize that the determination of the allowance for loan and lease losses is sensitive to the assigned credit risk ratings and inherent loss
rates at any given point in time. Therefore, we perform sensitivity analyses to provide insight regarding the impact that adverse changes in credit
risk ratings may have on our allowance for loan and lease losses. The sensitivity analyses have inherent limitations and are based on various
assumptions as of a point in time and, accordingly, it is not necessarily representative of the impact loan risk rating changes may have on the
allowance for loan and lease losses.
At December 31, 2013, in the event that 1% of our Non-PCI loans and leases were downgraded one credit risk rating category for each category
(e.g., 1% of the "pass" category moved to the "special mention" category, 1% of the "special mention" category moved to the "substandard"
category, and 1% of the "substandard" category moved to the "doubtful" category within our current allowance methodology), the allowance for
credit losses would have increased by approximately $1.3 million. In the event that 5% of our Non- PCI loans and leases were downgraded one
credit risk category, the allowance for credit losses would have increased by approximately $6.7 million.
Given our current risk management processes, we believe that the credit risk ratings and inherent loss rates currently assigned are appropriate.
It is possible that others, given the same information, may at any point in time reach different conclusions that could be significant to the
Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to review loans and leases within our
portfolio and as our borrowers are impacted by economic trends within their market areas.
57
Table of Contents
Although we have established an allowance for loan and lease losses that we consider appropriate, there can be no assurance that the
established allowance for loan and lease losses will be sufficient to offset losses on loans and leases in the future. Management also believes that
the reserve for unfunded loan commitments is appropriate. In making this determination, we use the same methodology for the reserve for unfunded
loan commitments as we do for the allowance for loan and lease losses and consider the same quantitative and qualitative factors, as well as an
estimate of the probability of advances of the commitments correlated to their credit risk rating.
Allowance for Credit Losses on Purchased Credit Impaired Loans
The purchased credit impaired ("PCI") loans are subject to our internal and external credit review. If deterioration in the expected cash flows
results in a reserve requirement, a provision for credit losses is charged to earnings. For PCI loans, the allowance for loan losses is measured at the
end of each financial reporting period based on expected cash flows. Decreases or (increases) in the amount and changes in the timing of expected
cash flows on the PCI loans as of the financial reporting date compared to those previously estimated are usually recognized by recording a
provision or a (negative provision) for credit losses on such loans.
Goodwill and Other Intangible Assets
Goodwill and intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible
assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and are instead tested for
impairment at least annually. Intangible assets with definite lives arising from business combinations are tested for impairment quarterly.
Our other intangible assets with definite lives include core deposit and customer relationship intangibles. The establishment and subsequent
amortization of these intangible assets requires several assumptions including, among other things, the estimated cost to service deposits acquired,
discount rates, estimated attrition rates and useful lives. These intangibles are being amortized over their estimated useful lives up to 10 years and
tested for impairment quarterly. If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the
carrying value in future periods, a write-down would be taken through a charge to our earnings. The most significant element in evaluation of these
intangibles is the attrition rate of the acquired deposits or loan relationships. If such attrition rate were to accelerate from that which we expected,
the intangible may have to be reduced by a charge to earnings. The attrition rate related to deposit flows or loan flows is influenced by many
factors, the most significant of which are alternative yields for loans and deposits available to customers and the level of competition from other
financial institutions and financial services companies.
Deferred Income Tax Assets
Our deferred income tax assets arise from differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. From an accounting
standpoint, we determine whether a deferred tax asset is realizable based on facts and circumstances, including the Company's current and
projected future tax position, the historical level of our taxable income, and estimates of our future taxable income. In most cases, the realization of
deferred tax assets is based on our future profitability. If we were to experience either reduced profitability or operating losses in a future period, the
realization of our deferred tax assets may no longer be considered more likely than not that they will be realized. In such an instance, we could be
required to record a valuation allowance on our deferred tax assets by charging earnings.
58
Table of Contents
Non-GAAP Measurements
Certain discussion in this Form 10-K contains certain non-GAAP financial disclosures for adjusted earnings from continuing operations before
income taxes, adjusted efficiency ratio, adjusted allowance for credit losses to loans and leases, return on average tangible equity, and tangible
common equity ratio. 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. As analysts and investors view
adjusted earnings from continuing operations 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. As the allowance for credit losses takes into account credit deterioration
on acquired loans and leases, which include an estimate of credit losses in their initial fair values, we disclose the adjusted allowance for credit
losses to loans and leases in addition to the allowance for credit losses to loans and leases. The adjusted allowance for credit losses to loans and
leases excludes acquired loans and leases and the related allowance. Given that the use of return on average tangible equity, tangible common
equity amounts and ratios, and tangible book value per share is prevalent among banking regulators, investors and analysts, we disclose our return
on average tangible equity in addition to return on average equity, our tangible common equity ratio in addition to the equity-to-assets ratio, and
tangible book value per share in addition to book value per share. The methodology for determining adjusted earnings from continuing operations
before income taxes, adjusted efficiency ratio, adjusted allowance for credit losses to loans and leases, return on average tangible equity, and
tangible common equity 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 U.S. 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:
Adjusted Earnings From Continuing Operations
Before Income Taxes
Earnings from continuing operations before income taxes
Plus: Provision (negative provision) for credit losses
Accelerated vesting of restricted stock
Non-covered OREO (income) expense, net
Covered OREO (income) expense, net
Other-than-temporary impairment loss on covered
securities
Acquisition and integration costs
Debt termination expense
Less: FDIC loss sharing income (expense), net
Gain on sale of securities
Acquisition-related securities gain
Year Ended December 31,
2013
2012
(In thousands)
2011
$
75,480 $
(4,210)
12,420
330
(1,833)
93,496 $
(12,819)
—
4,150
6,781
—
28,392
—
(26,172)
137
5,222
1,115
4,089
22,598
(10,070)
1,239
—
87,504
26,570
—
7,010
3,666
—
600
—
7,776
—
—
Adjusted earnings from continuing operations before
income taxes
$
131,392 $
128,241 $
117,574
59
Table of Contents
Adjusted Efficiency Ratio
2013
$
$
$
Year Ended December 31,
2012
(Dollars in thousands)
211,662 $
—
4,150
6,781
4,089
22,598
174,044 $
276,467 $
15,872
292,339
(10,070)
1,239
—
230,687 $
12,420
330
(1,833)
28,392
—
191,378 $
297,713 $
4,244
301,957
(26,172)
137
5,222
2011
179,993
—
7,010
3,666
600
—
168,717
262,641
31,426
294,067
7,776
—
—
—
322,770 $
(1,115)
302,285 $
—
286,291
$
76.4%
59.3%
72.4%
57.6%
61.2%
58.9%
Noninterest expense
Less: Accelerated vesting of restricted stock
Non-covered OREO (income) expense, net
Covered OREO (income) expense, net
Acquisition and integration costs
Debt termination expense
Adjusted noninterest expense
Net interest income
Noninterest income
Net revenues
Less: FDIC loss sharing income (expense), net
Gain on sale of securities
Acquisition-related securities gain
Other-than-temporary impairment loss on covered
securities
Adjusted net revenues
Base efficiency ratio(1)
Adjusted efficiency ratio(2)
(1)
(2)
Noninterest expense divided by net revenues.
Adjusted noninterest expense divided by adjusted net revenues.
Adjusted Allowance for Credit Losses to
Loans and Leases (Excludes PCI Loans)
Allowance for credit losses
Less: Allowance related to acquired loans and leases
Adjusted allowance for credit losses
Gross loans and leases
Less: Carrying value of acquired Non-PCI loans and leases
Adjusted loans and leases
December 31,
2013
2012
(Dollars in thousands)
$
$
$
$
67,816 $
607
67,209 $
3,930,539 $
1,060,172
2,870,367 $
72,119
1,046
71,073
3,074,947
298,456
2,776,491
Allowance for credit losses to loans and leases(1)
Adjusted allowance for credit losses to loans and leases(2)
1.73%
2.34%
2.35%
2.56%
(1)
(2)
Allowance for credit losses divided by gross loans and leases.
Adjusted allowance for credit losses divided by adjusted loans and leases.
60
Table of Contents
Return on Average Tangible Equity
PacWest Bancorp Consolidated:
Net earnings
Average stockholders' equity
Less: Average intangible assets
Average tangible common equity
Return on average equity(1)
Return on average tangible equity(2)
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
$
$
$
45,115
718,920
172,096
546,824
$
$
$
56,801
567,342
84,545
482,797
$
$
$
50,704
510,990
63,656
447,334
6.28%
8.25%
10.01%
11.76%
9.92%
11.33%
(1)
(2)
Calculated as net earnings divided by average stockholders' equity.
Calculated as net earnings divided by average tangible common equity.
Tangible Common Equity
PacWest Bancorp Consolidated:
Stockholders' equity
Less: Intangible assets
Tangible common equity
Total assets
Less: Intangible assets
Tangible assets
Equity to assets ratio
Tangible common equity ratio(1)
Book value per share
Tangible book value per share(2)
Shares outstanding
Pacific Western Bank:
Stockholders' equity
Less: Intangible assets
Tangible common equity
Total assets
Less: Intangible assets
Tangible assets
Equity to assets ratio
Tangible common equity ratio(1)
2013
December 31,
2012
(Dollars in thousands)
2011
809,093 $
225,991
583,102 $
6,533,363 $
225,991
6,307,372 $
12.38%
9.24%
17.66 $
12.73 $
589,121 $
94,589
494,532 $
5,463,658 $
94,589
5,369,069 $
10.78%
9.21%
15.74 $
13.22 $
45,822,834
37,420,909
546,203
56,556
489,647
5,528,237
56,556
5,471,681
9.88%
8.95%
14.66
13.14
37,254,318
911,200 $
225,991
685,209 $
6,523,742 $
225,991
6,297,751 $
13.97%
10.88%
649,656 $
94,589
555,067 $
5,443,484 $
94,589
5,348,895 $
11.93%
10.38%
625,494
56,556
568,938
5,512,025
56,556
5,455,469
11.35%
10.43%
$
$
$
$
$
$
$
$
$
$
(1)
(2)
Calculated as tangible common equity divided by tangible assets.
Calculated as tangible common equity divided by shares outstanding.
61
Table of Contents
Results of Operations
Acquisitions Impact Earnings Performance
The comparability of financial information is affected by our acquisitions. We completed the following four acquisitions during the three years
ended December 31, 2013: (1) Pacific Western Equipment Finance, or EQF, on January 3, 2012; (2) Celtic Capital Corporation, or Celtic, on April 3,
2012; (3) American Perspective Bank, or APB, on August 1, 2012, and (4) First California Financial Group, Inc., or FCAL, on May 31, 2013. These
acquisitions have been accounted for using the acquisition method of accounting and, accordingly, their operating results have been included in
the consolidated financial statements from their respective acquisition dates.
Net Interest Income
Net interest income, which is our principal source of income, represents the difference between interest earned on interest-earning assets and
interest paid on interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
The following table presents, for the periods indicated, the distribution of average assets, liabilities and stockholders' equity, as well as interest
income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities.
62
Table of Contents
ASSETS
Loans and leases, net
of unearned income
(1)
Investment securities
(2)
Deposits in financial
institutions
Federal funds sold
Total interest-
earning assets
Other assets
Total assets
2013
Interest
Income/
Expense
Yields
and
Rates
Average
Balance
Year Ended December 31,
2012
Interest
Income/
Expense
Average
Balance
Yields
and
Rates
(Dollars in thousands)
2011
Interest
Income/
Expense
Yields
and
Rates
Average
Balance
$ 3,975,337 $ 272,726
6.86% $ 3,548,369 $ 260,230
7.33% $ 3,755,190 $ 260,143
6.93%
1,460,516
36,923
2.53% 1,373,640
35,657
2.60% 1,100,869
34,785
3.16%
104,092
—
265
—
0.25%
—
87,600
2
228
—
0.26%
—
136,447
—
356
—
0.26%
—
5,539,945 $ 309,914
576,908
$ 6,116,853
5.59% 5,009,611 $ 296,115
468,024
$ 5,477,635
5.91% 4,992,506 $ 295,284
492,577
$ 5,485,083
5.91%
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest checking
deposits
Money market
deposits
Savings deposits
Time deposits
Total interest-
$
bearing deposits
Borrowings
Subordinated
debentures
Total interest-
bearing
liabilities
Noninterest-bearing
demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities
582,408 $
303
0.05% $
515,767 $
268
0.05% $
491,145 $
777
0.16%
1,400,065
194,300
753,122
2,929,895
12,979
2,455
63
5,047
7,868
537
0.18% 1,219,457
159,888
0.03%
889,146
0.67%
2,314
50
10,639
0.19% 1,227,482
0.03%
150,837
1.20% 1,077,930
0.27% 2,784,258
98,787
4.14%
13,271
2,656
0.48% 2,947,394
225,542
2.69%
5,356
226
14,290
20,649
7,071
0.44%
0.15%
1.33%
0.70%
3.14%
122,649
3,796
3.10%
112,015
3,721
3.32%
129,432
4,923
3.80%
3,065,523 $
12,201
0.40% 2,995,060 $
19,648
0.66% 3,302,368 $
32,643
0.99%
2,186,697
145,713
5,397,933
718,920
1,870,088
45,145
4,910,293
567,342
1,627,729
43,996
4,974,093
510,990
and
stockholders'
equity
$ 6,116,853
$ 5,477,635
$ 5,485,083
$ 297,713
$ 276,467
$ 262,641
Net interest income
Net interest rate
spread
Net interest margin
Total deposits
All-in deposit cost(3)
$ 5,116,592
5.19%
5.37%
5.25%
5.52%
$ 4,654,346
$ 4,575,123
0.15%
0.29%
4.92%
5.26%
0.45%
(1)
(2)
(3)
Includes nonaccrual loans and leases and loan fees.
Interest income on investment securities includes non-taxable interest of $11.8 million, $5.6 million, and $1.2 million for 2013, 2012, and 2011, respectively. The
tax-equivalent yield on investment securities was 2.93%, 2.76% and 3.22% for 2013, 2012 and 2011, respectively.
All-in deposit cost is calculated as annualized interest expense on deposits divided by average total deposits.
Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing
liabilities. The changes in the amount and mix of average interest-earning assets and interest-bearing liabilities are referred to as changes in
"volume." The changes in the yields earned on average interest-earning assets and rates paid on average interest-bearing liabilities are referred to
as changes in "rate." The change in interest income/expense attributable to volume reflects the change in volume multiplied by the prior year's rate
and the change in interest income/expense attributable to rate reflects the change in rates multiplied by the prior year's volume. The changes in
interest income and expense, which are not attributable specifically to either volume or rate, are allocated ratably between the two categories.
63
Table of Contents
The following table presents, for the years indicated, changes in interest income and expense and the amount of change attributable to changes
in volume and rate:
2013 Compared to 2012
2012 Compared to 2011
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Volume
Rate
(In thousands)
$
12,496 $
1,266
29,998 $
2,213
(17,502) $
(947)
87 $
872
(14,735) $
7,725
14,822
(6,853)
37
13,799
42
32,253
(5)
(18,454)
(128)
831
(127)
(7,137)
(1)
7,968
35
141
13
(5,592)
35
326
11
(1,443)
—
(185)
2
(4,149)
(509)
(3,042)
(176)
(3,651)
(5,403)
(2,119)
75
(7,447)
21,246 $
(1,071)
(3,074)
339
(3,806)
36,059 $
(4,332)
955
(264)
(3,641)
(14,813) $
(7,378)
(4,415)
(1,202)
(12,995)
13,826 $
37
(35)
13
(2,346)
(2,331)
(3,522)
(619)
(6,472)
(665) $
(546)
(3,007)
(189)
(1,305)
(5,047)
(893)
(583)
(6,523)
14,491
Interest Income:
Loans and leases
Investment securities
Deposits in financial
institutions
Total interest income
Interest Expense:
Interest checking
deposits
Money market deposits
Savings deposits
Time deposits
Total interest-bearing
deposits
Borrowings
Subordinated debentures
Total interest expense
Net interest income
$
The net interest margin ("NIM") is impacted by several items that cause volatility from period to period. The effects of such items on the NIM
are shown in the following table for the periods indicated:
Items Impacting NIM Volatility
2013
Year Ended December 31,
2012
Increase (Decrease) in
NIM
2011
Accelerated accretion of acquisition discounts resulting from PCI loan
payoffs
Nonaccrual loan interest
Unearned income on the early repayment of leases
Celtic loan portfolio premium amortization
Total
As reported NIM
Core NIM
0.08%
0.01%
0.02%
(0.01)%
0.10%
5.37%
5.27%
0.16% 0.18%
0.01% 0.01%
0.05% —
(0.03)% —
0.19% 0.19%
5.52% 5.26%
5.33% 5.07%
64
Table of Contents
The following table presents the loan yields and related average balances for our Non-PCI loans and leases, PCI loans, and total loan and lease
portfolio for the periods indicated:
Yields:
Non-PCI loans and leases
PCI loans
Total loans and leases
Average Balances:
Non-PCI loans and leases
PCI loans
Total loans and leases
2013
Year Ended December 31,
2012
(Dollars in thousands
2011
6.38%
10.63%
6.86%
6.82%
9.66%
7.33%
6.49%
8.52%
6.93%
$
$
3,528,278
447,059
3,975,337
$
$
2,935,420
612,949
3,548,369
$
$
2,948,696
806,494
3,755,190
Reductions in the higher yielding PCI loans will result in lower net interest income in the absence of larger amounts of originated or acquired
non-impaired loans. The loan yield is impacted by the same items which cause volatility in the NIM. The following table presents the effects of
these items on the total loan and lease yield for the periods indicated:
Items Impacting Loan and Lease Yield Volatility
Accelerated accretion of acquisition discounts resulting from PCI loan
payoffs
Nonaccrual loan interest
Unearned income on the early repayment of leases
Celtic loan portfolio premium amortization
Total
As reported loan and lease yield
Core loan and lease yield
2013 Compared to 2012
2013
Year Ended December 31,
2012
Increase (Decrease) in
Loan Yield
2011
0.12%
0.01%
0.03%
(0.02)%
0.14%
6.86%
6.72%
0.21% 0.24%
0.02% 0.02%
0.07% —
(0.04)% —
0.26% 0.26%
7.33% 6.93%
7.07% 6.67%
Our net interest margin and net interest income are driven by the combination of our loan and securities volume, asset yield, high proportion of
demand deposit balances to total deposits, and disciplined deposit pricing.
The 2013 NIM was 5.37%, a decrease of 15 basis points from 5.52% for last year. The decrease was due to lower yields on loans and leases and
investment securities, offset partially by lower funding costs.
Net interest income increased $21.2 million to $297.7 million for the year ended December 31, 2013 compared to 2012; interest income increased
$13.8 million and interest expense decreased $7.4 million. Interest income on loans and leases increased $12.5 million due to a higher average loan
and lease balance offset by a lower loan and lease yield. The increase in the average loan and lease balance was due mainly to acquisitions
including FCAL on May 31, 2013 and APB on August 1, 2012. The lower loan and lease yield was due to lower accelerated accretion of acquisition
discounts resulting from PCI loan payoffs and lower income from early lease payoffs. Interest income on investment securities increased $1.3 million
due mostly to higher average portfolio balances from purchases during the year. Interest expense on deposits decreased $5.4 million due mainly to a
lower average rate and
65
Table of Contents
balances for time deposits. Interest expense on borrowings declined $2.1 million due mostly to lower average borrowings; we repaid fixed-rate term
FHLB advances at the end of the first quarter of 2012 and have used lower cost overnight FHLB advances as needed.
The yield on average loans and leases decreased 47 basis points to 6.86% for the year ended December 31, 2013 compared to 7.33% for the
prior year, due to lower accelerated accretion of acquisition discounts resulting from PCI loan payoffs, lower income on early repayment of leases,
and lower yields on new loan and lease originations. Accelerated accretion of acquisition discounts resulting from PCI loan payoffs totaled
$4.4 million for the year ended December 31, 2013 and $7.6 million for the prior year, increasing the loan yields by 12 basis points and 21 basis
points, respectively. Total income from early lease payoffs was $1.3 million for the year ended December 31, 2013 and $2.4 million for the prior year.
All-in deposit cost declined 14 basis points to 0.15% for the year ended December 31, 2013 compared to last year. The cost of interest-bearing
deposits declined 21 basis points to 0.27% due to a lower rate on average time deposits and a shift in the deposit mix to lower cost interest-bearing
checking, money market and savings deposits from higher cost time deposits. The cost of total interest-bearing liabilities declined 26 basis points to
0.40% due to the reduction in the cost of time deposits and lower average fixed-rate borrowings; we repaid $225.0 million in fixed-rate term FHLB
advances and redeemed $18.6 million in subordinated debentures in the first quarter of 2012.
2012 Compared to 2011
The 2012 NIM was 5.52%, an increase of 26 basis points from 5.26% for 2011. The increase was due to growth in low cost deposits, lower
wholesale funding and higher loan and leases yields, offset partially by lower average loan and leases and an increase in lower yielding investment
securities.
The $13.8 million increase in net interest income for 2012 compared to 2011 was due to lower funding costs of $13.0 million and higher interest
income of $831,000. Interest expense decreased as a result of strong growth in low cost deposits, lower rates on all interest-bearing deposits and
lower average wholesale funding. Interest expense on deposits decreased $7.4 million. The cost of all interest-bearing deposits decreased 22 basis
points to 0.48% and the all-in deposit cost decreased 16 basis points to 0.29% for 2012. Average noninterest-bearing deposits increased
$242.4 million while average time deposits declined $188.8 million. All other average interest-bearing deposits increased $25.7 million year-over-year.
Interest expense on borrowings declined $4.4 million due to lower average borrowings of $126.8 million and a lower average rate on such
borrowings; we repaid $225.0 million in fixed-rate term FHLB advances at the end of the first quarter of 2012, which were replaced with lower cost
overnight FHLB advances and low cost deposits. Interest expense on subordinated debentures decreased $1.2 million due to the March 2012
redemption of $18.6 million in fixed-rate subordinated debentures. The cost of interest-bearing liabilities decreased 33 basis points to 0.66% due to
the reduction in the cost of interest-bearing deposits and the first quarter of 2012 repayment of the fixed-rate term FHLB advances and the
redemption of the fixed-rate subordinated debentures.
The increase in interest income was attributed to increases in the securities portfolio which offset the expected decreases in the loan portfolio.
Average securities increased $272.8 million while the securities yield declined 56 basis points to 2.60%; such decline in yield was in-line with market
trends during 2012. Average loans decreased $206.8 million while the loan yield increased 40 basis points to 7.33%. The lower average loans and
leases included $393.2 million of acquired loans and leases and the expected decreases of Non-PCI and PCI loans. The higher loan and leases yield
was attributed to the addition of Celtic's and EQF's higher-yielding loan and lease portfolios. The loan and lease yield, earning asset yield and net
interest margin are all affected by loans and leases being placed on or removed from nonaccrual status and the acceleration of acquisition discounts
on early repayment of PCI loans; the combination of these items increased interest income $8.1 million and positively impacted the net interest
margin 17 basis points in 2012. For 2011, these items increased interest income $9.5 million and increased the net interest margin 19 basis points.
66
Table of Contents
Provision for Credit Losses
The following table presents the details of the provision for credit losses, the related year-over-year increases and decreases, and allowance for
credit losses data for the years indicated:
Year Ended December 31,
Provision For Credit Losses:
Addition to (reduction in)
allowance for Non-PCI loans and
leases
$
Addition to (reduction in) reserve
for unfunded loan commitments
Total provision (negative
provision) for Non-PCI
loans and leases
Provision (negative provision) for
PCI loans
Total provision (negative
provision) for credit losses
Non-PCI Allowance for Credit Losses
Data:
Net charge-offs on Non-PCI loans
and leases
Net charge-off ratios:
Net charge-offs to average Non-
PCI loans and leases
At year-end:
Allowance for loan and lease
Allowance for credit losses
Non-PCI nonaccrual loans and
$
losses
leases
Non-PCI classified loans and
leases
Allowance for credit losses to
Non-PCI loans and leases
Allowance for credit losses to
Non-PCI nonaccrual loans and
leases
2013
Increase
(Decrease)
Increase
(Decrease)
2011
2012
(Dollars in thousands)
(1,355) $
8,395 $
(9,750) $
(20,255) $
10,505
1,355
3,605
(2,250)
(5,045)
2,795
—
12,000
(12,000)
(25,300)
13,300
(4,210)
(3,391)
(819)
(14,089)
13,270
$
(4,210) $
8,609 $
(12,819) $
(39,389) $
26,570
$
4,303 $
(5,361) $
9,664 $
(14,181) $
23,845
0.12%
0.33%
0.81%
60,241 $
67,816
(5,658) $
(4,303)
65,899 $
72,119
(19,414) $
(21,664)
85,313
93,783
46,774
5,012
41,762
(19,857)
61,619
127,311
26,292
101,019
(84,541)
185,560
1.73%
2.35%
3.30%
145.0%
172.7%
152.2%
Provisions for credit losses are charged to earnings as and when needed for both on and off-balance sheet credit exposures. We have a
provision for credit losses on our non-purchased credit impaired ("Non-PCI") loans and leases and a provision for credit losses on our purchased
credit impaired ("PCI') loans. The provision for credit losses on our Non-PCI loans and leases is based on our allowance methodology and is an
expense, or contra-expense, that, in our judgment, is required to maintain the adequacy of the allowance for loan and lease losses and the reserve
for unfunded loan commitments. Our allowance methodology reflects 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. The
provision for credit losses on our PCI loans results from decreases or increases in expected cash flows on such loans compared to those previously
estimated.
We made negative provisions for credit losses totaling $4.2 million and $12.8 million during 2013 and 2012, respectively, and provision for credit
losses totaling $26.6 million during 2011. The 2013 negative provision for credit losses consisted of a $1.4 million reduction to the allowance for
Non-PCI loans and leases, a $1.4 million addition to the reserve for unfunded loan commitments, and $4.2 million reduction to the allowance for PCI
loans. The negative 2013 provision for PCI loans was driven by increases in expected and actual cash flows on PCI loan pools compared to those
previously
67
Table of Contents
estimated. Increases in actual cash flows include early payoffs and/or amounts received in excess of previous estimates. The 2012 negative
provision for credit losses consisted of a $9.8 million reduction to the allowance for loan and lease losses on the Non-PCI loan and lease portfolio, a
$2.2 million reduction to the reserve for unfunded loan commitments, and an $819,000 reduction to the allowance for credit losses on PCI loans. The
negative 2012 provision for Non-PCI loans was based on our allowance methodology, which reflected (a) lower net charge-offs, (b) declining levels
and improving trends of nonaccrual and classified loans and leases, (c) the migration of loans and leases into various risk classifications, and (d) a
decline in Non-PCI loans when acquisition activity is excluded. The 2011 provision for credit losses was comprised of a $10.5 million addition to the
allowance for loan losses on the Non-PCI loan portfolio, a $2.8 million addition to the reserve for unfunded loan commitments, and a $13.3 million
addition to the allowance for credit losses on PCI loans.
Our Non-PCI loans and leases at December 31, 2013, included $1.1 billion in loans and leases acquired in acquisitions. These acquired loans
and leases were initially recorded at their estimated fair values and such initial fair values included an estimate of credit losses. The allowance
calculation for Non-PCI loans and leases included an amount for credit deterioration on acquired loans and leases since their acquisition dates. At
December 31, 2013, the allowance for credit losses included $607,000 attributed to these acquired loans and leases. When these acquired loans and
leases are excluded from the total of Non-PCI loans and leases and the related allowance of $607,000 is excluded from the allowance for credit losses,
the result is an adjusted coverage ratio of our allowance for credit losses for Non-PCI loans and leases of 2.34% at December 31, 2013; the
comparable ratio at December 31, 2012 was 2.56%.
Increased provisions for credit losses may be required in the future based on loan and unfunded commitment growth, the effect that changes in
economic conditions, such as inflation, unemployment, market interest rate levels, and real estate values, may have on the ability of our borrowers
to repay their loans, and other negative conditions specific to our borrowers' businesses. See "—Critical Accounting Policies," "—Financial
Condition—Allowance for Credit Losses on Non-PCI Loans," "—Financial Condition—Allowance for Credit Losses on PCI Loans," and Note 1(h),
Nature of Operations and Summary of Significant Accounting Policies—Impaired Loans and Leases and Allowances for Credit Losses and
Leases, and Note 7, Loans and Leases, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
68
Table of Contents
Noninterest Income
The following table presents the details of noninterest income and related year-over-year increases and decreases for the years indicated:
Noninterest Income:
Service charges on deposit accounts $
Other commissions and fees
Gain on sale of leases
Gain on sale of securities
Acquisition-related securities
gain
Other-than-temporary-impairment
losses on covered securities
Increase in cash surrender value of
life insurance
FDIC loss sharing income (expense),
net
Other income
Total noninterest income
$
Year Ended December 31,
2013
Increase
(Decrease)
2012
(In thousands)
Increase
(Decrease)
2011
11,765 $
8,416
1,791
137
(1,087) $
290
(976)
(1,102)
12,852 $
8,126
2,767
1,239
(977) $
510
2,767
1,239
13,829
7,616
—
—
5,222
5,222
—
—
—
1,115
(1,115)
(1,115)
—
—
1,164
(100)
1,264
(179)
1,443
(26,172)
1,921
4,244 $
(16,102)
1,112
(11,628) $
(10,070)
809
15,872 $
(17,846)
47
(15,554) $
7,776
762
31,426
The following table presents the details of FDIC loss sharing income (expense), net for the years indicated:
FDIC Loss Sharing Income, Net:
2013
Year Ended December 31,
2012
(In thousands)
2011
Gain (loss) on FDIC loss sharing asset(1)
FDIC loss sharing asset amortization, net
Net reimbursement (to) from FDIC for covered OREOs(2)
Other-than-temporary impairment losses on covered securities
Other
$
Total FDIC loss sharing income (expense), net
$
2,320 $
(26,829)
(1,547)
—
(116)
(26,172) $
(5,487) $
(10,658)
5,164
892
19
(10,070) $
8,379
(3,063)
2,416
—
44
7,776
(1)
(2)
Includes increases related to covered loan loss provisions and decreases for: (a) write-offs for covered loans expected to be resolved at amounts higher than their
carrying values, and (b) amounts to be reimbursed to the FDIC for covered loans resolved at amounts higher than their carrying values.
Represents amounts to be reimbursed to the FDIC for gains on covered OREO sales and due from the FDIC for covered OREO write-downs.
2013 Compared to 2012
Noninterest income declined by $11.7 million to $4.2 million during the year ended December 31, 2013 compared to $15.9 million for last year.
The decrease was due mainly to higher net FDIC loss sharing expense of $16.1 million in 2013 and the $5.2 million non-taxable acquisition-related
securities gain recognized in 2013. FDIC loss sharing expense, net, increased due to higher amortization of the FDIC loss sharing asset and lower
net covered OREO costs, offset by a higher gain on the FDIC loss sharing asset.
69
Table of Contents
2012 Compared to 2011
Noninterest income decreased by $15.5 million to $15.9 million for 2012 compared to $31.4 million for 2011. The decrease was due mostly to
lower net FDIC loss sharing income of $17.8 million, higher other-than-temporary impairment ("OTTI") losses of $1.1 million, and lower fee income
from service charges on deposit accounts of $977,000. These decreases in noninterest income were offset, in part, by $4.0 million of gains on sales
of leases and securities; there were no such gains in 2011. Net FDIC loss sharing income decreased due mainly to higher write-downs and
amortization of the FDIC loss sharing asset, offset by higher net covered OREO costs and covered investment security losses. The write-downs
and amortization of the FDIC loss sharing asset are the result of lower losses collectable from the FDIC, which include both the current period
activity and estimated future activity on covered PCI loans. This occurs when expected cash flows on covered PCI loan pools improve causing the
carrying value of the FDIC loss sharing asset to be reduced in the current reporting period. The OTTI loss related to one covered investment
security due to deteriorating cash flows and significant delinquency of the underlying loan collateral. This OTTI loss was offset partially by related
FDIC loss sharing income of $892,000; there were no such impairments or impairment-related loss sharing income in 2011. Lower non-sufficient
funds fees caused the decline in service charges on deposit accounts. The 2012 gain on sale of leases related to the acquired EQF operations. The
gain on sale of securities relates to the sale of $43.9 million of available-for-sale MBS securities; such securities were identified as generally having a
higher volatility than the broader portfolio and were sold as part of our portfolio management activities. During 2012, we also recognized a $297,000
gain on the sale of 10 branches; there was no such gain in 2011.
Noninterest Expense
The following table presents the details of noninterest expense and related increases and decreases for the years indicated:
Noninterest Expense:
Compensation
Accelerated vesting of restricted
stock
Occupancy
Data processing
Other professional services
Business development
Communications
Insurance and assessments
Non-covered other real estate
owned, net
Covered other real estate owned,
net
Intangible asset amortization
Acquisition and integration
Debt termination
Other expense
Total noninterest expense
$
Year Ended December 31,
2013
Increase
(Decrease)
2012
(In thousands)
Increase
(Decrease)
2011
$
107,067 $
12,100 $
94,967 $
8,167 $
86,800
12,420
29,459
9,494
9,481
3,282
2,923
5,596
12,420
1,346
374
1,114
744
400
312
—
28,113
9,120
8,367
2,538
2,523
5,284
—
(572)
156
(619)
217
(488)
(1,887)
—
28,685
8,964
8,986
2,321
3,011
7,171
330
(3,820)
4,150
(2,860)
7,010
(1,833)
5,402
28,392
—
18,674
230,687 $
(8,614)
(924)
24,303
(22,598)
1,868
19,025 $
6,781
6,326
4,089
22,598
16,806
211,662 $
3,115
(2,102)
3,489
22,598
2,455
31,669 $
3,666
8,428
600
—
14,351
179,993
70
Table of Contents
The following tables present the components of non-covered and covered OREO expense, net for the years indicated:
Non-Covered OREO Expense:
Provision for losses
Maintenance costs
(Gain) loss on sale
Total non-covered OREO expense, net
$
330 $
2013
Year Ended December 31,
2012
(In thousands)
2011
$
818 $
1,082
(1,570)
3,820 $
2,018
(1,688)
4,150 $
5,026
2,177
(193)
7,010
Covered OREO Expense:
Provision for losses
Maintenance costs
(Gain) loss on sale
Total covered OREO expense, net
2013 Compared to 2012
2013
Year Ended December 31,
2012
(In thousands)
2011
$
$
1,697 $
101
(3,631)
(1,833) $
10,513 $
366
(4,098)
6,781 $
11,968
645
(8,947)
3,666
Noninterest expense increased by $19.0 million to $230.7 million during the year ended December 31, 2013 compared to $211.7 million for last
year. This increase was due mostly to the combination of: (a) higher acquisition and integration costs of $24.3 million recognized in 2013;
(b) accelerated vesting of restricted stock of $12.4 million; and (c) higher compensation expense of $12.1 million due to a higher employee count
resulting from acquisition activity; offset in part by: (d) lower debt termination expense of $22.6 million as a result of the early repayments of FHLB
advances and subordinated debentures in 2012; and (e) lower OREO expense of $12.4 million due mainly to lower write-downs. Excluding the
accelerated vesting of restricted stock, acquisition and integration costs, OREO expense, and debt termination expense, noninterest expense
increased $17.3 million due to the bank acquisitions completed on May 31, 2013 and August 1, 2012.
In December 2013, the Company accelerated the vesting of certain restricted stock awards that resulted in a pre-tax charge of $12.4 million
($12.2 million after tax). This action was taken by the Company in order to eliminate an additional $21.0 million of compensation and tax expense
related to change in control payments that the Company would have otherwise incurred upon consummation of the CapitalSource merger. Such
eliminated expenses relate to tax gross-up payments and the value of lost tax deductions, in each case due to the impact of Sections 280G and 4999
of the Internal Revenue Code as they apply to change in control payments that would have become payable to certain PacWest employees in
conjunction with the CapitalSource merger. The restricted stock awards that were vested on an accelerated basis in 2013 would have otherwise
vested upon consummation of the CapitalSource merger, and the $12.2 million after-tax charge to earnings that we recorded in December 2013 would
have been incurred at that time.
Noninterest expense includes (a) amortization of time-based restricted stock, which vests either in increments over a three to five year period or
at the end of such period and is included in compensation expense, and (b) intangible asset amortization, which is related to customer deposits and
customer relationship intangible assets. Amortization of restricted stock, excluding the accelerated vesting of restricted stock, totaled $8.5 million
and $5.7 million for the years ended December 31, 2013 and 2012, respectively. Intangible asset amortization totaled $5.4 million for the year ended
December 31, 2013 compared to $6.3 million for 2012; the decrease was due to certain intangibles being fully amortized.
71
Table of Contents
2012 Compared to 2011
Noninterest expense increased by $31.7 million to $211.7 million for 2012 compared to $180.0 million for 2011. The increase was due mostly to
$22.6 million in debt termination expense incurred in the first quarter of 2012 for the early repayments of FHLB advances and subordinated
debentures; there was no such expense incurred in 2011. Acquisition and integration costs increased $3.5 million as a result of our 2012 acquisition
activities, including the then proposed acquisition of FCAL. Covered OREO expense increased by $3.1 million due mostly to lower gains on sales
offset by lower write-downs, while non-covered OREO expense decreased $2.8 million due to higher gains on sales of and lower write-downs.
When debt termination expense, acquisition and integration costs, and OREO costs, are excluded, noninterest expense increased $5.3 million;
this increase included $15.1 million of noninterest expense for the operations of APB, Celtic and EQF since their respective acquisition dates. The
remaining $9.8 million decrease in overhead costs included: (a) lower intangible asset amortization of $2.7 million due to the timing of core deposit
and customer relationship intangibles becoming fully amortized; (b) lower compensation costs of $2.0 million due to the staff reduction effort late in
2011 and cost savings from the third quarter of 2012 branch sale transaction; (c) lower occupancy costs of $1.9 million due to lease renewals at
lower rates and property cost savings after the 2012 branch sale transaction; (d) lower insurance and assessments of $1.9 million due to the revised
deposit insurance assessment formula; and (e) lower other professional services costs of $1.2 million due to lower legal fees for litigation on loans
and to lower fees for our outsourced internal audit function.
Amortization of restricted stock totaled $5.7 million and $7.6 million for the years ended December 31, 2012 and 2011, respectively. Intangible
asset amortization totaled $6.3 million for the year ended December 31, 2012 compared to $8.4 million for the prior year.
Income Taxes
Effective income tax rates were 39.7%, 39.2%, and 42.1% for the years ended December 31, 2013, 2012, and 2011, respectively. The difference in
the effective tax rates between the annual periods relates mainly to the level of tax credits and tax deductions and the amount of tax exempt income
recorded in each of the years. The Company operates primarily in the federal and California jurisdictions and the blended statutory tax rate for
federal and California is 42%. For further information on income taxes, see Note 15, Income Taxes, of the Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data."
72
Table of Contents
Fourth Quarter Results
The following table sets forth our unaudited quarterly results for the period indicated:
$
Earnings Summary:
Interest income
Interest expense
Net interest income
Negative provision for credit losses
FDIC loss sharing expense, net
Gain on asset sales
Acquisition-related securities gain
Other noninterest income
Total noninterest income (expense)
Accelerated vesting of restricted stock
Non-covered OREO expense, net
Covered OREO expense, net
Acquisition and integration costs
Other noninterest expense
Total noninterest expense
Earnings from continuing operations before income
taxes
Income tax expense
Net earnings from continuing operations
Earnings (loss) from discontinued operations
before income taxes
Income tax (expense) benefit
Net earnings (loss) from discontinued
operations
Net earnings
Profitability Measures:
Basic and diluted earnings per share:
Net earnings from continuing operations
Net earnings
Annualized return on:
Average assets
Average equity
Net interest margin
Core net interest margin
Base efficiency ratio
Adjusted efficiency ratio(1)
Three Months Ended
December 31,
2013
September 30,
2013
(Dollars in thousands, except
per share data)
83,856 $
(2,598)
81,258
1,338
(10,593)
411
—
6,256
(3,926)
(12,420)
(25)
594
(4,253)
(49,984)
(66,088)
12,582
(9,135)
3,447
(578)
240
85,158
(2,869)
82,289
4,167
(7,032)
604
5,222
6,333
5,127
—
88
332
(5,450)
(51,170)
(56,200)
35,383
(11,243)
24,140
39
(16)
$
$
$
(338)
3,109 $
23
24,163
0.07 $
0.06 $
0.19%
1.51%
5.41%
5.31%
85.5%
56.7%
0.53
0.53
1.44%
12.02%
5.46%
5.29%
64.3%
57.3%
(1)
Excludes FDIC loss sharing expense, securities gains and losses, OREO expense, acquisition and integration costs, and accelerated vesting of restricted
stock.
73
Table of Contents
Fourth Quarter of 2013 Compared to Third Quarter of 2013
We recorded net earnings of $3.1 million for the fourth quarter of 2013 compared to net earnings of $24.2 million for the third quarter of 2013.The
quarter-over-quarter decrease in net earnings of $21.1 million was due mostly to: (a) the $12.4 million ($12.2 million after tax) accelerated vesting of
restricted stock, (b) the $6.2 million ($3.6 million after tax) increase in net credit costs (mostly due to higher FDIC loss sharing expense), (c) the
$5.2 million non-taxable acquisition-related securities gain recorded in the third quarter but not repeated in the fourth quarter, and (d) the $1.0 million
($598,000 after tax) decrease in net interest income. These items were offset in part by the decrease in acquisition and integration costs of
$1.2 million ($524,000 after tax).
The net interest margin ("NIM") is impacted by several items that cause volatility from period to period. The effects of such items on the NIM
are shown in the following table for the periods indicated:
Items Impacting NIM Volatility
Accelerated accretion of acquisition discounts
resulting from PCI loan payoffs
Nonaccrual loan interest
Unearned income on the early repayment of leases
Celtic loan portfolio premium amortization
Total
As reported NIM
Core NIM
Three Months Ended
December 31,
2013
September 30,
2013
Increase (Decrease) in
NIM
0.10%
—
0.01%
(0.01)%
0.10%
5.41%
5.31%
0.14%
0.02%
0.02%
(0.01)%
0.17%
5.46%
5.29%
The following table presents the loan yields and related average balances for our non-covered loans and leases, covered loans, and total loan
and lease portfolio for the periods indicated:
Yields:
Non-PCI loans and leases
PCI loans
Total loans and leases
Average Balances:
Non-PCI loans and leases
PCI loans
Total loans and leases
Three Months Ended
December 31,
September 30,
2013
2013
(Dollars in thousands)
6.14%
13.15%
6.77%
6.35%
11.88%
6.90%
$
$
3,916,650 $
384,727
4,301,377 $
3,889,780
430,990
4,320,770
74
Table of Contents
The loan yield is impacted by the same items that cause volatility in the NIM. The following table presents the effects of these items on the
total loan and lease yield for the periods indicated:
Three Months Ended
Items Impacting Loan and Lease Yield Volatility
Accelerated accretion of acquisition discounts
resulting from PCI loan payoffs
Nonaccrual loan interest
Unearned income on the early repayment of leases
Celtic loan portfolio premium amortization
Total
As reported loan and lease yield
Core loan and lease yield
December 31,
2013
September 30,
2013
Increase (Decrease) in Loan Yield
0.13%
—
0.01%
(0.01)%
0.13%
6.77%
6.64%
0.19%
0.03%
0.03%
(0.02)%
0.23%
6.90%
6.67%
The NIM for the fourth quarter was 5.41%, a decrease of five basis points from 5.46% for the third quarter. The decrease was due to a lower
yield on loans and leases, offset partially by lower funding costs.
Net interest income declined by $1.0 million to $81.3 million for the fourth quarter compared to $82.3 million for the third quarter due primarily to
lower interest income on loans and leases. Interest income on loans and leases decreased $1.8 million due to lower accelerated accretion of
acquisition discounts resulting from PCI loan payoffs, lower nonaccrual loan interest recoveries, and lower income from early lease payoffs. Interest
income on investment securities increased $551,000 due to a higher average portfolio balance and a higher yield; the improved yield on our
securities portfolio is a result of higher yielding securities purchased during the third quarter, the impact of which was fully realized in the fourth
quarter, and lower premium amortization on mortgage-related securities due to slower prepayment speeds. Interest expense declined by $271,000
due to a lower average rate and average balance for time deposits.
The yield on loans and leases declined to 6.77% for the fourth quarter from 6.90% for the third quarter due to lower accelerated accretion of
acquisition discounts resulting from PCI loan payoffs, lower nonaccrual interest recoveries and lower income from early lease payoffs. The
accelerated accretion of acquisition discounts resulting from PCI loan payoffs totaled $1.4 million for the fourth quarter and $2.1 million for the third
quarter, increasing the loan yields by 13 basis points and 19 basis points, respectively. Total nonaccrual interest recoveries were $15,000 for the
fourth quarter and $350,000 for the third quarter. Total income from early lease payoffs was $52,000 for the fourth quarter and $299,000 for the third
quarter.
The cost of average funding sources declined two basis points to 0.18% for the fourth quarter from 0.20% for the third quarter. This includes
all-in deposit cost which declined one basis point to 0.11% for the fourth quarter. The cost of total interest-bearing deposits decreased two basis
points to 0.19% for the fourth quarter from 0.21% for the third quarter. The cost of total interest-bearing liabilities declined two basis points to 0.32%
for the fourth quarter. Such declines are due mainly to a lower average rate on time deposits.
75
Table of Contents
The Company recorded a negative provision for credit losses of $1.3 million in the fourth quarter of 2013 compared to a negative provision for
credit losses of $4.2 million in the third quarter of 2013 as follows:
Provision (Negative Provision) for
Credit Losses on:
Non-PCI loans and leases
PCI loans
Total provision (negative
provision) for credit losses
December 31,
2013
Three Months Ended
September 30,
2013
(In thousands)
Increase
(Decrease)
$
— $
(1,338)
— $
(4,167)
—
2,829
$
(1,338) $
(4,167) $
2,829
The provision level on the Non-PCI portfolio is generated by our allowance methodology and reflects historical and current net charge-offs, the
levels 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. Based on such methodology, there was no fourth quarter provision. The provision or (negative provision) for credit losses on the
PCI loans results from, respectively, decreases or (increases) in expected cash flows on such loans compared to those previously estimated.
Noninterest income declined by $9.0 million to a negative $3.9 million for the fourth quarter of 2013 from a positive $5.1 million for the prior
quarter. The decrease was due mostly to the $5.2 million non-taxable acquisition-related securities gain recorded in the third quarter that was not
repeated in the fourth quarter and an increase in FDIC loss sharing expense. The acquisition-related securities gain recognized our previously-held
equity interest in FCAL common stock at its fair value as of the acquisition date. The $3.6 million increase in FDIC loss sharing expense was due to
higher amortization of the FDIC loss sharing asset and lower gains on the FDIC loss sharing asset as covered PCI loan performance generally
continues to improve in relation to initial expectations.
The Bank reviewed its exposure to potential losses in December 2013 under the proposed regulations, referred to as the Volcker rule,
concerning investment securities and hedging activities. We identified securities totaling $11 million in our portfolio that may be negatively
impacted by this rule. In order to minimize the risk to the Company and the Bank in holding these securities, we sold $10 million of the securities in
December and realized a $272,000 pre-tax loss. The remaining security, which is covered under a loss sharing agreement and which has a market
value approximating its carrying value, will be sold if required under the Volcker rule. Neither the Company nor the Bank is engaged in any sort of
hedging activity utilizing derivatives.
76
Table of Contents
The following table presents the details of FDIC loss sharing income (expense), net for the periods indicated:
FDIC Loss Sharing Income, Net:
Gain (loss) on FDIC loss sharing
asset(1)
FDIC loss sharing asset amortization,
net
Net reimbursement (to) from FDIC for
covered OREO activity(2)
Other
Total FDIC loss sharing income
(expense), net
December 31,
2013
Three Months Ended
September 30,
2013
(In thousands)
Increase
(Decrease)
$
(1,909) $
269 $
(2,178)
(8,111)
(6,971)
(1,140)
(508)
(65)
(276)
(54)
(232)
(11)
$
(10,593) $
(7,032) $
(3,561)
(1)
(2)
Includes increases related to covered loan loss provisions and decreases for: (a) write-offs for covered loans expected to be resolved at amounts higher than
their carrying values, and (b) amounts to be reimbursed to the FDIC for covered loans resolved at amounts higher than their carrying values.
Represents amounts to be reimbursed to the FDIC for gains on covered OREO sales and due from the FDIC for covered OREO write-downs.
Noninterest expense increased by $9.9 million to $66.1 million during the fourth quarter compared to $56.2 million during the third quarter due to
the $12.4 million of expense from accelerated vesting of restricted stock, offset by the decreases in acquisition and integration costs and other
professional services of $1.2 million and $516,000. The decrease in other professional services was due mainly to lower legal expense for litigation
and loans, none of which related to acquisition activity. Excluding the accelerated vesting of restricted stock, acquisition and integration costs, and
OREO expense, noninterest expense declined $1.2 million during the fourth quarter as we continue to make improvements in efficiency. All operating
expense categories declined, except for business development expense, which increased $236,000 as we made $297,000 in CRA donations in the
fourth quarter.
Noninterest expense includes: (a) amortization of restricted stock, which is included in compensation, and (b) intangible asset amortization.
Amortization of restricted stock, excluding the accelerated vesting of restricted stock, totaled $2.3 million for the fourth quarter and $2.4 million for
the third quarter. Intangible asset amortization totaled $1.4 million for the fourth quarter and $1.5 million for the third quarter.
Business Segments
The Company's reportable segments consist of "Banking," "Asset Financing," and "Other." At December 31, 2013, the Other segment
consisted of the PacWest Bancorp holding company and other elimination and reconciliation entries. The accounting policies of the reported
segments are the same as those of the Company described in Note 1, "Nature of Operations and Summary of Significant Accounting Policies."
The Bank's Asset Financing segment includes the operations of the divisions and subsidiaries that provide asset-based commercial loans and
equipment leases. The asset-based lending products are offered primarily through three business units: (1) First Community Financial ("FCF"), a
division of the Bank, based in Phoenix, Arizona; (2) BFI Business Finance ("BFI"), a wholly-owned subsidiary of the Bank, based in San Jose,
California; and (3) Celtic Capital Corporation ("Celtic"), a wholly-owned subsidiary of the Bank based in Santa Monica, California. The Bank's
leasing products are offered through Pacific Western Equipment Finance ("EQF"), a division of the Bank based in Midvale, Utah.
77
Table of Contents
The following tables present information regarding our business segments as of and for the years indicated:
December 31, 2013
Asset
Financing
Other
(In thousands)
Consolidated
Company
Balance Sheet Data
Banking
Loans and leases, net of unearned income
Allowance for loan and lease losses
Total loans and leases, net
Goodwill(1)
Core deposit and customer relationship
intangibles, net
Total assets
Total deposits(2)
$
$
$
3,837,475 $
(75,498)
3,761,977 $
474,877 $
(6,536)
468,341 $
— $
—
— $
4,312,352
(82,034)
4,230,318
183,065 $
25,678 $
— $
208,743
15,331
6,004,067
5,302,822
1,917
519,675
—
—
9,621
(21,835)
17,248
6,533,363
5,280,987
(1)
(2)
The increase in the Banking segment's goodwill during 2013 was due primarily to $129.1 million from the FCAL acquisition.
The negative balance for total deposits in the "Other" segment represents the elimination of holding company cash held in deposit accounts at the Bank.
Balance Sheet Data
Banking
Loans and leases, net of unearned income
Allowance for loan and lease losses
Total loans and leases, net
Goodwill
Core deposit and customer relationship
intangibles, net
Total assets
Total deposits(1)
December 31, 2012
Asset
Financing
Other
(In thousands)
$
$
$
3,175,165 $
(87,538)
3,087,627 $
54,188 $
415,132 $
(4,430)
410,702 $
25,678 $
Consolidated
Company
— $
—
— $
— $
3,590,297
(91,968)
3,498,329
79,866
12,151
4,991,927
4,737,593
2,572
451,557
—
—
20,174
(28,472)
14,723
5,463,658
4,709,121
(1)
The negative balance for total deposits in the "Other" segment represents the elimination of holding company cash held in deposit accounts at the Bank.
78
Table of Contents
Year Ended December 31, 2013
Results of Operations
Banking
Asset
Financing
Consolidated
Company
$
Interest income
Intersegment interest income (expense)
Other interest expense
Net interest income
Negative provision (provision) for credit losses
FDIC loss sharing expense
Acquisition-related securities gain
Other noninterest income
Total noninterest income
Accelerated vesting of restricted stock
OREO income (expense)
Intangible asset amortization
Acquisition and integration costs
Other noninterest expense
Total noninterest expense
261,492 $
1,525
(7,873)
255,144
8,079
(26,172)
—
21,532
(4,640)
(12,420)
1,503
(4,748)
(28,132)
(156,600)
(200,397)
Other
(In thousands)
48,422 $
(1,525)
(532)
46,365
(3,869)
—
—
3,558
3,558
—
—
(654)
—
(23,575)
(24,229)
— $
—
(3,796)
(3,796)
—
—
5,222
104
5,326
—
—
—
(260)
(5,801)
(6,061)
Earnings (loss) from continuing operations before
income taxes
Income tax (expense) benefit
Net earnings (loss) from continuing operations
Loss from discontinued operations before income
taxes
Income tax benefit
Net loss from discontinued operations
Net earnings (loss)
$
58,186
(24,940)
33,246
21,825
(9,101)
12,724
(4,531)
4,038
(493)
(620)
258
(362)
32,884 $
—
—
—
12,724 $
—
—
—
(493) $
79
309,914
—
(12,201)
297,713
4,210
(26,172)
5,222
25,194
4,244
(12,420)
1,503
(5,402)
(28,392)
(185,976)
(230,687)
75,480
(30,003)
45,477
(620)
258
(362)
45,115
Table of Contents
Results of Operations
Banking
$
Interest income
Intersegment interest income (expense)
Other interest expense
Net interest income
Negative provision (provision) for credit losses
FDIC loss sharing expense
Other noninterest income
Total noninterest income
OREO expense
Intangible asset amortization
Acquisition and integration costs
Debt termination expense
Other noninterest expense
Total noninterest expense
Earnings (loss) before income taxes
Income tax (expense) benefit
Net earnings (loss)
$
251,720 $
2,055
(15,043)
238,732
14,585
(10,070)
21,811
11,741
(10,931)
(5,898)
(4,089)
(24,195)
(138,640)
(183,753)
81,305
(31,542)
49,763 $
Year Ended December 31, 2012
Asset
Financing
Consolidated
Company
Other
(In thousands)
44,395 $
(2,055)
(884)
41,456
(1,766)
—
4,017
4,017
—
(428)
—
—
(23,502)
(23,930)
19,777
(8,327)
11,450 $
— $
—
(3,721)
(3,721)
—
—
114
114
—
—
—
1,597
(5,576)
(3,979)
(7,586)
3,174
(4,412) $
296,115
—
(19,648)
276,467
12,819
(10,070)
25,942
15,872
(10,931)
(6,326)
(4,089)
(22,598)
(167,718)
(211,662)
93,496
(36,695)
56,801
Results of Operations
Banking
Interest income
Intersegment interest income (expense)
Other interest expense
Net interest income
Provision for credit losses
FDIC loss sharing income
Other noninterest income
Total noninterest income
OREO expense
Intangible asset amortization
Acquisition and integration costs
Other noninterest expense
Total noninterest expense
Earnings (loss) before income taxes
Income tax (expense) benefit
Net earnings (loss)
Year Ended December 31, 2011
Asset
Financing
Other
(In thousands)
Consolidated
Company
18,550 $
(1,226)
—
17,324
(50)
—
660
660
—
(164)
—
(10,846)
(11,010)
6,924
(2,917)
4,007 $
— $
—
(4,923)
(4,923)
—
—
157
157
—
—
—
(8,255)
(8,255)
(13,021)
5,671
(7,350) $
295,284
—
(32,643)
262,641
(26,570)
7,776
23,650
31,426
(10,676)
(8,428)
(600)
(160,289)
(179,993)
87,504
(36,800)
50,704
$
$
276,734 $
1,226
(27,720)
250,240
(26,520)
7,776
22,833
30,609
(10,676)
(8,264)
(600)
(141,188)
(160,728)
93,601
(39,554)
54,047 $
80
Table of Contents
2013 Compared to 2012
Net earnings for the Banking segment declined $16.9 million to $32.9 million for the year ended December 31, 2013 compared to $49.8 million for
the year ended December 31, 2012. The decrease in net earnings was due mainly to higher acquisition and integration costs of $24.0 million
($14.6 million after tax); $12.4 million ($12.2 million after tax) in accelerated vesting of restricted stock; higher compensation expense, mostly from
acquisitions, of $11.8 million ($6.8 million after tax); and higher net credit costs (provision for credit losses, FDIC loss sharing expense, and OREO
expense) of $10.2 million ($5.9 million after tax). These items were offset in part by $24.2 million ($14.0 million after tax) in debt termination expense
recognized in 2012 with no similar charge in 2013; and higher net interest income of $16.4 million ($9.5 million after tax).
The increase in net interest income for 2013 compared to 2012 was due mainly to an increase in interest-earning assets and lower interest
expense on deposits and borrowings, offset by a lower yield on average interest-earning assets. The Banking segment's average interest-earning
assets increased $435.3 million primarily due to the FCAL acquisition. The yield on average interest-earning assets was 5.15% for 2013 compared to
5.42% for 2012.
Net earnings for the Asset Financing segment increased $1.3 million to $12.7 million for the year ended December 31, 2013 compared to
$11.4 million for the year ended December 31, 2012. The increase in net earnings was due mostly to an increase in net interest income of $4.9 million
($2.8 million after tax), of which the Celtic acquisition that occurred in April 2012, contributed $3.2 million ($1.8 million after tax) in 2013. The Asset
Financing segment's average interest-earning assets increased $98.1 million during the current year. The yield on average interest-earning assets
was 10.64% for 2013 compared to 12.43% for 2012. Provision for credit losses increased $2.1 million ($1.2 million after tax) due primarily to two asset-
based lending relationships that were identified as impaired in the current year. Net earnings were positively impacted by an increase in noninterest
income, offset partially by an increase in overhead expenses in 2013 from the Celtic acquisition.
The net loss for the Other segment declined $3.9 million to $493,000 for the year ended December 31, 2013 compared to $4.4 million for the year
ended December 31, 2012. This decrease in net loss was primarily the result of the $5.2 million non-taxable acquisition-related securities gain from
the conversion of FCAL stock at the date of merger. This was partially offset by lower debt termination income of $1.6 million ($926,000 after tax)
that was recognized in the prior year.
2012 Compared to 2011
Net earnings for the Banking segment declined $4.3 million to $49.8 million for the year ended December 31, 2012, compared to $54.1 million for
2011. The decrease was due mainly to $24.2 million ($14.0 million after tax) in debt termination expense recognized in 2012 with no similar charge in
2011; lower FDIC loss sharing income of $17.8 million ($10.4 million after tax); lower net interest income of $11.5 million ($6.7 million after tax); and
higher acquisition and integration costs of $3.5 million ($2.0 million after tax). These items were offset partially by lower provision for credit losses
on PCI and Non-PCI loans and leases of $41.1 million ($23.8 million after tax), and a $2.8 million tax benefit attributable to tax credits and a lower
effective tax rate related to tax exempt income. The decrease in net interest income for 2012 compared to 2011 is attributed to both lower average
interest-earning assets and a lower yield on such assets. The Banking segment's average interest-earning assets totaled $4.6 billion for 2012, a
$197.5 million decrease compared to 2011, due to lower average loans. The yield on the Banking segment's average interest-earning assets
decreased 29 basis points to 5.42% for 2012 compared to 5.71% for 2011.
81
Table of Contents
Net earnings for the Asset Financing segment increased $7.4 million for the year ended December 31, 2012 compared to 2011 due to the 2012
EQF and Celtic acquisitions, which added $6.8 million in net earnings. The remaining increase in net earnings was due in part to increased net
interest income and lower intangible asset amortization and other professional services expense in 2012. Net interest income for the Asset Financing
segment increased $24.1 million ($14.0 million after tax), of which $23.4 million ($13.6 million after tax) related to the EQF and Celtic acquisitions. The
yield on the Asset Financing segment's average interest-earning assets decreased by one basis point to 12.43% for 2012 compared to 12.44% for
2011.
The Asset Financing segment provision for credit losses increased $1.7 million ($995,000 after tax), due mainly to increased loan and lease
volumes for EQF and Celtic post acquisition. Noninterest income increased $3.4 million ($1.9 million after tax), all of which related to EQF and Celtic,
including a $2.8 million ($1.6 million after tax) gain on sale of leases. Total noninterest expense for the Asset Financing segment increased by
$12.9 million ($7.5 million after tax). EQF and Celtic combined added $13.4 million ($7.8 million after tax) of noninterest expense, while compensation
expense, other professional services, and intangible asset amortization in the other financing units declined.
The net loss for the Other segment decreased $2.9 million for the year ended December 31, 2012 as compared to 2011. This decrease was the
result of lower after-tax interest expense of $697,000, after-tax income on debt termination of $926,000 attributable to the early redemption of
$18.6 million in subordinated debentures during the first quarter of 2012, and lower compensation expense and other professional services.
Financial Condition
Investment Portfolio
Our portfolio consists primarily of U.S. government agency obligations, government-sponsored enterprise ("GSE") obligations, obligations of
states and political subdivisions ("municipal securities"), and corporate debt securities. The covered private label collateralized mortgage
obligations ("CMOs') were acquired in the August 2009 Affinity acquisition and are covered by a FDIC loss sharing agreement.
The following table presents the composition of our investment portfolio at the dates indicated:
Security Type
Residential mortgage-backed securities:
Government agency and government-sponsored
enterprise pass through securities
Government agency and government-sponsored
enterprise collateralized mortgage obligations
Covered private label collateralized mortgage
obligations
Municipal securities
Corporate debt securities
Government-sponsored enterprise debt securities
Other securities
Total securities available-for-sale
Federal Home Loan Bank stock
Total investment securities
2013
December 31,
2012
(In thousands)
2011
$
707,188 $
807,842 $
1,042,507
192,873
101,694
82,027
37,904
436,658
82,707
9,872
27,543
1,494,745
27,939
1,522,684 $
44,684
348,041
42,365
—
10,759
1,355,385
37,126
1,392,511 $
45,149
126,797
25,128
—
4,750
1,326,358
46,106
1,372,464
$
82
Table of Contents
The following table presents the detail of our market purchases of securities during the years indicated:
Security Type
Residential mortgage-backed securities:
Government agency and government-sponsored enterprise
pass through securities
2013
Year Ended December 31,
2012
(In thousands)
2011
$
199,563 $
156,376 $
449,927
Government agency and government-sponsored enterprise
collateralized mortgage obligations
Municipal securities
Corporate debt securities
Government-sponsored enterprise debt securities
Collateralized loan obligation securities
Other securities
Total market purchases of securities available-for-sale
$
129,321
122,740
54,148
10,047
9,867
24,525
550,211 $
61,114
215,603
51,264
—
—
1,503
485,860 $
60,190
120,501
25,096
—
—
2,596
658,310
The following table presents the components, yields, and durations of our securities available-for-sale as of the date indicated:
Security Type
Residential mortgage-backed securities:
Government agency and government-sponsored
enterprise pass through securities
Government agency and government-sponsored
enterprise collateralized mortgage obligations
Covered private label collateralized mortgage
obligations
Municipal securities(2)
Corporate debt securities
Government-sponsored enterprise debt securities
Other securities
Amortized
Cost
December 31, 2013
Carrying
Value
Yield(1)
(Dollars in thousands)
$
691,944 $
707,188
2.15%
197,069
192,873
2.39%
30,502
459,182
84,119
10,046
27,654
37,904
436,658
82,707
9,872
27,543
9.09%
2.97%
2.61%
2.51%
0.99%
Total securities available-for-sale(2)
$
1,500,516 $
1,494,745
2.60%
Duration
(in years)
3.7
5.1
2.9
6.2
2.6
6.3
4.4
4.5
(1)
(2)
Represents the yield for the month of December 2013.
The tax equivalent yield was 4.46% and 2.97% for municipal securities and total securities available-for-sale, respectively.
83
Table of Contents
The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
Municipal Securities by State:
Texas
Washington
New York
Colorado
Illinois
Ohio
California
Hawaii
Florida
Massachusetts
Total of 10 largest states
All other states
Total municipal securities
% of
Total
December 31, 2013
Carrying
Value
(In thousands)
84,142
41,443
31,859
25,090
23,927
22,021
19,455
15,005
14,987
14,877
292,806
143,852
436,658
19%
10%
7%
6%
6%
5%
5%
3%
3%
3%
67%
33%
100%
$
$
The following table presents a summary of rates and contractual maturities of our securities available-for-sale as of the date indicated:
One Year
or Less
One Year
Through
Five Years
Five Years
Through
Ten Years
Over
Ten Years
December 31, 2013
Carrying
Value
Rate
Carrying
Value
Rate
Carrying
Value
(Dollars in thousands)
Rate
Carrying
Value
Rate
Total
Carrying
Value
Rate
Residential
mortgage-
backed
securities:
Government
agency and
government-
sponsored
enterprise
pass
through
securities
Government
$
agency and
government-
sponsored
enterprise
collateralized
mortgage
obligations
Covered
private
label
collateralized
mortgage
obligations
Municipal
securities(1)
Corporate debt
securities
Government-
sponsored
enterprise
debt
securities
Other securities
Total
securities
17 6.93%$
1,607 4.35%$ 44,203 3.55%$
661,361 3.84%$
707,188 3.82%
— —
25 9.09%
51,298 3.83%
141,550 3.25%
192,873 3.41%
— —
— —
533 5.33%
37,371 5.86%
37,904 5.85%
2,202 5.01%
2,952 4.64%
12,141 3.92%
419,363 4.53%
436,658 4.51%
— —
20,165 1.46%
11,938 1.25%
50,604 2.70%
82,707 2.19%
— —
3,573 —
— —
— —
9,872 2.65%
— —
— —
23,970 0.69%
9,872 2.65%
27,543 0.60%
available-
for-sale(1)
$
5,792 1.93%$ 24,749 2.04%$ 129,985 3.42%$ 1,334,219 3.95%$ 1,494,745 3.87%
(1)
Rates on tax exempt securities are not presented on a tax equivalent basis.
84
Table of Contents
Loans and Leases
The following tables present the balance of our total gross loans and lease by portfolio segment and class as of the dates indicated:
$
Real estate mortgage:
Hospitality
SBA 504
Other
Total real estate mortgage
Real estate construction:
Residential
Commercial
Total real estate construction
Total real estate loans
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total commercial
Leases
Consumer
Total gross loans and leases
$
December 31, 2013
December 31, 2012
Amount
% of
Total
Amount
% of
Total
181,735
45,166
2,569,097
2,795,998
58,898
160,619
219,517
3,015,515
588,031
153,880
202,428
28,642
972,981
269,769
55,070
4,313,335
4% $
1%
60%
65%
183,788
54,158
2,186,264
2,424,210
1%
4%
5%
70%
13%
4%
5%
1%
23%
6%
1%
100% $
54,602
100,002
154,604
2,578,814
470,861
80,910
239,430
25,325
816,526
174,373
23,119
3,592,832
5%
1%
61%
67%
1%
3%
4%
71%
13%
2%
7%
1%
23%
5%
1%
100%
The following table presents our loan and lease portfolio activity for the year ended December 31, 2013:
Non-covered loans,
excluding
Asset Financing Segment $
Asset Financing Segment
Total non-covered loans
and leases
Covered loans
Total
December 31,
2012
Originated
and
Purchased
Net
Paydowns
(In thousands)
Net
Acquired
December 31,
2013
2,635,702 $
413,803
533,086 $
232,245
(679,171) $
(173,851)
903,103 $
—
3,392,720
472,197
3,049,505
543,327
3,592,832 $
765,331
—
765,331 $
(853,022)
(198,946)
(1,051,968) $
903,103
104,037
1,007,140 $
3,864,917
448,418
4,313,335
$
Our real estate loan portfolio is predominantly commercial-related loans and as such does not expose us to the risks generally associated with
residential mortgage loans such as option ARM, interest-only, or subprime mortgage loans. Our portfolio does expose us to risk elements
associated with mortgage loans on commercial property. Commercial real estate mortgage loan repayments typically do not rely on the sale of the
underlying collateral, but instead rely on the income producing potential of the collateral as the source of repayment. Ultimately, though, due to the
loan amortization period generally being greater than the contractual loan term, the borrower may be required to
85
Table of Contents
refinance the loan, either with us or another lender, or pay off the loan, by selling the underlying collateral.
At December 31, 2013, we had $306.8 million of commercial real estate mortgage loans maturing over the next 12 months. For any of these loans,
in the event that we provide a concession through a refinance or modification which we would not ordinarily consider in order to protect as much of
our investment as possible, such loan may be considered a troubled debt restructuring even though it was performing throughout its term. The
circumstances regarding any modification and a borrower's specific situation, such as their ability to obtain financing from another source at similar
market terms, are evaluated on an individual basis to determine if a troubled debt restructuring has occurred. Higher levels of troubled debt
restructurings may lead to increased classified assets and credit loss provisions.
The following table presents the composition of our total real estate mortgage loan portfolio as of the dates indicated:
Loan Category
Commercial real estate mortgage:
Industrial/warehouse
Retail
Office buildings
Owner-occupied
Hotel
Healthcare
Mixed use
Gas station
Self storage
Restaurant
Land acquisition/development
Unimproved land
Other
Total commercial real estate mortgage
Residential real estate mortgage:
Multi-family
Single family owner-occupied
Single family nonowner-occupied
Mixed use
HELOCs
Total residential real estate mortgage
Total gross real estate mortgage loans
December 31, 2013
December 31, 2012
Amount
% of
Total
Amount
(Dollars in thousands)
% of
Total
354,345
346,370
434,961
233,195
181,735
189,737
68,966
35,224
73,760
21,510
4,420
12,517
174,780
2,131,520
330,229
212,508
33,741
10,701
77,299
664,478
2,795,998
13% $
12%
16%
8%
6%
7%
2%
1%
3%
1%
—
1%
6%
76%
12%
8%
1%
—
3%
24%
100% $
341,862
362,771
357,624
209,697
183,788
113,854
54,052
35,725
65,362
18,325
21,922
13,341
182,377
1,960,700
262,815
115,958
28,790
3,372
52,575
463,510
2,424,210
14%
15%
15%
9%
7%
5%
2%
1%
3%
1%
1%
1%
7%
81%
11%
5%
1%
—
2%
19%
100%
$
$
86
Table of Contents
Non-Covered Loans and Leases
The following table presents the balance of our non-covered loans and leases by portfolio segment and class as of the dates indicated:
$
Real estate mortgage:
Hospitality
SBA 504
Other
Total real estate mortgage
Real estate construction:
Residential
Commercial
Total real estate construction
Total real estate loans
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total commercial
Leases
Consumer
December 31, 2013
December 31, 2012
Amount
% of
Total
Amount
(Dollars in thousands)
% of
Total
179,340
45,166
2,153,519
2,378,025
58,881
142,842
201,723
2,579,748
581,097
150,985
202,428
28,642
963,152
269,769
52,248
5% $
1%
56%
62%
181,144
54,158
1,684,008
1,919,310
1%
4%
5%
67%
15%
4%
5%
1%
25%
7%
1%
48,629
81,330
129,959
2,049,269
458,206
80,381
239,430
25,325
803,342
174,373
22,521
6%
2%
55%
63%
1%
3%
4%
67%
15%
2%
8%
1%
26%
6%
1%
Total gross non-covered loans
and leases
$
3,864,917
100% $
3,049,505
100%
During 2013, gross non-covered loans and leases increased $815.4 million, due primarily to $903.1 million of acquired loans from the FCAL
acquisition and $765.3 million in originations and purchases, offset by net paydowns of $853.0 million. Our ability to make new loans is dependent
on economic factors in our market area, borrower qualifications, competition, and liquidity, among other items. Given the state of the economy in our
market areas and the intense competition for loans, achieving robust loan growth was challenging and net paydowns exceeded our originations and
purchases during the year. Organic net loan growth during the year would have involved underpricing competitors in many cases at margins that
were not significantly above our securities portfolio yield. However, we have seen some improvement in our markets and expect new loan activity
will increase.
During 2012, gross non-covered loans and leases increased $237.4 million due primarily to $393.2 million of acquired loans and leases from our
2012 acquisitions, offset partially by a decline of $155.8 million due to payments and resolution activities.
87
Table of Contents
Our largest loan portfolio concentration is the non-covered real estate mortgage category, which includes loans secured by commercial and
residential real estate. The following table presents the composition of our non-covered real estate mortgage loan portfolio as of the dates indicated:
$
Loan Category
Commercial real estate mortgage:
Industrial/warehouse
Retail
Office buildings
Owner-occupied
Hotel
Healthcare
Mixed use
Gas station
Self storage
Restaurant
Land acquisition/development
Unimproved land
Other
Total commercial real estate
mortgage
Residential real estate mortgage:
Multi-family
Single family owner-occupied
Single family nonowner-occupied
Mixed use
HELOCs
Total residential real estate
mortgage
December 31,
2013
2012
Amount
% of
Total
Amount
(Dollars in thousands)
% of
Total
336,648
281,739
392,921
218,786
179,340
180,957
63,218
31,421
47,762
20,617
4,420
12,043
167,356
14% $
12%
16%
9%
8%
8%
3%
1%
2%
1%
—
1%
7%
316,459
271,412
304,373
195,170
181,144
102,816
51,294
29,632
29,688
16,755
21,922
13,173
172,273
16%
14%
16%
10%
9%
5%
3%
2%
2%
1%
1%
1%
9%
1,937,228
82%
1,706,111
89%
211,360
149,917
16,084
10,230
53,206
9%
6%
1%
—
2%
103,742
44,792
12,789
1,333
50,543
5%
2%
1%
—
3%
440,797
18%
213,199
11%
Total gross non-covered real estate
mortgage loans
$
2,378,025
100% $
1,919,310
100%
The largest subset of the "Other" commercial real estate mortgage category is for fixed base operators at airports with a balance of $24.3 million,
or 14.5%, of the total.
88
Table of Contents
Covered Loans
The following table presents the composition of our covered loans as of the dates indicated:
$
Covered Loans
Real estate mortgage:
Hospitality
Other
Total real estate mortgage
Real estate construction:
Residential
Commercial
Total real estate construction
Total real estate loans
Commercial:
Collateralized
Unsecured
Total commercial
Consumer
Total gross covered loans
$
December 31,
2013
2012
Amount
% of
Total
Amount
(Dollars in thousands)
% of
Total
2,395
415,578
417,973
17
17,777
17,794
435,767
6,934
2,895
9,829
2,822
448,418
1% $
92%
93%
2,644
502,256
504,900
—
4%
4%
97%
1%
1%
2%
1%
100% $
5,973
18,672
24,645
529,545
12,655
529
13,184
598
543,327
1%
92%
93%
1%
4%
5%
98%
2%
—
2%
—
100%
The loans acquired in the Affinity and Los Padres acquisitions are covered by loss sharing agreements with the FDIC and we will be
reimbursed for a substantial portion of any future losses. We acquired $110.0 million of covered assets in the FCAL acquisition. We assumed the
loss sharing agreements between First California Bank and the FDIC related to FCB's acquisition of Western Commercial Bank ("Western
Commercial") and San Luis Trust Bank ("San Luis").
Under the terms of the Affinity loss sharing agreement, the FDIC will (a) absorb 80% of losses and receive 80% of loss recoveries on the first
$234 million of losses on covered assets and (b) absorb 95% of losses and receive 95% of loss recoveries on losses exceeding $234 million. The
Affinity loss sharing provisions expire in the third quarters of 2014 and 2019 for non-single family covered assets and single family covered assets,
respectively, while the related loss recovery provisions expire in the third quarters of 2017 and 2019, respectively.
Under the terms of the Los Padres loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the
covered assets. The Los Padres loss sharing provisions expire in the third quarters of 2015 and 2020 for non-single family and single family covered
assets, respectively, while the related loss recovery provisions expire in the third quarters of 2018 and 2020, respectively.
Under the terms of the Western Commercial loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on
the covered assets; all of which were deemed to be non-single family. The Western Commercial loss sharing provision expires in the fourth quarter
of 2015, while the related loss recovery provision expires in the fourth quarter of 2018.
89
Table of Contents
Under the terms of the San Luis loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the covered
assets. The San Luis loss sharing provisions expire in the first quarters of 2016 and 2021 for non-single family and single family covered assets,
respectively, while the related loss recovery provisions expire in the first quarters of 2019 and 2021, respectively.
Both the Western Commercial and San Luis loss sharing agreements contain True-Up provisions. As of December 31, 2013, the estimated True-
Up liability of $6.6 million is included in other liabilities in the accompanying condensed consolidated balance sheets.
The following table presents the composition of our covered real estate mortgage loan portfolio as of the dates indicated:
$
Loan Category
Commercial real estate mortgage:
Industrial/warehouse
Retail
Office buildings
Owner-occupied
Hotel
Healthcare
Mixed use
Gas station
Self storage
Restaurant
Unimproved land
Other
Total commercial real estate
mortgage
Residential real estate mortgage:
Multi-family
Single family owner-occupied
Single family nonowner-occupied
Mixed use
HELOCs
Total residential real estate mortgage
December 31,
2013
2012
Amount
% of
Total
Amount
(Dollars in thousands)
% of
Total
17,697
64,631
42,040
14,409
2,395
8,780
5,748
3,803
25,998
893
474
7,424
4% $
16%
10%
3%
1%
2%
1%
1%
6%
—
—
2%
25,403
91,359
53,251
14,527
2,644
11,038
2,758
6,093
35,674
1,570
168
10,104
5%
18%
11%
3%
1%
2%
1%
1%
7%
—
—
2%
194,292
46%
254,589
51%
118,869
62,591
17,657
471
24,093
223,681
29%
15%
4%
—
6%
54%
159,073
51,588
16,001
2,039
21,610
250,311
32%
10%
3%
—
4%
49%
Total gross covered real estate
mortgage loans
$
417,973
100% $
504,900
100%
90
Table of Contents
Loan and Lease Interest Rate Sensitivity
The following table presents contractual maturity and repricing information for the indicated Non-PCI and PCI loans and leases at December 31,
2013:
Repricing or Maturing In
Non-PCI Loans:
$
Real estate mortgage
Real estate construction
Commercial
Leases
Consumer
Total Non-PCI
PCI Loans
Total
$
One Year
Or Less
Over
One to
Five Years
Over
Five Years
Total
(In thousands)
689,936 $
144,386
674,351
19,219
48,629
1,576,521
249,611
1,826,132 $
1,350,474 $
61,783
209,257
227,609
3,452
1,852,575
88,566
1,941,141 $
384,454 $
2,921
88,399
22,941
2,728
501,443
44,619
546,062 $
2,424,864
209,090
972,007
269,769
54,809
3,930,539
382,796
4,313,335
The following table presents the interest rate profile of Non-PCI and PCI loans and leases due after one year at December 31, 2013:
Non-PCI Loans:
Real estate mortgage
Real estate construction
Commercial
Leases
Consumer
Total Non-PCI
PCI Loans
Total
Fixed
Rate
Due After One Year
Floating
Rate
(In thousands)
Total
$
$
1,129,820 $
29,812
285,405
250,550
5,884
1,701,471
77,122
1,778,593 $
605,108 $
34,892
12,251
—
296
652,547
56,063
708,610 $
1,734,928
64,704
297,656
250,550
6,180
2,354,018
133,185
2,487,203
Allowance for Credit Losses on Non-PCI Loans and Leases
For a discussion of our policy and methodology on the allowance for credit losses on Non-PCI loans and leases, see "—Critical Accounting
Policies—Allowance for Credit Losses on Non-PCI Loans and Leases." For further information on the allowance for credit losses on Non-PCI loans
and leases, see Note 7, Loans and Leases, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
91
Table of Contents
The following table presents the balance of our allowance for credit losses on Non-PCI loans and leases and certain credit quality measures as
of the dates indicated:
December 31,
2011
(Dollars in thousands)
2010
2009
Non-PCI Allowance Data:
2013
2012
Allowance for loan and lease losses
Reserve for unfunded loan commitments
$
Allowance for credit losses
$
Allowance for credit losses to loans and
leases
Allowance for credit losses to nonaccrual
loans and leases
Allowance for credit losses to
nonperforming assets
60,241 $
7,575
67,816 $
65,899 $
6,220
72,119 $
85,313 $
8,470
93,783 $
98,653 $
5,675
104,328 $
118,717
5,561
124,278
1.73%
2.35%
3.30%
3.26%
3.34%
145.0%
172.7%
152.2%
109.2%
51.6%
68.8%
73.5%
65.3%
59.0%
39.9%
The following table presents the changes in our Non-PCI allowance for loan and lease losses for the years indicated:
Non-PCI Allowance for Loan and Lease Losses:
2013
2012
2010
2009
Year Ended December 31,
2011
(Dollars in thousands)
Allowance for loan and lease losses,
beginning of year
Loans and leases charged off:
Real estate mortgage
Real estate construction
Commercial
Leases
Consumer
$
65,899 $
85,313 $
98,653 $
118,717 $
63,519
(4,552)
—
(6,295)
(114)
(198)
(7,680)
(492)
(4,580)
(28)
(290)
(10,180)
(6,886)
(10,072)
—
(1,422)
(117,029)
(63,590)
(18,854)
—
(3,749)
(46,047)
(28,542)
(12,350)
—
(1,180)
Total loans and leases charged off(1)
(11,159)
(13,070)
(28,560)
(203,222)
(88,119)
Recoveries on loans charged off:
Real estate mortgage
Real estate construction
Commercial
Consumer
Total recoveries on loans charged
off
Net charge-offs
Provision (negative provision) for loan
and lease losses
Allowance for loan and lease losses, end
of year
Ratios:
Allowance for loan and lease losses to
loans and leases
Allowance for loan and lease losses to
nonaccrual loans and leases
Net charge-offs to average loans and
leases(2)
2,507
1,654
2,621
74
1,598
49
1,622
137
513
1,025
1,783
1,394
1,222
708
1,785
565
503
461
592
151
6,856
(4,303)
3,406
(9,664)
4,715
(23,845)
4,280
(198,942)
1,707
(86,412)
(1,355)
(9,750)
10,505
178,878
141,610
$
60,241 $
65,899 $
85,313 $
98,653 $ 118,717
1.53%
2.14%
3.00%
3.09%
3.19%
128.79%
157.80%
138.45%
103.29%
49.32%
0.12%
0.33%
0.80
5.88%
2.22%
(1)
(2)
2010 includes $144.6 million of charge-offs related to the sales of $398.5 million in classified loans. The charge-offs were composed of $85.7 million for real estate
mortgage loans, $55.1 million for real estate construction loans, and $3.8 million in commercial loans.
Net charge-offs, excluding charge-offs on classified loans sold, to average loans and lease was 1.60% for 2010.
92
Table of Contents
The following table presents the changes in our Non-PCI reserve for unfunded loan commitments for the years indicated:
Non-PCI Reserve for Unfunded Loan Commitments:
2013
2012
Year Ended December 31,
2011
(In thousands)
2010
2009
Reserve for unfunded loan commitments,
beginning of year
Provision (negative provision)
Reserve for unfunded loan commitments, end of
year
$
6,220 $
1,355
8,470 $
(2,250)
5,675 $
2,795
5,561 $
114
5,271
290
$
7,575 $
6,220 $
8,470 $
5,675 $
5,561
The following table presents the Non-PCI allowance for loan and lease losses by portfolio segment as of the dates indicated:
Non-PCI Allowance for Loan and Lease Losses by Portfolio Segment
Real
Estate
Mortgage
Real
Estate
Construction
Commercial
Leases
(Dollars in thousands)
Consumer
Total
December 31, 2013
Allowance for loan and
lease losses
% of loans to total
loans
December 31, 2012
$
26,078 $
4,298 $
23,694 $
3,227 $
2,944 $
60,241
62%
5%
25%
7%
1%
100%
Allowance for loan and
lease losses
% of loans to total
loans
December 31, 2011
$
38,700 $
3,221 $
20,759 $
1,493 $
1,726 $
65,899
63%
4%
26%
6%
1%
100%
Allowance for loan
losses
$
50,205 $
8,697 $
23,643 $
— $
2,768 $
85,313
% of loans to total
loans
December 31, 2010
70%
4%
25%
—
1%
100%
Allowance for loan
losses
$
51,657 $
8,766 $
33,578 $
— $
4,652 $
98,653
% of loans to total
loans
December 31, 2009
72%
5%
22%
—
1%
100%
Allowance for loan
losses
% of loans to total
loans
$
58,241 $
39,934 $
18,521 $
— $
2,021 $
118,717
65%
12%
22%
—
1%
100%
At December 31, 2013, the portion of the Non-PCI allowance allocated to individual portfolio segments included an amount for both imprecision
and uncertainties to better reflect our view of risk. Nonetheless, the Non-PCI allowance for loan and lease losses is available to absorb any losses
without restriction. For further information on the Non-PCI allowance for loan and lease losses, see Note 7, Loans and Leases, of the Notes to
Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Allowance for Credit Losses on PCI Loans
For a discussion of our policy and methodology on the allowance for credit losses on PCI loans, see "—Critical Accounting Policies—
Allowance for Credit Losses on PCI Loans." For further information on the allowance for credit losses on PCI loans, see Note 7, Loans and Leases,
of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
93
Table of Contents
The following table presents the changes in our allowance for credit losses on PCI loans for the years indicated:
2013
Year Ended December 31,
2012
(In thousands)
2011
Allowance for credit losses on PCI loans,
beginning of year
Provision (negative provision)
Charge-offs, net
$
26,069 $
(4,210)
(66)
31,275 $
(819)
(4,387)
33,264
13,270
(15,259)
Allowance for credit losses on PCI loans, end of
year
$
21,793 $
26,069 $
31,275
Nonperforming Assets and Performing Restructured Loans
The following table presents nonperforming assets and performing restructured loans information as of the dates indicated:
Nonaccrual loans and leases(1)
Other real estate owned
Total nonperforming assets
Performing restructured loans(1)
Nonaccrual loans and leases to loans
and leases, net of unearned income
(1)
Nonperforming assets ratio(1)(2)
2013
2012
$
$
46,774 $
51,837
98,611 $
December 31,
2011
(Dollars in thousands)
61,619 $
81,918
143,537 $
41,762 $
56,414
98,176 $
2010
2009
95,509 $
81,414
176,923 $
240,717
70,943
311,660
$
41,648 $
106,288 $
116,791 $
89,272 $
181,454
1.19%
2.48%
1.36%
3.14%
2.17%
4.91%
2.99%
5.40%
6.48%
8.23%
(1)
(2)
Excludes PCI loans.
Nonperforming assets ratio is calculated as nonperforming assets divided by the sum of total non-PCI loans and leases and total OREO.
Nonperforming assets include Non-PCI nonaccrual loans and leases and total OREO and totaled $98.6 million at December 31, 2013 compared to
$98.2 million at December 31, 2012. The $435,000 increase in nonperforming assets was due to a $5.0 million increase in nonaccrual loans and leases
offset by a $4.6 million decrease in total OREO. The nonperforming assets ratio decreased to 2.48% at December 31, 2013 from 3.14% at
December 31, 2012.
Nonaccrual Loans and Leases
The $5.0 million increase in nonaccrual loans and leases (excluding PCI loans) during 2013 was attributable primarily to additions of
$54.2 million, $18.5 million of which are from the FCAL acquisition, offset partially by reductions, payoffs and returns to accrual status of
$30.8 million, charge-offs of $10.1 million, and foreclosures of $8.3 million.
94
Table of Contents
The following table presents our Non-PCI nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by
portfolio segment and class as of the dates indicated:
Nonaccrual Loans and Leases
December 31, 2013
December 31, 2012
Accruing and
30 - 89 Days Past Due
Real estate mortgage:
Hospitality
SBA 504
Other
Total real estate
mortgage
Real estate construction:
Residential
Commercial
Total real estate
construction
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total commercial
Leases
Consumer
Total Non-PCI loans
and leases
Balance
% of
Category
% of
Category
Balance
(Dollars in thousands)
December 31,
2013
Balance
December 31,
2012
Balance
$
6,723
2,602
18,648
3.7% $
5.8%
0.8%
6,908
2,982
16,585
3.8% $
5.5%
1.0%
— $
2,155
11,270
27,973
1.2%
26,475
1.4%
13,425
389
2,830
0.7%
1.9%
1,057
2,715
2.2%
3.3%
3,219
1.5%
3,772
2.9%
9,991
458
1,070
3,037
14,556
632
394
1.7%
0.3%
0.5%
10.6%
1.5%
0.2%
0.7%
4,462
2,027
176
4,181
10,846
244
425
1.0%
2.5%
0.1%
16.5%
1.3%
0.1%
1.8%
—
—
—
119
82
—
459
660
2,273
3,313
—
955
1,408
2,363
—
—
—
166
138
—
313
617
357
15
$
46,774
1.2% $
41,762
1.3% $
19,671 $
3,352
95
Table of Contents
The following table lists the ten largest Non-PCI lending relationships on nonaccrual status, excluding SBA-related loans, as of the date
indicated:
December 31,
2013
Nonaccrual
Amount
(In thousands)
$
Description
6,723 Two loans, each secured by a hotel in San Diego County. The borrower is paying according to the restructured terms of each loan.
5,444
Three loans to a contractor, one of which is secured by equipment, one of which is secured by an industrial building in San Diego
County, and one of which is unsecured. The borrower is paying according to the restructured terms of each loan.
3,105
Two loans that are both unsecured. The borrower is paying according to the restructured terms of each loan.
2,074
1,844
Three loans, one of which is secured by an office building in Ventura County; the other two loans are unsecured. The borrower is
paying according to the restructured terms of each loan.
Two loans, one of which is secured by an office building in Clark County, Nevada, and the other of which is secured by an office
building in Maricopa County, Arizona. The Bank is in the process of foreclosing on both properties.
1,494
Loan secured by industrial zoned land in Ventura County.
1,256
Loan secured by a strip retail center in Clark County, Nevada. The borrower is paying according to the restructured terms of the
loan.
1,126
Loan secured by an industrial building in San Bernardino County.
1,094
Two loans, one of which is secured by an apartment building in San Diego County; and one of which is secured by an office
building in San Diego County. The loans are paying according to the restructured terms of each loan.
1,070
Asset-based loan to a clothing manufacturer secured by accounts receivable and inventory. Loan is in the process of liquidation.
$
25,230
Total
Other Real Estate Owned (OREO)
The following table presents the components of total OREO by property type as of the dates indicated:
December 31,
Property Type
Commercial real estate
Construction and land development
Multi-family
Single family residence
Total OREO
$
$
96
2013
2012
(In thousands)
15,753 $
35,063
835
186
51,837 $
13,319
38,596
4,239
260
56,414
Table of Contents
OREO declined by $4.6 million in 2013, due primarily to sales of $31.3 million and write-downs of $2.5 million, offset partially by foreclosures
totaling $13.8 million and additions from the FCAL acquisition of $15.4 million.
The construction and land development category includes foreclosed undeveloped land located in Ventura County, California, having a
carrying value of $22 million at December 31, 2013.
Performing Restructured Loans
Non-PCI performing restructured loans declined by $64.6 million during 2013 to $41.6 million at December 31, 2013. The change was attributable
primarily to payoffs of $40.1 million (of which $31.8 million related to two loans in a single lending relationship that paid off on December 31, 2013),
the removal of $26.6 million in loans from restructured loan status due to the performance of the loans in accordance with their modified terms, and
the transfer of performing restructured loans to nonaccrual status of $10.8 million, offset by additions of $8.8 million and transfers from nonaccrual
status of $8.7 million. At December 31, 2013, we had $34.3 million in real estate mortgage loans, $4.3 million in real estate construction loans,
$2.7 million in commercial loans, and $308,000 in consumer loans that were accruing interest under the terms of troubled debt restructurings.
The majority of the performing restructured loans was on accrual status prior to the loan modifications and has remained on accrual status after
the loan modifications due to the borrowers making payments before and after the restructurings. In these circumstances, generally, a borrower may
have had a fixed-rate loan that they continued to repay, but may be having cash flow difficulties. In an effort to work with certain borrowers, we
have agreed to interest rate reductions to reflect the lower market interest rate environment and/or interest-only payments for a period of time. In
these cases, we do not forgive principal or extend the maturity date as part of the loan modification. As a result of the current economic
environment in our market areas, we anticipate loan restructurings to continue.
PCI Nonaccrual Loans and Performing Restructured Loans
Loans accounted for as purchased credit impaired are generally considered accruing and performing loans as the loans accrete interest income
over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still
considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be
classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated.
The following table presents a summary of PCI loans that would normally be considered nonaccrual except for the accounting requirements
regarding PCI loans and PCI performing restructured loans as of the dates indicated:
December 31,
PCI nonaccrual loans
PCI performing restructured loans
2013
2012
(In thousands)
$
$
101,411 $
26,137 $
114,782
21,553
97
Table of Contents
Deposits
The following table presents a summary of our average deposits and average rates paid during the years indicated:
Deposit Category
Noninterest-bearing deposits
Interest checking deposits
Money market deposits
Savings deposits
Time deposits
Total average deposits
2013
Average
Amount
Rate
Year Ended December 31,
2012
Average
Amount
Rate
(Dollars in thousands)
2011
Average
Amount
Rate
$
$
2,186,697
582,408
1,400,065
194,300
753,122
5,116,592
— $
0.05%
0.18%
0.03%
0.67%
0.15% $
1,870,088
515,767
1,219,457
159,888
889,146
4,654,346
— $
0.05%
0.19%
0.03%
1.20%
0.29% $
1,627,729
491,145
1,227,482
150,837
1,077,930
4,575,123
—
0.16%
0.44%
0.15%
1.33%
0.45%
The following table presents the changes in deposit categories during 2013 compared to 2012:
Deposit Category
Noninterest-bearing deposits
Interest checking deposits
Money market deposits
Savings deposits
Total core deposits
Time deposits
Total deposits
2013
Amount
December 31,
2012
Rate
Amount
(Dollars in thousands)
Rate
Increase
(Decrease)
in Amount
$
$
2,318,446
620,622
1,458,910
218,638
4,616,616
664,371
5,280,987
— $
0.05%
0.17%
0.02%
0.56%
0.12% $
1,939,212
513,389
1,282,513
153,680
3,888,794
820,327
4,709,121
— $
0.05%
0.17%
0.03%
1.16%
0.25% $
379,234
107,233
176,397
64,958
727,822
(155,956)
571,866
Deposits of foreign customers located
primarily in Mexico included above
$
121,785
$
131,442
$
(9,657)
Total deposits increased $571.9 million to $5.3 billion at December 31, 2013 due to acquired deposits of $1.1 billion from the FCAL acquisition,
offset by a planned decline in time deposits. Our core deposits increased $727.8 million and our time deposits decreased $155.9 million during 2013.
At December 31, 2013, core deposits totaled $4.6 billion, or 88% of total deposits, and noninterest-bearing deposits totaled $2.3 billion, or 44% of
total deposits.
Brokered time deposits totaled $49.4 million at December 31, 2013, and $37.7 million at December 31, 2012, all of which were part of the CDARS
program. The CDARS program represents deposits that are participated with other FDIC insured financial institutions through the CDARS program
as a means to provide FDIC deposit insurance coverage for the full amount of our customers' deposits.
Competition for deposits among banks and financial institutions in our Southern California market area was robust in 2013 and is expected to
continue through 2014. Our deposit gathering activities may be negatively impacted by two of our business practices. First, we generally price our
deposits lower than our competitors. Second, since a good portion of our deposits are tied to lending relationships, the economic downturn in
Southern California may lead to lower loan production and loss of existing customers. To mitigate these challenges, we actively review our deposit
offerings to provide the
98
Table of Contents
optimum mix of service, product, and rate, and continually seek new deposits through various programs.
The following table summarizes the maturities of time deposits as of the date indicated:
December 31, 2013
Maturity
Due in three months or less
Due in over three months through six months
Due in over six months through twelve months
Due in over 12 months through 24 months
Due in over 24 months
Total
$
$
Time
Deposits
Under
$100,000
Time
Deposits
$100,000
or More
(Dollars in thousands)
154,233 $
84,196
105,034
36,419
59,129
439,011 $
68,417 $
48,227
57,176
17,200
34,340
225,360 $
Total
Time
Deposits
Rate
222,650
132,423
162,210
53,619
93,469
664,371
0.45%
0.52%
0.52%
0.82%
0.81%
0.56%
Borrowings
The Bank has various lines of credit available. These include the ability to borrow funds from time to time on a long-term, short-term, or
overnight basis from the FHLB, the Federal Reserve Bank of San Francisco ("FRBSF"), or other financial institutions. The maximum amount that we
could borrow under our credit lines with the FHLB at December 31, 2013 was $1.3 billion, of which $1.2 billion was available on that date. The
maximum amount that we could borrow under our secured credit line with the FRBSF at December 31, 2013 was $563.6 million, all of which was
available on that date. The FHLB lines are secured by (a) a blanket lien on certain qualifying loans in our loan portfolio, which are not pledged to the
FRBSF, and (b) a portion of our available-for-sale investment securities. The FRBSF line is secured by certain qualifying loans.
At December 31, 2013, our borrowings included $106.6 million of overnight FHLB advances, $7.1 million in non-recourse debt related to the
payment stream of certain leases sold to third parties, and $132.6 million in subordinated debentures. At December 31, 2012, our borrowings
included $12.6 million in non-recourse debt related to the payment stream of certain leases sold to third parties, and $108.3 million in subordinated
debentures. Subordinated debentures increased $24.3 million due to additional debt assumed in the FCAL acquisition.
Capital Resources
We have access to the capital markets to raise funds, which is accomplished generally through the issuance of equity, both common and
preferred stock, and the issuance of subordinated debentures. We may use the proceeds to invest in our business through organic growth or other
acquisitions. We also have the ability to invest in our Company through stock repurchase programs, which we have elected to do from time to time.
Capital
Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital
(as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. Banks and bank holding companies considered to be
"adequately capitalized" are required to maintain a minimum total risk-based capital ratio of 8% and a minimum Tier 1 risk-based capital ratio of 4.0%.
Banks and bank holding companies considered to be "well capitalized" must maintain a minimum leverage ratio of 5%, a minimum total risk-based
capital ratio of 10%, and a minimum Tier 1 risk-based capital ratio of 6.0%. Regulatory capital requirements limit the
99
Table of Contents
amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the
calculated limit are deducted from regulatory capital. At December 31, 2013, such amount was $3.8 million for the Company and $3.3 million for the
Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future.
The following table presents regulatory capital requirements and our regulatory capital ratios as of the date indicated:
Well
Capitalized
Requirement
December 31, 2013
Pacific
Western
Bank
PacWest
Bancorp
Consolidated
Tier 1 leverage capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tangible common equity ratio
5.00%
6.00%
10.00%
N/A
10.79%
14.54%
15.80%
10.88%
11.22%
15.12%
16.38%
9.24%
As of December 31, 2013, we exceeded each of the capital requirements of the Board of Governors of the Federal Reserve System ("FRB") and
were deemed to be "well capitalized." In addition, as of December 31, 2013, Pacific Western exceeded the capital requirements to be "well
capitalized." For further information on regulatory capital, see Note 20, Dividend Availability and Regulatory Matters, of the Notes to
Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Subordinated Debentures
The Company issued subordinated debentures to trusts that were established by us or entities we have acquired, which, in turn, issued trust
preferred securities, which totaled $131.0 million at December 31, 2013. With the FCAL acquisition, we added $26.0 million of trust preferred
securities. The Company includes in Tier 1 capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital
elements, which is generally defined as shareholders' equity less goodwill, net of any related deferred income tax liability. At December 31, 2013, the
amount of trust preferred securities included in Tier I capital was $131.0 million. Our existing trust preferred securities are currently grandfathered as
Tier 1 capital under the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, under new capital rules approved in July 2013 by
the FRB and FDIC, if the Company completes the CapitalSource merger or any subsequent acquisition such that, upon completion of such
transaction, the Company exceeds $15 billion in consolidated total assets, beginning in 2015, only 25% of the Company's $131.0 million of trust
preferred securities currently outstanding will be included in Tier 1 capital, and in 2016, none of the Company's trust preferred securities will be
included in Tier 1 capital. Further, under such rules, trust preferred securities no longer included in the Company's Tier 1 capital may be included as
a component of Tier 2 capital on a permanent basis without phase-out. For more information, see "—New Capital Rules" below and "Item 1.
Business—Supervision and Regulation—Capital Requirements—Basel III Capital Rules." If trust preferred securities are excluded from regulatory
capital at December 31, 2013, we remain "well capitalized."
100
Table of Contents
New Capital Rules
In July 2013, the Company's primary federal regulator, the FRB, and the Bank's primary federal regulator, the FDIC, approved final rules (the
"New Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital Rules generally
implement the Basel Committee on Banking Supervision's (the "Basel Committee") December 2010 final capital framework referred to as "Basel III"
for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank
holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to the current U.S. general risk-
based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting
the numerator in banking institutions' regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting
the denominator in banking institutions' regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from
the Basel Committee's 1988 "Basel I" capital accords, with a more risk-sensitive approach based, in part, on the "standardized approach" in the
Basel Committee's 2004 "Basel II" capital accords. The New Capital Rules are effective for the Company and the Bank on January 1, 2015, subject to
phase-in periods for certain of their components and other provisions. We are currently evaluating the impact of the New Capital Rules on our
capital ratios and related calculations. For more information regarding the New Capital Rules, see "Item 1. Business—Supervision and Regulation—
Capital Requirements—Basel III Capital Rules."
Dividends on Common Stock and Interest on Subordinated Debentures
Bank holding companies, such as PacWest Bancorp, are required to notify the FRB prior to declaring and paying a dividend to stockholders
during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other
requirements. Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations.
Liquidity
The goals of our liquidity management are to ensure the ability of the Company to meet its financial commitments when contractually due and
to respond to other demands for funds such as the ability to meet the cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers who may need assurance that sufficient funds will be available to meet their credit needs. We have an Executive
Asset/Liability Management Committee, or Executive ALM Committee, which is comprised of members of senior management and responsible for
managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving our financial objectives. Our Executive
ALM Committee meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.
The Company manages its liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and due from banks, interest-
earning deposits in other financial institutions, and unpledged investment securities available-for-sale, which we refer to as our primary liquidity. In
addition, we also maintain available borrowing capacity under secured borrowing lines with the FHLB and the FRBSF, which we refer to as our
secondary liquidity. In addition to its secured lines of credit, the Company also maintains unsecured lines of credit, subject to availability, of
$80.0 million with correspondent banks for purchase of overnight funds.
101
Table of Contents
The following table provides a summary of the Bank's primary and secondary liquidity levels at the dates indicated:
Primary Liquidity—On-Balance Sheet:
Cash and due from banks
Interest-earning deposits at financial institutions
Investment securities available-for-sale
Less pledged securities
Total primary liquidity
Ratio of primary liquidity to total deposits
Secondary Liquidity—Off-Balance Sheet Available
Secured Borrowing Capacity:
Total secured borrowing capacity with the FHLB
Less secured letters of credit outstanding
Less secured advances outstanding
Net secured borrowing capacity with the FHLB
Secured credit line with the FRBSF
Total secondary liquidity
$
$
$
$
2013
December 31,
2012
(Dollars in thousands)
2011
96,424 $
50,998
1,494,745
(208,340)
1,433,827 $
27.2%
89,011 $
75,393
1,355,385
(157,279)
1,362,510 $
28.9%
92,342
203,275
1,326,358
(69,623)
1,552,352
33.9%
1,329,512 $
—
(106,600)
1,222,912
563,560
1,786,472 $
1,024,261 $
(1,244)
—
1,023,017
385,691
1,408,708 $
1,273,927
(2,002)
(225,000)
1,046,925
347,407
1,394,332
During 2013, the Company's primary liquidity increased $71.3 million due mostly to a $88.3 million increase in net unpledged investment
securities available-for-sale and a $7.4 million increase in cash and due from banks, partially offset by a $24.4 million decrease in interest earning
deposits at financial institutions. The Company's secondary liquidity increased $377.8 million during 2013 due to the increased borrowing capacity
of our secured borrowing lines with the FHLB and FRBSF resulting from the collateral pledged from the FCAL acquisition. Our total liquidity and
the ratio of primary liquidity to total deposits remain at historically high levels.
At December 31, 2013, $702.6 million of certain qualifying loans were specifically pledged as collateral for the secured borrowing line maintained
with the FRBSF. The FHLB borrowing lines are secured by (a) a blanket lien on certain qualifying loans in our loan portfolio, which are not pledged
to the FRBSF, and (b) a portion of our available-for-sale securities.
In addition to our primary liquidity, we generate liquidity from cash flow from our amortizing loan and securities portfolios and from our large
base of core customer deposits, defined as noninterest-bearing demand, interest checking, savings and money market accounts. At December 31,
2013, such deposits totaled $4.6 billion and represented 87% of the Company's total deposits. These core deposits are normally less volatile, often
with customer relationships tied to other products offered by the Company promoting long lasting relationships and stable funding sources.
During 2013, total core deposits increased $727.8 million, due primarily to the deposits added in the FCAL acquisition, and focused mainly in
noninterest-bearing demand deposits from our small to medium-sized business customer base. We continue to experience strong demand for our
core deposit products. We attribute some of the demand for our core deposit products to businesses having a tendency to maintain higher cash
balances because of current economic conditions and low rate investment alternatives. Deposits from our customers may decline if interest rates
increase significantly or if corporate customers move funds from the Company generally. In order to address the Company's liquidity risk as deposit
balances may fluctuate, the Company maintains adequate levels of available liquidity.
102
Table of Contents
The following table provides a summary of the Bank's core deposits at the dates indicated:
Core Deposits:
Non-interest bearing demand
Interest checking
Savings and money market
Total core deposits
2013
December 31,
2012
(In thousands)
2011
$
$
2,318,446 $
620,622
1,677,548
4,616,616 $
1,939,212 $
513,389
1,436,193
3,888,794 $
1,685,799
500,998
1,422,762
3,609,559
Our asset/liability management policy establishes various liquidity guidelines for the Company. The policy includes guidelines for On-Balance
Sheet Liquidity (a measurement of primary liquidity to total deposits), Coverage and Crisis Coverage Ratios (measurements of liquid assets to
expected short-term liquidity required for the loan and deposit portfolios under normal and stressed conditions), Loan to Funding Ratio, Wholesale
Funding Ratio, and other guidelines developed for measuring and maintaining liquidity. As of December 31, 2013, we were in compliance with all
liquidity guidelines established in the asset/liability management policy.
We may use large denomination brokered time deposits, the availability of which is uncertain and subject to competitive market forces, for
liquidity management purposes. At December 31, 2013, the Bank had none of these brokered deposits. However, we had $49.4 million of time
deposits that were part of the CDARS program. The CDARS program represents deposits that are participated with other FDIC insured financial
institutions as a means to provide FDIC deposit insurance coverage for the full amount of our participating customers' deposits.
Holding Company Liquidity
The primary sources of liquidity for the Company, on a stand-alone basis, include dividends from the Bank and our ability to raise capital, issue
subordinated debt, and secure outside borrowings. The ability of the Company to obtain funds for the payment of dividends to our stockholders
and for other cash requirements is largely dependent upon the Bank's earnings. Pacific Western is subject to restrictions under certain federal and
state laws and regulations that limit its ability to transfer funds to the Company through intercompany loans, advances, or cash dividends.
Dividends paid by state banks, such as Pacific Western, are regulated by the California Department of Business Oversight, Division of
Financial Institutions ("DBO"), under its general supervisory authority as it relates to a bank's capital requirements. A state bank may declare a
dividend without the approval of the DBO as long as the total dividends declared in a calendar year do not exceed either the retained earnings or
the total of net profits for three previous fiscal years less any dividends paid during such period. During 2013, PacWest received $48.0 million in
dividends from the Bank. For the foreseeable future, any dividends from the Bank to the Company require DBO approval. See also Note 20,
Dividend Availability and Regulatory Matters, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
At December 31, 2013, the Company had, on a stand-alone basis, approximately $21.8 million in cash on deposit at the Bank. Management
believes this amount of cash along with other sources of liquidity is sufficient to fund the Company's 2014 cash flow needs. See related discussion
of liquidity sources at "—Capital Resources."
103
Table of Contents
Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
Time deposits(1)
Overnight FHLB advance
Long-term debt obligations(1)
Contractual interest(2)
Operating lease obligations
Other contractual obligations
Total
Due
Within
One Year
Due in
One to
Three Years
December 31, 2013
Due in
Three to
Five Years
(In thousands)
Due
After
Five Years
$
$
516,727 $
106,600
4,238
1,244
17,279
10,433
656,521 $
129,733 $
—
2,575
2,361
27,372
6,473
168,514 $
16,479 $
—
248
599
17,285
235
34,846 $
70 $
—
135,055
2
12,449
52
147,628 $
Total
663,009
106,600
142,116
4,206
74,385
17,193
1,007,509
(1)
(2)
Excludes purchase accounting fair value adjustments.
Excludes interest on subordinated debentures as these instruments are floating rate.
Operating lease obligations, time deposits, and debt obligations are discussed in Note 10, Premises and Equipment, Net, Note 11, Deposits,
and Note 12, Borrowings and Subordinated Debentures, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data." The other contractual obligations relate to our minimum liability associated with our data and item processing
contract with a third-party provider and commitments to contribute capital to investments in low income housing project partnerships.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We
expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity, and continued deposit gathering
activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
Our obligations also include off-balance sheet arrangements consisting of loan and lease-related commitments, of which only a portion is
expected to be funded. At December 31, 2013, our loan and lease-related commitments, including standby letters of credit, totaled $1.0 billion. The
commitments, which result in funded loans and leases, increase our profitability through net interest income. We manage our overall liquidity taking
into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "—Liquidity,"
have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments,
see Note 13, Commitments and Contingencies, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
Recent Accounting Pronouncements
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data" for information on recent accounting pronouncements and their impact, if any,
on our consolidated financial statements.
104
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We measure our interest rate risk position on at least a quarterly basis using two methods: (i) net interest income simulation analysis; and
(ii) market value of equity modeling. The results of these analyses are reviewed by the Executive ALM Committee and the Board ALCO quarterly. If
hypothetical changes to interest rates cause changes to our simulated net present value of equity and/or net interest income outside our pre-
established limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.
We evaluated the results of our net interest income simulation and market value of equity models prepared as of December 31, 2013, the results
of which are presented below. Our net interest income simulation indicates that our balance sheet is liability sensitive to the first 100 basis points of
rate increase, shifting to asset sensitive when rates are modeled to increase 200 basis points or more. This profile is primarily a result of the amount
of variable rate loans in our loan portfolio, including loans with in-the-money interest rate floors that are projected to lift off of those floors as rates
increase, combined with the level of noninterest bearing deposits that comprise a significant portion of our funding. Our market value of equity
model indicates an asset sensitive profile in the up 100 basis points scenario, switching to liability sensitive in the up 200 basis point scenario. An
asset sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated market value of equity,
while a liability sensitive profile would suggest that our estimated market value of equity would decrease when rates increase. In general, we view
the net interest income model results as more relevant to the Company's current operating profile and manage our balance sheet giving priority to
this information.
Net Interest Income Simulation
We used a simulation model to measure the estimated changes in net interest income that would result over the next 12 months from immediate
and sustained changes in interest rates as of December 31, 2013. This model is an interest rate risk management tool and the results are not
necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate
changes and assumptions at one point in time. We have assumed no growth in either our total interest-sensitive assets or liabilities over the next
12 months; therefore, the results reflect an interest rate shock to a static balance sheet.
This analysis calculates the difference between net interest income forecasted using both increasing and declining interest rate scenarios and
net interest income forecasted using a base market interest rate derived from the U.S. Treasury yield curve at December 31, 2013. In order to arrive at
the base case, we extend our balance sheet at December 31, 2013 one year and reprice any assets and liabilities that would contractually reprice or
mature during that period using the products' pricing as of December 31, 2013. Based on such repricings, we calculate an estimated net interest
income and net interest margin.
The repricing relationship for each of our assets and liabilities includes many assumptions. For example, many of our assets are floating-rate
loans, which are assumed to reprice to the same extent as the change in market rates according to their contracted index, except for floating-rate
loans tied to our base lending rate which are assumed to reprice upward only after the first 75 basis point increase in market rates. This assumption
is due to the fact that our base lending rate is 4.00% while the major bank prime rate is 3.25%. Some loans and investment vehicles include the
opportunity of prepayment (imbedded options) and the simulation model uses a prepayment model to estimate these prepayments and reinvest
these proceeds at current simulated yields. Our deposit products reprice at our discretion and are assumed to reprice more slowly in a rising or
declining interest rate environment and usually reprice at a rate less than the change in market rates. In December 2013, we decreased the assumed
pricing sensitivity of money market and savings deposits to changes in market interest rates (the
105
Table of Contents
"deposit pricing beta"), based on an updated study of the historical repricing relationship. The effects of certain balance sheet attributes, such as
fixed-rate loans, floating-rate loans that have reached their floors, and the volume of noninterest-bearing deposits as a percentage of earning assets,
impact our assumptions and consequently the results of our interest rate risk management model. Changes that could vary significantly from our
assumptions include loan and deposit growth or contraction, changes in the mix of our earning assets or funding sources, and future asset/liability
management decisions, all of which may have significant effects on our net interest income.
The simulation analysis does not account for all factors that impact this analysis, including changes by management to mitigate the impact of
interest rate changes or the impact a change in interest rates may have on our credit risk profile, loan prepayment estimates, and spread
relationships, which can change regularly. In addition, the simulation analysis does not make any assumptions regarding loan fee income, which is a
component of our net interest income and tends to increase our net interest margin. Management reviews the model assumptions for
reasonableness on a quarterly basis.
The following table presents as of December 31, 2013, forecasted net interest income and net interest margin for the next 12 months using a
base market interest rate and the estimated change to the base scenario given immediate and sustained upward and downward movements in
interest rates of 100, 200 and 300 basis points.
December 31, 2013
Interest Rate Scenario
Up 300 basis points
Up 200 basis points
Up 100 basis points
BASE CASE
Down 100 basis points
Down 200 basis points
Down 300 basis points
Estimated
Net Interest
Income
$
$
$
$
$
$
$
325.6
316.2
306.9
308.5
305.9
304.0
302.6
Percentage
Change
From Base
Estimated
Net Interest
Margin
(Dollars in millions)
5.6%
2.5%
(0.5)%
—
(0.8)%
(1.4)%
(1.9)%
5.50%
5.35%
5.19%
5.22%
5.18%
5.15%
5.12%
Estimated
Net Interest
Margin Change
From Base
0.28%
0.13%
(0.03)%
—
(0.04)%
(0.07)%
(0.10)%
The net interest income simulation model prepared as of December 31, 2013 suggests our balance sheet is liability sensitive for the first 100
basis points of rate rise, then becoming asset sensitive as rates increase 200 basis points or more. Liability sensitivity indicates that in a rising
interest rate environment, our net interest margin would decrease, while asset sensitivity indicates that our net interest margin would increase. Due
to the historically low market interest rates as of December 31, 2013, the "down" scenarios are not considered meaningful and are excluded from the
following discussion. The interest rate risk profile is due mostly to the mix of fixed-rate loans and the amount of loans with in-the-money interest
rate floors to total loans in the loan portfolio relative to our amount of interest-bearing deposits that would reprice as interest rates change.
Although $2.1 billion of the $4.3 billion of total loans in the portfolio have variable interest rate terms, only $451 million of those variable-rate loans
would immediately reprice at December 31, 2013 under the modeled scenarios. Of the remaining variable-rate loans, $1.4 billion would not
immediately reprice because the loans' fully-
106
Table of Contents
indexed rates are below their floor rates. Of these $1.4 billion of loans at their floors, the fully-indexed rates would rise off of the floors and reprice as
follows:
Rate
Cumulative
Increase
Amount of
Needed to
Loans
Reprice
(Dollars in millions)
$
$
$
943.2
1,277.5
1,401.3
100 bps
200 bps
300 bps
An additional $254 million of hybrid ARM loans would not immediately reprice because the loans contain an initial fixed-rate period before they
become adjustable. The cumulative amounts of hybrid ARM loans that would switch from being fixed-rate to floating-rate because the initial fixed-
rate term would expire is approximately $98 million, $143 million and $195 million in the next one, two, and three years, respectively.
In comparing the December 31, 2013 simulation results to December 31, 2012, our profile has become more asset sensitive while our overall
estimated net interest income has increased for all scenarios. The increased asset sensitivity was due primarily to the change in the deposit pricing
beta assumption, which resulted in decreased interest expense in rising rate scenarios compared to the previous assumption. The increase in the
simulated net interest income is a result of higher earning assets due to the 2013 acquisition of FCAL.
Market Value of Equity
We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities and off-
balance sheet items, defined as the market value of equity, using a simulation model. This simulation model assesses the changes in the market
value of our interest-sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market
interest rates of 100, 200, and 300 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections
are by their nature forward-looking and therefore inherently uncertain, and include various assumptions regarding cash flows and interest rates.
This model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results
may vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of
our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions.
The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets,
liabilities and off-balance sheet items existing at December 31, 2013.
107
Table of Contents
The following table shows the projected change in the market value of equity for the set of rate shocks presented as of December 31, 2013:
December 31, 2013
Interest Rate Scenario
Up 300 basis points
Up 200 basis points
Up 100 basis points
BASE CASE
Down 100 basis points
Down 200 basis points
Down 300 basis points
Estimated
Market Value
of Equity
Dollar
Change
From Base
$
$
$
$
$
$
$
1,060.2 $
1,090.0 $
1,116.8 $
1,098.0
1,021.7 $
1,009.4 $
1,013.3 $
Percentage
Change
From Base
(Dollars in millions)
(3.4)%
(0.7)%
1.7%
—
(6.9)%
(8.1)%
(7.7)%
(37.8)
(8.0)
18.8
—
(76.3)
(88.6)
(84.7)
Percentage
of Total
Assets
Ratio of
Estimated
Market Value
to Book Value
16.2%
16.7%
17.1%
16.8%
15.6%
15.4%
15.5%
131.0%
134.7%
138.0%
135.7%
126.3%
124.8%
125.2%
In comparing the December 31, 2013 simulation results to December 31, 2012, our base case estimated market value of equity has increased
while our overall profile has become more liability sensitive. Base case market value of equity increased $327.2 million compared to December 31,
2012; this increase was due to a $220.0 million increase in stockholders' equity due to the FCAL acquisition, a $159.4 million increase in the market
value of deposits, and a $52.6 million decrease in the market value of loans. The change in the market value of loans was due to a decrease in loan
portfolio yield at December 31, 2013 compared to the prior year. The increase in the market value of deposits was due to an increase in discount
rates used to calculate the market values of deposits due to the generally higher prevailing interest rate levels at December 2013.
Our market value of equity profile is affected by the assumed floors in the Company's base lending rate and the significant value placed on the
Company's noninterest-bearing deposits for purposes of this analysis. Static balances of noninterest- bearing deposits do not impact the net
interest income simulation, while at the same time the value of these deposits increases substantially in the market value of equity model when
market rates are assumed to rise.
108
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Contents
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Earnings for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012,
and 2011
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31,
2013, 2012, and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
110
111
112
113
114
115
116
117
109
Table of Contents
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of PacWest Bancorp, including its consolidated subsidiaries, is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company's
management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with U.S.
generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with
management's authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to see that information and
communication flows are effective and to monitor performance, including performance of internal control procedures.
As of December 31, 2013, PacWest Bancorp management assessed the effectiveness of the Company's internal control over financial reporting
based on the framework established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as
of December 31, 2013, is effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the control procedures may deteriorate.
KPMG LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this
Annual Report on Form 10-K, has issued a report on the effectiveness of the Company's internal control over financial reporting as of December 31,
2013. The report, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of
December 31, 2013, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."
110
Table of Contents
The Board of Directors and Stockholders
PacWest Bancorp:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of PacWest Bancorp and subsidiaries as of December 31, 2013 and 2012, and
the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2013. We also have audited PacWest Bancorp's internal control over financial reporting as of December 31,
2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). PacWest Bancorp's management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PacWest
Bancorp and subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, PacWest Bancorp
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in
Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Los Angeles, California
February 28, 2014
111
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Par Value Data)
ASSETS
Cash and due from banks
Interest-earning deposits in financial institutions
Total cash and cash equivalents
Securities available-for-sale, at fair value ($37,904 and $44,684 covered by
FDIC loss sharing at December 31, 2013 and 2012)
Federal Home Loan Bank stock, at cost
Total investment securities
Loans and leases, net of unearned income ($448,418 and $543,327 covered
by FDIC loss sharing at December 31, 2013 and 2012)
Allowance for loan and lease losses ($21,793 and $26,069 for loans covered
by FDIC loss sharing at December 31, 2013 and 2012)
Total loans and leases, net
Other real estate owned, net ($9,036 and $22,842 covered by FDIC loss
sharing at December 31, 2013 and 2012)
Premises and equipment, net
FDIC loss sharing asset
Cash surrender value of life insurance
Goodwill
Core deposit and customer relationship intangibles, net
Other assets
Total assets
LIABILITIES
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Borrowings
Subordinated debentures
Discontinued operations
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued
and outstanding
Common stock, $0.01 par value; authorized 75,000,000 shares; issued
46,526,124 and 37,772,559 shares at December 31, 2013 and 2012 (includes
1,216,524 and 1,698,281 shares of unvested restricted stock, respectively)
Additional paid-in capital
Accumulated deficit
Treasury stock, at cost; 703,290 and 351,650 shares at December 31, 2013
and 2012
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2013
2012
$
96,424 $
50,998
147,422
89,011
75,393
164,404
1,494,745
27,939
1,522,684
1,355,385
37,126
1,392,511
4,312,352
3,590,297
(82,034)
4,230,318
(91,968)
3,498,329
51,837
32,435
45,524
77,489
208,743
17,248
199,663
56,414
19,503
57,475
68,326
79,866
14,723
112,107
$ 6,533,363 $ 5,463,658
$ 2,318,446 $ 1,939,212
2,769,909
4,709,121
12,591
108,250
—
44,575
4,874,537
2,962,541
5,280,987
113,726
132,645
123,028
73,884
5,724,270
—
—
465
1,286,737
(454,422)
377
1,062,184
(499,537)
(20,340)
(3,347)
809,093
(6,803)
32,900
589,121
$ 6,533,363 $ 5,463,658
See accompanying Notes to Consolidated Financial Statements.
112
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands, Except Per Share Data)
INTEREST INCOME:
Loans and leases
Investment securities
Deposits in financial institutions
Total interest income
INTEREST EXPENSE:
Deposits
Borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION (NEGATIVE PROVISION) FOR CREDIT LOSSES
Net interest income after provision for credit losses
NONINTEREST INCOME:
Service charges on deposit accounts
Other commissions and fees
Gain on sale of leases
Gain on sale of securities
Acquisition-related securities gain
Other-than-temporary-impairment losses on covered securities
Increase in cash surrender value of life insurance
FDIC loss sharing income (expense), net
Other income
Total noninterest income
NONINTEREST EXPENSE:
Compensation
Accelerated vesting of restricted stock
Occupancy
Data processing
Other professional services
Business development
Communications
Insurance and assessments
Non-covered other real estate owned, net
Covered other real estate owned, net
Intangible asset amortization
Acquisition and integration
Debt termination
Other expense
Total noninterest expense
Earnings from continuing operations before income taxes
Income tax expense
NET EARNINGS FROM CONTINUING OPERATIONS
Earnings from discontinued operations before income taxes
Income tax expense
NET EARNINGS FROM DISCONTINUED OPERATIONS
NET EARNINGS
Basic earnings per share:
Net earnings from continuing operations
Net earnings
Diluted earnings per share:
Net earnings from continuing operations
Net earnings
Dividends declared per share
Year Ended December 31,
2012
2013
2011
$ 272,726
36,923
265
309,914
$ 260,230
35,657
228
296,115
$ 260,143
34,785
356
295,284
7,868
537
3,796
12,201
297,713
(4,210)
301,923
13,271
2,656
3,721
19,648
276,467
(12,819)
289,286
20,649
7,071
4,923
32,643
262,641
26,570
236,071
11,765
8,416
1,791
137
5,222
—
1,164
(26,172)
1,921
4,244
107,067
12,420
29,459
9,494
9,481
3,282
2,923
5,596
330
(1,833)
5,402
28,392
—
18,674
230,687
75,480
(30,003)
45,477
(620)
258
(362)
$ 45,115
12,852
8,126
2,767
1,239
—
(1,115)
1,264
(10,070)
809
15,872
94,967
—
28,113
9,120
8,367
2,538
2,523
5,284
4,150
6,781
6,326
4,089
22,598
16,806
211,662
93,496
(36,695)
56,801
—
—
—
$ 56,801
13,829
7,616
—
—
—
—
1,443
7,776
762
31,426
86,800
—
28,685
8,964
8,986
2,321
3,011
7,171
7,010
3,666
8,428
600
—
14,351
179,993
87,504
(36,800)
50,704
—
—
—
$ 50,704
$
$
$
$
$
1.09
1.08
1.09
1.08
1.00
$
$
$
$
$
1.54
1.54
1.54
1.54
0.79
$
$
$
$
$
1.37
1.37
1.37
1.37
0.21
See accompanying Notes to Consolidated Financial Statements.
113
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Net earnings
Other comprehensive income (loss) related to unrealized gains
and (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period
Income tax (expense) benefit related to unrealized holding gains
(losses) arising during the period
Reclassification adjustment for net gains included in net
earnings
Income tax expense related to reclassification adjustment
Other comprehensive (loss) income
COMPREHENSIVE INCOME
Year Ended December 31,
2012
56,801 $
2013
45,115 $
2011
50,704
$
(57,136)
17,532
32,473
26,190
(7,363)
(13,639)
(5,359)
58
(36,247)
$
8,868 $
(124)
52
10,097
66,898 $
—
—
18,834
69,538
See accompanying Notes to Consolidated Financial Statements.
114
Table of Contents
BALANCE,
DECEMBER
31, 2010
Net earnings
Other
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
Common Stock
Par
Value
Additional
Paid-in
Capital
Shares
Accumulated
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
36,672,429 $ 369 $ 1,085,364 $
—
—
—
(607,042) $
50,704
(3,863) $
—
3,969 $ 478,797
50,704
—
comprehensive
income—net
unrealized
gain on
securities
available-
for-sale, net
of tax
Tax effect from
vesting of
restricted
stock
Restricted
stock
awarded and
earned stock
compensation,
net of shares
forfeited
Restricted
stock
surrendered
Cash
—
—
—
—
—
18,834
18,834
—
—
(937)
—
—
—
(937)
662,062
6
7,890
—
—
—
7,896
(80,173) —
—
—
(1,465)
—
(1,465)
dividends
paid ($0.21
per share)
BALANCE,
DECEMBER
31, 2011
Net earnings
Other
—
—
(7,626)
—
—
—
(7,626)
37,254,318
—
375
—
1,084,691
—
(556,338)
56,801
(5,328)
—
22,803
—
546,203
56,801
comprehensive
income—net
unrealized
gain on
securities
available-
for-sale, net
of tax
Tax effect from
vesting of
restricted
stock
Restricted
stock
awarded and
earned stock
compensation,
net of shares
—
—
—
—
—
10,097
10,097
—
—
283
—
—
—
283
forfeited
Restricted
stock
surrendered
Cash
dividends
paid ($0.79
per share)
BALANCE,
DECEMBER
31, 2012
Net earnings
Other
230,272
2
5,997
—
—
—
5,999
(63,681) —
—
—
(1,475)
—
(1,475)
—
—
(28,787)
—
—
—
(28,787)
37,420,909
—
377
—
1,062,184
—
(499,537)
45,115
(6,803)
—
32,900
—
589,121
45,115
—
—
—
—
—
(36,247)
(36,247)
8,403,119
84
242,184
—
—
—
242,268
—
—
2,133
—
—
—
2,133
350,446
4
21,242
—
—
—
21,246
(351,640) —
—
—
(13,537)
—
(13,537)
Cash
dividends
paid ($1.00
per share)
BALANCE,
DECEMBER
31, 2013
—
—
(41,006)
—
—
—
(41,006)
45,822,834 $ 465 $ 1,286,737 $
(454,422) $ (20,340) $
(3,347) $ 809,093
See accompanying Notes to Consolidated Financial Statements.
115
comprehensive
loss—net
unrealized
loss on
securities
available-
for-sale, net
of tax
Issuance of
common
stock for
acquisition
of First
California
Financial
Group, Inc
Tax effect from
vesting of
restricted
stock
Restricted
stock
awarded and
earned stock
compensation,
net of shares
forfeited
Restricted
stock
surrendered
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
(Negative provision) provision for credit losses
Gain on sale of other real estate owned
Provision for losses and valuation adjustments on other real estate owned
Gain on sale of leases
(Gain) loss on sale of premises and equipment
Gain on branch sale
Gain on sale of securities
Acquisition-related securities gain
Other-than-temporary impairment losses on covered securities
Earned stock compensation
Tax effect included in stockholders' equity of restricted stock vesting
Increase (decrease) in accrued and deferred income taxes, net
Decrease in FDIC loss sharing asset
(Increase) decrease in other assets
Decrease in accrued interest payable and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Resolution of goodwill matter with FDIC
Net cash and cash equivalents acquired (used) in acquisitions
Net cash used in branch sale
Net decrease in loans and leases
Proceeds from sales of loans and leases
Securities available-for-sale:
Proceeds from maturities and paydowns
Proceeds from sales
Purchases
Net redemptions of Federal Home Loan Bank stock
Proceeds from sale of other real estate owned
Capitalized costs to complete other real estate owned
Purchases of premises and equipment, net
Proceeds from sales of premises and equipment
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits:
Noninterest-bearing
Interest-bearing
Net increase (decrease) in borrowings
Redemption of subordinated debentures
Repayment of acquired debt
Tax effect included in stockholders' equity of restricted stock vesting
Restricted stock surrendered
Cash dividends paid
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes, net of refunds
Supplemental disclosure of noncash investing and financing activities:
Transfer of loans to other real estate owned
Common stock issued for First California Financial Group acquisition
Year Ended December 31,
2012
2013
2011
$
45,115 $
56,801
$
50,704
31,509
(4,210)
(5,201)
2,515
(1,791)
(21)
—
(137)
(5,222)
—
21,246
(2,133)
2,198
29,192
(9,403)
(53,405)
50,252
—
273,013
—
275,740
33,824
306,536
22,415
(550,211)
18,705
36,490
—
(3,604)
31
412,939
25,792
(12,819)
(5,786)
14,333
(2,767)
155
(297)
(1,239)
—
1,115
5,999
(283)
(3,737)
37,712
18,754
(15,753)
117,980
—
(87,098)
(119,756)
232,549
58,691
415,854
90,745
(485,860)
10,392
59,614
—
(4,914)
704
170,921
20,084
26,570
(9,140)
16,994
—
(23)
—
—
—
—
7,896
937
17,694
21,165
18,053
(661)
170,273
7,636
—
—
450,492
2,495
231,898
—
(658,310)
8,934
61,954
(125)
(5,936)
27
99,065
18,068
(547,081)
101,250
—
—
2,133
(13,537)
(41,006)
(480,173)
(16,982)
164,404
271,934
(234,608)
(228,107)
(18,558)
(180,796)
283
(1,475)
(28,787)
(420,114)
(131,213)
295,617
$ 147,422 $ 164,404
220,237
(292,482)
—
—
—
(937)
(1,465)
(7,626)
(82,273)
187,065
108,552
$ 295,617
$
13,275 $
27,665
21,614
40,772
$
33,000
19,083
15,416
242,268
40,207
—
68,683
—
See accompanying Notes to Consolidated Financial Statements.
116
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is
to serve as a holding company for our Los Angeles-based wholly owned banking subsidiary, Pacific Western Bank, which we refer to as "Pacific
Western" or the "Bank." When we say "we," "our" or the "Company," we mean the Company on a consolidated basis with the Bank. When we
refer to "PacWest" or to the holding company, we are referring to the parent company on a stand-alone basis.
We have completed 26 acquisitions from May 2000 through December 31, 2013, including the merger whereby the former Rancho Santa Fe
National Bank and First Community Bank of the Desert became wholly-owned subsidiaries of the Company in a pooling-of-interests transaction
completed in May 2000. All other acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating
results of the acquired entities have been included in the consolidated financial statements from their respective dates of acquisition. During the
three years ended December 31, 2013, we completed the following four acquisitions: Pacific Western Equipment Finance, or EQF, which closed on
January 3, 2012; Celtic Capital Corporation, or Celtic, which closed on April 3, 2012; American Perspective Bank, or APB, which closed on August 1,
2012; and First California Financial Group, or FCAL, which closed on May 31, 2013. See Note 4, Acquisitions, and Note 5, Goodwill and Other
Intangible Assets, for more information about these acquisitions
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 and leases, including commercial, real estate construction, equipment finance leases, SBA guaranteed
and consumer loans; 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.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment
securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services.
Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation and general operating expenses. The
Bank relies on a foundation of locally generated and relationship-based deposits. The Bank has a relatively low cost of funds due to a high
percentage of noninterest-bearing and low cost deposits.
Our operations, like those of other financial institutions operating in Southern California, are significantly influenced by economic conditions in
Southern California, including local economies, the strength of the real estate market, and the fiscal and regulatory policies of the federal and state
government and the regulatory authorities that govern financial institutions. Through our offices located in Northern California, our asset-based
lending operations with production and marketing offices located in Arizona, Northern California, Texas, Colorado, Minnesota and the Pacific
Northwest,
117
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
and our equipment leasing operations located in Utah, we are also subject to the economic conditions affecting these markets. No individual or
single group of related accounts is considered material in relation to our total assets or deposits of the Bank, or in relation to the overall business of
the Company. However, 70% of our total gross non-covered and covered loan portfolio at December 31, 2013 consisted of real estate loans.
A downturn or deterioration in the real estate market could materially and adversely affect our business because a significant portion of our
loans is secured by real estate. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would
be more likely to suffer losses on defaulted loans. Substantially all of our real property collateral is located in Southern California. Consequently, the
ability of our borrowers to repay their loans and our results of operations and financial condition are dependent upon the general trends in the
Southern California economies and, in particular, the residential and commercial real estate markets.
Real estate values could be affected by, among other things, a worsening of economic conditions, an increase in foreclosures, a decline in
home sale volumes, an increase in interest rates, earthquakes and other natural disasters particular to California. Further, we may experience an
increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations
to us given a sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we
do business. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net
charge-offs and provision for credit losses.
(a) Basis of Presentation
The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we may
refer to as U.S. GAAP. All significant intercompany balances and transactions have been eliminated.
(b) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. Actual results could differ
from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying
value of intangible assets, the carrying value of the FDIC loss sharing asset, and the realization of deferred tax assets.
As described in Note 4, Acquisitions, below, we completed the acquisition of FCAL on May 31, 2013. The acquired assets and liabilities of
FCAL were measured at their estimated fair values. Management made significant estimates and exercised significant judgment in estimating fair
values and accounting for the acquired assets and assumed liabilities of FCAL.
118
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Reclassifications
Certain prior period amounts have been reclassified to conform to the current period's presentation format. Starting with the June 30, 2013
quarter-end, loan tables presented non-purchased credit impaired ("Non-PCI") and purchased credit impaired ("PCI") loan categories in addition to
covered and non-covered loan information. Previously the loan tables only presented covered and non-covered loan categories.
(d) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash, due from banks, and interest-earning
deposits in financial institutions. Interest-earning assets in financial institutions represent cash held at the Federal Reserve Bank of San Francisco
("FRBSF"), the majority of which is immediately available.
(e) Investment Securities
We determine the classification of securities at the time of purchase. If we have the intent and the ability at the time of purchase to hold
securities until maturity, they are classified as held-to-maturity. Investment securities held-to-maturity are stated at amortized cost. Securities to be
held for indefinite periods of time, but not necessarily to be held-to-maturity or on a long-term basis, are classified as available-for-sale and carried
at estimated fair value, with unrealized gains or losses reported as a separate component of stockholders' equity in accumulated other
comprehensive income, net of applicable income taxes. Securities available-for-sale include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk, and other related factors.
Securities are individually evaluated for appropriate classification when acquired; consequently, similar types of securities may be classified
differently depending on factors existing at the time of purchase.
The carrying values of all securities are adjusted for amortization of premiums and accretion of discounts over the period to maturity of the
related security using the interest method. Realized gains or losses on the sale of securities, if any, are determined using the amortized cost of the
specific securities sold. If a decline in the fair value of a security below its amortized cost is judged by management to be other than temporary, the
cost basis of the security is written down to its fair value and the amount of the write-down is recognized through a charge to earnings.
Investments in Federal Home Loan Bank of San Francisco, or FHLB, stock are carried at cost and evaluated regularly for impairment. FHLB
stock is expected to be redeemed at an amount not to exceed par and is a required investment based on measurements of the Bank's assets and/or
borrowing levels.
(f) Loans and Leases Held for Sale and Servicing Assets
Loans and leases held for sale include loans and leases originated or purchased for resale. Loans and leases originated or purchased for resale
include the principal amount outstanding net of unearned income, and are carried at the lower of cost or fair value on an aggregate basis. A decline
in the aggregate fair value of the loans below their aggregate carrying amount is recognized through a charge
119
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
to earnings in the period of such decline. Unearned income on these loans and leases is taken into earnings when they are sold. At December 31,
2013 and 2012, the Company had no loans or leases held for sale.
Gains or losses resulting from sales of loans and leases are recognized at the date of settlement and are based on the difference between the
cash received and the carrying value of the related loans or leases less related transaction costs. A transfer of financial assets in which control is
surrendered is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the
exchange. Assets, liabilities, derivative financial instruments or other retained interests issued or obtained through the sale of financial assets are
measured at estimated fair value, if practicable. Lease sales where we keep part of the lease payment stream are accounted for as non-recourse
borrowings.
The most common retained interest related to loan sales is a servicing asset. Servicing assets are amortized in proportion to and over the period
of estimated future net servicing income. The amortization of the servicing asset and the servicing income are included in noninterest income in the
consolidated statement of earnings. The fair value of the servicing assets is estimated by discounting the future cash flows using market-based
discount rates and prepayment speeds. Our servicing asset is evaluated regularly for impairment. We stratify the servicing asset based on the
original term to maturity and the year of origination of the underlying loans for purposes of measuring impairment. The risk is that loans prepay
faster than anticipated and the fair value of the asset declines. If the fair value of the servicing asset is less than the amortized carrying value, the
asset is considered impaired and an impairment charge will be taken against earnings.
At December 31, 2013 and 2012, the servicing asset totaled $807,000 and $1.0 million, respectively, and related to the servicing of approximately
$65.0 million and $62.7 million in SBA loans, respectively. The servicing asset is included in other assets on the consolidated balance sheets. All
loans sold after December 31, 2008, were sold on a servicing released basis.
(g) Loans and Leases
Originated loans. Loans are originated by the Company with the intent to hold them for investment and are stated at the principal amount
outstanding, net of unearned income. Unearned income includes deferred unamortized nonrefundable loan fees and direct loan origination costs.
Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest
method or taken into income when the related loans are paid off or sold. The amortization of loan fees or costs is discontinued when a loan is placed
on nonaccrual status. Interest income is recorded on an accrual basis in accordance with the terms of the respective loan and includes prepayment
penalties.
Purchased loans. Purchased loans are stated at the principal amount outstanding, net of unearned discounts or unamortized premiums. All
loans acquired in our acquisitions are initially measured and recorded at their fair value on the acquisition date. A component of the initial fair value
measurement is an estimate of the credit losses over the life of the purchased loans. Purchased loans are also evaluated for impairment as of the
acquisition date and are accounted for as "acquired non-impaired" or "purchased credit impaired" loans.
120
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquired non-impaired loans. Acquired non-impaired loans are those loans for which there was no evidence of credit deterioration at their
acquisition date and it was probable that we would be able to collect all contractually required payments. Acquired non-impaired loans, together
with originated loans, are referred to as non-purchased credit impaired ("Non-PCI") loans. Purchase discount or premium on acquired non-impaired
loans is recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method or taken into
income when the related loans are paid off or sold.
Purchased credit impaired loans. Purchased credit impaired ("PCI") loans are accounted for in accordance with ASC Subtopic 310-30,
"Loans and Debt Securities Acquired with Deteriorated Credit Quality." A purchased loan is deemed to be credit impaired when there is evidence
of credit deterioration since its origination and it is probable at the acquisition date that we would be unable to collect all contractually required
payments. We apply PCI loan accounting when (i) we acquire loans deemed to be impaired, and (ii) as a general policy election for non-impaired
loans that we acquire in a distressed bank acquisition.
For PCI loans, at the time of acquisition we (i) calculated the contractual amount and timing of undiscounted principal and interest payments
(the "undiscounted contractual cash flows") and (ii) estimated the amount and timing of undiscounted expected principal and interest payments
(the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash
flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to
the PCI loan portfolios; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is
reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the "accretable yield" and
is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows
is reasonably estimable. If the timing of cash flows is uncertain, any cash payments will be recognized when received.
As part of the fair value process and the subsequent accounting, the Company aggregates PCI loans into pools having common credit risk
characteristics such as type and risk rating. Increases in expected cash flows over those previously estimated increase the accretable yield and are
recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those
previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan
losses. As the accretable yield increases or decreases from changes in cash flow expectations, the offset is a decrease or increase to the
nonaccretable difference. The accretable yield is measured at each financial reporting date based on information then currently available and
represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.
PCI loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated
cash flows will be received. If the timing and amount
121
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of cash flows is not reasonably estimable, the loans may be classified as nonaccrual with interest income recognized on either a cash basis or as a
reduction of the principal amount outstanding.
Covered loans. We refer to loans that are covered by loss sharing agreements with the Federal Deposit Insurance Corporation ("FDIC") as
covered loans. Our covered loans include loans that we acquired in the Los Padres and Affinity acquisitions, and through the FCAL acquisition,
loans for which we assumed the loss sharing agreements between First California Bank ("FCB") and the FDIC related to FCB's acquisitions of
Western Commercial Bank ("Western Commercial") and San Luis Trust Bank ("San Luis"). We will be reimbursed for a substantial portion of any
future losses on such loans under the terms of the FDIC loss sharing agreements. The FDIC loss sharing asset related to covered loans is reported
separately in the balance sheet. See "—FDIC Loss Sharing Asset."
When we refer to non-covered loans, we are referring to loans not covered by our loss sharing agreements with the FDIC.
We apply acquired impaired loan accounting to the majority of the covered loans as such covered loans were deemed to be impaired on the
acquisition date. We apply acquired non-impaired loan accounting to covered revolving credit agreements, mainly home equity loans and
commercial asset-based lines of credit, where the borrower had revolving privileges.
Leases. Leases are recorded as direct financing (capital) leases for accounting purposes. Lease receivables are recorded on the balance sheet
but the leased property is not, although we generally retain legal title to the leased property until the end of each lease. Leases are stated at the net
amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition
discount at the reporting date. Direct lease origination costs are amortized over the weighted average life of the lease portfolio. Leases acquired in
an acquisition are initially measured and recorded at their fair value on the acquisition date. Purchase discount or premium on acquired leases is
recognized as an adjustment to interest income over the contractual life of the leases using the effective interest method or taken into income when
the related leases are paid off.
Leases in process. We offer "progress funding" which works similarly to a bridge loan by financing an item to be leased during the
construction or build phase. Lessees pay interest on the amount advanced to fund a project at an interest rate implicit in the master lease
agreement; such income is deferred until the project funding is complete. The amount of funding advanced during the progress funding period is
recorded in other assets. At the end of the progress funding period, we either (i) enter into a lease agreement with the lessee and the deferred
income is accreted to interest income using an effective yield method over the life of the lease, or (ii) sell the lease to a third party lender and
recognize the deferred income as part of any gain or loss on such sale.
Delinquent or past due loans and leases. Loans and leases are considered delinquent when principal or interest payments are past due
30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due.
Nonaccrual loans and leases. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual
of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a
reasonable
122
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is
received and the loan's principal balance is deemed collectable. Loans are restored to accrual status when the loans become both well-secured and
are in the process of collection. Leases are designated as nonaccrual leases when the recognition of interest has been discontinued. The
recognition of interest on leases is discontinued when a lessee's payments are past due 90 days or when, in the opinion of management, there is a
reasonable doubt as to collectability. Interest on nonaccrual leases is subsequently recognized only to the extent that cash is received and the lease
balance is deemed collectable. Leases are restored to accrual status when the leases become both well secured and are in the process of collection.
Impaired loans and leases. A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan or lease agreement. Impaired loans and leases include loans and leases on nonaccrual status and
performing restructured loans. Income from impaired loans is recognized on an accrual basis unless the loan is on nonaccrual status. Income from
loans on nonaccrual status is recognized to the extent cash is received and when the loan's principal balance is deemed collectable. We measure
impairment of a loan by using the estimated fair value of the collateral, less estimated costs to sell, including senior obligations such as delinquent
property taxes, if the loan is collateral-dependent and the present value of the expected future cash flows discounted at the loan's effective interest
rate if the loan is not collateral-dependent. The impairment amount on a collateral-dependent loan is charged-off to the allowance and the
impairment amount on a loan that is not collateral-dependent is set up as a specific reserve. We measure impairment of a lease based upon the
present value of the scheduled lease and residual cash flows, discounted at the lease's effective interest rate.
Troubled debt restructurings. A loan is classified as a troubled debt restructuring when we grant a concession to a borrower experiencing
financial difficulties. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or
other actions intended to minimize potential losses. All loan modifications are evaluated on an individual basis to determine whether such
modifications meet the criteria to be classified as a troubled debt restructuring under ASC Subtopic 310-40, "Troubled Debt Restructurings by
Creditors." Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be
excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.
A loan that has been placed on nonaccrual status that is subsequently restructured will usually remain on nonaccrual status until the borrower
is able to demonstrate repayment performance in compliance with the restructured terms for a sustained period, typically for six months. A
restructured loan may return to accrual status sooner based on other significant events or mitigating circumstances. A loan that has not been
placed on nonaccrual status may be restructured and such loan may remain on accrual status after such restructuring. In these circumstances, the
borrower has made payments before and after the restructuring. Generally, this restructuring involves a reduction in the loan interest rate and/or a
change to interest-only payments for a period of time. The restructured loan is considered impaired despite the accrual status and a specific reserve
is calculated based on the present value of expected cash flows discounted at the loan's original effective interest rate.
123
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Allowances for Credit Losses
Allowance for credit losses on Non-PCI loans and leases. The allowance for credit losses on Non-PCI loans and leases is the combination of
the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a
reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within other liabilities. Generally, as
loans are funded, the amount of the commitment reserve applicable to such funded loans is transferred from the reserve for unfunded loan
commitments to the allowance for loan and lease losses based on our allowance methodology. The following discussion is for Non-PCI loans and
leases and the allowance for credit losses thereon. Refer to "Allowance for Credit Losses on PCI Loans" for the policy on PCI loans.
The allowance for loan and lease losses is maintained at a level deemed appropriate by management to adequately provide for known and
inherent risks in the loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon a continuing
review of the portfolio, past loan and lease loss experience, current economic conditions that may affect the borrowers' ability to pay, and the
underlying collateral value of the loans and leases. Loans and leases that are deemed to be uncollectable are charged off and deducted from the
allowance. The provision for loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.
The methodology we use to estimate the amount of our allowance for credit losses is based on both objective and subjective criteria. While
some criteria are formula driven, other criteria are subjective inputs included to capture environmental and general economic risk elements which
may trigger losses in the loan and lease portfolios, and to account for the varying levels of credit quality in the loan and lease portfolios of the
entities we have acquired that have not yet been captured in our objective loss factors.
Specifically, our allowance methodology contains three key elements: (i) amounts based on specific evaluations of impaired loans and leases;
(ii) amounts of estimated losses on several pools of loans categorized by risk rating and loan and lease type; and (iii) amounts for environmental
and general economic factors that indicate probable losses incurred but not captured through the other elements of our allowance process. In
addition, for loans and leases measured at fair value on the acquisition date and deemed to be non-impaired, our allowance methodology captures
deterioration in credit quality and other inherent risks of such acquired assets experienced after the purchase date.
Impaired loans and leases are identified at each reporting date based on certain criteria and the majority of which are individually reviewed for
impairment. Non-PCI nonaccrual loans and leases with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed
individually for the amount of impairment. Non-PCI nonaccrual loans and leases with an unpaid principal balance of $250,000 or less are evaluated
for impairment collectively. A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to
the original contractual terms of the agreement. We measure impairment of a loan based upon the fair value of the loan's collateral if the loan is
collateral-dependent or the present value of cash flows, discounted at the loan's effective interest rate, if the loan is not collateral-dependent. The
impairment amount on a collateral-dependent loan is charged-off to the allowance, and the impairment amount on a loan that is not collateral-
dependent is set up as a specific reserve within the allowance. We measure
124
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
impairment of a lease based upon the present value of the scheduled lease and residual cash flows, discounted at the lease's effective interest rate.
Increased charge-offs or additions to specific reserves generally result in increased provisions for credit losses.
Our loan and lease portfolio, excluding impaired loans and leases that are evaluated individually, is categorized into several pools for purposes
of determining allowance amounts by pool. The pools we currently evaluate are: commercial real estate construction, residential real estate
construction, SBA real estate, hospitality real estate, real estate other, commercial collateralized, commercial unsecured, SBA commercial, consumer,
asset-based and leasing. Within these pools, we then evaluate loans and leases not adversely classified, which we refer to as "pass" credits,
separately from adversely classified loans and leases. The adversely classified loans and leases are further grouped into three credit risk rating
categories: "special mention," "substandard," and "doubtful," which we define as follows:
•
•
•
Special Mention: Loans and leases classified as "special mention" have a potential weakness that requires management's attention.
If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
Substandard: Loans and leases classified as "substandard" have a well-defined weakness or weaknesses that jeopardize the
collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
Doubtful: Loans and leases classified as "doubtful" have all the weaknesses of those classified as "substandard," with the
additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases classified as "substandard" and "doubtful" together as "classified" loans and leases. For
further information on classified loans and leases, see Note 7, Loans and Leases, of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data."
The allowance amounts for "pass" rated loans and leases and those loans and leases adversely classified, which are not reviewed individually,
are determined using historical loss rates developed through migration analysis. The migration analysis is updated quarterly based on historic
losses and movement of loans between ratings. As a result of this migration analysis and its quarterly updating, decreases we experience in both
charge-offs and adverse classifications generally result in lower loss factors.
Finally, in order to ensure our allowance methodology is incorporating recent trends and economic conditions, we apply environmental and
general economic factors to our allowance methodology including: credit concentrations; delinquency trends; economic and business conditions;
the quality of lending management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio;
nonaccrual and problem loan trends; usage trends of unfunded commitments; and other adjustments for items not covered by other factors.
Management believes that the allowance for loan and lease losses is adequate and appropriate for the known and inherent risks in our Non-PCI
loan and lease portfolio. In making its evaluation, management considers certain quantitative and qualitative factors including the Company's
historical loss experience; the volume and type of lending conducted by the Company; the results of our credit
125
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
review process; the levels of classified and criticized loans and leases; the levels of impaired loans and leases, including nonperforming loans and
leases and performing restructured loans; regulatory policies; general economic conditions; underlying collateral values; and other factors
regarding collectability and impairment. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes
in collateral values, or negative changes in economic and business conditions that adversely affect our borrowers, our classified loans and leases
may increase. Higher levels of classified loans and leases generally result in higher allowances for loan and lease losses.
We recognize that the determination of the allowance for loan and lease losses is sensitive to the assigned credit risk ratings and inherent loss
rates at any given point in time. Therefore, we perform sensitivity analyses to provide insight regarding the impact that adverse changes in credit
risk ratings may have on our allowance for loan and lease losses. The sensitivity analyses have inherent limitations and are based on various
assumptions as of a point in time and, accordingly, it is not necessarily representative of the impact loan risk rating changes may have on the
allowance for loan and lease losses.
Management also believes that the reserve for unfunded loan commitments is appropriate. In making this determination, we use the same
methodology for the reserve for unfunded loan commitments as we do for the allowance for loan and lease losses and consider the same
quantitative and qualitative factors, as well as an estimate of the probability of advances of the commitments correlated to their credit risk rating.
Our federal and state banking regulators, as an integral part of their examination process, periodically review the Company's allowance for credit
losses. Our regulators may require the Company to recognize additions to the allowance based on their judgments related to information available to
them at the time of their examinations.
Allowance for credit losses on PCI loans. The PCI loans are subject to our internal and external credit review. If deterioration in the expected
cash flows results in a reserve requirement, a provision for credit losses is charged to earnings. For PCI loans, the allowance for loan losses is
measured at the end of each financial reporting period based on expected cash flows. Decreases or (increases) in the amount and changes in the
timing of expected cash flows on the PCI loans as of the financial reporting date compared to those previously estimated are usually recognized by
recording a provision or a (negative provision) for credit losses on such loans.
(i) FDIC Loss Sharing Asset
The FDIC loss sharing asset relates to assets covered by the loss sharing agreements between the Bank and the FDIC arising from the
acquisitions of Affinity Bank and Los Padres Bank and, through the FCAL acquisition, the assumption of the loss sharing agreements between
First California Bank and the FDIC arising from FCB's acquisition of Western Commercial and San Luis. The FDIC loss sharing asset related to
Western Commercial and San Luis was measured at its fair value as of May 31, 2013 in conjunction with the FCAL acquisition. The FDIC loss
sharing asset related to Los Padres and Affinity was measured at its estimated fair value at their respective acquisition dates.
126
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
An increase in the expected amount of losses on the covered assets will increase the FDIC loss sharing asset; such increase is recognized
through a credit to FDIC loss sharing income. Recoveries on previous losses paid to us by the FDIC reduce the FDIC loss sharing asset by a charge
to FDIC loss sharing income. In addition, decreases in the expected amount of losses on covered assets will decrease the amount of funds expected
to be collected from the FDIC and will therefore reduce the FDIC loss sharing asset through higher prospective amortization expense. The FDIC loss
sharing asset is being amortized to its estimated value over the lesser of the term of the loss sharing agreements or the remaining contractual life of
the assets covered by the loss sharing agreements.
Both the Western Commercial and San Luis loss sharing agreements contain true-up provisions, under which we will owe the FDIC amounts at
the end of the loss sharing agreements based on the performance of the covered assets. The true-up liability is included in other liabilities in the
accompanying condensed consolidated balance sheets.
Under the terms of the Affinity loss sharing agreement, the FDIC will (a) absorb 80% of losses and receive 80% of loss recoveries on the first
$234 million of losses on covered assets and (b) absorb 95% of losses and receive 95% of loss recoveries on losses exceeding $234 million. The
Affinity loss sharing provisions expire in the third quarters of 2014 and 2019 for non-single family covered assets and single family covered assets,
respectively, while the related loss recovery provisions expire in the third quarters of 2017 and 2019, respectively.
Under the terms of the Los Padres loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the
covered assets. The Los Padres loss sharing provisions expire in the third quarters of 2015 and 2020 for non-single family and single family covered
assets, respectively, while the related loss recovery provisions expire in the third quarters of 2018 and 2020, respectively.
Under the terms of the Western Commercial loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on
the covered assets; all of which were deemed to be non-single family. The Western Commercial loss sharing provision expires in the fourth quarter
of 2015, while the related loss recovery provision expires in the fourth quarter of 2018.
Under the terms of the San Luis loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the covered
assets. The San Luis loss sharing provisions expire in the first quarters of 2016 and 2021 for non-single family and single family covered assets,
respectively, while the related loss recovery provisions expire in the first quarters of 2019 and 2021, respectively.
(j) Land, Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is not depreciated. Depreciation and
amortization is charged to noninterest expense using the straight-line method over the estimated useful lives of the assets. The estimated useful
lives of furniture, fixtures and equipment range from 3 to 10 years and for buildings up to 35 years. Leasehold improvements are amortized over their
estimated useful lives, or the life of the lease, whichever is shorter.
127
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Other Real Estate Owned
Non-covered OREO. Other real estate owned, or OREO, is initially recorded at the estimated fair value of the property, based on current
independent appraisals obtained at the time of acquisition, less estimated costs to sell, including senior obligations such as delinquent property
taxes. The excess of the recorded loan balance over the estimated fair value of the property at the time of acquisition less estimated costs to sell is
charged to the allowance for loan losses. Any subsequent write-downs are charged to noninterest expense and recognized through an OREO
valuation allowance. Subsequent increases in the fair value of the asset less selling costs reduce the OREO valuation allowance, but not below zero,
and are credited to noninterest expense. Gains and losses on the sale of foreclosed properties and operating expenses of such assets are also
included in noninterest expense.
Covered OREO. Covered OREO was initially recorded at its estimated fair value on the acquisition date based on independent appraisals less
estimated selling costs. Any subsequent write-downs due to declines in fair value are charged to noninterest expense with a partial offset to FDIC
loss sharing income for the loss reimbursement under the FDIC loss sharing agreement. Any recoveries of previous write-downs are credited to
noninterest expense with a corresponding charge to FDIC loss sharing income, net for the portion of the recovery that is due to the FDIC.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. Any interest or penalties assessed by the
taxing authorities is classified in the financial statements as income tax expense. Deferred tax assets are included in other assets on the consolidated
balance sheets.
On a quarterly basis, the Company evaluates its deferred tax assets to assess whether they are expected to be realized in the future. This
determination is based on currently available facts and circumstances, including our current and projected future tax position, the historical level of
our taxable income, and estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future
profitability. To the extent our deferred tax assets are no longer considered more likely than not to be realized, we could be required to record a
valuation allowance on our deferred tax assets by charging earnings.
(m) Goodwill and Other Intangible Assets
Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the
fair value of the net assets and other identifiable intangible assets acquired. Goodwill and other intangible assets deemed to have indefinite lives
generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually.
Impairment exists when the carrying value of the goodwill
128
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
exceeds its implied fair value. And impairment loss would be recognized in an amount equal to that excess and would be included in noninterest
expense in the financial statements.
Intangible assets with estimable useful lives are amortized over such useful lives to their estimated residual values. Core deposit intangible
assets, which we refer to as CDI, and customer relationship intangible assets, which we refer to as CRI, are recognized apart from goodwill at the
time of acquisition based on market valuations prepared by independent third parties. In preparing such valuations, the third parties consider
variables such as deposit servicing costs, attrition rates, and market discount rates. CDI assets are amortized to expense over their useful lives,
which we have estimated to range from 7 to 10 years. CRI assets are amortized to expense over their useful lives, which we have estimated to range
from 4 to 5 years. Both CDI and CRI are reviewed for impairment quarterly or earlier if events or changes in circumstances indicate that their carrying
values may not be recoverable. If the recoverable amount of either CDI or CRI is determined to be less than its carrying value, we would then
measure the amount of impairment based on an estimate of the intangible asset's fair value at that time. If the fair value is below the carrying value,
the intangible asset is reduced to such fair value and the impairment is recognized as noninterest expense in the financial statements.
(n) Stock-Based Compensation
Compensation expense related to awards of restricted stock is based on the fair value of the underlying stock on the award date and is
recognized over the vesting period using the straight-line method. The vesting of performance-based restricted stock awards and recognition of
related compensation expense may occur over a shorter vesting period if financial performance targets are achieved earlier than anticipated.
Amortization of unvested performance-based restricted stock is suspended when it becomes less than probable that the performance targets will be
met. Amortization of unvested performance-based restricted stock is discontinued and previous amortization amounts are credited to earnings when
it becomes improbable that performance targets will be met. When and if it becomes probable in the future that the performance target will be met a
catch up adjustment is made and amortization resumes.
Unvested restricted stock participates with common stock in any dividends declared and paid. Dividends paid on unvested restricted stock
awards expected to vest and the related tax benefits are included as a net reduction to stockholders' equity. Dividends paid on unvested restricted
stock not expected to vest are charged to compensation expense.
(o) Business Segments
The Company's reportable segments consist of "Banking," "Asset Financing," and "Other." The Other segment consists of the PacWest
Bancorp holding company and other elimination and reconciliation entries.
The Bank's Asset Financing segment includes the operations of the divisions and subsidiaries that provide asset-based commercial loans and
equipment leases. The asset-based lending products are offered primarily through three business units: (1) First Community Financial ("FCF"), a
division of the Bank, based in Phoenix, Arizona; (2) BFI Business Finance ("BFI"), a wholly-owned subsidiary of the Bank, based in San Jose,
California; and (3) Celtic, a wholly-owned subsidiary of the Bank based in
129
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Santa Monica, California. The Bank's leasing products are offered through EQF, a division of the Bank based in Midvale, Utah.
Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Asset Financing
segment based upon the Bank's total cost of interest-bearing liabilities. The provision for credit losses is allocated based on actual charge-offs for
the period as well as assigning a minimum reserve requirement to the Asset Financing segment. Noninterest income and noninterest expense
directly attributable to a segment are assigned to it.
(p) Comprehensive Income
Comprehensive income consists of net earnings and net unrealized gains (losses) on securities available-for-sale, net and is presented in the
consolidated statements of comprehensive income.
(q) Earnings Per Share
In accordance with ASC Topic 260, "Earnings Per Share," all outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends are considered participating securities and are included in the two-class method of determining basic and diluted earnings
per share. All of our unvested restricted stock participates with our common stockholders in dividends. Accordingly, earnings allocated to
unvested restricted stock are deducted from net earnings to determine that amount of earnings available to common stockholders. In the two-class
method, the amount of our earnings available to common stockholders is divided by the weighted average shares outstanding, excluding any
unvested restricted stock, for both the basic and diluted earnings per share.
(r) Business Combinations
Business combinations completed after January 1, 2009, are accounted for under the acquisition method of accounting in accordance with ASC
Topic 805, "Business Combinations." Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the
acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess
of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair
value of net assets acquired, including other identifiable assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired
and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period.
Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs,
including conversion and restructuring charges, are expensed as incurred.
(s) Recently Issued Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Income Taxes
(Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists." Under ASU 2013-11, an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss
carryforward, a similar tax loss, or a tax credit
130
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would
result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and
should not be combined with deferred tax assets. ASU 2013-11 is effective for us on January 1, 2014 and is to be applied prospectively, although
early adoption and retrospective adoption are permitted. The adoption of this standard is not expected to have any material effect on our financial
statements.
In January 2014, the FASB issued ASU 2014-01, "Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in
Qualified Affordable Housing Projects." ASU 2014-01 allows investors in low-income housing tax credit ("LIHTC") entities that meet certain
conditions to present the net tax benefits (net of the amortization of the cost of the investment) within income tax expense. The cost of the
investments that meets the conditions will be amortized in proportion to (and over the same period as) the total expected tax benefits, including tax
credits and other tax benefits, as they are realized on the tax return. ASU 2014-01 is effective for us on January 1, 2015 and is to be applied
retrospectively if investors elect the proportional amortization method. However, if investors have LIHTC investments accounted for under the
effective yield method at adoption, they may continue to apply that method for those existing investments. Early adoption is permitted. The
adoption of this standard permits expenses currently reported in noninterest expense to be reported in income tax expense. While the adoption of
this standard will not have a material impact on our financial statements, total noninterest expense and income tax expense will change.
In January 2014, the FASB issued ASU 2014-04, "Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure." ASU 2014-04 clarifies when a creditor
should reclassify mortgage loans collateralized by residential real estate from loans receivable to other real estate owned. ASU 2014-04 defines when
an in-substance repossession or foreclosure has occurred and when a creditor is considered to have received physical possession of residential
real estate collateralizing a mortgage loan. ASU 2014-04 is effective for us on January 1, 2015 and can be applied either prospectively or using a
modified retrospective transition method, and early adoption is permitted. We are evaluating the impact this standard may have on our financial
statements.
NOTE 2—DISCONTINUED OPERATIONS
In connection with the acquisition of FCAL, we acquired Electronic Payment Services ("EPS"), a division of the Bank that is being
discontinued. Accordingly, all income and expense related to EPS have been removed from continuing operations and are included in the
condensed consolidated statements of earnings under the caption "Earnings (loss) from discontinued operations." For the period from acquisition
date to December 31, 2013, revenues and pre-tax loss for the EPS division were $2.6 million and $620,000, respectively. Liabilities of the EPS division,
which consist primarily of noninterest-bearing deposits, are included in the condensed consolidated balance sheets under the caption
"Discontinued operations." For segment reporting purposes, the EPS division is included in our Banking Segment.
131
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3—RESTRICTED CASH BALANCES
The Company is required to maintain reserve balances with the FRBSF. Such reserve requirements are based on a percentage of deposit
liabilities and may be satisfied by cash on hand. The average reserves required to be held at the FRBSF for the years ended December 31, 2013 and
2012 were $13.1 million and $5.0 million, respectively.
NOTE 4—ACQUISITIONS
We completed the following acquisitions during the time period of January 1, 2011 to December 31, 2013, using the acquisition method of
accounting, and, accordingly, the operating results of the acquired entities have been included in our consolidated financial statements from their
respective dates of acquisition.
132
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 4—ACQUISITIONS (Continued)
The following balance sheets of the acquired entities are presented at estimated fair value of their respective acquisition dates:
Acquisition and Date Acquired
Assets Acquired:
Cash and due from banks
Interest-earning deposits in financial
institutions
Investment securities available-for-sale
FHLB stock
Loans and leases
Other real estate owned
Premises and equipment
FDIC loss sharing asset
Cash surrender value of life insurance
Goodwill
Core deposit and customer relationship
intangibles
Other intangible assets
Leases in process
Other assets
Total assets acquired
$
Liabilities Assumed:
$
Noninterest-bearing deposits
Interest-bearing deposits
Borrowings from parent
Other borrowings
Subordinated debentures
Discontinued operations
Accrued interest payable and other liabilities
$
$
$
Total liabilities assumed
Total consideration paid
Summary of consideration:
Cash paid
PacWest common stock issued
Cancellation of FCAL common stock owned
by
PacWest (at acquisition date fair
value)
Total
First
California
Financial
Group
May 31,
2013
American
Perspective
Bank
August 1,
2012
Celtic
Capital
Corporation
April 3,
2012
(In thousands)
Pacific
Western
Equipment
Finance
January 3,
2012
$
6,124 $
3,370 $
3,435 $
7,092
266,889
4,444
9,518
1,049,613
13,772
15,322
17,241
13,265
129,070
10,081
48,887
1,412
197,279
1,561
—
—
—
15,047
7,927
—
—
47,671
1,580,856 $
1,924
—
—
4,234
283,795 $
361,166 $
739,713
—
—
24,061
184,619
19,729
1,329,288 $
251,568 $
40,673 $
178,891
—
5,315
—
—
840
225,719 $
58,076 $
—
—
—
54,963
—
—
—
—
6,645
1,300
670
—
69
67,082 $
— $
—
—
46,804
—
—
2,278
49,082 $
18,000 $
—
—
—
140,959
—
—
—
—
19,033
1,700
1,420
19,162
467
189,833
—
—
128,677
15,839
—
—
10,317
154,833
35,000
— $
242,268
58,076 $
—
18,000 $
—
35,000
—
9,300
251,568 $
—
58,076 $
—
18,000 $
—
35,000
$
133
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 4—ACQUISITIONS (Continued)
First California Financial Group Acquisition
On May 31, 2013, we completed the acquisition of First California Financial Group, Inc., or FCAL, following receipt of shareholder approval from
both institutions and all required regulatory approvals. As part of the acquisition, First California Bank, or FCB, a wholly-owned subsidiary of
FCAL, merged with and into Pacific Western.
In the FCAL acquisition, each share of FCAL common stock was converted into the right to receive 0.2966 of a share of PacWest common
stock. The exchange ratio was calculated based on the volume-weighted average share price of PacWest common stock for the 20 consecutive
trading days ending on the second full trading day prior to the receipt of the last of the regulatory approvals required under the merger agreement.
PacWest issued an aggregate of approximately 8.4 million shares of PacWest common stock to FCAL stockholders. In addition, 1,094,000 shares of
FCAL common stock previously owned by PacWest at a cost of $4.1 million were cancelled in the transaction. These shares were carried in our
securities available-for-sale portfolio at their estimated market value with their unrealized gain of $5.2 million included in stockholders' equity at
May 31, 2013. Under acquisition accounting, this unrealized gain was recognized in earnings. Based on the closing price of PacWest's common
stock on May 31, 2013 of $28.83 per share, the aggregate consideration paid to FCAL common stockholders, including the 1,094,000 shares of FCAL
common stock owned by us and cancelled in the merger, was $251.6 million.
The FCAL acquisition has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and
intangible, were recorded at their estimated fair values as of the May 31, 2013 acquisition date. The application of the acquisition method of
accounting resulted in goodwill of $129.1 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.
FCB was a full-service commercial bank headquartered in Westlake Village, California. FCB provided a full range of banking services, including
revolving lines of credit, term loans, commercial real estate loans, construction loans, consumer loans and home equity loans to individuals,
professionals, and small to mid-sized businesses. FCB operated 15 branches throughout Southern California in the Los Angeles, Orange, Riverside,
San Bernardino, San Diego, Ventura, and San Luis Obispo Counties. We made this acquisition to expand our presence in Southern California. We
completed the conversion and integration of the FCB branches to PWB's operating platform in June 2013 and as a result, we added seven locations
to our branch network.
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.
134
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 4—ACQUISITIONS (Continued)
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 lending 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, and 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 loan portfolio, expanded our product lines, and deployed excess liquidity into higher yielding assets.
Unaudited Pro Forma Results of Operations
The following table presents our unaudited pro forma results of operations for the periods presented as if the FCAL acquisition had been
completed on January 1, 2012. The unaudited pro forma results of operations include the historical accounts of the Company and FCAL and pro
forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums
or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for
informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the
FCAL acquisition been completed at the beginning of 2012. No assumptions have been applied to the pro forma results of operations regarding
possible revenue enhancements, expense efficiencies or asset dispositions.
Pro forma revenues (net interest income plus noninterest
Pro forma net earnings from continuing operations
Pro forma net earnings from continuing operations per
income)
share:
Basic
Diluted
135
Year Ended
December 31,
2013
2012
(In thousands, except
per share date)
$
$
325,801 $
52,640 $
370,115
71,684
$
$
1.16 $
1.16 $
1.58
1.58
Table of Contents
NOTE 4—ACQUISITIONS (Continued)
Acquisition-Related Charges
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
All of the acquisitions consummated after December 31, 2000 were completed using the acquisition method of accounting. For those
acquisitions completed prior to January 1, 2009, we recorded the estimated merger-related charges associated with each acquisition as a liability at
closing when the related purchase price was allocated. For each acquisition, we developed an integration plan for the Company that addressed,
among other things, requirements for staffing, systems platforms, branch locations and other facilities. The remaining merger-related liability for
acquisitions completed prior to January 1, 2009 was zero at December 31, 2013. For acquisitions completed after January 1, 2009, acquisition-related
costs, such as legal, accounting, valuation and other professional fees, necessary to effect a business combination, were charged to earnings in the
periods in which the costs were incurred. We incurred and charged to expense approximately $28.4 million, $4.1 million, and $600,000 of such costs
in 2013, 2012, and 2011, respectively.
CapitalSource Merger Announcement
On July 22, 2013, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest and
CapitalSource, Inc. ("CapitalSource") will merge in a transaction valued at approximately $2.8 billion based on the closing price of PacWest common
stock on February 13, 2014 of $40.11. The combined company will be called PacWest Bancorp. As part of the merger, CapitalSource Bank, a wholly-
owned subsidiary of CapitalSource, will merge with and into Pacific Western, and the combined subsidiary bank will be called Pacific Western Bank.
The CapitalSource national lending operation will continue to do business under the name CapitalSource as a division of Pacific Western Bank.
Under the terms of the Agreement, CapitalSource shareholders will receive $2.47 in cash and 0.2837 shares of PacWest common stock for each
share of CapitalSource common stock. The total value of the CapitalSource per share merger consideration was $13.85 based on the closing price of
PacWest shares on February 13, 2014 of $40.11.
As of December 31, 2013, on a pro forma consolidated basis, the combined company would have had approximately $15.4 billion in assets with
94 branches throughout California. We currently expect to receive final regulatory approval in the first quarter of 2014 and to close the merger on
April 1, 2014.
136
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill for the years indicated:
Balance, December 31, 2010
Adjustments to Los Padres goodwill, including resolution of
matter with FDIC regarding settlement accounting for wholly-
owned subsidiary of Los Padres
Balance, December 31, 2011
Addition from the EQF acquisition
Addition from the Celtic acquisition
Addition from the APB acquisition
Balance, December 31, 2012
Adjustment to APB goodwill
Addition from the FCAL acquisition
Balance, December 31, 2013
Goodwill
(In thousands)
47,301
$
(8,160)
39,141
19,033
6,645
15,047
79,866
(193)
129,070
208,743
$
The goodwill related to the FCAL, Celtic and APB acquisitions is not deductible for tax purposes, while the EQF acquisition is deductible.
Our intangible assets with definite lives include core deposit and customer relationship intangibles. These intangibles are amortized over their
respective estimated useful lives to their estimated residual values and reviewed for impairment at least quarterly. The amortization expense
represents the estimated decline in the value of the underlying deposits or loan customers acquired. The weighted average amortization period for
the CDI addition from the FCAL acquisition is 3.3 years. The weighted average amortization period remaining for all of our core deposit and
customer relationship intangibles is 2.6 years. The estimated aggregate amortization expense related to these intangible assets for each of the next
five years is $5.3 million, $4.8 million, $3.0 million, $1.6 million and $1.3 million.
137
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
The following table presents the changes in the gross amounts of core deposit intangibles, or CDI, and customer relationship intangibles, or
CRI, and the related accumulated amortization for the years indicated:
Gross amount of CDI and CRI:
Balance, beginning of year
Additions due to acquisitions
Fully amortized portion
Removal due to branch sale
Balance, end of year
Accumulated Amortization:
Balance, beginning of year
Amortization
Fully amortized portion
Removal due to branch sale
Balance, end of year
Net CDI and CRI, end of year
2013
Year Ended December 31,
2012
(In thousands)
2011
$
45,412 $
7,927
(4,376)
—
48,963
67,100 $
4,924
(20,746)
(5,866)
45,412
(30,689)
(5,402)
4,376
—
(31,715)
17,248 $
(49,685)
(6,326)
20,746
4,576
(30,689)
14,723 $
$
76,319
—
(9,219)
—
67,100
(50,476)
(8,428)
9,219
—
(49,685)
17,415
The $1.3 million of CDI written off during 2012 related to previously acquired deposits that were sold in connection with the sale of branches in
September 2012. Such expense is included in "other income" in the net gain on sale of branches.
138
Table of Contents
NOTE 6—INVESTMENT SECURITIES
Securities Available-for-Sale
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following tables present the amortized cost, gross unrealized gains and losses, and carrying value of securities available-for-sale as of the
dates indicated:
December 31, 2013
Security Type
Residential mortgage-backed securities:
Government agency and government-
sponsored enterprise pass through
securities
Government agency and government-
sponsored enterprise collateralized
mortgage obligations
Covered private label collateralized mortgage
obligations
Municipal securities
Corporate debt securities
Government-sponsored enterprise debt
securities
Other securities
Total securities available-for-sale
$
Security Type
Residential mortgage-backed securities:
Government agency and government-
sponsored enterprise pass through
securities
Government agency and government-
sponsored enterprise collateralized
mortgage obligations
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Carrying
Value
$
691,944 $
18,012 $
(2,768) $
707,188
197,069
388
(4,584)
192,873
30,502
459,182
84,119
7,552
1,749
71
(150)
(24,273)
(1,483)
37,904
436,658
82,707
10,046
27,654
1,500,516 $
—
2
27,774 $
(174)
(113)
(33,545) $
9,872
27,543
1,494,745
December 31, 2012
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Carrying
Value
$
774,677 $
33,618 $
(453) $
807,842
Covered private label collateralized mortgage
obligations
Municipal securities
Corporate debt securities
Other securities
Total securities available-for-sale
$
99,956
1,870
(132)
101,694
36,078
339,547
42,014
6,389
1,298,661 $
8,729
10,445
432
4,370
59,464 $
(123)
(1,951)
(81)
—
(2,740) $
44,684
348,041
42,365
10,759
1,355,385
During 2013, 2012, and 2011, we made investment purchases of $550.2 million, $485.9 million, and $658.3 million, of investment securities
available-for-sale, respectively.
During 2013, we sold $12.4 million of corporate debt securities and $10.0 million in collateralized loan obligation securities for which we realized
a gross gain of $409,000 and a gross loss of $272,000, respectively. The sale of the corporate debt securities was done as part of our portfolio risk
management activities to reduce price volatility and duration. The sale of collateralized loan obligation
139
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 6—INVESTMENT SECURITIES (Continued)
securities was done in order to minimize our risk in holding these securities subject to the then proposed regulations referred to as the Volcker rule.
During 2012, we sold $43.9 million of GSE pass through securities as part of our portfolio risk management activities and realized a $1.2 million gross
gain. We also sold $45.6 million of the $48.9 million of investment securities obtained in the APB acquisition for no gain or loss. There were no sales
of securities in 2011.
At December 31, 2013, the fair value of residential mortgage-backed securities issued by the Federal National Mortgage Association ("Fannie
Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") that were held in our portfolio was approximately $740.4 million. We do
not own any equity securities issued by Fannie Mae or Freddie Mac. The covered private label collateralized mortgage obligations ("CMO's") were
acquired in the FDIC-assisted acquisition of Affinity Bank in August 2009 and are covered by an FDIC loss sharing agreement. The loss sharing
provisions of this agreement expire in the third quarter of 2014 for non-single family covered assets such as these private label CMO's. Other
securities consist primarily of asset-backed securities. As of December 31, 2013 and 2012, securities available-for-sale with a carrying value of
$208.3 million and $157.3 million, respectively, were pledged as security for borrowings, public deposits and other purposes as required by various
statutes and agreements.
Market valuations of our investment securities are provided by an independent third party. The fair values are determined by using several
sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and
incorporate available trade, bid and other market information. In accordance with the hierarchy established in ASC Topic 820, "Fair Value
Measurement," the market valuation sources include observable market inputs for the majority of our securities and are therefore considered Level 2
inputs for purposes of determining the fair values. The valuation techniques for the covered private label CMOs are considered Level 3. See
Note 14, Fair Value Measurements, for information on fair value measurements and methodology.
The following tables present, for those securities that were in a gross unrealized loss position, the carrying values, which are the estimated fair
values, and the gross unrealized losses on securities by length of time the securities were in an unrealized loss position as of the dates indicated:
Security Type
Residential mortgage-backed securities:
Government agency and government-
sponsored enterprise pass through
securities
Government agency and government-
sponsored enterprise collateralized
mortgage obligations
Covered private label collateralized
mortgage obligations
Municipal securities
Corporate debt securities
Government-sponsored enterprise debt
securities
Other securities
Total
Less than 12 months
Gross
Unrealized
Losses
Carrying
Value
December 31, 2013
12 months or longer
Gross
Unrealized
Losses
Carrying
Value
(In thousands)
Total
Carrying
Value
Gross
Unrealized
Losses
$ 148,662
$
(2,767)
$
32
$
(1)
$ 148,694
$
(2,768)
179,938
(4,486)
4,383
184,321
(4,584)
(98)
(90)
—
—
2,257
337,208
72,636
617
—
—
—
—
5,032
$
—
—
(189)
9,872
23,969
$ 778,957
$
(150)
(24,273)
(1,483)
(174)
(113)
(33,545)
1,640
337,208
72,636
9,872
23,969
$ 773,925
$
(60)
(24,273)
(1,483)
(174)
(113)
(33,356)
$
140
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 6—INVESTMENT SECURITIES (Continued)
Security Type
Residential mortgage-backed securities:
Government agency and government-
sponsored enterprise pass through
securities
Government agency and government-
sponsored enterprise collateralized
mortgage obligations
Covered private label collateralized
mortgage obligations
Municipal securities
Corporate debt securities
Total
Less than 12 months
Gross
Unrealized
Losses
Carrying
Value
December 31, 2012
12 months or longer
Gross
Unrealized
Losses
Carrying
Value
(In thousands)
Total
Carrying
Value
Gross
Unrealized
Losses
$
67,299
$
(452)
$
60
$
(1)
$
67,359
$
(453)
18,317
(132)
—
—
18,317
(132)
—
90,303
16,819
$ 192,738
$
—
(1,951)
(81)
(2,616)
$
1,692
—
—
1,752
$
(123)
—
—
(124)
1,692
90,303
16,819
$ 194,490
$
(123)
(1,951)
(81)
(2,740)
We reviewed the securities that were in a continuous loss position less than 12 months and longer than 12 months at December 31, 2013, and
concluded that their losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by
shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers'
ability to repay. Accordingly, we determined that the securities were temporarily impaired and we did not recognize such impairment in the
consolidated statements of earnings. Additionally, we have no plans to sell these securities and believe that it is more likely than not we would not
be required to sell these securities before recovery of their amortized cost.
During 2012, we determined that one covered private label CMO was impaired due to deteriorating cash flows and the depletion of the credit
support from the subordinated classes of the securitization. We recorded an other-than-temporary impairment ("OTTI") loss of $1.1 million, which
was entirely credit related, in the consolidated statements of earnings. This loss was offset by FDIC loss sharing income of $892,000, which
represented the FDIC's 80% share of the loss. There were no OTTI losses recognized during 2013 and 2011.
The contractual maturity distribution of our securities available-for-sale portfolio based on amortized cost and carrying value is shown as of the
date below:
December 31, 2013
Maturity
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total securities available-for-sale
$
$
Amortized
Cost
Carrying
Value
(In thousands)
5,775 $
24,597
131,259
1,338,885
1,500,516 $
5,792
24,749
129,985
1,334,219
1,494,745
Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected
maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call
or prepayment penalties.
141
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 6—INVESTMENT SECURITIES (Continued)
The following table presents the composition of our interest income on investment securities for the years indicated:
Year Ended December 31,
2012
2011
2013
Securities Interest by Type:
Taxable interest
Nontaxable interest
Dividend income
$
Total interest income on investment securities $
$
23,542
11,777
1,604
36,923 $
$
29,652
5,559
446
35,657 $
33,390
1,222
173
34,785
FHLB Stock
At December 31, 2013, the Company had a $27.9 million investment in FHLB stock carried at cost. We evaluated the carrying value of our FHLB
stock investment at December 31, 2013, and determined that it was not impaired. Our evaluation considered the long-term nature of the investment,
the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the
investment, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.
NOTE 7—LOANS AND LEASES
The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
December 31, 2013
December 31, 2012
Non-PCI
Loans and
Leases
PCI
Loans
Non-PCI
Loans and
Leases
Total
(In thousands)
PCI
Loans
Total
Non-covered
loans and leases $
Covered loans
Total gross
loans and
leases
Unearned income
Total loans and
leases, net of
unearned
income
Allowance for loan
3,844,591 $
85,948
20,326 $
362,470
3,864,917 $
448,418
3,049,505 $
25,442
— $
517,885
3,049,505
543,327
3,930,539
(983)
382,796
—
4,313,335
(983)
3,074,947
(2,535)
517,885
—
3,592,832
(2,535)
3,929,556
382,796
4,312,352
3,072,412
517,885
3,590,297
and lease
losses:
Non-covered
loans and
leases
Covered loans
(60,241)
—
—
(21,793)
(60,241)
(21,793)
(65,899)
—
—
(26,069)
(65,899)
(26,069)
Total
allowance
for loan
and lease
losses
Total net loans
and leases
(60,241)
(21,793)
(82,034)
(65,899)
(26,069)
(91,968)
$
3,869,315 $
361,003 $
4,230,318 $
3,006,513 $
491,816 $
3,498,329
142
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following table presents the composition of our gross loans and leases by portfolio segment as of the dates indicated:
December 31, 2013
December 31, 2012
Non-PCI
Loans and
Leases
PCI
Loans
Non-PCI
Loans and
Leases
Total
(In thousands)
PCI
Loans
Total
Non-Covered
Loans and
Leases
Real estate
mortgage
Real estate
construction
Commercial
Leases
Consumer
Total gross
non-
covered
loans and
leases
Covered Loans
Real estate
mortgage
Real estate
construction
Commercial
Consumer
Leases
Real estate
mortgage
Real estate
Commercial
Leases
Consumer
construction
$
2,359,125 $
18,900 $
2,378,025 $
1,919,310 $
— $
1,919,310
200,332
963,152
269,769
52,213
1,391
—
—
35
201,723
963,152
269,769
52,248
129,959
803,342
174,373
22,521
—
—
—
—
129,959
803,342
174,373
22,521
$
3,844,591 $
20,326 $
3,864,917 $
3,049,505 $
— $
3,049,505
$
65,739 $
352,234 $
417,973 $
20,843 $
484,057 $
504,900
8,758
8,855
2,596
9,036
974
226
17,794
9,829
2,822
—
4,113
486
24,645
9,071
112
24,645
13,184
598
Total gross
covered
loans
Total Loans and
$
85,948 $
362,470 $
448,418 $
25,442 $
517,885 $
543,327
$
2,424,864 $
371,134 $
2,795,998 $
1,940,153 $
484,057 $
2,424,210
209,090
972,007
269,769
54,809
10,427
974
—
261
219,517
972,981
269,769
55,070
129,959
807,455
174,373
23,007
24,645
9,071
—
112
154,604
816,526
174,373
23,119
Total gross
loans and
leases
$
3,930,539 $
382,796 $
4,313,335 $
3,074,947 $
517,885 $
3,592,832
As of May 31, 2013, the fair value of the FCAL Non-PCI loans acquired was $1.0 billion, the related gross contractual amount was $1.3 billion,
and the estimated contractual cash flows not expected to be collected was $34.4 million.
143
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following table presents a summary of the activity in the allowance for credit losses on Non-PCI loans and leases for the years indicated:
Balance, December 31, 2010
Charge-offs
Recoveries
Provision
Balance, December 31, 2011
Charge-offs
Recoveries
Negative provision
Balance, December 31, 2012
Charge-offs
Recoveries
(Negative provision) provision
Balance, December 31, 2013
$
Components
Non-PCI
Allowance for
Loan and
Lease Losses
Non-PCI
Reserve for
Unfunded
Loan
Commitments
(In thousands)
Total
Non-PCI
Allowance for
Credit
Losses
$
5,675 $
—
—
2,795
8,470
—
—
(2,250)
6,220
—
—
1,355
7,575 $
104,328
(28,560)
4,715
13,300
93,783
(13,070)
3,406
(12,000)
72,119
(11,159)
6,856
—
67,816
98,653 $
(28,560)
4,715
10,505
85,313
(13,070)
3,406
(9,750)
65,899
(11,159)
6,856
(1,355)
60,241 $
144
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following tables present summaries of the activity in the allowance for loan and lease losses on Non-PCI loans and leases by portfolio
segment and PCI loans for the years indicated:
Real
Estate
Mortgage
Allowance for
Year Ended December 31, 2013
Real
Estate
Construction Commercial Leases
Consumer
(In thousands)
Total
Non-PCI
Total
PCI
Total
Loan and Lease
Losses:
Beginning balance $
Charge-offs
Recoveries
Provision
38,700 $
(4,552)
2,507
3,221 $
—
1,654
20,759 $
(6,295)
2,621
1,493 $
(114)
—
1,726 $
(198)
74
65,899 $ 26,069 $
(66)
(11,159)
—
6,856
91,968
(11,225)
6,856
(10,577)
26,078 $
$
(577)
4,298 $
6,609
23,694 $
1,848
3,227 $
1,342
2,944 $
(1,355)
(4,210)
60,241 $ 21,793 $
(5,565)
82,034
(negative
provision)
Ending balance
Amount of the
allowance
applicable to
loans and
leases:
Individually
evaluated for
impairment
$
Collectively
evaluated for
impairment
$
2,188 $
169 $
5,003 $
— $
240 $
7,600
23,890 $
4,129 $
18,691 $
3,227 $
2,704 $
52,641
Acquired with
deteriorated
credit quality
Loans and Leases:
Ending balance
The ending
$2,424,864 $
209,090 $ 972,007 $269,769 $ 54,809 $3,930,539 $382,796 $4,313,335
$ 21,793
balance of the
loan and lease
portfolio is
composed of
loans and
leases:
Individually
evaluated for
impairment
$
Collectively
62,276 $
7,512 $
17,300 $
632 $
702 $
88,422
evaluated for
impairment
$2,362,588 $
Acquired with
deteriorated
credit quality
201,578 $ 954,707 $269,137 $ 54,107 $3,842,117
$382,796
145
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
Real
Estate
Mortgage
Allowance for
Year Ended December 31, 2012
Real
Estate
Construction Commercial Leases
Consumer
(In thousands)
Total
Non-PCI
Total
PCI
Total
Loan and Lease
Losses:
Beginning balance $
Charge-offs
Recoveries
Provision
50,205 $
(7,680)
1,598
8,697 $
(492)
49
23,643 $
(4,580)
1,622
— $
(28)
—
2,768 $
(290)
137
85,313 $ 31,275 $ 116,588
(17,457)
(4,387)
(13,070)
3,406
—
3,406
(5,423)
38,700 $
(5,033)
3,221 $
74
20,759 $
1,521
1,493 $
(889)
1,726 $
(9,750)
(819)
65,899 $ 26,069 $
(10,569)
91,968
$
(negative
provision)
Ending balance
Amount of the
allowance
applicable to
loans and
leases:
Individually
evaluated for
impairment
$
Collectively
evaluated for
impairment
$
7,827 $
371 $
4,525 $
— $
265 $
12,988
30,873 $
2,850 $
16,234 $
1,493 $
1,461 $
52,911
Acquired with
deteriorated
credit quality
Loans and Leases:
Ending balance
The ending
$1,940,153 $
balance of the
loan and lease
portfolio is
composed of
loans and
leases:
Individually
evaluated for
impairment
$ 107,198 $
Collectively
evaluated for
impairment
$1,832,955 $
Acquired with
deteriorated
credit quality
129,959 $ 807,455 $174,373 $ 23,007 $3,074,947 $517,885 $3,592,832
$ 26,069
25,450 $
14,530 $
244 $
628 $ 148,050
104,509 $ 792,925 $174,129 $ 22,379 $2,926,897
$517,885
146
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
Non-Purchased Credit Impaired (Non-PCI) Loans and Leases
The following tables present the credit risk rating categories for Non-PCI loans and leases by portfolio segment and class as of the dates
indicated. Nonclassified loans and leases are those with a credit risk rating of either pass or special mention, while classified loans and leases are
those with a credit risk rating of either substandard or doubtful.
Nonclassified
December 31, 2013
Classified
Total
Nonclassified
(In thousands)
December 31, 2012
Classified
Total
Real estate
mortgage:
Hospitality
SBA 504
Other
$
168,216 $
39,869
2,134,866
12,337 $
5,297
64,279
180,553 $
45,166
2,199,145
168,489 $
48,372
1,655,086
12,655 $
5,786
49,765
181,144
54,158
1,704,851
Total real
estate
mortgage
Real estate
construction:
Residential
Commercial
Total real
estate
construction
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total
commercial
Leases
Consumer
Total Non-
PCI loans
and leases $
2,342,951
81,913
2,424,864
1,871,947
68,206
1,940,153
58,131
143,918
750
6,291
58,881
150,209
46,591
77,503
2,038
3,827
48,629
81,330
202,049
7,041
209,090
124,094
5,865
129,959
568,348
151,896
195,569
22,880
938,693
269,137
50,398
18,838
1,856
6,859
5,761
33,314
632
4,411
587,186
153,752
202,428
28,641
972,007
269,769
54,809
447,323
77,670
235,075
18,888
778,956
174,129
21,767
14,802
2,905
4,355
6,437
28,499
244
1,240
462,125
80,575
239,430
25,325
807,455
174,373
23,007
3,803,228 $
127,311 $
3,930,539 $
2,970,893 $
104,054 $
3,074,947
In addition to our internal credit risk rating process, our federal and state banking regulators, as an integral part of their examination process,
periodically review the Company's loan risk rating classifications. Our regulators may require the Company to recognize rating downgrades based
on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in higher
allowances for credit losses.
147
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following tables present an aging analysis of our Non-PCI loans and leases by portfolio segment and class as of the dates indicated:
December 31, 2013
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
Than
90 Days
Past Due
Total
Past Due
(In thousands)
Current
Total
Real estate
mortgage:
Hospitality
SBA 504
Other
$
— $
2,564
12,466
— $
—
560
— $
—
2,406
— $
2,564
15,432
180,553 $
42,602
2,183,713
180,553
45,166
2,199,145
Total real
estate
mortgage
Real estate
construction:
Residential
Commercial
Total real
estate
construction
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total
commercial
Leases
Consumer
Total Non-PCI
loans and
leases
$
15,030
560
2,406
17,996
2,406,868
2,424,864
—
—
—
66
83
—
1,173
1,322
2,530
3,315
—
—
—
2,013
—
2,013
58,881
148,196
58,881
150,209
—
2,013
2,013
207,077
209,090
407
—
—
597
1,004
132
4
259
68
—
243
570
244
—
732
151
—
2,013
2,896
2,906
3,319
586,454
153,601
202,428
26,628
969,111
266,863
51,490
587,186
153,752
202,428
28,641
972,007
269,769
54,809
22,197 $
1,700 $
5,233 $
29,130 $
3,901,409 $
3,930,539
At December 31, 2013 and 2012, the Company had no loans or leases that were greater than 90 days past due and still accruing interest. It is the
Company's policy to discontinue accruing interest when principal or interest payments are past due 90 days or when, in the opinion of management,
there is a reasonable doubt as to collectability in the normal course of business. At December 31, 2013, nonaccrual loans and leases totaled
$46.8 million. Nonaccrual loans and leases included $4.2 million of
148
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
loans 30 to 89 days past due and $37.3 million of current loans that were placed on nonaccrual status based on management's judgment regarding
their collectability.
December 31, 2012
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
Than
90 Days
Past Due
Total
Past Due
(In thousands)
Current
Total
Real estate
mortgage:
Hospitality
SBA 504
Other
$
— $
955
4,098
— $
—
54
— $
1,727
3,271
— $
2,682
7,423
181,144 $
51,476
1,697,428
181,144
54,158
1,704,851
Total real
estate
mortgage
Real estate
construction:
Residential
Commercial
Total real
estate
construction
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total
commercial
Leases
Consumer
Total Non-
PCI loans
and
leases
5,053
54
4,998
10,105
1,930,048
1,940,153
—
—
—
964
3
—
281
1,248
225
23
—
—
—
1,245
—
1,245
48,629
80,085
48,629
81,330
—
1,245
1,245
128,714
129,959
161
135
—
547
843
132
1
872
230
176
1,271
2,549
244
—
1,997
368
176
2,099
4,640
601
24
460,128
80,207
239,254
23,226
802,815
173,772
22,983
462,125
80,575
239,430
25,325
807,455
174,373
23,007
$
6,549 $
1,030 $
9,036 $
16,615 $
3,058,332 $
3,074,947
Nonaccrual loans totaled $41.8 million at December 31, 2012, including $4.2 million of loans 30 to 89 days past due and $28.6 million of current
loans that were placed on nonaccrual status based on management's judgment regarding their collectability.
149
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following tables present our Non-PCI nonaccrual and performing loans and leases by portfolio segment and class as of the dates indicated:
Nonaccrual
December 31, 2013
Performing
Total
Nonaccrual
(In thousands)
December 31, 2012
Performing
Total
Real estate
mortgage:
Hospitality
SBA 504
Other
$
6,723 $
2,602
18,648
173,830 $
42,564
2,180,497
180,553 $
45,166
2,199,145
6,908 $
2,982
16,585
174,236 $
51,176
1,688,266
181,144
54,158
1,704,851
Total real
estate
mortgage
Real estate
construction:
Residential
Commercial
Total real
estate
construction
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Total
commercial
Leases
Consumer
Total Non-
PCI loans
and
leases
27,973
2,396,891
2,424,864
26,475
1,913,678
1,940,153
389
2,830
58,492
147,379
58,881
150,209
1,057
2,715
47,572
78,615
48,629
81,330
3,219
205,871
209,090
3,772
126,187
129,959
9,991
458
1,070
3,037
14,556
632
394
577,195
153,294
201,358
25,604
957,451
269,137
54,415
587,186
153,752
202,428
28,641
972,007
269,769
54,809
4,462
2,027
176
4,181
10,846
244
425
457,663
78,548
239,254
21,144
796,609
174,129
22,582
462,125
80,575
239,430
25,325
807,455
174,373
23,007
$
46,774 $
3,883,765 $
3,930,539 $
41,762 $
3,033,185 $
3,074,947
Nonaccrual loans and leases and performing restructured loans are considered impaired for reporting purposes. The following table presents
the composition of our impaired loans and leases as of the dates indicated:
December 31, 2013
Performing
Restructured
Loans
Nonaccrual
Loans/Leases
Total
Impaired
Loans/Leases
Nonaccrual
Loans/Leases
(In thousands)
December 31, 2012
Performing
Restructured
Loans
Total
Impaired
Loans/Leases
Real estate
mortgage $
27,973 $
34,303 $
62,276 $
26,475 $
80,723 $
107,198
Real estate
construction
Commercial
Leases
Consumer
Total
$
3,219
14,556
632
394
46,774 $
4,293
2,744
—
308
41,648 $
7,512
17,300
632
702
88,422 $
150
3,772
10,846
244
425
41,762 $
21,678
3,684
—
203
106,288 $
25,450
14,530
244
628
148,050
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
At December 31, 2013, we had commitments in the amount of $997,000 to lend on nonaccrual loans but are under no obligation to honor such
commitment as long as the loan is on nonaccrual. We had commitments in the amount of $7,000 to lend on performing restructured loans. For the
years ended December 31, 2013, 2012, and 2011, no interest income was recorded on Non-PCI impaired loans during the time such loans were on
nonaccrual status; any interest payments received were credited to principal.
151
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following table presents information regarding our Non-PCI impaired loans and leases by portfolio segment and class as of the dates
indicated:
December 31, 2013
Unpaid
Principal
Balance
Recorded
Investment(1)
December 31, 2012
Unpaid
Principal
Balance
Recorded
Investment(1)
Related
Allowance
(In thousands)
Related
Allowance
$
5,717 $
1,642
15,937
6,215 $
1,643
16,571
198 $
230
1,760
8,954 $
1,676
58,364
9,640 $
1,676
60,262
778
1,250
4,377
801
1,070
1,136
424
778
1,250
4,692
829
1,070
1,136
471
168
1
4,270
375
180
178
240
1,303
6,723
2,477
2,396
—
2,871
466
1,330
6,723
2,731
3,121
—
3,616
506
$
3,013 $
2,602
33,365
3,385 $
3,646
46,062
— $
—
—
— $
— $
2,982
35,222
3,755
39,503
5,484
9,923
6,700
179
—
3,037
632
278
9,924
247
—
4,945
632
394
—
—
—
—
—
—
—
17,424
21,085
3,657
156
176
2,797
244
162
4,994
163
176
4,057
244
233
2,396
324
5,107
165
206
1,865
2,234
—
426
265
—
—
—
—
—
—
—
—
—
—
With An Allowance
Recorded:
Real estate mortgage:
Real estate construction:
Hospitality
SBA 504
Other
Residential
Other
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Consumer
Hospitality
SBA 504
Other
Other
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Leases
Consumer
With No Related Allowance
Recorded:
Real estate mortgage:
Real estate construction:
Total:
Real estate mortgage
Real estate construction
Commercial
Leases
Consumer
$
62,276 $
7,512
17,300
632
702
77,522 $
11,951
22,843
632
865
2,188 $
169
5,003
—
240
107,198 $ 114,836 $
25,450
14,530
244
628
29,138
18,858
244
739
7,827
371
4,525
—
265
Total Non-PCI loans and
leases
$
88,422 $ 113,813 $
7,600 $
148,050 $ 163,815 $
12,988
(1)
The recorded investment in a loan reflects the contractual amount due from the borrower reduced by charge-offs, any participation amount sold to a third party, interest
payments on nonaccrual loans applied to principal, and purchase discounts.
152
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
2013
Weighted
Average
Recorded
Investment(1)
Interest
Income
Recognized
Year Ended December 31,
2012
Weighted
Average
Recorded
Investment(1)
Interest
Income
Recognized
(In thousands)
2011
Weighted
Average
Recorded
Investment(1)
Interest
Income
Recognized
With An Allowance
Recorded:
Real estate mortgage:
With No Related
Allowance Recorded:
Real estate mortgage:
Hospitality
SBA 504
Other
Real estate
construction:
Residential
Other
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Consumer
Hospitality
SBA 504
Other
Real estate
construction:
Residential
Other
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Leases
Consumer
Total:
$
5,717 $
1,642
13,205
81 $
90
509
8,954 $
827
51,441
80 $
41
2,070
17,399 $
895
42,973
622
21
1,623
778
1,250
3,281
772
569
1,136
425
14
63
29
33
—
56
10
1,303
6,723
2,219
2,273
—
2,593
389
11
231
48
20
—
53
7
2,520
5,375
4,745
2,767
—
1,761
291
$
3,013 $
2,601
27,912
— $
—
1,060
— $
1,472
29,316
— $
—
1,523
— $
1,916
13,827
—
4,866
3,410
157
—
2,571
245
161
—
11
20
—
—
—
—
—
—
17,424
1,657
148
132
2,601
224
136
—
589
27
—
—
24
—
—
611
14,904
1,584
499
14
5,753
—
234
66
113
66
24
—
86
—
—
—
678
—
375
—
—
—
15
—
27
Real estate mortgage $
Real estate
construction
Commercial
Leases
Consumer
54,090 $
1,740 $
92,010 $
3,714 $
77,010 $
2,944
6,894
11,896
245
586
88
138
—
10
25,450
11,623
224
525
831
172
—
7
23,410
17,123
—
525
554
191
—
27
Total Non-PCI
loans and leases $
73,711 $
1,976 $
129,832 $
4,724 $
118,068 $
3,716
(1)
For the loans and leases reported as impaired at December 31, 2013, 2012, and 2011, amounts were calculated based on the period of time such loans and leases were
impaired during the reporting period.
153
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following tables present Non-PCI new troubled debt restructurings and defaulted troubled debt restructurings for the years indicated:
Troubled Debt Restructurings
Number
of
Loans
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Troubled Debt
Restructurings
That Subsequently
Defaulted(1)
Number
of
Loans
Recorded
Investment
14
$
16,223
$
16,223
2
$
1,844
1
11
5
1
4
2
390
5,618
521
2,032
137
125
390
5,618
521
2,032
137
125
—
1
2
1
—
—
38
$
25,046
$
25,046
6
$
2
8
3
7
5
4
1
$
1,680
14,861
$
1,680
13,840
6,919
1,652
317
1,216
206
6,919
1,652
317
1,216
206
$
—
—
—
2
—
1
—
30
$
26,851
$
25,830
3
$
$
1
1
35
6
15
4
15
1
$
2,086
619
56,201
14,906
2,780
581
3,515
144
2,086
619
56,008
14,906
2,780
581
3,515
144
$
—
—
3
1
—
—
3
—
78
$
80,832
$
80,639
7
$
—
419
66
1,070
—
—
(2)
3,399
—
—
—
458
—
873
—
(3)
1,331
—
—
2,914
1,492
—
—
59
—
(4)
4,465
Year Ended December 31, 2013
Real estate mortgage:
Real estate construction:
Other
Residential
Commercial:
Collateralized
Unsecured
Asset-based
SBA 7(a)
Consumer
Total
Year Ended December 31, 2012
Real estate mortgage:
SBA 504
Other
Real estate construction:
Other
Commercial:
Collateralized
Unsecured
SBA 7(a)
Consumer
Total
Year Ended December 31, 2011
Real estate mortgage:
Hospitality
SBA 504
Other
Real estate construction:
Other
Commercial:
Collateralized
Unsecured
SBA 7(a)
Consumer
Total
(1)
(2)
(3)
(4)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table
excludes defaulted troubled restructurings in those classes for which the recorded investment was zero at the end of the period.
Represents the balance at December 31, 2013 and is net of charge-offs of $1.6 million.
Represents the balance at December 31, 2012 and is net of charge-offs of $921,000.
Represents the balance at December 31, 2011 and is net of charge-offs of $4.5 million.
154
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
Purchased Credit Impaired (PCI) Loans
The following table reflects the PCI loans by portfolio segment as of the dates indicated:
December 31, 2013
December 31, 2012
Real estate mortgage
Real estate construction
Commercial
Consumer
Total outstanding PCI loans
Less:
Discount
Allowance for loan losses
Total net PCI loans
$
Amount
% of
Total
Amount
(Dollars in thousands)
96% $
3
1
—
534,378
23,220
11,130
108
568,836
100%
% of
Total
94%
4
2
—
100%
412,791
12,015
3,021
424
428,251
(45,455)
(21,793)
361,003
$
(50,951)
(26,069)
491,816
$
The following table summarizes the accretable yield on the purchased credit impaired loans acquired in the FCAL acquisition as of May 31,
2013:
Undiscounted contractual cash flows
Undiscounted cash flows not expected to be
$
collected (nonaccretable difference)
Undiscounted cash flows expected to be
collected
Estimated fair value of loans acquired
Acquired accrued interest receivable
Accretable yield
Covered
PCI Loans
May 31, 2013
Accretable Yield
Non-Covered
PCI Loans
(In thousands)
Total
42,881 $
41,936 $
84,817
(16,050)
(16,337)
(32,387)
26,831
(24,341)
(66)
2,424 $
25,599
(19,805)
(122)
5,672 $
52,430
(44,146)
(188)
8,096
$
155
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7—LOANS AND LEASES (Continued)
The following table summarizes the changes in the carrying amount of PCI loans and accretable yield on those loans for the years indicated:
Covered
PCI Loans
Non-Covered
PCI Loans
Balance, December 31, 2010
Accretion
Payments received
Increase in expected cash flows, net
Provision for credit losses
Balance, December 31, 2011
Accretion
Payments received
Decrease in expected cash flows, net
Negative provision for credit losses
Balance, December 31, 2012
Addition from the FCAL acquisition
Accretion
Payments received
Decrease (increase) in expected cash flows,
net
Negative provision for credit losses
Balance, December 31, 2013
Carrying
Amount
Accretable
Yield
$
Carrying
Amount
879,486 $
65,282
(257,440)
—
(13,270)
674,058
49,562
(232,623)
—
819
491,816
24,341
44,304
(223,994)
Accretable
Yield
(In thousands)
(290,665) $
65,282
—
(33,882)
—
(259,265)
49,562
—
13,681
—
(196,022)
(2,424)
44,304
—
— $
—
—
—
—
—
—
—
—
—
—
19,805
2,376
(1,855)
—
4,210
340,677 $
20,494
—
(133,648) $
—
—
20,326 $
$
—
—
—
—
—
—
—
—
—
—
—
(5,672)
2,376
—
(2,624)
—
(5,920)
The following tables present the credit risk rating categories for PCI loans by portfolio segment as of the dates indicated. Nonclassified loans
are those with a credit risk rating of either pass or special mention, while classified loans are those with a credit risk rating of either substandard or
doubtful.
Nonclassified
December 31, 2013
Classified
Total
Nonclassified
(In thousands)
December 31, 2012
Classified
Total
$
216,092 $
155,042 $
371,134 $
331,341 $
152,716 $
484,057
4,399
569
—
6,028
405
261
10,427
974
261
6,311
3,420
—
18,334
5,651
112
24,645
9,071
112
Real estate
mortgage
Real estate
construction
Commercial
Consumer
Total PCI loans,
net
$
221,060 $
161,736 $
382,796 $
341,072 $
176,813 $
517,885
Our federal and state banking regulators, as an integral part of their examination process, periodically review the Company's loan
classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available
to them at the time of their examinations.
156
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 8—OTHER REAL ESTATE OWNED (OREO)
The following tables summarize OREO by property type at the dates indicated:
Property Type
December 31, 2013
Non-Covered
OREO
Covered
OREO
December 31, 2012
Total
OREO
Non-Covered
OREO
Covered
OREO
Total
OREO
(In thousands)
Commercial real estate
Construction and land
development
Multi-family
Single family residence
Total OREO, net
$
10,672 $
5,081 $
15,753 $
1,684 $
11,635 $
13,319
31,950
—
179
42,801 $
3,113
835
7
9,036 $
35,063
835
186
51,837 $
31,888
—
—
33,572 $
6,708
4,239
260
22,842 $
38,596
4,239
260
56,414
$
The following table presents a rollforward of OREO, net of the valuation allowance, for the years indicated:
OREO Activity:
Balance, December 31, 2010
Foreclosures
Payments to third parties(1)
Provision for losses
Reductions related to sales
Balance, December 31, 2011
Addition from the APB acquisition
Foreclosures
Payments to third parties(1)
Provision for losses
Reductions related to sales
Balance, December 31, 2012
Addition from the FCAL acquisition
Foreclosures
Payments to third parties(1)
Provision for losses
Reductions related to sales
Balance, December 31, 2013
$
Non-Covered
OREO
Covered
OREO
(In thousands)
Total
OREO
$
25,598 $
34,743
1,619
(5,026)
(8,522)
48,412
1,561
4,223
889
(3,820)
(17,693)
33,572
10,092
7,891
39
(818)
(7,975)
42,801 $
55,816 $
33,940
10
(11,968)
(44,292)
33,506
—
35,984
—
(10,513)
(36,135)
22,842
3,680
7,525
—
(1,697)
(23,314)
9,036 $
81,414
68,683
1,629
(16,994)
(52,814)
81,918
1,561
40,207
889
(14,333)
(53,828)
56,414
13,772
15,416
39
(2,515)
(31,289)
51,837
(1)
Represents amounts due to participants and for guarantees, property taxes or other prior lien positions.
157
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 8—OTHER REAL ESTATE OWNED (OREO) (Continued)
The following table presents a rollforward of our OREO valuation allowance for the years indicated:
OREO Valuation Allowance Activity:
Balance, December 31, 2010
Provision for losses
Selling costs(1)
Due from the SBA
Reductions related to sales
Balance, December 31, 2011
Provision for losses
Selling costs(1)
Reductions related to sales
Balance, December 31, 2012
Provision for losses
Reductions related to sales
Balance, December 31, 2013
Non-Covered
OREO
Covered
OREO
(In thousands)
Total
OREO
$
$
13,831 $
5,026
—
108
(9,431)
9,534
3,820
—
(7,936)
5,418
818
(766)
5,470 $
3,982 $
11,968
2,527
—
(7,436)
11,041
10,513
876
(11,167)
11,263
1,697
(7,116)
5,844 $
17,813
16,994
2,527
108
(16,867)
20,575
14,333
876
(19,103)
16,681
2,515
(7,882)
11,314
(1)
During 2011, the FDIC changed its methodology such that selling costs are reimbursed at the time of sale rather than at the time of foreclosure. Such
amounts will be realized when the related OREO parcels are sold.
NOTE 9—FDIC LOSS SHARING ASSET
The following table presents changes in the FDIC loss sharing asset for the years indicated:
Year Ended December 31,
FDIC loss sharing asset, beginning of year
Addition from the FCAL acquisition
FDIC share of additional losses, net of recoveries
Cash received from FDIC
Net amortization
FDIC loss sharing asset, end of year
$
$
158
2013
2012
(In thousands)
57,475 $
17,241
4,969
(7,332)
(26,829)
45,524 $
95,187
—
6,169
(33,223)
(10,658)
57,475
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 9—FDIC LOSS SHARING ASSET (Continued)
The following table presents information about the composition of the FDIC loss sharing asset, the true-up liability, and the non-single family
and the single family covered assets as of the date indicated:
Affinity
Bank
$9,732
N/A
December 31, 2013
Western
Commercial
Bank
(In thousands)
$1,709
$1,522
Los Padres
Bank
$22,962
N/A
San Luis
Trust
Bank
$11,121
$5,125
Total
$45,524
$6,647
$199,686
$133,201
$16,309
$44,859
$394,055
$14,197
$74,367
N/A
$37,997
$126,561
3rd Quarter
2014
3rd Quarter
2015
4th Quarter
2015
1st Quarter
2016
3rd Quarter
2019
3rd Quarter
2020
N/A
1st Quarter
2021
3rd Quarter
2017
3rd Quarter
2018
4th Quarter
2018
1st Quarter
2019
FDIC loss sharing asset
True-up liability
Non-single family covered
assets(1)
Single family covered
assets
Loss sharing expiration
dates:
Non-single family
Single family
Loss recovery expiration
dates:
Non-single family
Single family
3rd Quarter
2019
3rd Quarter
2020
N/A
1st Quarter
2021
(1)
Excludes securities.
NOTE 10—PREMISES AND EQUIPMENT, NET
The following table presents the components of premises and equipment as of the dates indicated:
December 31,
Land
Buildings
Furniture, fixtures and equipment
Leasehold improvements
Premises and equipment, gross
Less: accumulated depreciation and amortization
Premises and equipment, net
$
$
2013
2012
(In thousands)
6,755 $
12,725
31,080
26,091
76,651
(44,216)
32,435 $
2,027
5,578
28,272
23,996
59,873
(40,370)
19,503
Depreciation and amortization expense was $6.0 million, $5.4 million, and $5.4 million for the years ended December 31, 2013, 2012, and 2011,
respectively.
159
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 10—PREMISES AND EQUIPMENT, NET (Continued)
We have obligations under a number of noncancelable operating leases for premises and equipment. The following table presents future
minimum rental payments under noncancelable operating leases as of December 31, 2013:
Estimated Lease Payments for
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
Amount
(In thousands)
17,279
15,055
12,317
9,824
7,461
12,449
74,385
$
$
Total gross rental expense for the years ended December 31, 2013, 2012, and 2011 was $17.6 million, $16.8 million, and $16.7 million, respectively.
Most of the leases provide that the Company pays maintenance, insurance and certain other operating expenses applicable to the leased premises
in addition to the monthly rental payments.
Total rental income for the years ended December 31, 2013, 2012, and 2011, was approximately $750,000, $505,000, and $587,000, respectively.
The future minimum rental payments to be received under noncancelable subleases are $2.6 million.
NOTE 11—DEPOSITS
The following table presents the components of interest-bearing deposits as of the dates indicated:
December 31,
Deposit Category
Interest checking deposits
Money market deposits
Savings deposits
Time deposits under $100,000
Time deposits of $100,000 or more
Total interest-bearing deposits
2013
2012
(In thousands)
$
$
620,622 $
1,458,910
218,638
225,360
439,011
2,962,541 $
513,389
1,282,513
153,680
274,622
545,705
2,769,909
Brokered time deposits totaled $49.4 million at December 31, 2013, and $37.7 million at December 31, 2012, all of which were part of the CDARS
program. The CDARS program represents deposits that are participated with other FDIC insured financial institutions through the CDARS program
as a means to provide FDIC deposit insurance coverage for the full amount of our customers' deposits.
160
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 11—DEPOSITS (Continued)
The following table summarizes the maturities of time deposits as of the date indicated:
December 31, 2013
Year of Maturity
2014
2015
2016
2017
2018
2019
Total
$
$
Time
Deposits
Under
$100,000
Time
Deposits
$100,000
or More
(Dollars in thousands)
343,463 $
36,419
47,769
7,472
3,888
—
439,011 $
173,820 $
17,200
29,151
2,694
2,425
70
225,360 $
Total
Time
Deposits
Rate
517,283
53,619
76,920
10,166
6,313
70
664,371
0.49%
0.82%
0.78%
1.10%
0.78%
0.70%
0.56%
NOTE 12—BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
Non-recourse debt
Overnight FHLB advances
Total borrowings
December 31,
2013
2012
Amount
Rate
Amount
(Dollars in thousands)
Rate
$
$
7,126
106,600
113,726
6.30% $
0.06%
$
12,591
—
12,591
6.28%
—
The nonrecourse debt represents the payment stream of certain leases sold to third parties. The debt is secured by the equipment in the leases
and all interest rates are fixed. As of December 31, 2013, this debt had a weighted average remaining maturity of 2 years.
The Bank has established secured and unsecured lines of credit. We may borrow funds from time to time on a term or overnight basis from the
FHLB, the FRBSF, or other financial institutions.
FHLB Secured Lines of Credit. The borrowing arrangements with the FHLB are based on two separate FHLB programs, one collateralized by
loans and the other by securities available-for-sale. At December 31, 2013, our FHLB borrowing lines were secured by: (1) a blanket lien on certain
qualifying loans in our loan portfolio which were not pledged to the FRBSF, and (2) available-for-sale securities with a carrying value of
$10.9 million. As of December 31, 2013, our outstanding balance was $106.6 million, and our aggregate remaining borrowing capacity under the
FHLB secured borrowing lines was $1.2 billion. There was no balance outstanding at December 31, 2012.
161
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 12—BORROWINGS AND SUBORDINATED DEBENTURES (Continued)
Federal Funds Arrangements with Commercial Banks. As of December 31, 2013, 2012, the Bank had unsecured lines of credit with
correspondent banks, subject to availability, in the amount of $80.0 million. These lines are renewable annually and have no unused commitment
fees. As of December 31, 2013 and 2012, there were no balances outstanding.
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. The secured borrowing capacity is collateralized by
liens covering $702.6 million of certain qualifying loans. As of December 31, 2013, our secured FRBSF borrowing capacity was $563.6 million. As of
December 31, 2013 and 2012, there were no balances outstanding.
Subordinated Debentures
The Company had an aggregate of $132.6 million and $108.3 million in subordinated debentures outstanding at December 31, 2013 and 2012,
respectively. With the FCAL acquisition, we added $26.8 million of subordinated debentures. These subordinated debentures were issued in
separate series and each issuance had a maturity of thirty years from its date of issue. The subordinated debentures are variable-rate instruments
and are each callable at par with no prepayment penalty. The subordinated debentures were issued to trusts established by us or entities we have
acquired, which in turn issued trust preferred securities, which totaled $131.0 million at December 31, 2013. The proceeds of the subordinated
debentures were used primarily to fund several of our acquisitions and to augment regulatory capital.
See Note 20, Dividend Availability and Regulatory Matters, for information regarding the regulatory capital treatment of trust preferred
securities and the payment of interest on subordinated debentures.
The following table summarizes the terms of each issuance of the subordinated debentures outstanding as of the dates indicated:
December 31,
2013
2012
$
Rate(1) Amount
(Dollars in thousands)
10,310
3.34% $
10,310
3.29%
5,155
3.19%
61,856
2.99%
20,619
1.93%
10,310
10,310
5,155
61,856
20,619
Series
Amount
Rate(2)
Date
Issued
Maturity
Date
Rate Index
Next
Reset
Date
Trust V
Trust VI
Trust CII
Trust VII
Trust CIII
Trust FCCI(3)
Trust FCBI(3)
Gross
subordinated
debentures
Unamortized
discount(4)
Net
subordinated
debentures
3.41% 8/15/03
3.36%
9/3/03
3.26% 9/17/03
2/5/04
3.05%
2.00% 8/15/05
9/17/33
9/15/33
9/17/33
4/23/34
9/15/35
3 month LIBOR + 3.10
3 month LIBOR + 3.05
3 month LIBOR + 2.95
3 month LIBOR + 2.75
3 month LIBOR + 1.69
3/13/14
3/12/14
3/13/14
4/28/14
3/12/14
16,495
1.84%
—
—
1/25/07
3/15/37
3 month LIBOR + 1.60
3/12/14
10,310
1.79%
—
—
9/30/05
12/15/35
3 month LIBOR + 1.55
3/12/14
135,055
108,250
(2,410)
—
$ 132,645
$ 108,250
(1)
(2)
(3)
(4)
As of January 28, 2014.
As of January 28, 2013.
Acquired in the FCAL acquisition.
Amount represents the fair value adjustment on trusts acquired in the FCAL acquisition.
162
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13—COMMITMENTS AND CONTINGENCIES
Lending Commitments
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit, standby letters of credit, and commitments to purchase equipment
being acquired for lease to others. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in those
particular classes of financial instruments.
The following presents a summary of the financial instruments described above as of the dates indicated:
December 31,
Total loan commitments to extend credit
Standby letters of credit
Commitments to purchase equipment being acquired for
lease to others
2013
2012
(In thousands)
$
1,001,740 $
39,200
849,607
27,534
8,475
1,049,415 $
4,399
881,540
$
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support private borrowing arrangements. Most guarantees will expire within one year. The Company
generally requires collateral or other security to support financial instruments with credit risk.
In addition, the Company has investments in low income housing project partnerships, which provide the Company income tax credits, and in a
few small business investment companies. The investments call for capital contributions up to an amount specified in the partnership agreements.
As of December 31, 2013 and 2012, the Company had commitments to contribute capital to these entities totaling $11.0 million and $10.8 million,
respectively.
Legal Matters
In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business.
The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon
information currently available to us, any resulting liability, in addition to amounts already accrued, taking into consideration insurance which may
be applicable, would not have a material adverse effect on the Company's financial statements or operations.
163
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)
FCAL-Related Litigation
As set forth below, there are a number of litigation matters pending against FCB, the defense of which PacWest has assumed.
Fourteen lawsuits have been filed in the Superior Court of the State of California, County of Los Angeles against FCB, among others, by
various former clients of political campaign and non-profit organization treasurer Kinde Durkee. The lawsuits are entitled (i) Wardlaw, et al. v. First
California Bank, et al. (Case No. SC 114232), filed September 23, 2011; (ii) Lou Correa for State Senate, Orange County's Youth et al. v. First
California Bank, et al. (Case No. BC 479872), filed February 29, 2012; (iii) Committee(s) to Re-elect Lorreta Sanchez, Linda Sanchez, and Susan
Davis, et al. v. First California Bank, et al. (Case No. BC 479873), filed February 29, 2012; (iv) Holden for Assembly v. First California Bank, et al.
(Case No. BC 489604), filed August 3, 2012; (v) Latino Diabetes Ass'n v. First California Bank, et al. (Case No. BC 489605), filed August 3, 2012;
(vi) Jose Solorio Assembly Officeholder Committee, et al. v. First California Bank, et al. (Case No. 492855), filed September 27, 2012; (vii) Foster
for Treasurer 2014, et al. v. First California Bank, et al. (Case No. BC 492878), filed September 27, 2012; (viii) Los Angeles County Democratic
Central Committee, et al. v. First California Bank, et al. (Case No. BC 492854), filed September 27, 2012; (ix) FCAL v. 68th AD Democratic PAC, et
al. (Case No. : BC470812), filed September 23, 2011(the "Interpleader Action"); (x) First California Bank v. Shallman, John, Shallman
Communication/John D. Shallman v. FCB (Case No. LC099226), filed December 11, 2012; (xi) National Popular Vote, et al. v. First California
Bank, et al. (Case No. BC501213) filed February 19, 2013; (xii) Zine v. First California Bank, et al. (Case No. BC504476), filed April 2, 2013;
(xiii) Rothman, Elliott v. FCAL (Case No. BC511180), filed June 5, 2013; and (xiv) Ted Lieu as Treasurer for Ted Lieu for Assembly 2008 v. First
California Bank (Case No. BC470182), filed November 18, 2011.
Plaintiffs in each of the cases claim, among other things, that FCB aided and abetted a fraud and unlawful conversion by Ms. Durkee and/or her
affiliated company of funds held in accounts at FCB. Based largely on the same alleged conduct, plaintiffs also assert claims for an alleged violation
of California Business & Professions Code Section 17200 and for declaratory relief. Plaintiffs seek compensatory and punitive damages, as well as
various forms of equitable and declaratory relief.
Each of the cases is pending before the same judge, who is coordinating their progress. FCB has answered each of the complaints, and the
parties are engaged in discovery.
On September 23, 2011, FCB filed a Complaint-in-Interpleader in the Superior Court of the State of California, County of Los Angeles (Case
No. BC 470182), pursuant to which FCB interpleaded the sum of $2,539,049 as the amounts on deposit in accounts at FCB that were controlled by
Ms. Durkee on behalf of the several hundred named defendants (the "Interpleader Action"). FCB seeks an order requiring the defendants to
interplead and litigate their respective claims, discharging FCB from liability, and restraining proceedings or actions against FCB by the defendants
with respect to those amounts. On December 6, 2011, the Interpleader Action was designated as complex and transferred to the Superior Court's
complex litigation division. It has been related to the other pending actions that relate to the conduct of Ms. Durkee.
On June 18, 2012, FCB moved for summary judgment in the Interpleader Action. At hearings held in late 2012 and early 2013, the Superior Court
entered summary judgment with respect to a majority of the accounts at issue. Those sums have been paid by the Superior Court to the former
164
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)
accountholders. There still remains a total of $99,884.79 on deposit with the Court in the Interpleader Action.
In September 2013, Durkee pled guilty to mail fraud resulting in a judgment of $9.7 million being entered against her. The parties participated in
a mediation on October 16, 2013, which did not result in settlement of any claims. Thereafter, at a Further Status Conference on December 19, 2013,
the Court scheduled a jury trial on August 13, 2014 as to the following cases: Orange County's Youth, Latino Diabetes Association, Jose Solorio
Assembly Officeholder Committee, Holden for Assembly, and Committee(s) to Re-elect Lorreta Sanchez, Linda Sanchez, and Susan Davis.
CapitalSource Merger-Related Litigation
Since July 24, 2013, 11 putative stockholder class action lawsuits (the "Merger Litigations") were filed against PacWest and certain other
defendants in connection with PacWest entering into the CapitalSource Merger Agreement in which PacWest agreed to acquire CapitalSource. The
CapitalSource Merger Agreement was publicly announced on July 22, 2013. Five of the 11 actions were filed in Superior Court of California, Los
Angeles County: (1) Engel v. CapitalSource, Inc. et al., Case No. BC516267, filed on July 24, 2013; (2) Miller v. Fremder et al., Case No. BC516590,
filed on July 29, 2013; (3) Basu v. CapitalSource, Inc. et al., Case No. BC516775, filed on July 31, 2013; (4) Holliday v. PacWest Bancorp et al., Case
No. BC517209, filed on August 5, 2013 and (5) Iron Workers Mid-South Pension Fund v. CapitalSource Inc. et al., Case No. BC517698, filed on
August 8, 2013 (collectively, the "California Actions"). The other six actions were filed in the Court of Chancery of the State of Delaware: (1) Fosket
v. Byrnes et al., Case No. 8765, filed on August 1, 2013; (2) Bennett v. CapitalSource, Inc. et al., Case No. 8770, filed on August 2, 2013;
(3) Chalfant v. CapitalSource et al., Case No. 8777, filed on August 6, 2013; (4) Oliveira v. CapitalSource, Inc. et al., Case No. 8779, filed on
August 7, 2013; (5) Desai v. CapitalSource, Inc. et al., Case No. 8804, filed on August 13, 2013; and (6) Fattore v. CapitalSource, Inc. et al., Case
No. 8927, filed on September 19, 2013 (collectively, the "Delaware Actions").
On August 15, 2013, the Delaware Actions were consolidated into a single action, captioned In re CapitalSource Inc. Stockholder Litigation,
Consol. C.A. No. 8765-CS, and assigned to Chancellor Leo E. Strine. On September 25, 2013, plaintiffs in the Delaware Actions filed a Verified
Consolidated Amended Class Action Complaint (the "Delaware Consolidated Complaint"). On September 17, 2013, the California Actions were
consolidated into a single action, captioned In re CapitalSource Inc. Shareholder Litigation, Lead Case No. BC516267, and assigned to Judge
Elihu M. Berle. On October 2, 2013, plaintiffs in the California Actions filed an Amended Consolidated Complaint (the "California Consolidated
Complaint").
The Delaware Consolidated Complaint and the California Consolidated Complaint each allege that the members of the CapitalSource board of
directors breached their fiduciary duties to CapitalSource stockholders by approving the proposed merger for inadequate consideration; approving
the transaction in order to obtain benefits not equally shared by other CapitalSource stockholders; entering into the merger agreement containing
preclusive deal protection devices; and failing to take steps to maximize the value to be paid to the CapitalSource stockholders. The Delaware
Consolidated Complaint and the California Consolidated Complaint also each allege claims against CapitalSource and PacWest for aiding and
abetting these alleged breaches of fiduciary duties. Plaintiffs in these actions seek, among other things, declaratory and injunctive relief concerning
the alleged breaches of fiduciary duties,
165
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)
injunctive relief prohibiting consummation of the merger, rescission, an accounting by defendants, damages and attorneys' fees and costs, and
other and further relief. The judge in the Delaware Actions ruled on October 23, 2013, that discovery would proceed in the Delaware Actions and
that it would be shared with the plaintiffs in the California Actions and that the California Actions would be stayed while that process takes place.
Thereafter, on October 28, 2013, the California Actions' plaintiffs stipulated in the California Actions that they would participate in the discovery
process in the Delaware Actions and the administrative stay in the California Actions will remain in place unless and until the Delaware Actions are
abandoned.
On December 20, 2013, the parties in the California and Delaware Actions entered into a Memorandum of Understanding setting forth the terms
of an agreement in principle to settle both the California and Delaware Actions, subject to certain conditions and future occurrences. A further
status conference is set in the California Actions for May 5, 2014. The Company expects to appear in the Delaware Actions for Court approval in the
event a settlement is finalized by the parties. At this stage, it is not possible to predict the outcome of the proceedings or their impact on
CapitalSource or the Company.
NOTE 14—FAIR VALUE MEASUREMENTS
ASC Topic 820, "Fair Value Measurement," defines fair value, establishes a framework for measuring fair value including a three-level
valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that
a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and
liabilities as follows:
•
•
•
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted
prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or
indirectly, for substantially the full term of the financial instrument. This category generally includes government agency and
government-sponsored enterprise securities.
Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair
value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a
determination of fair value that requires significant management judgment or estimation. This category also includes observable
inputs from a pricing service not corroborated by observable market data, and includes our covered private label CMOs.
We use fair value to measure certain assets on a recurring basis, primarily securities available for sale; we have no liabilities being measured at
fair value. For assets and liabilities measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a
reporting period and such measurements are therefore considered "nonrecurring" for purposes of disclosing our fair value measurements. Fair value
is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain
assets, such as goodwill, core deposit intangibles and other long-lived assets.
166
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
The following tables present information on the assets measured and recorded at fair value on a recurring basis as of the dates indicated:
Fair Value Measurement as of December 31, 2013
Measured on a Recurring Basis:
Securities available-for-sale:
Government agency and government-sponsored
Total
Level 1
Level 2
Level 3
(In thousands)
enterprise residential mortgage-backed
securities
Covered private label CMOs
Municipal securities
Corporate debt securities
Government-sponsored enterprise debt
securities
Other securities
$
900,061 $ — $
37,904
436,658
82,707
—
—
—
900,061 $
—
436,658
82,707
—
37,904
—
—
9,872
27,543
1,494,745 $
—
507
507 $
9,872
27,036
1,456,334 $
—
—
37,904
$
Fair Value Measurement as of December 31, 2012
Measured on a Recurring Basis:
Securities available-for-sale:
Government agency and government-sponsored
Total
Level 1
Level 2
Level 3
(In thousands)
enterprise residential mortgage-backed
securities
Covered private label CMOs
Municipal securities
Corporate debt securities
Other securities
$
$
909,536 $
44,684
348,041
42,365
10,759
1,355,385 $
— $
—
—
—
8,985
8,985 $
909,536 $
—
348,041
42,365
1,774
1,301,716 $
—
44,684
—
—
—
44,684
There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a
recurring basis during 2013.
167
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
The following table presents information about quantitative inputs and assumptions used to evaluate the fair values provided by our third
party pricing service for our Level 3 covered private label CMOs measured at fair value on a recurring basis as of December 31, 2013:
Covered Private Label CMO's:
Unobservable Inputs
Voluntary annual prepayment speeds
Annual default rates
Loss severity rates
Discount rates
Range of
Inputs
0% - 34.4%
0% - 42.5%
0% - 64.6%
0% - 11.1%
Weighted
Average
Input
5.9%
3.0%
29.9%
5.2%
The following table presents activity for assets measured at fair value on a recurring basis that are categorized as Level 3 for the years
indicated:
Covered private label CMOs, beginning of year
$
Total realized in earnings(1)
Total unrealized gain (loss) in comprehensive
income
Net settlements
Covered private label CMOs, end of year
$
2013
Year Ended December 31,
2012
(In thousands)
2011
44,684 $
1,938
45,149 $
340
50,437
2,097
(1,204)
(7,514)
37,904 $
4,883
(5,688)
44,684 $
(846)
(6,539)
45,149
(1)
Includes other-than-temporary impairment loss of $1.1 million for 2012.
The following tables present assets measured at fair value on a non-recurring basis as of the dates indicated:
Fair Value Measurement as of December 31, 2013
Measured on a Non-Recurring Basis:
Non-PCI impaired loans
Non-covered other real estate owned
Covered other real estate owned
SBA loan servicing asset
Total
Level 1
Level 2
(In thousands)
Level 3
$
$
40,886
9,062
1,815
807
52,570
$ —
—
—
—
$ —
$
$
2,051
7,084
1,700
—
10,835
$
$
38,835
1,978
115
807
41,735
168
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
Fair Value Measurement as of December 31, 2012
Measured on a Non-Recurring Basis:
Non-PCI impaired loans
Non-covered other real estate owned
Covered other real estate owned
SBA loan servicing asset
Total
Level 1
Level 2
(In thousands)
Level 3
$
$
102,207
7,945
4,893
1,000
116,045
$ —
—
—
—
$ —
$
$
4,975
—
2,599
—
7,574
$
$
97,232
7,945
2,294
1,000
108,471
The following table presents gains and (losses) recognized on assets measured on a nonrecurring basis for the years indicated:
2013
Year Ended December 31,
2012
(In thousands)
2011
Gain (Loss) on Assets Measured on a Non-
Recurring Basis:
Non-covered impaired loans
Non-covered other real estate owned
Covered other real estate owned
SBA loan servicing asset
Total net loss
$
$
(1,206) $
(726)
(319)
12
(2,239) $
(5,582) $
(2,824)
(1,096)
4
(9,498) $
(22,796)
(4,381)
(9,275)
2
(36,450)
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring
basis as of December 31, 2013:
Fair Value
(in 000's)
Valuation
Methodology
Unobservable
Inputs
Range
Weighted
Average
$
37,672 Discounted cash flow Discount rates
4.06% - 8.81%
6.29%
Asset
Impaired
loans(1)
OREO
$
2,093
Appraisals
Discount,
including 8% for
selling costs
12% - 30%
13
%
SBA loan
servicing
asset
$
807 Discounted cash flow
Prepayment
speeds
Discount rates
3.40% - 16.34%
9.63% - 13.42%
(2)
(2)
(1)
(2)
Excludes $1.2 million of impaired loans with balances of $250,000 or less.
Not readily available.
ASC Topic 825, "Financial Instruments," requires disclosure of the estimated fair value of certain financial instruments and the methods and
significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded
from the applicable disclosure requirements.
169
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates
indicated:
Financial Assets:
Cash and due from banks
Interest-earning deposits in
financial institutions
Securities available-for-sale
Investment in FHLB stock
Loans and leases, net
SBA loan servicing asset
Financial Liabilities:
Deposits
Demand, money market,
interest checking, and
savings deposits
Time deposits
Borrowings
Subordinated debentures
Financial Assets:
Cash and due from banks
Interest-earning deposits in
financial institutions
Securities available-for-sale
Investment in FHLB stock
Loans and leases, net
SBA loan servicing asset
Financial Liabilities:
Deposits:
Demand, money market,
interest checking, and
savings deposits
Time deposits
Borrowings
Subordinated debentures
Carrying or
Contract
Amount
December 31, 2013
Estimated Fair Value
Total
Level 1
(In thousands)
Level 2
Level 3
$
96,424 $
96,424 $
96,424 $
— $
—
50,998
1,494,745
27,939
4,230,318
807
50,998
1,494,745
27,939
4,231,078
807
50,998
507
—
—
—
—
1,456,334
27,939
2,051
—
—
37,904
—
4,229,027
807
4,616,616
664,371
113,726
132,645
4,616,616
665,148
113,726
132,498
—
—
106,600
—
4,616,616
665,148
7,126
132,498
—
—
—
—
Carrying or
Contract
Amount
December 31, 2012
Estimated Fair Value
Total
Level 1
(In thousands)
Level 2
Level 3
$
89,011 $
89,011 $
89,011 $
— $
—
75,393
1,355,385
37,126
3,498,329
1,000
75,393
1,355,385
37,126
3,551,674
1,000
75,393
8,985
—
—
—
—
1,301,716
37,126
4,975
—
—
44,684
—
3,546,699
1,000
3,888,794
820,327
12,591
108,250
3,888,794
823,912
12,611
108,186
170
—
—
—
—
3,888,794
823,912
12,611
108,186
—
—
—
—
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820) and for
estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825):
Cash and due from banks. The carrying amount is assumed to be the fair value because of the liquidity of these instruments.
Interest-earning deposits in financial institutions. The carrying amount is assumed to be the fair value given the short-term nature of these
deposits.
Securities available-for-sale. Securities available-for-sale are measured and carried at fair value on a recurring basis. Unrealized gains and
losses on available-for-sale securities are reported as a component of accumulated other comprehensive income in the consolidated balance sheets.
See Note 6, Investment Securities, for further information on unrealized gains and losses on securities available-for-sale.
Fair value for securities categorized as Level 1, which are publicly traded securities, are based on readily available quoted prices. In determining
the fair value of the securities categorized as Level 2, we obtain a report from a nationally recognized broker-dealer detailing the fair value of each
investment security we hold as of each reporting date. The broker-dealer uses observable market information to value our securities, with the
primary source being a nationally recognized pricing service. We review the market prices provided by the broker-dealer for our securities for
reasonableness based on our understanding of the marketplace and we consider any credit issues related to the securities. As we have not made
any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within
the fair value hierarchy.
Our covered private label CMOs are categorized as Level 3 due in part to the inactive market for such securities. There is a wide range of prices
quoted for private label CMOs among independent third party pricing services and this range reflects the significant judgment being exercised over
the assumptions and variables that determine the pricing of such securities. We consider this subjectivity to be a significant unobservable input
and have concluded that the covered private label CMOs should be categorized as a Level 3 measured asset. Our fair value estimate was based on
prices provided to us by a nationally recognized pricing service, which we also use to determine the fair value of the majority of our securities
portfolio. We determined the reasonableness of the fair values by reviewing assumptions at the individual security level about prepayment, default
expectations, estimated severity loss factors, and discount rates, all of which are not directly observable in the market. Significant changes in
default expectations, severity loss factors, or discount rates, which occur all together or in isolation, would result in different fair value
measurements.
FHLB stock. Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted
to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with
the issuer. The fair value of investments in FHLB stock is equal to the carrying amount.
Non-PCI loans and leases. As Non-PCI loans and leases are not measured at fair value, the following discussion relates to estimating the fair
value disclosures under ASC Topic 825. Fair values are estimated for portfolios of loans and leases with similar financial characteristics. Loans are
segregated by type and further segmented into fixed and adjustable rate interest terms and by credit
171
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans are sold outside the
parameters of normal operating activities. The fair value of performing fixed-rate loans is estimated by discounting scheduled cash flows through
the estimated maturity using estimated market prepayment speeds. The fair value of equipment leases is estimated by discounting scheduled lease
and expected lease residual cash flows over their remaining term. The estimated market discount rates used for performing fixed-rate loans and
equipment leases are the Company's current offering rates for comparable instruments with similar terms. The fair value of performing adjustable-
rate loans is estimated by discounting scheduled cash flows through the next repricing date. As these loans reprice frequently at market rates and
the credit risk is not considered to be greater than normal, the market value is typically close to the carrying amount of these loans. These methods
and assumptions are not based on the exit price concept of fair value.
Non-PCI impaired loans. Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are
measured and recorded at fair value on a non-recurring basis. Non-PCI nonaccrual loans with an unpaid principal balance over $250,000 and all
performing restructured loans are reviewed individually for the amount of impairment, if any. Non-PCI nonaccrual loans with an unpaid principal
balance of $250,000 or less are evaluated for impairment collectively.
To the extent a loan is collateral dependent, we measure such impaired loan based on the estimated fair value of the underlying collateral. The
fair value of each loan's collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted
for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a
Level 2 measurement. The Level 2 measurement is based on appraisals obtained within the last 12 months and for which a charge-off was
recognized or a change in the specific valuation allowance was made during the year ended December 31, 2013.
When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or
the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The
impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on
unobservable inputs such as the strength of a guarantor, including an SBA government guarantee, cash flows discounted at the effective loan rate,
and management's judgment.
The Non-PCI impaired loan balances shown above represent those nonaccrual and restructured loans for which impairment was recognized
during 2013 and 2012. The amounts shown as net losses include the impairment recognized during the years ended December 31, 2013, 2012, and
2011, for the loan balances shown. Of the $46.8 million of nonaccrual loans at December 31, 2013, $2.0 million were written down to their collateral
fair values through charge-offs during 2013.
Other real estate owned. The fair value of foreclosed real estate, both non-covered and covered, is generally based on estimated market
prices from independently prepared current appraisals or negotiated sales prices with potential buyers, less estimated costs to sell; such valuation
inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. As a matter of policy, appraisals are
required annually and may be updated more frequently as circumstances require in the opinion of management. The Level 2 measurement for OREO
is based on appraisals obtained within the last 12 months and for which a write-down was recognized in 2013 and 2012.
172
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the
appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a
fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a
significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3
measurement. The OREO losses disclosed are write-downs based on either a recent appraisal obtained after foreclosure or an accepted purchase
offer by an independent third party received after foreclosure.
SBA servicing asset. In accordance with ASC Topic 860, "Transfers and Servicing," the SBA servicing asset, included in other assets in the
consolidated balance sheets, is carried at its implied fair value. The fair value of the servicing asset is estimated by discounting future cash flows
using market-based discount rates and prepayment speeds. The discount rate is based on the current US Treasury yield curve, as published by the
Department of the Treasury, plus a spread for the marketplace risk associated with these assets. We utilize estimated prepayment vectors using
SBA prepayment information provided by Bloomberg for pools of similar assets to determine the timing of the cash flows. These nonrecurring
valuation inputs are considered to be Level 3 inputs.
Deposits. Deposits are carried at historical cost. The fair value of deposits with no stated maturity, such as noninterest-bearing demand
deposits, interest checking, money market, and savings accounts, is equal to the amount payable on demand as of the balance sheet date and
considered Level 2. The fair value of time deposits is based on the discounted value of contractual cash flows and considered Level 2. The discount
rate is estimated using the rates currently offered for deposits of similar remaining maturities. No value has been separately assigned to the
Company's long-term relationships with its deposit customers, such as a core deposit intangible.
Borrowings. Borrowings include overnight FHLB advances and other fixed-rate term borrowings. Borrowings are carried at amortized cost.
The fair value of overnight FHLB advances is equal to the carrying value and considered Level 1. The fair value of fixed-rate borrowings is
calculated by discounting scheduled cash flows through the estimated maturity or call dates, if applicable, using estimated market discount rates
that reflect current rates offered for borrowings with similar remaining maturities and characteristics and are considered Level 2.
Subordinated debentures. Subordinated debentures are carried at amortized cost. The fair value of subordinated debentures with variable
rates is determined using a market discount rate on the expected cash flows.
Commitments to extend credit. The majority of our commitments to extend credit carry current market interest rates if converted to loans.
Because these commitments are generally unassignable by either the borrower or us, they only have value to the borrower and us. The estimated
fair value approximates the recorded deferred fee amounts and is excluded from the table above because it is not material.
173
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14—FAIR VALUE MEASUREMENTS (Continued)
Limitations
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial
instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair
value estimates are based on what management believes to be conservative judgments regarding expected future cash flows, current economic
conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates. Since the fair values have been estimated as of December 31, 2013 and 2012, the amounts that will actually be realized or paid at
settlement or maturity of the instruments could be significantly different.
NOTE 15—INCOME TAXES
The following table presents the components of income tax expense for the years indicated:
Current Income Tax (Expense) Benefit:
Federal
State
Total current income tax expense
Deferred Income Tax (Expense) Benefit:
2013
Year Ended December 31,
2012
(In thousands)
2011
$
(29,591) $
(7,667)
(37,258)
(24,177) $
(1,825)
(26,002)
(15,129)
(9,562)
(24,691)
Federal
State
Total deferred income tax benefit (expense)
Total income tax expense
$
9,099
(1,586)
7,513
(29,745) $
(2,550)
(8,143)
(10,693)
(36,695) $
(11,726)
(383)
(12,109)
(36,800)
174
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 15—INCOME TAXES (Continued)
The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying the applicable
federal statutory income tax rate of 35% to earnings or loss before income taxes:
Computed expected income tax expense at
federal statutory rate
State tax expense, net of federal tax benefit
Tax-exempt interest benefit
Increase in cash surrender value of life
insurance
Tax credits
Nondeductible employee compensation
Nondeductible acquisition-related expense
Acquisition-related securities gain
Other, net
Recorded income tax expense
$
2013
Year Ended December 31,
2012
(In thousands)
2011
$
(26,201) $
(6,014)
3,979
(32,724) $
(6,479)
1,847
(30,626)
(6,464)
406
407
2,480
(4,730)
(1,196)
1,828
(298)
(29,745) $
442
1,313
(322)
(532)
—
(240)
(36,695) $
504
556
(572)
—
—
(604)
(36,800)
The Company had net income taxes receivable of $39.6 million and $30.0 million at December 31, 2013 and 2012, respectively, included in other
assets on its consolidated balance sheets.
The Company had available at December 31, 2013, approximately $34,000 of unused federal net operating loss carryforwards that may be
applied against future taxable income through 2022. The Company had available at December 31, 2013, approximately $658,000 of unused state net
operating loss carryforwards that may be applied against future taxable income through 2033. Utilization of the net operating loss and other
carryforwards are subject to annual limitations set forth in Section 382 of the Internal Revenue Code.
175
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 15—INCOME TAXES (Continued)
The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax
liabilities as of the dates indicated:
December 31,
Deferred Tax Assets:
charge-offs
Book allowance for loan losses in excess of tax specific
Interest on nonaccrual loans
Deferred compensation
Premises and equipment, principally due to differences in
depreciation
OREO valuation allowance
Assets acquired in FDIC-assisted acquisition
State tax benefit
Accrued liabilities
Other
Goodwill
Deferred loan fees and costs
Unrealized loss on securities available-for-sale
Gross deferred tax assets
Deferred Tax Liabilities:
Core deposit and customer relationship intangibles
Deferred loan fees and costs
Unrealized gain on securities available-for-sale
FHLB stock and dividends
Unrealized income from FDIC-assisted acquisition
Gross deferred tax liabilities
Total net deferred tax asset
2013
2012
(In thousands)
$
45,840 $
444
4,541
31,602
473
3,727
3,643
9,784
16,375
2,368
16,629
7,846
6,595
378
2,424
116,867
6,022
—
—
7,123
24,086
37,231
79,636 $
$
2,457
7,398
19,170
247
10,126
10,934
3,846
—
—
89,980
5,004
296
23,824
7,557
23,614
60,295
29,685
Based upon our taxpaying history and estimates of taxable income over the years in which the items giving rise to the deferred tax assets are
deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
Our evaluation of tax positions was performed for those tax years that remain open to audit. As of December 31, 2013, all the federal returns
filed since 2008 and state returns filed since 2008 are subject to adjustment upon audit.
We had no unrecognized net tax benefit positions at December 31, 2013, 2012 and 2011, respectively. While the amount of unrecognized tax
benefits may change in the next twelve months, the Company does not expect this change to have a material impact on the results of operations or
the financial position of the Company. We may from time to time be assessed interest or penalties by taxing authorities, although any such
assessments historically have been minimal and immaterial to our financial results. In the event we are assessed for interest and/or penalties, such
amounts will be classified in the financial statements as income tax expense.
176
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 16—EARNINGS PER SHARE
The following table presents a summary of the calculation of basic and diluted net earnings per share for the years indicated:
Basic Earnings Per Share:
Net earnings from continuing operations
Less: earnings allocated to unvested restricted stock(1)
Net earnings from continuing operations allocated to common
shares
Net loss from discontinued operations allocated to common
shares
Net earnings allocated to common shares
Weighted-average basic shares and unvested restricted stock
outstanding
Less: weighted-average unvested restricted stock outstanding
Weighted-average basic shares outstanding
Basic earnings per share:
Net earnings from continuing operations
Net loss from discontinued operations
Net earnings
Diluted Earnings Per Share:
Net earnings from continuing operations allocated to common
shares
Net loss from discontinued operations allocated to common
shares
Net earnings allocated to common shares
Weighted-average basic shares outstanding
Diluted earnings per share:
Net earnings from continuing operations
Net loss from discontinued operations
Net earnings
2013
Year Ended December 31,
2012
(In thousands,
except per share data)
2011
$
45,477 $
(1,096)
56,801 $
(1,845)
50,704
(2,072)
44,381
54,956
48,632
(348)
44,033 $
—
54,956 $
—
48,632
$
42,506
(1,683)
40,823
37,370
(1,685)
35,685
37,142
(1,651)
35,491
$
$
1.09 $
(0.01)
1.08 $
1.54 $
—
1.54 $
1.37
—
1.37
$
44,381 $
54,956 $
48,632
(348)
44,033 $
40,823
—
54,956 $
35,685
—
48,632
35,491
1.09 $
(0.01)
1.08 $
1.54 $
—
1.54 $
1.37
—
1.37
$
$
$
(1)
Represents cash dividends paid to holders of unvested restricted stock, net of estimated forfeitures, plus undistributed earnings amounts available to holders of
unvested restricted stock, if any.
177
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 17—STOCK COMPENSATION PLANS
The Company's 2003 Stock Incentive Plan, or the 2003 Plan, permits stock-based compensation awards to officers, directors, key employees and
consultants. As of December 31, 2013, the 2003 Plan authorized grants of stock-based compensation instruments to purchase or issue up to
6,500,000 shares of authorized but unissued Company common stock, subject to adjustments provided by the 2003 Plan. In May 2013, the Board of
Directors approved the equity award of 12,742 common shares to non-employee directors of the Company. Such shares were granted outright and
vested immediately with a charge to other noninterest expense of $361,000 at that time. As of December 31, 2013, there were 1,433,647 shares
available for grant under the 2003 Plan. At the Special Meeting of Stockholders held on January 13, 2014, our stockholders approved an amendment
to the 2003 Plan to increase the aggregate number of shares of Company common stock authorized for grant from 6.5 million shares to 9.0 million
shares. As a result of this action, 3,927,147 shares were available for grant as of February 28, 2014.
Accelerated Vesting of Restricted Stock
In December 2013, the Company accelerated the vesting of certain restricted stock awards that resulted in a pre-tax charge of $12.4 million
($12.2 million after tax). This action was taken by the Company in order to eliminate an additional $21.0 million of compensation and tax expense
related to change in control payments that the Company would have otherwise incurred upon consummation of the CapitalSource merger. Such
eliminated expenses relate to tax gross-up payments and the value of lost tax deductions, in each case due to the impact of Sections 280G and 4999
of the Internal Revenue Code as they apply to change in control payments that would have become payable to certain PacWest employees in
conjunction with the CapitalSource merger. The restricted stock awards that were vested on an accelerated basis in 2013 would have otherwise
vested upon consummation of the CapitalSource merger, and the $12.2 million after-tax charge to earnings that we recorded in December 2013 would
have been incurred at that time.
178
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 17—STOCK COMPENSATION PLANS (Continued)
Restricted Stock
The following table presents a summary of restricted stock transactions for the years indicated:
Unvested restricted stock, December 31, 2010
Granted
Shares issued by the Company upon vesting
Forfeited
Unvested restricted stock, December 31, 2011
Granted
Shares issued by the Company upon vesting
Forfeited
Unvested restricted stock, December 31, 2012
Granted
Shares issued by the Company upon vesting
Forfeited
Unvested restricted stock, December 31, 2013
Weighted
Average
Grant Date
Fair Value
(Per Share)
35.86
20.50
30.13
23.56
30.53
23.77
21.69
22.31
30.68
29.06
24.84
48.92
28.69
Number of
Shares
1,230,582 $
692,900
(203,174)
(44,578)
1,675,730
226,400
(195,871)
(7,978)
1,698,281
673,900
(819,461)
(336,196)
1,216,524 $
At December 31, 2013, there were outstanding 609,074 shares of unvested time-based restricted common stock and 607,450 shares of unvested
performance-based restricted common stock. The awarded shares of time-based restricted common stock vest over a service period of three to five
years from the date of the grant. Of the 607,450 outstanding shares of unvested performance-based restricted stock, 505,944 shares will vest in full
on the date the Compensation, Nominating and Governance, or CNG, Committee of the Board of Directors, as Administrator of the 2003 Plan,
determines that the Company has achieved certain financial goals established by the CNG Committee as set forth in the grant documents. The
remaining 101,506 shares of unvested performance-based restricted stock vest over a period of three years once the performance targets are met.
Both time-based and performance-based restricted common stock vest immediately upon a change in control of the Company as defined in the 2003
Plan or upon death of the employee. The vesting date fair values of restricted stock awards that vested during 2013, 2012, and 2011 were
$30.9 million, $4.5 million, and $3.7 million, respectively.
Compensation expense related to time-based restricted stock awards is based on the fair value of the underlying stock on the award date and is
recognized over the vesting period using the straight-line method. Restricted stock amortization totaled $8.5 million (excluding accelerated vesting
of restricted stock of $12.4 million), $5.7 million, and $7.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. Such amounts
are included in compensation expense on the accompanying consolidated statements of earnings. The income tax benefit recognized in the
consolidated statements of earnings related to this expense was $3.4 million, $2.2 million, and $3.2 million for 2013, 2012, and 2011, respectively. As
of December 31, 2013, total unrecognized compensation cost related to unvested time-based restricted stock was $9.2 million. This cost would be
recognized over a weighted average period of 1.5 years if the CapitalSource merger is not consummated.
179
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 17—STOCK COMPENSATION PLANS (Continued)
We are currently not recognizing any compensation expense for 505,944 of the 607,450 shares of performance-based restricted stock as
management has concluded that it is improbable that the respective financial targets related to these outstanding stock awards will be met. If and
when the attainment of such financial targets is deemed probable in future periods, a catch-up adjustment will be recorded and amortization of such
performance-based restricted stock will begin again. The total amount of unrecognized compensation expense related to the 505,944 shares of
performance-based restricted stock for which amortization is not being recognized totaled $17.5 million at December 31, 2013. We are recognizing
amortization and compensation expense for the remaining 101,506 shares of performance-based restricted stock. The total amount of unrecognized
compensation expense related to these shares was $2.4 million at December 31, 2013.
As noted above, both time-based and performance-based restricted stock vest upon a change in control of the Company. The closing of the
CapitalSource merger will trigger restricted stock vesting under the change in control provisions within the 2003 Plan. The remaining unamortized
expense will be recognized at that time for those awards where compensation expense is currently being recognized. The expense to be recognized
for those performance-based awards where we are not currently recognizing any compensation expense will be the fair value of those shares on the
merger closing date.
The following table summarizes information about outstanding time-based and performance-based restricted stock awards as of the date
indicated:
Time-based restricted stock granted in:
2010
2011
2012
2013
Outstanding time-based restricted stock
awards
Performance-based restricted stock granted
in:
2007
2011
2013
Outstanding performance-based
restricted stock awards
Total outstanding restricted stock awards
December 31, 2013
Weighted
Average
Grant Date
Fair Value
(Per Share)
Weighted
Average
Fair Value(1)
(In thousands)
Weighted
Average
Remaining
Contractual
Life (Years)
Number
of Shares
Outstanding
19.79 $
20.30
23.74
29.87
56,884 $
190,716 $
213,050 $
148,424 $
609,074
205,000 $
291,759 $
110,691 $
54.92
20.46
28.74
607,450
1,216,524
$
2,402
8,052
8,995
6,266
25,715
8,655
12,318
4,673
25,646
51,361
0.2
1.4
1.3
2.3
1.5
3.1
2.2
3.5
2.8
2.1
(1)
Determined using the $42.22 closing price of PacWest common stock on December 31, 2013.
180
Table of Contents
NOTE 18—BENEFIT PLANS
401(K) Plans
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company sponsors a defined contribution plan for the benefit of its employees. Participants are eligible to participate immediately as long
as they are scheduled to work a minimum of 1,000 hours and are at least 21 years of age. Eligible participants may contribute up to 60% of their
annual compensation, not to exceed the dollar limit imposed by the Internal Revenue Code. Employer contributions are determined annually by the
Board of Directors in accordance with plan requirements and applicable tax code.
Expense related to 401(k) matching contributions was $1.3 million, $1.0 million, and $433,000 for the years ended December 31, 2013, 2012, and
2011, respectively.
NOTE 19—STOCKHOLDERS' EQUITY
Treasury Shares
As a Delaware corporation, the Company records treasury shares for shares surrendered to the Company resulting from statutory payroll tax
obligations arising from the vesting of restricted stock. During 2013, the Company purchased 351,640 treasury shares at a weighted average price of
$38.50 per share. During 2012, the Company purchased 63,681 treasury shares at a weighted average price of $23.17 per share. During 2011, the
Company purchased 80,173 treasury shares at a weighted average price of $18.27 per share.
Accumulated Other Comprehensive Income
The following table provides information about reclassification adjustments from accumulated other comprehensive income ("AOCI") for the
year indicated:
AOCI Component:
Unrealized gains on available-for-sale securities:
Year Ended December 31, 2013
Amount
Reclassified
from AOCI
(In thousands)
Affected Line Item in the
Statement Where
Net Income is Presented
Total reclassification for the year
$
5,301 Net of tax
$
137 Gain on sale of securities
5,222 Acquisition-related securities gain(1)
5,359 Total before tax
(58) Income tax expense
(1)
Non-taxable gain on equity interest in FCAL common stock at its fair value as of the FCAL acquisition date.
NOTE 20—DIVIDEND AVAILABILITY AND REGULATORY MATTERS
Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available under
state law governing the Company and certain federal laws and regulations governing the banking and financial services business. Our ability to pay
dividends to our stockholders is subject to the restrictions set forth in Delaware General Corporation Law and
181
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 20—DIVIDEND AVAILABILITY AND REGULATORY MATTERS (Continued)
certain covenants contained in the indentures governing trust preferred securities issued by us or entities that we have acquired. Notification to the
Board of Governors of the Federal Reserve System ("FRB") is also required prior to our declaring and paying dividends during any period in which
our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Should the FRB
object to payment of dividends, we would not be able to make the payment until approval is received or we no longer need to provide notice under
applicable regulations.
It is possible, depending upon the financial condition of the Bank, and other factors, that the FRB, the FDIC or the California Department of
Business Oversight, Division of Financial Institutions ("DBO"), could assert that payment of dividends or other payments is an unsafe or unsound
practice. Pacific Western is subject to restrictions under certain federal and state laws and regulations governing banks which limit its ability to
transfer funds to the holding company through intercompany loans, advances or cash dividends. Dividends paid by state banks such as Pacific
Western are regulated by the DBO under its general supervisory authority as it relates to a bank's capital requirements. A state bank may declare a
dividend without the approval of the DBO as long as the total dividends declared in a calendar year do not exceed either the retained earnings or
the total of net earnings for three previous fiscal years less any dividend paid during such period. During 2013, PacWest received $48.0 million in
dividends from the Bank. For the foreseeable future, dividends from the Bank to PacWest will require DBO approval.
PacWest, as a bank holding company, is subject to regulation by the FRB under the Bank Holding Company Act of 1956, as amended. The
Federal Deposit Insurance Corporation Improvement Act of 1991 required that the federal regulatory agencies adopt regulations defining capital
tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's
and the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets ("leverage ratio"). Tier 1 capital includes common
stockholders' equity and trust preferred securities, less goodwill and certain other deductions (including a portion of servicing assets and the after-
tax unrealized net gains and losses on securities available-for-sale). Total risk-based capital includes Tier 1 capital and other items such as
subordinated debt and the allowance for credit losses. Both measures are stated as a percentage of risk-weighted assets, which are measured based
on their perceived credit risk and include certain off-balance sheet exposures, such as unfunded loan commitments and letters of credit. The
Company is also subject to a leverage ratio requirement, which is defined as Tier 1 capital as a percentage of average assets, adjusted for goodwill
and other non-qualifying intangible assets and other assets.
182
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 20—DIVIDEND AVAILABILITY AND REGULATORY MATTERS (Continued)
Bank holding companies considered to be "adequately capitalized" are required to maintain a minimum total risk-based capital ratio of 8%, a
minimum Tier 1 risk-based capital ratio of 4.0%, and a minimum leverage ratio of 4.0%. Bank holding companies considered to be "well capitalized"
must maintain a minimum total risk-based capital ratio of 10.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, and a minimum leverage ratio of
5%. As of December 31, 2013, the most recent notification date to the regulatory agencies, the Company and the Bank are each "well capitalized"
under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes
have changed the Company's or any of the Bank's categories.
Management believes, as of December 31, 2013, that we have met all capital adequacy requirements to which we are subject.
Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital.
Deferred tax asset amounts in excess of the calculated limit are deducted from regulatory capital. At December 31, 2013, such amount was
$3.8 million for the Company and $3.3 million for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not
increase in the future.
The following table presents actual capital amounts and ratios for the Company and the Bank as of the dates indicated:
December 31, 2013:
Tier I capital (to average assets):
PacWest Bancorp Consolidated
Pacific Western Bank
Tier I capital (to risk-weighted assets):
PacWest Bancorp Consolidated
Pacific Western Bank
Total capital (to risk-weighted assets):
PacWest Bancorp Consolidated
Pacific Western Bank
December 31, 2012:
Tier I capital (to average assets):
PacWest Bancorp Consolidated
Pacific Western Bank
Tier I capital (to risk-weighted assets):
PacWest Bancorp Consolidated
Pacific Western Bank
Total capital (to risk-weighted assets):
PacWest Bancorp Consolidated
Pacific Western Bank
Actual
Well Capitalized
Minimum
Requirement
Amount
Ratio
Amount
(Dollars in thousands)
Ratio
Excess
Capital
Amount
$
718,800
690,440
11.22% $
10.79
320,405
319,999
5.00% $
5.00
398,395
370,441
718,800
690,400
15.12
14.54
285,163
284,825
6.00
6.00
778,582
750,152
16.38
15.80
475,271
474,708
10.00
10.00
433,637
405,575
303,311
275,444
$
570,082
528,151
10.53% $
9.78
270,694
269,901
5.00% $
5.00
299,388
258,250
570,082
528,151
15.17
14.10
225,541
224,778
6.00
6.00
617,702
575,614
16.43
15.36
375,901
374,630
10.00
10.00
344,541
303,373
241,801
200,984
183
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 20—DIVIDEND AVAILABILITY AND REGULATORY MATTERS (Continued)
The Company issued subordinated debentures to trusts that were established by us or entities that we have acquired, which, in turn, issued
trust preferred securities, which totaled $131.0 million at December 31, 2013. The Company includes in Tier 1 capital an amount of trust preferred
securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity less goodwill, net of
any related deferred income tax liability. At December 31, 2013, the amount of trust preferred securities included in Tier I capital was $131.0 million.
Our existing trust preferred securities are currently grandfathered as Tier 1 capital under the Dodd-Frank Wall Street Reform and Consumer
Protection Act. However, under new capital rules approved in July 2013 by the FRB and FDIC, if the Company completes the CapitalSource merger
or any subsequent acquisition such that, upon completion of such transaction, the Company exceeds $15 billion in consolidated total assets,
beginning in 2015, only 25% of the Company's $131.0 million of trust preferred securities currently outstanding will be included in Tier 1 capital, and
in 2016, none of the Company's trust preferred securities will be included in Tier 1 capital. Further, under such rules, trust preferred securities no
longer included in the Company's Tier 1 capital may be included as a component of Tier 2 capital on a permanent basis without phase-out. If trust
preferred securities are excluded from regulatory capital at December 31, 2013, we remain "well capitalized."
Interest payments made by the Company on subordinated debentures are considered dividend payments under the FRB regulations and
subject to the same notification requirements for declaring and paying dividends on common stock.
NOTE 21—BUSINESS SEGMENTS
The Company's reportable segments consist of "Banking," "Asset Financing," and "Other." At December 31, 2013, the Other segment
consisted of the PacWest Bancorp holding company and other elimination and reconciliation entries.
The Bank's Asset Financing segment includes the operations of the divisions and subsidiaries that provide asset-based commercial loans and
equipment leases. The asset-based lending products are offered primarily through three business units: (1) First Community Financial ("FCF"), a
division of the Bank, based in Phoenix, Arizona; (2) BFI Business Finance ("BFI"), a wholly-owned subsidiary of the Bank, based in San Jose,
California; and (3) Celtic Capital Corporation ("Celtic"), a wholly-owned subsidiary of the Bank based in Santa Monica, California. The Bank's
leasing products are offered through Pacific Western Equipment Finance ("EQF"), a division of the Bank based in Midvale, Utah.
The accounting policies of the reported segments are the same as those of the Company described in Note 1, "Nature of Operations and
Summary of Significant Accounting Policies." Transactions between segments consist primarily of borrowed funds. Intersegment interest expense
is allocated to the Asset Financing segment based upon the Bank's total cost of interest-bearing liabilities. The provision for credit losses is
allocated based on actual charge-offs for the period as well as assigning a minimum reserve requirement to the Asset Financing segment.
Noninterest income and noninterest expense directly attributable to a segment are assigned to it.
184
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 21—BUSINESS SEGMENTS (Continued)
The following tables present information regarding our business segments as of and for the years indicated:
December 31, 2013
Asset
Financing
Other
(In thousands)
Consolidated
Company
Balance Sheet Data
Banking
Loans and leases, net of unearned income
Allowance for loan and lease losses
Total loans and leases, net
Goodwill(1)
Core deposit and customer relationship
intangibles, net
Total assets
Total deposits(2)
$
$
$
3,837,475 $
(75,498)
3,761,977 $
474,877 $
(6,536)
468,341 $
— $
—
— $
4,312,352
(82,034)
4,230,318
183,065 $
25,678 $
— $
208,743
15,331
6,004,067
5,302,822
1,917
519,675
—
—
9,621
(21,835)
17,248
6,533,363
5,280,987
(1)
(2)
The increase in the Banking segment's goodwill during 2013 was due primarily to $129.1 million from the FCAL acquisition.
The negative balance for total deposits in the "Other" segment represents the elimination of holding company cash held in deposit accounts at the Bank.
Balance Sheet Data
Banking
Loans and leases, net of unearned income
Allowance for loan and lease losses
Total loans and leases, net
Goodwill
Core deposit and customer relationship
intangibles, net
Total assets
Total deposits(1)
December 31, 2012
Asset
Financing
Other
(In thousands)
$
$
$
3,175,165 $
(87,538)
3,087,627 $
54,188 $
415,132 $
(4,430)
410,702 $
25,678 $
Consolidated
Company
— $
—
— $
— $
3,590,297
(91,968)
3,498,329
79,866
12,151
4,991,927
4,737,593
2,572
451,557
—
—
20,174
(28,472)
14,723
5,463,658
4,709,121
(1)
The negative balance for total deposits in the "Other" segment represents the elimination of holding company cash held in deposit accounts at the Bank.
185
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 21—BUSINESS SEGMENTS (Continued)
Year Ended December 31, 2013
Results of Operations
Banking
Asset
Financing
Consolidated
Company
$
Interest income
Intersegment interest income (expense)
Other interest expense
Net interest income
Negative provision (provision) for credit losses
FDIC loss sharing expense
Acquisition-related securities gain
Other noninterest income
Total noninterest income
Accelerated vesting of restricted stock
OREO income (expense)
Intangible asset amortization
Acquisition and integration costs
Other noninterest expense
Total noninterest expense
261,492 $
1,525
(7,873)
255,144
8,079
(26,172)
—
21,532
(4,640)
(12,420)
1,503
(4,748)
(28,132)
(156,600)
(200,397)
Other
(In thousands)
48,422 $
(1,525)
(532)
46,365
(3,869)
—
—
3,558
3,558
—
—
(654)
—
(23,575)
(24,229)
— $
—
(3,796)
(3,796)
—
—
5,222
104
5,326
—
—
—
(260)
(5,801)
(6,061)
Earnings (loss) from continuing operations before
income taxes
Income tax (expense) benefit
58,186
(24,940)
21,825
(9,101)
(4,531)
4,038
Net earnings (loss) from continuing
operations
Loss from discontinued operations before income
taxes
Income tax benefit
Net loss from discontinued operations
Net earnings (loss)
$
33,246
12,724
(493)
45,477
(620)
258
(362)
32,884 $
—
—
—
12,724 $
—
—
—
(493) $
(620)
258
(362)
45,115
186
309,914
—
(12,201)
297,713
4,210
(26,172)
5,222
25,194
4,244
(12,420)
1,503
(5,402)
(28,392)
(185,976)
(230,687)
75,480
(30,003)
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 21—BUSINESS SEGMENTS (Continued)
Year Ended December 31, 2012
Results of Operations
Banking
Asset
Financing
Consolidated
Company
$
Interest income
Intersegment interest income (expense)
Other interest expense
Net interest income
Negative provision (provision) for credit losses
FDIC loss sharing expense
Other noninterest income
Total noninterest income
OREO expense
Intangible asset amortization
Acquisition and integration costs
Debt termination expense
Other noninterest expense
Total noninterest expense
Earnings (loss) before income taxes
Income tax (expense) benefit
Net earnings (loss)
$
251,720 $
2,055
(15,043)
238,732
14,585
(10,070)
21,811
11,741
(10,931)
(5,898)
(4,089)
(24,195)
(138,640)
(183,753)
81,305
(31,542)
49,763 $
187
Other
(In thousands)
44,395 $
(2,055)
(884)
41,456
(1,766)
—
4,017
4,017
—
(428)
—
—
(23,502)
(23,930)
19,777
(8,327)
11,450 $
— $
—
(3,721)
(3,721)
—
—
114
114
—
—
—
1,597
(5,576)
(3,979)
(7,586)
3,174
(4,412) $
296,115
—
(19,648)
276,467
12,819
(10,070)
25,942
15,872
(10,931)
(6,326)
(4,089)
(22,598)
(167,718)
(211,662)
93,496
(36,695)
56,801
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 21—BUSINESS SEGMENTS (Continued)
Year Ended December 31, 2011
Results of Operations
Banking
Interest income
Intersegment interest income (expense)
Other interest expense
Net interest income
Provision for credit losses
FDIC loss sharing income
Other noninterest income
Total noninterest income
OREO expense
Intangible asset amortization
Acquisition and integration costs
Other noninterest expense
Total noninterest expense
Earnings (loss) before income taxes
Income tax (expense) benefit
Net earnings (loss)
Asset
Financing
Other
(In thousands)
Consolidated
Company
18,550 $
(1,226)
—
17,324
(50)
—
660
660
—
(164)
—
(10,846)
(11,010)
6,924
(2,917)
4,007 $
— $
—
(4,923)
(4,923)
—
—
157
157
—
—
—
(8,255)
(8,255)
(13,021)
5,671
(7,350) $
295,284
—
(32,643)
262,641
(26,570)
7,776
23,650
31,426
(10,676)
(8,428)
(600)
(160,289)
(179,993)
87,504
(36,800)
50,704
$
$
276,734 $
1,226
(27,720)
250,240
(26,520)
7,776
22,833
30,609
(10,676)
(8,264)
(600)
(141,188)
(160,728)
93,601
(39,554)
54,047 $
188
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 22—CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The parent company only condensed balance sheets as of December 31, 2013 and 2012 and the related condensed statements of net earnings
and condensed statements of cash flows for each of the years in the three-year period ended December 31, 2013 are presented below:
December 31,
Parent Company Only
Condensed Balance Sheets
Assets:
Cash and due from banks
Investments in subsidiaries
Other assets
Total assets
Liabilities:
Subordinated debentures
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
2013
2012
(In thousands)
$
$
$
$
21,835 $
911,200
10,341
943,376 $
28,472
649,656
20,174
698,302
132,645 $
1,638
134,283
809,093
943,376 $
108,250
931
109,181
589,121
698,302
Parent Company Only
Condensed Statements of Earnings
Acquisition-related securities gain
Debt termination income
Miscellaneous income
Dividends from Bank subsidiary
Total income
Interest expense
Operating expenses
Total expenses
$
Earnings before income taxes and equity in undistributed earnings
of subsidiaries
Income tax benefit
Earnings before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net earnings
$
189
Year Ended December 31,
2013
2012
(In thousands)
2011
5,222 $
—
104
48,000
53,326
3,796
6,061
9,857
— $
1,597
114
50,000
51,711
3,721
5,576
9,297
43,469
4,038
47,507
(2,392)
45,115 $
42,414
3,174
45,588
11,213
56,801 $
—
—
157
25,500
25,657
4,923
8,255
13,178
12,479
5,671
18,150
32,554
50,704
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 22—CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (Continued)
Parent Company Only
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Acquisition-related securities gain
Change in other assets
Change in liabilities
Tax effect in stockholders' equity of restricted stock vesting
Earned stock compensation
Equity in undistributed (earnings) losses of subsidiaries
Net cash provided by operating activities
Cash flows from investing activities:
Net cash and cash equivalents acquired in acquisition
Purchases of securities available-for-sale
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Redemptions of subordinated debentures
Tax effect in stockholders' equity of restricted stock vesting
Restricted stock surrendered
Cash dividends paid
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of noncash investing and financing
activities:
Common stock issued for First California Financial Group
acquisition
Year Ended December 31,
2013
2012
(In thousands)
2011
$
45,115 $
56,801 $
50,704
(5,222)
(609)
4,932
(364)
441
2,392
46,685
857
—
857
—
711
(4,122)
(102)
715
(11,213)
42,790
—
(1,500)
(1,500)
—
364
(13,537)
(41,006)
(54,179)
(6,637)
28,472
21,835 $
(18,558)
102
(1,475)
(28,787)
(48,718)
(7,428)
35,900
28,472 $
$
—
(4,533)
6,262
501
3,551
(32,554)
23,931
—
(2,580)
(2,580)
—
(501)
(1,465)
(7,626)
(9,592)
11,759
24,141
35,900
$
242,268 $
— $
—
190
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 23—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth our unaudited, quarterly results for the periods indicated:
Three Months Ended
Interest income
Interest expense
Net interest income
Negative provision (provision) for credit
losses
FDIC loss sharing expense, net
(Loss) gain on sale of securities
Acquisition-related securities gain
Other noninterest income
Total noninterest income
Accelerated vesting of restricted stock
Non-covered OREO expense, net
Covered OREO expense, net
Acquisition and integration costs
Other noninterest expense
Total noninterest expense
Earnings from continuing operations before
income taxes
Income tax expense
Net earnings from continuing operations
Earnings (loss) from discontinued operations
before income taxes
Income tax (expense) benefit
Net earnings (loss) from discontinued
operations
Net earnings
Basic earnings per share:
Net earnings from continuing operations
Net earnings
Diluted earnings per share:
Net earnings from continuing operations
Net earnings
$
$
$
$
$
$
December 31,
2013
September 30,
2013
June 30,
2013
March 31,
2013
(Dollars in thousands, except per share data)
71,631 $
85,158 $
(3,158)
(2,869)
68,473
82,289
83,856 $
(2,598)
81,258
1,338
(10,593)
(272)
—
6,939
(3,926)
(12,420)
(25)
594
(4,253)
(49,984)
(66,088)
12,582
(9,135)
3,447
(578)
240
4,167
(7,032)
—
5,222
6,937
5,127
—
88
332
(5,450)
(51,170)
(56,200)
35,383
(11,243)
24,140
39
(16)
1,842
(5,410)
—
—
5,613
203
—
(80)
94
(17,997)
(46,233)
(64,216)
6,302
(1,906)
4,396
(81)
34
69,269
(3,576)
65,693
(3,137)
(3,137)
409
—
5,568
2,840
—
(313)
813
(692)
(43,991)
(44,183)
21,213
(7,719)
13,494
—
—
(338)
3,109 $
23
24,163 $
(47)
4,349 $
—
13,494
0.53 $
0.53 $
0.53 $
0.53 $
0.11 $
0.11 $
0.11 $
0.11 $
0.37
0.37
0.37
0.37
0.07 $
0.06 $
0.07 $
0.06 $
191
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 23—SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (Continued)
Three Months Ended
Interest income
Interest expense
Net interest income
Negative provision for credit losses
FDIC loss sharing expense, net
Gain on sale of securities
Other-than-temporary impairment loss on
covered security
Other noninterest income
Total noninterest income
Non-covered OREO expense, net
Covered OREO expense, net
Acquisition and integration costs
Debt termination expense
Other noninterest expense
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Earnings per share:
Basic
Diluted
$
$
$
$
December 31,
2012
September 30,
2012
June 30,
2012
March 31,
2012
(Dollars in thousands, except per share data)
72,890 $
75,123 $
(4,477)
(4,352)
68,413
70,771
271
2,141
(102)
(367)
—
—
73,702 $
(4,099)
69,603
4,333
(6,022)
1,239
—
6,840
2,057
(316)
461
(1,092)
—
(42,578)
(43,525)
32,468
(12,576)
19,892 $
—
6,049
5,682
(1,883)
(4,290)
(2,101)
—
(43,383)
(51,657)
26,937
(10,849)
16,088 $
(1,115)
6,088
4,871
(130)
(2,130)
(871)
—
(44,454)
(47,585)
25,970
(10,413)
15,557 $
74,400
(6,720)
67,680
6,074
(3,579)
—
—
6,841
3,262
(1,821)
(822)
(25)
(22,598)
(43,629)
(68,895)
8,121
(2,857)
5,264
0.54 $
0.54 $
0.43 $
0.43 $
0.42 $
0.42 $
0.14
0.14
NOTE 24—RELATED PARTY TRANSACTIONS
Castle Creek Financial, LLC, or Castle Creek Financial, serves as the exclusive financial advisor for the Company pursuant to a services
agreement dated May 18, 2011, between Castle Creek Financial and the Company. Castle Creek Financial is an affiliate of Castle Creek Capital, LLC,
which is controlled by the Company's chairman. During 2013, the Bank paid an advisory fee of $1.3 million to Castle Creek Financial in connection
with the FCAL acquisition that was completed on May 31, 2013. During 2012, the Bank paid an advisory fee of $448,000 to Castle Creek Financial in
connection with the APB acquisition that was completed on August 1, 2012. During 2011, there were no amounts paid by the Company to Castle
Creek Financial.
CapGen Capital Group II LP, or CapGen, is a significant stockholder of the Company and our top tier holding Company. One of the Company's
directors is a principal with CapGen and, pursuant to an agreement, 80% of his board service fees are remitted to CapGen Financial, LLC. In addition,
in lieu of the stock awards with a value of $30,000 on the date of grant in 2013, 2012 and 2011 for non-employee directors, 80% of such value was
remitted in cash to CapGen Financial, LLC. The
192
Table of Contents
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 24—RELATED PARTY TRANSACTIONS (Continued)
Company paid CapGen Financial, LLC $72,000 related to board service fees for each of 2013, 2012, and 2011.
As of December 31, 2013 and 2012, there were no loans outstanding to any members of our board of directors or executive management. Such
parties' deposits as of those dates totaled $3.6 million and $4.2 million, respectively, and bear market rates and terms.
NOTE 25—SUBSEQUENT EVENTS (Unaudited)
Dividend Approval
On February 12, 2014, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.25 per common share
payable on March 5, 2014, to stockholders of record at the close of business on February 24, 2014.
We have evaluated events that have occurred subsequent to December 31, 2013 and have concluded there are no subsequent events that
would require recognition in the accompanying consolidated financial statements.
193
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure
controls and procedures as of December 31, 2013 and have concluded that these disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is
accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
(b) Management's Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our management conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal
Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
Report of the Registered Public Accounting Firm. KPMG LLP, an independent registered public accounting firm, has audited the
consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein,
on the effectiveness of our internal control over financial reporting.
(c) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that
occurred during the fourth quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
194
Table of Contents
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information required by this Item regarding the Company's directors and executive officers, and corporate governance, including information
with respect to beneficial ownership reporting compliance, will appear in the Proxy Statement we will deliver to our stockholders in connection with
our 2014 Annual Meeting of Stockholders. Such information is incorporated herein by reference. Information relating to the registrant's Code of
Business Conduct and Ethics that applies to its employees, including its senior financial officers, is included in Part I of this Annual Report on
Form 10-K under "Item 1. Business—Available Information."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2014 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item regarding security ownership of certain beneficial owners and management will appear in the Proxy
Statement we will deliver to our stockholders in connection with our 2014 Annual Meeting of Stockholders. Such information is incorporated herein
by reference. Information relating to securities authorized for issuance under the Company's equity compensation plans is included in Part II of this
Annual Report on Form 10-K under "Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2014 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2014 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
195
Table of Contents
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The consolidated financial statements of PacWest Bancorp and its subsidiaries and independent auditors' report are included in Item 8 under
Part II of this Form 10-K.
2.
Financial Statement Schedules
All financial statement schedules have been omitted, as they are either inapplicable or included in the Notes to Consolidated Financial
Statements.
3.
Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10-K:
2.1 Agreement and Plan of Merger dated as of November 6, 2012, by and between PacWest Bancorp
and First California Financial Group, Inc. (Exhibit 2.1 to Form 8-K filed on November 9, 2012 and
incorporated herein by this reference).
2.2
2.3
3.1
3.2
3.3
4.1
4.2
4.3
4.4
Agreement and Plan of Merger dated as of July 22, 2013 by and between PacWest Bancorp and
CapitalSource, Inc. (Exhibit 2.1 to Form 8-K filed on July 26, 2013 and incorporated herein by
reference).
Amendment No. 1 to Agreement and Plan of Merger dated as of December 20, 2013 by and
between PacWest Bancorp and CapitalSource, Inc. (Exhibit 2.1 to Form 8-K filed on December 20,
2013 and incorporated herein by reference).
Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware Corporation, dated
April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this
reference).
Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware
Corporation, dated May 14, 2010 (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated
herein by this reference).
Bylaws of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.2 to Form 8-
K filed on May 14, 2008 and incorporated herein by this reference).
Indenture between First Community Bancorp, as Issuer, and U.S. Bank, N.A., as Trustee, dated
as of August 15, 2003 (Exhibit 4.5 to Form 10-Q filed on November 7, 2003 and incorporated
herein by this reference).
Indenture between First Community Bancorp, as Issuer, and The Bank of New York, as Trustee,
dated as of September 3, 2003 (Exhibit 4.6 to Form 10-Q filed on November 7, 2003 and
incorporated herein by this reference).
Indenture between First Community Bancorp, as Issuer and JPMorgan Chase Bank, as Trustee,
dated as of February 5, 2004 (Exhibit 4.7 to Form 10-K filed on March 12, 2004 and incorporated
herein by this reference).
Indenture between Community Bancorp Inc. and U.S. Bank National Association, as Trustee,
dated as of September 17, 2003, as supplemented by the First Supplemental Indenture between
First Community Bancorp and U.S. Bank National Association, as Trustee, dated as of
October 26, 2006 (Exhibit 4.8 to Form 10-K filed on February 27, 2007 and incorporated herein by
reference).
196
Table of Contents
4.5
Indenture, between Community Bancorp Inc. and Wilmington Trust Company, as Trustee, dated
as of August 15, 2005, as supplemented by the First Supplemental Indenture between First
Community Bancorp and Wilmington Trust Company, as Trustee, dated as of October 26, 2006
(Exhibit 4.9 to Form 10-K filed on February 27, 2007 and incorporated herein by reference).
4.6
Other long-term borrowing instruments are omitted pursuant to Item 601(b)(4) (iii) of Regulation
S-K. The Company undertakes to furnish copies of such instruments to the Commission upon
request.
10.1*
PacWest Bancorp 2003 Stock Incentive Plan, as amended and restated, dated March 28, 2012,
(pages A-1 to A-15 of the Company's Definitive Proxy Statement filed on April 6, 2012, and
incorporated herein by this reference).
10.2*
Executive Severance Pay Plan, as amended and restated effective December 15, 2008, applicable
to the executive officers of PacWest Bancorp and certain senior officers of the PacWest Bancorp
and its subsidiaries (Exhibit 10.2 to Form 10-K filed on March 2, 2009 and incorporated herein by
this reference).
10.3*
2007 Executive Incentive Plan, as amended and restated, effective May 11, 2010 (pages A-1 to A-
5 of the Company's Definitive Proxy Statement filed on April 9, 2010 and incorporated herein by
this reference).
10.4*
Indemnification Agreement, as amended, applicable to the directors and executive officers of the
Company (Exhibit 10.24 to Form 10-K filed on March 12, 2004 and incorporated herein by this
reference).
10.5*
Form of Stock Award Agreement and Grant Notice pursuant to the Company's 2003 Stock
Incentive Plan, as amended (Exhibit 10.5 to Form 10-K filed on March 2, 2009 and incorporated
herein by this reference).
10.6
10.7
10.8
Amended and Restated Declaration of Trust of First Community/CA Statutory Trust V by and
among U.S. Bank, N.A. as Institutional Trustee, First Community Bancorp, as Sponsor and
Matthew P. Wagner, Lynn M. Hopkins and Jared M. Wolff, as Administrators dated as of
August 15, 2003 (Exhibit 10.6 to Form 10-Q filed on November 7, 2003 and incorporated herein by
this reference).
Guarantee Agreement by and between First Community Bancorp and U.S. Bank, N.A. dated as of
August 15, 2003 (Exhibit 10.18 to Form 10-Q filed on November 7, 2003 and incorporated herein
by this reference).
Amended and Restated Trust Agreement of First Community/CA Statutory Trust VI among First
Community Bancorp as Depositor, The Bank of New York as Property Trustee, The Bank of New
York (Delaware) as the Delaware Trustee, and the Administrative Trustees named therein, dated
as of September 3, 2003 (Exhibit 10.7 to Form 10-Q filed on November 7, 2003 and incorporated
herein by this reference).
10.9
Guarantee Agreement between First Community Bancorp and The Bank of New York, dated as of
September 3, 2003 (Exhibit 10.19 to Form 10-Q filed on November 7, 2003 and incorporated herein
by this reference).
10.10
Amended and Restated Trust Agreement of First Community/CA Statutory Trust VII among
First Community Bancorp as Sponsor, Chase Manhattan Bank USA, N.A. as Delaware Trustee,
JPMorgan Chase Bank, as Institutional Trustee, and the Administrators named therein, dated as
of February 5, 2004 (Exhibit 10.19 to Form 10-K filed on March 12, 2004 and incorporated herein
by this reference).
197
Table of Contents
10.11 Guarantee Agreement between First Community Bancorp and JPMorgan Chase Bank, dated as of
February 5, 2004 (Exhibit 10.20 to Form 10-K filed on March 12, 2004 and incorporated herein by
this reference).
10.12
Amended and Restated Declaration of Trust of Community (CA) Capital Statutory Trust II, dated
as of September 17, 2003 (Exhibit 10.22 to Form 10-K files filed February 27, 2007 and
incorporated herein by this reference).
10.13
Guarantee Agreement By and Between Community Bancorp Inc. and U.S. Bank National
Association, dated as of September 17, 2003 (Exhibit 10.23 to Form 10-K files filed February 27,
2007 and incorporated herein by this reference).
10.14
Amended and Restated Declaration of Trust of Community (CA) Capital Statutory Trust III,
dated as of August 15, 2005 (Exhibit 10.24 to Form 10-K files filed February 27, 2007 and
incorporated herein by this reference).
10.15
Guarantee Agreement By and Between Community Bancorp Inc. and Wilmington Trust
Company, dated as of August 15, 2005 (Exhibit 10.25 to Form 10-K files filed February 27, 2007
and incorporated herein by this reference).
10.16
Services Agreement, dated as of May 18, 2011, between PacWest Bancorp and Castle Creek
Financial LLC (Exhibit 10.1 to Form 8-K filed on May 24, 2011 and incorporated herein by this
reference).
10.17
Lease Agreement, as amended through January 1, 2004, between DL FNBC, L.P. and First
National Bank, for the premises located at 401 West "A" Street, San Diego, California
(Exhibit 10.29 to Form 10-K filed on March 14, 2005 and incorporated herein by this reference).
10.18
Stock Purchase Agreement, by and between PacWest Bancorp and CapGen Capital Group II LP,
dated August 29, 2008 (Exhibit 10.1 to Form 8-K filed on September 4, 2008 and incorporated
herein by this reference).
10.19
Purchase and Assumption Agreement, dated as of August 28, 2009, between Federal Deposit
Insurance Corporation and Pacific Western Bank (Exhibit 2.1 to Form 8-K filed on September 2,
2009 and incorporated herein by this reference).
10.20
Purchase and Assumption Agreement, dated as of August 20, 2010, between Federal Deposit
Insurance Corporation and Pacific Western Bank (Exhibit 2.1 to Form 8-K filed on August 26,
2010 and incorporated herein by this reference).
11.1
Statement re: Computation of Per Share Earnings (See Note 16 of the Notes to Consolidated
Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this
Annual Report on Form 10-K).
12.1
Statement re: Computation of Ratios (See "Item 6. Selected Financial Data" of this Annual Report
on Form 10-K).
21.1
Subsidiaries of the Registrant.
23.1
Consent of KPMG LLP.
24.1
Powers of Attorney (included on signature page).
31.1
Section 302 Certifications.
32.1
Section 906 Certifications.
198
Table of Contents
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets
as of December 31, 2013 and 2012, (ii) the Consolidated Statements of Earnings for the years
ended December 31, 2013, 2012, and 2011, (iii) the Consolidated Statements of Comprehensive
Income for the years ended December 31, 2013, 2012, and 2011, (iv) the Consolidated Statement
of Changes in Stockholders' Equity for the years ended December 31, 2013, 2012, and 2011,
(v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and
2011, and (vi) the Notes to Consolidated Financial Statements. (Pursuant to Rule 406T of
Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11
and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.)
*
Management contract or compensatory plan or arrangement.
199
Table of Contents
(b)
Exhibits
The exhibits listed in Item 15(a)3 are incorporated by reference or attached hereto.
(c)
Excluded Financial Statements
Not Applicable
200
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: February 28, 2014
By:
/s/ MATTHEW P. WAGNER
PACWEST BANCORP
Matthew P. Wagner
(Chief Executive Officer)
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John M. Eggemeyer,
Matthew P. Wagner, Stephen M. Dunn, Victor R. Santoro and Jared M. Wolff, and each of them severally, his or her true and lawful attorney-in-fact
with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and
execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules,
regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all
amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said
attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN M. EGGEMEYER
John M. Eggemeyer
/s/ MATTHEW P. WAGNER
Matthew P. Wagner
Chairman of the Board of Directors
February 28, 2014
Chief Executive Officer and Director
(Principal Executive Officer)
February 28, 2014
/s/ VICTOR R. SANTORO
Victor R. Santoro
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
February 28, 2014
/s/ MARK N. BAKER
Mark N. Baker
Director
February 28, 2014
201
Table of Contents
Signature
Title
Date
/s/ CRAIG A. CARLSON
Craig A. Carlson
/s/ JOSEPH N. COHEN
Joseph N. Cohen
/s/ STEPHEN M. DUNN
Stephen M. Dunn
/s/ BARRY C. FITZPATRICK
Barry C. Fitzpatrick
/s/ ANTOINETTE T. HUBENETTE
Antoinette T. Hubenette
/s/ GEORGE E. LANGLEY
George E. Langley
/s/ SUSAN E. LESTER
Susan E. Lester
/s/ TIMOTHY B. MATZ
Timothy B. Matz
/s/ ARNOLD W. MESSER
Arnold W. Messer
/s/ DANIEL B. PLATT
Daniel B. Platt
/s/ JOHN W. ROSE
John W. Rose
/s/ ROBERT A. STINE
Robert A. Stine
Director
February 28, 2014
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
202
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
(Back To Top)
Section 2: EX-21.1 (EX-21.1)
QuickLinks -- Click here to rapidly navigate through this document
Exhibit 21.1
PACWEST BANCORP
LIST OF SUBSIDIARIES
Subsidiaries of PacWest Bancorp:
Pacific Western Bank
California state-chartered bank
State:
First Community/CA Statutory Trust V
Connecticut
First Community/CA Statutory Trust VI
First Community Statutory Trust VII
Community/CA Capital Statutory Trust II
Community/CA Capital Statutory Trust III
First California Capital Trust I
FCB Statutory Trust I
Subsidiaries of Pacific Western Bank:
BFI Business Finance, Inc.
Celtic Capital Corporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
California
State:
QuickLinks
Exhibit 21.1
PACWEST BANCORP LIST OF SUBSIDIARIES
(Back To Top)
Section 3: EX-23.1 (EX-23.1)
QuickLinks -- Click here to rapidly navigate through this document
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
PacWest Bancorp:
We consent to the incorporation by reference in the registration statements (No. 333-157789) on Form S-3 and (Nos. 333-107636, 333-138542,
333-162808 and 333-181869) on Form S-8 and (No. 333-185356) on Form S-4 and on Form S-4/A of PacWest Bancorp of our report dated February 28,
2014, with respect to the consolidated balance sheets of PacWest Bancorp and subsidiaries as of December 31, 2013 and 2012, and the related
consolidated statements of earnings, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2013 and the effectiveness of internal control over financial reporting as of December 31, 2013, which report appears in
the December 31, 2013, Annual Report on Form 10-K of PacWest Bancorp.
/s/ KPMG LLP
Los Angeles, California
February 28, 2014
QuickLinks
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
(Back To Top)
Section 4: EX-31.1 (EX-31.1)
QuickLinks -- Click here to rapidly navigate through this document
Certification
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Matthew P. Wagner, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the year ended December 31, 2013 of PacWest Bancorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 28, 2014
/s/ MATTHEW P. WAGNER
Matthew P. Wagner
Chief Executive Officer
Certification
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Victor R. Santoro, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the year ended December 31, 2013 of PacWest Bancorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 28, 2014
/s/ VICTOR R. SANTORO
Victor R. Santoro
Executive Vice President and
Chief Financial Officer
QuickLinks
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Back To Top)
Section 5: EX-32.1 (EX-32.1)
QuickLinks -- Click here to rapidly navigate through this document
Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of PacWest Bancorp (the
"Company"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "Report") fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 28, 2014
/s/ MATTHEW P. WAGNER
Name: Matthew P. Wagner
Title:
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and is
not being filed as part of the Report or as a separate disclosure document.
Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of PacWest Bancorp (the
"Company"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "Report") fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 28, 2014
/s/ VICTOR R. SANTORO
Name: Victor R. Santoro
Title:
Executive Vice President and
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and is
not being filed as part of the Report or as a separate disclosure document.
QuickLinks
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Back To Top)