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PACWEST BANCORP - Quarter Report: 2014 September (Form 10-Q)




 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission File No. 00-30747
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
10250 Constellation Blvd., Suite 1640
Los Angeles, CA 90067
(Address of Principal Executive Offices, Including Zip Code)
(310) 286-1144
(Registrant's Telephone Number, Including Area Code)
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  þ      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  þ      No  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of October 30, 2014 there were 101,912,280 shares of the registrant's common stock outstanding, excluding 1,115,550 shares of unvested restricted stock.


1



TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
Condensed Consolidated Statements of Earnings (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statement Changes in Stockholders' Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Index to Exhibits
Signatures




2



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
(Dollars in thousands, except par value and share data)
ASSETS
 
 
 
Cash and due from banks
$
145,463

 
$
96,424

Interest-earning deposits in financial institutions
115,399

 
50,998

Total cash and cash equivalents
260,862

 
147,422

Securities available-for-sale, at fair value
1,539,681

 
1,494,745

Federal Home Loan Bank stock, at cost
45,602

 
27,939

Total investment securities
1,585,283

 
1,522,684

Gross loans and leases
11,591,395

 
4,313,335

Deferred fees and costs
(16,510
)
 
(983
)
Allowance for loan and lease losses
(81,899
)
 
(82,034
)
Total loans and leases, net
11,492,986

 
4,230,318

Equipment leased to others under operating leases
125,119

 

Premises and equipment, net
38,368

 
32,435

Foreclosed assets, net
40,524

 
55,891

Goodwill
1,722,129

 
208,743

Core deposit and customer relationship intangibles, net
18,823

 
17,248

FDIC loss sharing asset
22,977

 
45,524

Deferred tax asset, net
331,176

 
79,636

Other assets
300,098

 
193,462

Total assets
$
15,938,345

 
$
6,533,363

 
 
 
 
LIABILITIES:
 
 
 
Non interest-bearing deposits
$
2,842,488

 
$
2,318,446

Interest-bearing deposits
8,680,949

 
2,962,541

Total deposits
11,523,437

 
5,280,987

Borrowings
363,672

 
113,726

Subordinated debentures
433,545

 
132,645

Accrued interest payable and other liabilities
139,445

 
196,912

Total liabilities
12,460,099

 
5,724,270

Commitments and contingencies
0

 
0

STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)

 

Common stock ($0.01 par value, 200,000,000 and 75,000,000 shares authorized at September 30, 2014 and December 31, 2013, respectively; 104,225,010 and 46,526,124 shares issued, respectively, includes 1,115,550 and 1,216,524 shares of unvested restricted stock, respectively)
1,042

 
465

Additional paid-in capital
3,855,546

 
1,286,737

Accumulated deficit
(356,516
)
 
(454,422
)
Treasury stock, at cost (1,197,180 and 703,290 shares at September 30, 2014 and December 31, 2013, respectively)
(42,647
)
 
(20,340
)
Accumulated other comprehensive income, net
20,821

 
(3,347
)
Total stockholders' equity
3,478,246

 
809,093

Total liabilities and stockholders' equity
$
15,938,345

 
$
6,533,363


See "Notes to Condensed Consolidated Financial Statements."

3



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Dollars in thousands, except per share data)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
189,961

 
$
192,201

 
$
75,196

 
$
459,625

 
$
199,374

Investment securities
12,331

 
11,986

 
9,871

 
35,140

 
26,501

Deposits in financial institutions
64

 
176

 
91

 
314

 
183

Total interest income
202,356

 
204,363

 
85,158

 
495,079

 
226,058

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
8,822

 
7,313

 
1,692

 
17,360

 
6,418

Borrowings
74

 
199

 
108

 
352

 
451

Subordinated debentures
4,614

 
4,318

 
1,069

 
9,973

 
2,734

Total interest expense
13,510

 
11,830

 
2,869

 
27,685

 
9,603

Net interest income
188,846

 
192,533

 
82,289

 
467,394

 
216,455

Provision (negative provision) for credit losses
5,050

 
5,030

 
(4,167
)
 
9,436

 
(2,872
)
Net interest income after provision (negative provision) for credit losses
183,796

 
187,503

 
86,456

 
457,958

 
219,327

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
2,725

 
2,719

 
2,938

 
8,446

 
8,568

Other commissions and fees
6,371

 
5,743

 
2,204

 
14,046

 
6,291

Leased equipment income
5,615

 
5,672

 

 
11,287

 

Gain (loss) on sale of loans and leases
973

 
(485
)
 
604

 
594

 
1,108

Gain on securities

 
89

 
5,222

 
4,841

 
5,631

FDIC loss sharing expense, net
(7,415
)
 
(8,525
)
 
(7,032
)
 
(27,370
)
 
(15,579
)
Other income
8,045

 
3,266

 
1,191

 
17,640

 
2,151

Total noninterest income
16,314

 
8,479

 
5,127

 
29,484

 
8,170

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation and benefits
45,861

 
45,081

 
27,963

 
119,569

 
79,370

Occupancy
11,188

 
11,078

 
7,828

 
29,861

 
21,906

Data processing
3,929

 
4,099

 
2,590

 
10,568

 
7,278

Other professional services
3,687

 
2,843

 
1,906

 
8,053

 
4,984

Insurance and assessments
3,020

 
3,179

 
1,496

 
7,792

 
4,024

Intangible asset amortization
1,608

 
1,677

 
1,512

 
4,649

 
3,972

Other expense
13,355

 
12,115

 
7,875

 
32,758

 
19,860

Total operating expense
82,648

 
80,072

 
51,170

 
213,250

 
141,394

Leased equipment depreciation
2,961

 
3,095

 

 
6,056

 

Foreclosed assets expense (income), net
4,827

 
497

 
(420
)
 
3,463

 
(934
)
Acquisition, integration and reorganization costs
5,193

 
86,242

 
5,450

 
93,635

 
24,139

Total noninterest expense
95,629

 
169,906

 
56,200

 
316,404

 
164,599

Earnings from continuing operations before taxes
104,481

 
26,076

 
35,383

 
171,038

 
62,898

Income tax expense
(42,205
)
 
(14,846
)
 
(11,243
)
 
(71,627
)
 
(20,868
)
Net earnings from continuing operations
62,276

 
11,230

 
24,140

 
99,411

 
42,030

(Loss) earnings from discontinued operations before taxes
(8
)
 
(1,151
)
 
39

 
(2,572
)
 
(42
)
Income tax benefit
3

 
476

 
(16
)
 
1,067

 
18

Net (loss) earnings from discontinued operations
(5
)
 
(675
)
 
23

 
(1,505
)
 
(24
)
Net earnings
$
62,271

 
$
10,555

 
$
24,163

 
$
97,906

 
$
42,006

Basic earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.60

 
$
0.11

 
$
0.53

 
$
1.20

 
$
1.03

Net earnings
$
0.60

 
$
0.10

 
$
0.53

 
$
1.18

 
$
1.03

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.60

 
$
0.11

 
$
0.53

 
$
1.20

 
$
1.03

Net earnings
$
0.60

 
$
0.10

 
$
0.53

 
$
1.18

 
$
1.03

Dividends declared per share
$
0.25

 
$
0.25

 
$
0.25

 
$
0.75

 
$
0.75

See "Notes to Condensed Consolidated Financial Statements."

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(In thousands)
Net earnings
$
62,271

 
$
10,555

 
$
24,163

 
$
97,906

 
$
42,006

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities available-for-sale (1)
93

 
23,011

 
4,070

 
45,395

 
(50,529
)
Income tax benefit (expense) related to unrealized holding (losses) gains arising during the period (2)
607

 
(9,663
)
 
483

 
(18,342
)
 
23,415

Unrealized holding gains (losses) on securities available-for-sale, net of tax
700

 
13,348

 
4,553

 
27,053

 
(27,114
)
Reclassification adjustment for gain included in net earnings (3)

 
(89
)
 
(5,222
)
 
(4,841
)
 
(5,631
)
Income tax expense related to reclassification adjustment (2)

 
37

 

 
1,956

 
172

Reclassification adjustment for gains included in earnings, net of tax

 
(52
)
 
(5,222
)
 
(2,885
)
 
(5,459
)
Other comprehensive income (loss), net of tax
700

 
13,296

 
(669
)
 
24,168

 
(32,573
)
Comprehensive income
$
62,971

 
$
23,851

 
$
23,494

 
$
122,074

 
$
9,433


(1) 
Recognized in "Other income" on the Condensed Consolidated Statements of Earnings.
(2) 
Recognized in "Income Tax Expense" on the Condensed Consolidated Statements of Earnings.
(3) 
Recognized in "Gain on securities" on the Condensed Consolidated Statements of Earnings.

See "Notes to Condensed Consolidated Financial Statements."

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
Nine Months Ended September 30, 2014
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
(Unaudited)
 
(Dollars in thousands, except share data)
Balance, December 31, 2013
45,822,834

 
$
465

 
$
1,286,737

 
$
(454,422
)
 
$
(20,340
)
 
$
(3,347
)
 
$
809,093

Net earnings

 

 

 
97,906

 

 

 
97,906

Other comprehensive income - net unrealized gain on securities available-for-sale, net of tax

 

 

 

 

 
24,168

 
24,168

Issuance of common stock for merger with CapitalSource Inc.
56,601,997

 
566

 
2,593,504

 

 

 

 
2,594,070

Restricted stock awarded and earned stock compensation, net of shares forfeited
1,095,538

 
11

 
33,630

 

 

 

 
33,641

Restricted stock surrendered
(493,890
)
 

 


 

 
(22,307
)
 

 
(22,307
)
Dividend reinvestment
1,351

 

 
57

 

 

 

 
57

Tax effect from vesting of restricted stock

 

 
4,402

 

 

 

 
4,402

Cash dividends paid

 

 
(62,784
)
 

 

 

 
(62,784
)
Balance, September 30, 2014
103,027,830

 
$
1,042

 
$
3,855,546

 
$
(356,516
)
 
$
(42,647
)
 
$
20,821

 
$
3,478,246


See "Notes to Condensed Consolidated Financial Statements."


6



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended September 30,
 
2014
 
2013
 
(Unaudited)
 
(Dollars in thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
97,906

 
$
42,006

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
28,434

 
23,768

Provision (negative provision) for credit losses
9,436

 
(2,872
)
Gain on sale of foreclosed assets
(2,746
)
 
(4,006
)
Provision for losses on foreclosed assets
5,065

 
2,094

Gain on sale of loans and leases
(594
)
 
(1,108
)
Gain on sale of premises and equipment
(1,523
)
 
(15
)
Gain on sale of securities
(4,841
)
 
(5,631
)
Foreign currency gain
(1,331
)
 

Derivatives loss
(1,062
)
 

Earned stock compensation
33,641

 
6,545

Write off of goodwill relating to the asset financing segment reorganization
6,645

 

Tax effect included in stockholders' equity of restricted stock vesting
(4,402
)
 
(985
)
Decrease (increase) in deferred income taxes, net
47,938

 
4,267

Decrease in FDIC loss sharing asset
22,547

 
19,063

(Increase) decrease in other assets
(8,206
)
 
6,254

Decrease in accrued interest payable and other liabilities
(79,644
)
 
(22,952
)
   Net cash provided by operating activities
147,263

 
66,428

 
 
 
 
Cash flows from investing activities:
 
 
 
Cash acquired in acquisitions, net of cash consideration paid
346,047

 
273,013

Net (increase) decrease in loans and leases
(433,525
)
 
221,779

Proceeds from sale of loans and leases
35,696

 
18,812

Securities available-for-sale:
 
 
 
Proceeds from maturities and paydowns
95,039

 
264,654

Proceeds from sales
465,608

 
12,810

Purchases
(186,969
)
 
(504,936
)
Collection of securities sales proceeds
484,084

 

Net redemptions of Federal Home Loan Bank stock
28,397

 
12,549

Proceeds from sales of foreclosed assets
20,097

 
28,918

Purchases of premises and equipment, net
(2,283
)
 
(2,246
)
Proceeds from sales of premises and equipment
3,759

 
26

Net decrease of equipment leased to others under operating leases
30,502

 

   Net cash provided by investing activities
886,452

 
325,379

 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits:
 
 
 
   Noninterest-bearing
420,478

 
28,310

   Interest-bearing
(518,012
)
 
(405,166
)
Net decrease in borrowings
(742,109
)
 
(4,258
)
Restricted stock surrendered
(22,307
)
 
(2,415
)
Tax effect included in stockholders' equity of restricted vesting stock
4,402

 
985

Cash dividends paid
(62,727
)
 
(29,648
)
   Net cash used in financing activities
(920,275
)
 
(412,192
)
Net increase (decrease) in cash and cash equivalents
113,440

 
(20,385
)
Cash and cash equivalents, beginning of period
147,422

 
164,404

Cash and cash equivalents, end of period
$
260,862

 
$
144,019

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
23,959

 
$
10,604

Cash (received) paid for income taxes
(3,829
)
 
16,703

Loans transferred to other real estate owned
667

 
12,754

Common stock issued in CapitalSource acquisition
2,594,070

 

Common stock issued in First California Financial Group acquisition

 
242,268

See "Notes to Condensed Consolidated Financial Statements."


7


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 1.  Organization    
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. As of September 30, 2014, we had total assets of $15.9 billion, total loans and leases of $11.5 billion, total deposits of $11.5 billion and total stockholders' equity of $3.5 billion.
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 an array of commercial real estate loans and commercial lending products. The Bank has a foundation of locally generated and relationship-based deposits, with 80 full-service branches located throughout the state of California. Our branch operations are located primarily in Southern California extending from San Diego County to California’s Central Coast, and we operate three banking offices in the San Francisco Bay area and two offices in the Central Valley. Our targeted collateral for our real estate loan offerings includes healthcare properties, office properties, industrial properties, multifamily properties, hospitality properties, and retail properties. Our commercial loan products include equipment loans and leases, asset-based loans, lender finance loans and loans secured by borrower future cash flows.
As a result of the CapitalSource Inc. merger, Pacific Western Bank established the CapitalSource Division, which we also refer to as the National Lending segment. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to small to middle market businesses. Pacific Western’s leasing operation, Pacific Western Equipment Finance, and its group specializing in asset-based lending, CapitalSource Business Finance Group (formerly BFI Business Finance and First Community Financial), also became part of the CapitalSource Division. The CapitalSource Division’s loan and lease origination efforts are conducted through offices located in Chevy Chase, Maryland; Los Angeles and San Jose, California; St. Louis, Missouri; Denver, Colorado; Chicago, Illinois; New York, New York; and Midvale, Utah. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of Pacific Western Bank that specializes in middle-market lending on a nationwide basis.
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.
We have completed 27 acquisitions from May 2000 through September 30, 2014, including the acquisition of CapitalSource Inc. on April 7, 2014. Since 2000, our 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 condensed consolidated financial statements from their respective acquisition dates. See Note 3, Acquisitions, for more information about the CapitalSource Inc. merger and the acquisition of First California Financial Group, Inc. ("FCAL") on May 31, 2013.
Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission ("Form 10-K").
Basis of Presentation    
Our interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all adjustments and eliminations, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
The accompanying financial statements reflect our consolidated accounts. All significant intercompany accounts and transactions have been eliminated.

8


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Use of Estimates
We have 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with GAAP. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value and useful lives of intangible assets, the carrying value of the FDIC loss sharing asset, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
As described in Note 3, Acquisitions, the acquired assets and liabilities of CapitalSource Inc. and FCAL were measured at their estimated fair values. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. As of September 30, 2014, the "Leases" loan portfolio segment is included in the "Equipment finance" class category of the "Commercial" loan portfolio segment; loan-related legal expenses which were previously reported within the "Other professional services" category are reported within the "Other expense" category; and other foreclosed assets which were previously reported within the "Other assets" category are reported within the "Foreclosed assets, net" category.
Note 2.  Discontinued Operations    
Discontinued operations include the income and expense related to Electronic Payment Services ("EPS"), a discontinued division of the Bank acquired in connection with the FCAL acquisition. For the three months ended September 30, 2014, the EPS division recorded no revenues and a pre-tax loss of $8,000. For the nine months ended September 30, 2014, the EPS division recorded no revenues and a pre-tax loss of $2.6 million. Liabilities of the EPS division, which consist primarily of noninterest‑bearing deposits, are included in the condensed consolidated balance sheets under the caption “Accrued interest payable and other liabilities.” For segment reporting purposes, the EPS division is included in our Community Banking segment.



9


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 3.  Acquisitions    
The following assets acquired and liabilities assumed of CapitalSource Inc. and FCAL are presented at estimated fair value as of their respective acquisition dates:
 
Acquisition and Date Acquired
 
CapitalSource Inc.
 
First California Financial Group
 
April 7, 2014
 
May 31, 2013
 
(In thousands)
Assets Acquired:
 
 
 
Cash and due from banks
$
768,553

 
$
6,124

Interest‑earning deposits in financial institutions
60,612

 
266,889

Investment securities available‑for‑sale
382,797

 
4,444

FHLB SF stock
46,060

 
9,518

Loans and leases
6,877,427

 
1,049,613

Equipment leased to others under operating leases
160,015

 

Premises and equipment
12,663

 
15,322

Foreclosed assets
6,382

 
13,772

FDIC loss sharing asset

 
17,241

Income tax assets
311,462

 
33,360

Goodwill
1,520,031

 
129,070

Core deposit and customer relationship intangibles
6,720

 
7,927

Other assets
581,905

 
27,576

Total assets acquired
$
10,734,627

 
$
1,580,856

Liabilities Assumed:
 
 
 
Noninterest‑bearing deposits
$
4,631

 
$
361,166

Interest‑bearing deposits
6,236,419

 
739,713

Other borrowings
992,109

 

Subordinated debentures
300,918

 
24,061

Discontinued operations

 
184,619

Accrued interest payable and other liabilities
123,362

 
19,729

Total liabilities assumed
$
7,657,439

 
$
1,329,288

Total consideration paid
$
3,077,188

 
$
251,568

Summary of consideration:
 
 
 
Cash paid
$
483,118

 
$

PacWest common stock issued
2,594,070

 
242,268

Cancellation of FCAL common stock owned by PacWest (at acquisition date fair value)

 
9,300

Total
$
3,077,188

 
$
251,568

CapitalSource Inc. Merger
We acquired CapitalSource Inc. on April 7, 2014. As part of the merger, CapitalSource Bank (“CSB”), a wholly owned subsidiary of CapitalSource Inc., merged with and into Pacific Western Bank. We completed the merger in order to augment our loan and lease generation capabilities and to diversify our loan portfolio.
Upon closing, we created the CapitalSource Division of the Bank. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to middle market businesses. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of the Bank that provides on a nationwide basis senior secured real estate loans, equipment loans and leases, asset-based loans, lender finance loans and cash flow loans secured by the enterprise value of the borrowing entity.
In the merger with CapitalSource Inc., each share of CapitalSource Inc. common stock was converted into the right to receive $2.47 in cash and 0.2837 of a share of PacWest common stock. PacWest issued an aggregate of approximately 56.6 million  shares of PacWest common stock to CapitalSource Inc. stockholders. Based on the closing price of PacWest’s common stock on April 7,

10


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


2014 of $45.83 per share, the aggregate consideration paid to CapitalSource Inc. common stockholders and holders of equity awards to acquire CapitalSource Inc. common stock was approximately $3.1 billion.
CSB was a commercial lender which operated under a California Industrial Loan Bank charter headquartered in Los Angeles, California. CSB provided financial products to small to middle market businesses nationwide and also provided depository products and services to consumers in Southern and Central California. CSB’s loan origination efforts were conducted nationwide, and continue as part of the CapitalSource Division, with offices located in Chevy Chase, Maryland; Los Angeles, California; St. Louis, Missouri; Denver, Colorado; Chicago, Illinois; and New York, New York.
The integration of CSB’s deposit system and the conversion of CSB’s branches to Pacific Western Bank’s operating platform were completed over the weekend of April 12, 2014. CSB had 21 branches, 12 of which were closed in the consolidation with Pacific Western at the close of business on April 11, 2014 and one overlapping Pacific Western branch was closed as well. All remaining branches opened on Monday, April 14, 2014 as Pacific Western branches.
The CapitalSource Inc. merger 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 merger date. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the merger date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in goodwill of $1.5 billion. All of the recognized goodwill is expected to be non‑deductible for tax purposes. The fair value of the acquired tax assets, once the final tax returns have been filed, are expected to change.
As required by the merger agreement and as described in the joint proxy statement/prospectus relating to the merger, the Board of Directors of PacWest adopted a Tax Asset Protection Plan (the “Plan”). This Plan is similar to the Tax Benefit Preservation Plan that CapitalSource Inc. had in place prior to the merger. The purpose of the Plan is to seek to preserve PacWest’s ability to utilize net operating loss carryforwards and certain other tax assets (collectively, the “NOLs”) for U.S. federal income tax purposes that PacWest and certain of its subsidiaries have. The Plan seeks to protect the ability to utilize the NOLs by mitigating the potential for an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).
In general, an “ownership change” would occur if PacWest’s “5‑percent shareholders,” as defined under Section 382 of the Code, collectively increase their ownership in PacWest, in relation to their respective historical low points, by more than 50 percentage points over a rolling three‑year period. In general, institutional holders that file as “investment advisers” for SEC purposes, such as mutual fund companies that hold PacWest common stock on behalf of several individual mutual funds where no single fund owns five percent or more of PacWest’s common stock, are typically not treated as “5‑percent shareholders” for purposes of Section 382 of the Code.
First California Financial Group Acquisition
On May 31, 2013, we acquired First California Financial Group, Inc. As part of this acquisition, First California Bank ("FCB"), a wholly owned subsidiary of FCAL, merged with and into Pacific Western. 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 completed the conversion and integration of the FCB branches to Pacific Western’s operating platform in June 2013 and as a result, we added seven locations to our branch network.
Unaudited Pro Forma Results of Operations
The following table presents our unaudited pro forma results of operations for the periods presented as if the CapitalSource Inc. and FCAL acquisitions had been completed on January 1, 2013. The unaudited pro forma results of operations include the historical accounts of the Company, CapitalSource Inc. and FCAL and pro forma adjustments, 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 CapitalSource

11


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Inc. and FCAL acquisitions been completed at the beginning of 2013. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2014
 
2013
 
(Dollars in thousands, except per share data)
Pro forma revenues (net interest income plus noninterest income)
$
209,558

 
$
591,283

 
$
606,570

Pro forma net earnings from continuing operations
$
82,662

 
$
177,846

 
$
180,219

Pro forma net earnings from continuing operations per share:
 
 
 
 
 
Basic
$
0.81

 
$
1.73

 
$
1.76

Diluted
$
0.81

 
$
1.73

 
$
1.76

No pro forma results of operations information have been provided for the three months ended September 30, 2014 as CapitalSource Inc. was acquired on April 7, 2014 and the actual results of CapitalSource Inc. and the Company are included together for this three-month period in the condensed consolidated statements of earnings.
Revenues and pre-tax net earnings from operations related to CapitalSource Inc. from the April 7, 2014 merger date through September 30, 2014, and included in the consolidated statement of earnings, were $259.0 million and $94.4 million, respectively.
Note 4.  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. Our intangible assets with definite lives are core deposit intangibles ("CDI") and customer relationship intangibles ("CRI"). In the second quarter of 2014, we wrote-off $6.6 million of goodwill and $0.5 million of CRI related to the reorganization of the legacy PacWest asset financing segment. These amounts are included in "Acquisition, integration and reorganization costs" in the condensed consolidated statement of earnings. In the third quarter of 2014, we had no such write-offs.
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 goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in “Noninterest expense” in the condensed consolidated statement of earnings.
CDI and CRI are amortized over their respective estimated useful lives 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 remaining for all of our CDI and CRI is 4.6 years. The aggregate CDI and CRI amortization expense is expected to be $6.7 million for 2014. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $6.0 million for 2015, $4.1 million for 2016, $2.3 million for 2017, $2.0 million for 2018 and $1.7 million for 2019.
The following table presents the changes in the carrying amount of goodwill for the period indicated:    
 
Goodwill
 
(In thousands)
Balance, December 31, 2013
$
208,743

Addition from the CapitalSource Inc. merger
1,520,031

Write-off of goodwill
(6,645
)
Balance, September 30, 2014
$
1,722,129


12


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
53,090

 
$
48,963

 
$
53,339

 
$
48,963

 
$
45,412

Additions

 
6,720

 

 
6,720

 
7,927

Fully amortized portion

 
(1,293
)
 
(4,376
)
 
(1,293
)
 
(4,376
)
Write-off

 
(1,300
)
 

 
(1,300
)
 

Balance, end of period
53,090

 
53,090

 
48,963

 
53,090

 
48,963

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(32,659
)
 
(33,079
)
 
(33,149
)
 
(31,715
)
 
(30,689
)
Amortization
(1,608
)
 
(1,677
)
 
(1,512
)
 
(4,649
)
 
(3,972
)
Fully amortized portion

 
1,293

 
4,376

 
1,293

 
4,376

Write-off

 
804

 

 
804

 

Balance, end of period
(34,267
)
 
(32,659
)
 
(30,285
)
 
(34,267
)
 
(30,285
)
Net CDI and CRI, end of period
$
18,823

 
$
20,431

 
$
18,678

 
$
18,823

 
$
18,678


Note 5. Investments     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and carrying values of securities available-for-sale. As of September 30, 2014 and December 31, 2013, our investment securities, available-for-sale were as follows:
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
pass through securities
$
537,969

 
$
17,917

 
$
(799
)
 
$
555,087

 
$
691,944

 
$
18,012

 
$
(2,768
)
 
$
707,188

Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
280,820

 
1,456

 
(2,485
)
 
279,791

 
197,069

 
388

 
(4,584
)
 
192,873

Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
27,830

 
7,568

 
(89
)
 
35,309

 
30,502

 
7,552

 
(150
)
 
37,904

Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
12,563

 
35

 
(5
)
 
12,593

 

 

 

 

Municipal securities
473,426

 
12,212

 
(3,211
)
 
482,427

 
459,182

 
1,749

 
(24,273
)
 
436,658

Corporate debt securities
110,032

 
2,139

 
(28
)
 
112,143

 
84,119

 
71

 
(1,483
)
 
82,707

Government-sponsored enterprise debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
securities
36,214

 
168

 

 
36,382

 
10,046

 

 
(174
)
 
9,872

Other securities
26,044

 
33

 
(128
)
 
25,949

 
27,654

 
2

 
(113
)
 
27,543

Total
$
1,504,898

 
$
41,528

 
$
(6,745
)
 
$
1,539,681

 
$
1,500,516

 
$
27,774

 
$
(33,545
)
 
$
1,494,745



13


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The covered private label collateralized mortgage obligations ("CMO's") were acquired in the FDIC-assisted acquisition of Affinity Bank in August 2009. The loss sharing provisions for these private label CMO's expired in the third quarter of 2014. Other securities consist primarily of asset‑backed securities. See Note 11, Fair Value Measurements, for information on fair value measurements and methodology.
As of September 30, 2014, securities available‑for‑sale with a carrying value of $294.6 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended September 30, 2014 and 2013, we sold no securities. However, during the three months ended September 30, 2013, we recorded a $5.2 million non-taxable gain to recognize our previously-held equity interest in FCAL common stock at its fair market value as of the acquisition date.
During the nine months ended September 30, 2014, we sold $461.7 million of GSE pass through securities, other securities, and securities obtained in the CapitalSource Inc. merger, for which we realized gains of $4.9 million. During the nine months ended September 30, 2013, we sold $12.4 million in corporate debt securities for which we realized gains of $409,000.
Realized gains or losses resulting from the sale of securities are calculated using the specific identification method and included in gain on securities. During the three months ended September 30, 2014 and 2013, we had $0.7 million and $(0.7) million, respectively, of net unrealized after-tax gains (losses) as a component of accumulated other comprehensive income, net.
Unrealized Losses on Investment Securities
As of September 30, 2014 and December 31, 2013, the gross unrealized losses and fair values of investment securities that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, were as follows:
 
September 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass through
 
 
 
 
 
 
 
 
 
 
 
securities
$
38,316

 
$
(191
)
 
$
27,894

 
$
(608
)
 
$
66,210

 
$
(799
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
159,329

 
(967
)
 
42,340

 
(1,518
)
 
201,669

 
(2,485
)
Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations

 

 
1,050

 
(89
)
 
1,050

 
(89
)
Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
893

 
(5
)
 

 

 
893

 
(5
)
Municipal securities
18,058

 
(75
)
 
133,602

 
(3,136
)
 
151,660

 
(3,211
)
Corporate debt securities

 

 
12,971

 
(28
)
 
12,971

 
(28
)
securities

 

 

 

 

 

Other securities
6,427

 
(108
)
 
10,030

 
(20
)
 
16,457

 
(128
)
     Total
$
223,023

 
$
(1,346
)
 
$
227,887

 
$
(5,399
)
 
$
450,910

 
$
(6,745
)


14


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
December 31, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass through
 
 
 
 
 
 
 
 
 
 
 
securities
$
148,662

 
$
(2,767
)
 
$
32

 
$
(1
)
 
$
148,694

 
$
(2,768
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
179,938

 
(4,486
)
 
4,383

 
(98
)
 
184,321

 
(4,584
)
Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
1,640

 
(60
)
 
617

 
(90
)
 
2,257

 
(150
)
Municipal securities
337,208

 
(24,273
)
 

 

 
337,208

 
(24,273
)
Corporate debt securities
72,636

 
(1,483
)
 

 

 
72,636

 
(1,483
)
Government-sponsored enterprise debt
 
 
 
 
 
 
 
 
 
 
 
securities
9,872

 
(174
)
 

 

 
9,872

 
(174
)
Other securities
23,969

 
(113
)
 

 

 
23,969

 
(113
)
Total
$
773,925

 
$
(33,356
)
 
$
5,032

 
$
(189
)
 
$
778,957

 
$
(33,545
)

We reviewed the securities that were in a loss position at September 30, 2014, and concluded 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 the securities were temporarily impaired and we did not recognize such impairment in the condensed 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.
Contractual Maturities
The following table presents the contractual maturities of our available-for-sale securities portfolio based on amortized cost and carrying value as of the date indicated.
 
September 30, 2014
 
Amortized Cost
 
Estimated Fair Value
 
(In thousands)
Due in one year or less
$
4,386

 
$
4,422

Due after one year through five years
85,057

 
85,209

Due after five years through ten years
249,748

 
252,685

Due after ten years
1,165,707

 
1,197,365

Total securities available-for-sale
$
1,504,898

 
$
1,539,681

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.

15


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


FHLB Stock
At September 30, 2014, we had a $45.6 million investment in Federal Home Loan Bank of San Francisco ("FHLB SF") stock carried at cost. During the nine months ended September 30, 2014, FHLB SF stock increased $17.7 million due primarily to the addition of FHLB SF stock from the CapitalSource Inc. merger. We evaluated the carrying value of our FHLB SF stock investment at September 30, 2014, 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 SF, repurchase activity of excess stock by the FHLB SF 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.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Taxable interest
$
7,850

 
$
7,668

 
$
6,028

 
$
22,438

 
$
16,979

Non-taxable interest
3,343

 
3,333

 
3,302

 
10,004

 
8,443

Dividend income
1,138

 
985

 
541

 
2,698

 
1,079

Total interest income on investment securities
$
12,331

 
$
11,986

 
$
9,871

 
$
35,140

 
$
26,501

Note 6.  Loans and Leases and Credit Quality
The Company’s loan and lease portfolio includes originated and purchased loans and leases. Originated loans and leases and purchased loans and leases, in each case, 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, are referred to collectively as non-purchased credit impaired loans, or "Non-PCI loans." Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or "PCI loans".
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans 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.
PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate 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 difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. 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.
In the CapitalSource Inc. merger, the estimated fair value of the loans and leases acquired, excluding PCI loans, was $6.8 billion, the related gross contractual cash flows was $9.4 billion, and the estimated contractual cash flows not expected to be collected was $839.8 million. The estimated fair value of loans acquired that were identified as PCI loans was $79.2 million.

16


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the accretable yield on the PCI loans acquired in the CapitalSource Inc. merger as of April 7, 2014:
 
April 7, 2014
Accretable Yield
 
(In thousands)
Undiscounted contractual cash flows
$
227,688

Undiscounted cash flows not expected to be collected (nonaccretable difference)
(134,726
)
Undiscounted cash flows expected to be collected
92,962

Estimated fair value of PCI loans acquired
(79,234
)
Accretable yield
$
13,728


The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
 
September 30, 2014
 
December 31, 2013
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,406,371

 
$
314,919

 
$
5,721,290

 
$
2,424,864

 
$
371,134

 
$
2,795,998

Real estate construction
285,109

 
8,208

 
293,317

 
209,090

 
10,427

 
219,517

Commercial
5,440,144

 
27,961

 
5,468,105

 
1,241,776

 
974

 
1,242,750

Consumer
108,340

 
343

 
108,683

 
54,809

 
261

 
55,070

Total gross loans and leases
11,239,964

 
351,431

 
11,591,395

 
3,930,539

 
382,796

 
4,313,335

Deferred fees and costs
(16,458
)
 
(52
)
 
(16,510
)
 
(983
)
 

 
(983
)
Total loans and leases, net of unearned income
11,223,506

 
351,379

 
11,574,885

 
3,929,556

 
382,796

 
4,312,352

Allowance for loan and lease losses
(63,084
)
 
(18,815
)
 
(81,899
)
 
(60,241
)
 
(21,793
)
 
(82,034
)
Total net loans and leases
$
11,160,422

 
$
332,564

 
$
11,492,986

 
$
3,869,315

 
$
361,003

 
$
4,230,318


The following tables present a summary 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 periods indicated:
 
Three Months Ended September 30, 2014
 
Real Estate Mortgage
 
Real Estate Construction
 
Commercial
 
Consumer
 
Total Non-PCI
 
Total PCI
 
Total
 
(In thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
22,276

 
$
4,302

 
$
35,530

 
$
3,415

 
$
65,523

 
$
16,626

 
$
82,149

Charge-offs
(395
)
 

 
(7,282
)
 
(171
)
 
(7,848
)
 
(108
)
 
(7,956
)
Recoveries
1,312

 
24

 
337

 
52

 
1,725

 

 
1,725

Provision (negative provision)
3,810

 
1,591

 
422

 
(2,139
)
 
3,684

 
2,297

 
5,981

Balance, end of period
$
27,003

 
$
5,917

 
$
29,007

 
$
1,157

 
$
63,084

 
$
18,815

 
$
81,899



17


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Nine Months Ended September 30, 2014
 
Real Estate Mortgage
 
Real Estate Construction
 
Commercial
 
Consumer
 
Total Non-PCI
 
Total PCI
 
Total
 
(In thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
26,078

 
$
4,298

 
$
26,921

 
$
2,944

 
$
60,241

 
$
21,793

 
$
82,034

Charge-offs
(976
)
 

 
(9,049
)
 
(203
)
 
(10,228
)
 
(4,712
)
 
(14,940
)
Recoveries
1,949

 
112

 
1,301

 
294

 
3,656

 
51

 
3,707

Provision (negative provision)
(48
)
 
1,507

 
9,834

 
(1,878
)
 
9,415

 
1,683

 
11,098

Balance, end of period
$
27,003

 
$
5,917

 
$
29,007

 
$
1,157

 
$
63,084

 
$
18,815

 
$
81,899

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of the allowance applicable to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,568

 
$
119

 
$
7,654

 
$
34

 
$
9,375

 
 
 
 
Collectively evaluated for impairment
$
25,435

 
$
5,798

 
$
21,353

 
$
1,123

 
$
53,709

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
18,815

 
 
Loan and Leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
5,398,244

 
$
283,067

 
$
5,433,787

 
$
108,408

 
$
11,223,506

 
$
351,379

 
$
11,574,885

The ending balance of the loan and lease portfolio is composed of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
59,729

 
$
12,692

 
$
47,180

 
$
3,655

 
$
123,256

 
 
 
 
Collectively evaluated for impairment
$
5,338,515

 
$
270,375

 
$
5,386,607

 
$
104,753

 
$
11,100,250

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
351,379

 
 
 
Three Months Ended September 30, 2013
 
Real Estate Mortgage
 
Real Estate Construction
 
Commercial
 
Consumer
 
Total Non-PCI
 
Total PCI
 
Total
 
(In thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
31,804

 
$
3,432

 
$
26,343

 
$
1,667

 
$
63,246

 
$
27,397

 
$
90,643

Charge-offs
(281
)
 

 
(2,439
)
 
(75
)
 
(2,795
)
 

 
(2,795
)
Recoveries
152

 
179

 
324

 
15

 
670

 
5

 
675

Provision (negative provision)
(2,069
)
 
(66
)
 
1,233

 
332

 
(570
)
 
(4,167
)
 
(4,737
)
Balance, end of period
$
29,606

 
$
3,545

 
$
25,461

 
$
1,939

 
$
60,551

 
$
23,235

 
$
83,786



18


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Nine Months Ended September 30, 2013
 
Real Estate Mortgage
 
Real Estate Construction
 
Commercial
 
Consumer
 
Total Non-PCI
 
Total PCI
 
Total
 
(In thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
38,700

 
$
3,221

 
$
22,252

 
$
1,726

 
$
65,899

 
$
26,069

 
$
91,968

Charge-offs
(3,840
)
 

 
(4,631
)
 
(111
)
 
(8,582
)
 

 
(8,582
)
Recoveries
1,665

 
514

 
2,028

 
57

 
4,264

 
38

 
4,302

Provision (negative provision)
(6,919
)
 
(190
)
 
5,812

 
267

 
(1,030
)
 
(2,872
)
 
(3,902
)
Balance, end of period
$
29,606

 
$
3,545

 
$
25,461

 
$
1,939

 
$
60,551

 
$
23,235

 
$
83,786

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of the allowance applicable to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,225

 
$
103

 
$
6,147

 
$
240

 
$
9,715

 
 
 
 
Collectively evaluated for impairment
$
26,381

 
$
3,442

 
$
19,314

 
$
1,699

 
$
50,836

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
23,235

 
 
Loan and Leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
2,548,932

 
$
188,872

 
$
1,178,923

 
$
33,909

 
$
3,950,636

 
$
432,757

 
$
4,383,393

The ending balance of the loan and lease portfolio is composed of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
90,329

 
$
14,878

 
$
25,083

 
$
792

 
$
131,082

 
 
 
 
Collectively evaluated for impairment
$
2,458,603

 
$
173,994

 
$
1,153,840

 
$
33,117

 
$
3,819,554

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
432,757

 
 

19


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Non‑Purchased Credit Impaired (Non‑PCI) Loans and Leases
The following table presents 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.
 
September 30, 2014
 
December 31, 2013
 
Nonclassified
 
Classified
 
Total
 
Nonclassified
 
Classified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Hospitality
$
504,066

 
$
15,284

 
$
519,350

 
$
168,216

 
$
12,337

 
$
180,553

SBA
344,285

 
7,483

 
351,768

 
39,869

 
5,297

 
45,166

Other
4,430,742

 
96,384

 
4,527,126

 
2,132,109

 
64,279

 
2,196,388

Total real estate mortgage
5,279,093

 
119,151

 
5,398,244

 
2,340,194

 
81,913

 
2,422,107

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
Residential
71,961

 
925

 
72,886

 
58,131

 
750

 
58,881

Commercial
205,258

 
4,923

 
210,181

 
142,607

 
6,291

 
148,898

Total real estate construction
277,219

 
5,848

 
283,067

 
200,738

 
7,041

 
207,779

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
416,759

 
11,818

 
428,577

 
567,643

 
18,838

 
586,481

Unsecured
125,373

 
1,666

 
127,039

 
151,896

 
1,856

 
153,752

Asset-based
1,575,920

 
18,512

 
1,594,432

 
195,569

 
6,859

 
202,428

Cash flow
2,238,196

 
76,002

 
2,314,198

 

 

 

Equipment finance
906,494

 
21,966

 
928,460

 
272,851

 
632

 
273,483

SBA
39,042

 
2,039

 
41,081

 
22,880

 
5,761

 
28,641

Total commercial
5,301,784

 
132,003

 
5,433,787

 
1,210,839

 
33,946

 
1,244,785

Consumer
104,424

 
3,984

 
108,408

 
50,474

 
4,411

 
54,885

Total Non-PCI loans and leases
$
10,962,520

 
$
260,986

 
$
11,223,506

 
$
3,802,245

 
$
127,311

 
$
3,929,556

In addition to our internal 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.

20


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following tables present an aging analysis of our Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:
 
September 30, 2014
 
30-89 Days Past Due
 
90 or More
 Days Past Due
 
Total Past Due
 
Current
 
Total Loans
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Hospitality
$

 
$

 
$

 
$
519,350

 
$
519,350

SBA
2,304

 
516

 
2,820

 
348,948

 
351,768

Other
8,150

 
13,128

 
21,278

 
4,505,848

 
4,527,126

Total real estate mortgage
10,454

 
13,644

 
24,098

 
5,374,146

 
5,398,244

Real estate construction:
 
 
 
 
 
 
 
 
 
Residential

 
542

 
542

 
72,344

 
72,886

Commercial
1,928

 
1,487

 
3,415

 
206,766

 
210,181

Total real estate construction
1,928

 
2,029

 
3,957

 
279,110

 
283,067

Commercial:
 
 
 
 
 
 
 
 
 
Collateralized
56

 
940

 
996

 
427,581

 
428,577

Unsecured
38

 
25

 
63

 
126,976

 
127,039

Asset-based
271

 

 
271

 
1,594,161

 
1,594,432

Cash flow
235

 

 
235

 
2,313,963

 
2,314,198

Equipment finance
119

 
132

 
251

 
928,209

 
928,460

SBA

 

 

 
41,081

 
41,081

Total commercial
719

 
1,097

 
1,816

 
5,431,971

 
5,433,787

Consumer
168

 
3,244

 
3,412

 
104,996

 
108,408

Total Non-PCI loans and leases
$
13,269

 
$
20,014

 
$
33,283

 
$
11,190,223

 
$
11,223,506


 
December 31, 2013
 
30-89 Days Past Due
 
90 or More
Days Past Due
 
Total Past Due
 
Current
 
Total Loans
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Hospitality
$

 
$

 
$

 
$
180,553

 
$
180,553

SBA
2,564

 

 
2,564

 
42,602

 
45,166

Other
13,026

 
2,406

 
15,432

 
2,180,956

 
2,196,388

Total real estate mortgage
15,590

 
2,406

 
17,996

 
2,404,111

 
2,422,107

Real estate construction:
 
 
 
 
 
 
 
 
 
Residential

 

 

 
58,881

 
58,881

Commercial

 
2,013

 
2,013

 
146,885

 
148,898

Total real estate construction

 
2,013

 
2,013

 
205,766

 
207,779

Commercial:
 
 
 
 
 
 
 
 
 
Collateralized
473

 
259

 
732

 
585,749

 
586,481

Unsecured
83

 
68

 
151

 
153,601

 
153,752

Asset-based

 

 

 
202,428

 
202,428

Equipment finance
2,662

 
244

 
2,906

 
270,577

 
273,483

SBA
1,770

 
243

 
2,013

 
26,628

 
28,641

Total commercial
4,988

 
814

 
5,802

 
1,238,983

 
1,244,785

Consumer
3,319

 

 
3,319

 
51,566

 
54,885

Total Non-PCI loans and leases
$
23,897

 
$
5,233

 
$
29,130

 
$
3,900,426

 
$
3,929,556


21


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


At September 30, 2014 and December 31, 2013, the Company had no loans and leases (excluding PCI loans) 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 more unless the loan is both well secured and in the process of collection or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business.
The following table presents our nonaccrual and performing Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:  
 
September 30, 2014
 
December 31, 2013
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Hospitality
$
6,451

 
$
512,899

 
$
519,350

 
$
6,723

 
$
173,830

 
$
180,553

SBA
7,483

 
344,285

 
351,768

 
2,602

 
42,564

 
45,166

Other
26,575

 
4,500,551

 
4,527,126

 
18,648

 
2,177,740

 
2,196,388

Total real estate mortgage
40,509

 
5,357,735

 
5,398,244

 
27,973

 
2,394,134

 
2,422,107

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
Residential
925

 
71,961

 
72,886

 
389

 
58,492

 
58,881

Commercial
2,703

 
207,478

 
210,181

 
2,830

 
146,068

 
148,898

Total real estate construction
3,628

 
279,439

 
283,067

 
3,219

 
204,560

 
207,779

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
5,165

 
423,412

 
428,577

 
9,991

 
576,490

 
586,481

Unsecured
226

 
126,813

 
127,039

 
458

 
153,294

 
153,752

Asset-based
5,003

 
1,589,429

 
1,594,432

 
1,070

 
201,358

 
202,428

Cash flow
15,958

 
2,298,240

 
2,314,198

 

 

 

Equipment finance
12,885

 
915,575

 
928,460

 
632

 
272,851

 
273,483

SBA
2,039

 
39,042

 
41,081

 
3,037

 
25,604

 
28,641

Total commercial
41,276

 
5,392,511

 
5,433,787

 
15,188

 
1,229,597

 
1,244,785

Consumer
3,535

 
104,873

 
108,408

 
394

 
54,491

 
54,885

Total Non-PCI loans and leases
$
88,948

 
$
11,134,558

 
$
11,223,506

 
$
46,774

 
$
3,882,782

 
$
3,929,556

At September 30, 2014, nonaccrual loans and leases totaled $88.9 million. Nonaccrual loans and leases included $7.4 million of loans 30 to 89 days past due and $61.6 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectibility. Nonaccrual loans and leases totaled $46.8 million at December 31, 2013, including $4.2 million of 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 collectibility.
Non‑PCI 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:
 
September 30, 2014
 
December 31, 2013
 
 
 
Performing
 
Total
 
 
 
Performing
 
Total
 
 
Nonaccrual
 
Restructured
 
Impaired
 
Nonaccrual
 
Restructured
 
Impaired
 
 
Loans/Leases
 
Loans
 
Loans/Leases
 
Loans/Leases
 
Loans
 
Loans/Leases
 
 
(In thousands)
 
Real estate mortgage
$
40,509

 
$
19,220

 
$
59,729

 
$
27,973

 
$
34,303

 
$
62,276

 
Real estate construction
3,628

 
9,064

 
12,692

 
3,219

 
4,293

 
7,512

 
Commercial
41,276

 
5,904

 
47,180

 
15,188

 
2,744

 
17,932

 
Consumer
3,535

 
120

 
3,655

 
394

 
308

 
702

 
Total
$
88,948

 
$
34,308

 
$
123,256

 
$
46,774

 
$
41,648

 
$
88,422

 

22


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following tables present information regarding our Non‑PCI impaired loans and leases by portfolio segment and class for the dates indicated:
 
September 30, 2014
 
December 31, 2013
 
Recorded Investment
 
Unpaid Principal Balance
 
Related
Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related
Allowance
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Hospitality
$
1,957

 
$
1,956

 
$
92

 
$
5,717

 
$
6,215

 
$
198

SBA

 

 

 
1,642

 
1,643

 
230

Other
13,302

 
13,389

 
1,476

 
15,937

 
16,571

 
1,760

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
Residential
767

 
767

 
72

 
778

 
778

 
168

Commercial
1,162

 
4,945

 
47

 
1,250

 
1,250

 
1

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
5,404

 
5,789

 
3,536

 
4,377

 
4,692

 
4,270

Unsecured
620

 
631

 
416

 
801

 
829

 
375

Asset-based
262

 
262

 
262

 
1,070

 
1,070

 
180

Cash flow
15,958

 
18,014

 
2,666

 

 

 

Equipment finance
1,864

 
1,864

 
774

 

 

 

SBA

 

 

 
1,136

 
1,136

 
178

Consumer
146

 
145

 
34

 
424

 
471

 
240

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Hospitality
$
6,451

 
$
7,593

 
$

 
$
3,013

 
$
3,385

 
$

SBA
7,483

 
10,712

 

 
2,602

 
3,646

 

Other
30,536

 
41,596

 

 
33,365

 
46,062

 

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
Residential
542

 
550

 

 

 

 

Commercial
10,221

 
10,995

 

 
5,484

 
9,923

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
3,820

 
10,932

 

 
6,700

 
9,924

 

Unsecured
180

 
278

 

 
179

 
247

 

Asset-based
4,741

 
5,584

 

 

 

 

Cash flow

 
505

 

 

 

 

Equipment finance
11,021

 
14,809

 

 
632

 
632

 

SBA
3,310

 
4,984

 

 
3,037

 
4,945

 

Consumer
3,509

 
3,681

 

 
278

 
394

 

Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
59,729

 
$
75,246

 
$
1,568

 
$
62,276

 
$
77,522

 
$
2,188

Real estate construction
12,692

 
17,257

 
119

 
7,512

 
11,951

 
169

Commercial
47,180

 
63,652

 
7,654

 
17,932

 
23,475

 
5,003

Consumer
3,655

 
3,826

 
34

 
702

 
865

 
240

Total
$
123,256

 
$
159,981

 
$
9,375

 
$
88,422

 
$
113,813

 
$
7,600


23


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Three Months Ended September 30,
 
2014
 
2013
 
Weighted Average
Balance(1)
 
Interest
Income
Recognized
 
Weighted Average
Balance(1)
 
Interest
Income
Recognized
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
Hospitality
$
1,963

 
$
20

 
$
8,779

 
$
226

SBA

 

 
1,659

 
23

Other
13,401

 
99

 
51,327

 
513

Real estate construction:
 
 
 
 
 
 
 
Residential
768

 
4

 
393

 

Commercial
1,176

 
6

 
8,540

 
87

Commercial:
 
 
 
 
 
 
 
Collateralized
5,815

 
43

 
3,804

 
10

Unsecured
624

 
6

 
2,062

 
8

Asset-based
265

 

 
223

 
5

Cash flow

15,695

 

 

 

Equipment finance
1,889

 

 

 

SBA

 

 
1,094

 
12

Consumer
148

 
2

 
436

 
3

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Hospitality
$
6,485

 
$

 
$

 
$

SBA
7,746

 
38

 
2,935

 

Other
31,313

 
87

 
25,041

 
133

Real estate construction:
 
 
 
 
 
 
 
Residential
542

 

 
441

 

Commercial
10,236

 
74

 
4,568

 
(59
)
Commercial:
 
 
 
 
 
 
 
Collateralized
5,252

 
21

 
4,266

 

Unsecured
202

 

 
179

 

Asset-based

 

 

 

Cash flow

 

 

 

Equipment finance
9,818

 
671

 
244

 

SBA
3,756

 
36

 
2,872

 
5

Consumer
3,745

 
2

 
173

 

Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
60,908

 
$
244

 
$
89,741

 
$
895

Real estate construction
12,722

 
84

 
13,942

 
28

Commercial
43,316

 
777

 
14,744

 
40

Consumer
3,893

 
4

 
609

 
3

Total
$
120,839

 
$
1,109

 
$
119,036

 
$
966

_________________________
(1)
For the loans and leases (excluding PCI loans) reported as impaired at September 30, 2014 and 2013, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.

24


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Nine Months Ended September 30,
 
2014
 
2013
 
Weighted Average
Balance(1)
 
Interest
Income
Recognized
 
Weighted Average
Balance(1)
 
Interest
Income
Recognized
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
Hospitality
$
1,971

 
$
60

 
$
8,770

 
$
109

SBA

 

 
1,649

 
23

Other
13,218

 
376

 
47,411

 
481

Real estate construction:
 
 
 
 
 
 
 
Residential
770

 
12

 
391

 

Commercial
539

 
13

 
8,541

 
88

Commercial:
 
 
 
 
 
 
 
Collateralized
5,167

 
92

 
4,467

 
7

Unsecured
664

 
18

 
787

 
8

Asset-based
268

 

 
2,377

 

Cash flow
5,232

 

 

 

Equipment finance
1,073

 

 

 

SBA

 

 
1,278

 
12

Consumer
1,890

 
11

 
429

 
3

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Hospitality
$
6,529

 
$

 
$

 
$

SBA
5,378

 
38

 
2,791

 

Other
26,235

 
240

 
25,540

 
410

Real estate construction:
 
 
 
 
 
 
 
Residential
406

 

 
435

 

Commercial
8,888

 
171

 
5,511

 
98

Commercial:
 
 
 
 
 
 
 
Collateralized
2,772

 
52

 
8,989

 
15

Unsecured
264

 

 
217

 

Asset-based
1,560

 

 

 

Cash flow

58

 

 

 

Equipment finance
7,436

 
671

 
244

 

SBA
2,189

 
36

 
2,846

 
5

Consumer
1,417

 
2

 
248

 

Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
53,331

 
$
714

 
$
86,161

 
$
1,023

Real estate construction
10,603

 
196

 
14,878

 
186

Commercial
26,683

 
869

 
21,205

 
47

Consumer
3,307

 
13

 
677

 
3

Total
$
93,924

 
$
1,792

 
$
122,921

 
$
1,259

_________________________
(1)
For the loans and leases (excluding PCI loans) reported as impaired at September 30, 2014 and 2013, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.




    

25


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Troubled debt restructurings are a result of rate reductions, term extensions, fee concessions, and debt forgiveness or a combination thereof. The following tables present new troubled debt restructurings of Non-PCI loans for the periods indicated:
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
Troubled Debt Restructurings:
Number of Loans
 
Pre- Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Pre- Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
SBA
1

 
$
64

 
$
64

 

 
$

 
$

Other
7

 
10,496

 
10,496

 

 

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
9

 
1,507

 
1,507

 
8

 
4,824

 
4,824

Unsecured
3

 
173

 
173

 
2

 
499

 
499

Asset-based

 

 

 
1

 
17

 
17

SBA
2

 
1,313

 
1,313

 

 

 

Consumer
3

 
183

 
183

 

 

 

Total
25

 
$
13,736

 
$
13,736

 
11

 
$
5,340

 
$
5,340

 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
Troubled Debt Restructurings:
Number of Loans
 
Pre- Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Pre- Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
(Dollars In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
SBA
1

 
$
64

 
$
64

 

 
$

 
$

Other
15

 
14,352

 
14,352

 
12

 
16,215

 
16,215

Real estate construction - Commercial
2

 
4,920

 
4,920

 

 

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
15

 
4,853

 
4,853

 
7

 
4,553

 
4,553

Unsecured
5

 
211

 
211

 
5

 
502

 
502

Asset-based

 

 

 
1

 
2,032

 
2,032

SBA
2

 
1,313

 
1,313

 
4

 
137

 
137

Consumer
4

 
307

 
307

 

 

 

Total
44

 
$
26,020

 
$
26,020

 
29

 
$
23,439

 
$
23,439



26


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



The following tables present troubled debt restructurings that subsequently defaulted for the periods indicated:
 
Three Months Ended September 30,
 
 
2014
 
2013
 
Troubled Debt Restructurings
Number of
 
Recorded
 
Number of
 
Recorded
 
That Subsequently Defaulted:
Loans
 
Investment(1)
 
Loans
 
Investment(1)
 
 
(Dollars in thousands)
 
Real estate construction - Commercial
1

 
$
1,190

 

 
$

 
Commercial - Unsecured
2

 
37

 
2

 
70

 
Total
3

 
$
1,227

(2)
2

 
$
70

(3)
_________________________
(1)
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.
(2)
Represents the balance at September 30, 2014, and is net of charge-offs of $0.2 million.
(3)
Represents the balance at September 30, 2013 and there were no charge-offs.
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
Troubled Debt Restructurings
Number of
 
Recorded
 
Number of
 
Recorded
 
That Subsequently Defaulted:
Loans
 
Investment(1)
 
Loans
 
Investment(1)
 
 
(Dollars in thousands)
 
Real estate mortgage - Other

 
$

 
1

 
$
1,327

 
Real estate construction - Commercial
1

 
1,190

 

 

 
Commercial:
 
 
 
 
 
 
 
 
Collateralized
1

 
22

 
1

 
427

 
Unsecured
2

 
37

 
2

 
70

 
Consumer
1

 
109

 

 

 
Total
5

 
$
1,358

(2)
4

 
$
1,824

(3)
_________________________
(1)
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.
(2)
Represents the balance at September 30, 2014, and is net of charge-offs of $0.2 million
(3)
Represents the balance at September 30, 2013, and is net of charge-offs of $1.1 million

Purchased Credit Impaired (PCI) Loans
The following table reflects the PCI loans by portfolio segment as of the dates indicated:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Real estate mortgage
$
356,151

 
$
412,791

Real estate construction
8,506

 
12,015

Commercial
28,532

 
3,021

Consumer
402

 
424

Total gross PCI loans
393,591

 
428,251

Less:
 
 
 
Discount
(42,212
)
 
(45,455
)
Allowance for loan losses
(18,815
)
 
(21,793
)
Total net PCI loans
$
332,564

 
$
361,003


27


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the changes in the carrying amount of PCI loans and accretable yield on those loans for the period indicated:
 
Carrying Amount
 
Accretable Yield
 
(In thousands)

Balance, December 31, 2013
$
361,003

 
$
(139,568
)
Addition
79,234

 
(13,728
)
Accretion
45,919

 
45,919

Payments received
(151,910
)
 

Decrease in expected cash flows, net

 
(12,435
)
Provision for credit losses
(1,682
)
 

Balance, September 30, 2014
$
332,564

 
$
(119,812
)
The following table presents 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.
 
September 30, 2014
 
December 31, 2013
 
Nonclassified
 
Classified
 
Total
 
Nonclassified
 
Classified
 
Total
 
(In thousands)
Real estate mortgage
$
180,763

 
$
134,108

 
$
314,871

 
$
216,092

 
$
155,042

 
$
371,134

Real estate construction
1,921

 
6,282

 
8,203

 
4,399

 
6,028

 
10,427

Commercial
232

 
27,730

 
27,962

 
569

 
405

 
974

Consumer

 
343

 
343

 

 
261

 
261

Total PCI loans
$
182,916

 
$
168,463

 
$
351,379

 
$
221,060

 
$
161,736

 
$
382,796

In addition to our internal 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.
Note 7.  Foreclosed Assets
The following tables summarize foreclosed assets at the dates indicated:
Property Type:
September 30, 2014
 
December 31, 2013
 
(In thousands)
Commercial real estate
$
2,559

 
$
15,753

Construction and land development
27,731

 
35,063

Multi‑family
835

 
835

Single family residence
13

 
186

Total other real estate owned, net
31,138

 
51,837

Other foreclosed assets
9,386

 
4,054

Total foreclosed assets
$
40,524

 
$
55,891


28


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table presents a rollforward of foreclosed assets, net of the valuation allowance, for the periods indicated:
 
Foreclosed Assets
 
(In thousands)
Balance, December 31, 2013
$
55,891

Addition from the CapitalSource Inc. merger
6,382

Foreclosures
667

Provision for losses
(5,065
)
Reductions related to sales
(17,351
)
Balance, September 30, 2014
$
40,524



Note 8.  FDIC Loss Sharing Asset
We are a party to four loss sharing agreements with the FDIC. Such agreements cover a substantial portion of losses incurred on acquired covered loans and other real estate owned. The loss sharing agreements relate to the acquisitions of: (1) Affinity Bank ("Affinity") in August 2009, (2) Los Padres Bank ("Los Padres") in August 2010, (3) Western Commercial Bank ("Western Commercial") in connection with the May 2013 FCAL acquisition, and (4) San Luis Trust Bank ("San Luis") in connection with the May 2013 FCAL acquisition. Generally, under the terms of the loss sharing agreements, the FDIC is responsible for 80% of losses in connection with covered assets and is entitled to receive 80% of loss recoveries on the covered assets during the applicable contractual periods. The loss sharing provisions for the Affinity Bank non-single family covered assets expired in the third quarter of 2014; accordingly, further activity will be limited to recoveries through the third quarter of 2017 for assets covered by this loss sharing agreement.
The following table presents the changes in the FDIC loss sharing asset for the period indicated:
 
FDIC Loss Sharing Asset
 
(In thousands)
Balance, December 31, 2013
$
45,524

FDIC share of additional losses, net of recoveries
(4,654
)
Cash paid to the FDIC
3,363

Net amortization
(21,256
)
Balance, September 30, 2014
$
22,977

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:
 
September 30, 2014
 
Affinity Bank
 
Los Padres Bank
 
Western Commercial Bank
 
San Luis Trust Bank
 
Total
 
(In thousands)
FDIC loss sharing asset
$
(819
)
 
$
13,283

 
$
1,432

 
$
9,081

 
$
22,977

True‑up liability
N/A

 
N/A

 
$
1,574

 
$
5,350

 
$
6,924

Non-single family covered assets
$
142,454

 
$
92,440

 
$
13,746

 
$
30,670

 
$
279,310

Single family covered assets
$
12,536

 
$
64,131

 
N/A

 
$
31,302

 
$
107,969

 
 
 
 
 
 
 
 
 
 
Loss sharing expiration dates:
 
 
 
 
 
 
 
 
 
Non‑single family
3rd Quarter 2014

 
3rd Quarter 2015

 
4th Quarter 2015

 
1st Quarter 2016

 
 
Single family
3rd Quarter 2019

 
3rd Quarter 2020

 
N/A
 
1st Quarter 2021

 
 
Loss recovery expiration dates:
 
 
 
 
 
 
 
 
 
Non‑single family
3rd Quarter 2017

 
3rd Quarter 2018

 
4th Quarter 2018

 
1st Quarter 2019

 
 
Single family
3rd Quarter 2019

 
3rd Quarter 2020

 
N/A
 
1st Quarter 2021

 
 



29


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 9. Borrowings, Subordinated Debentures and Brokered Deposits
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 
September 30, 2014
 
December 31, 2013
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
3,672

 
6.26
%
 
$
7,126

 
6.30
%
FHLB overnight advances
360,000

 
0.07
%
 
106,600

 
0.06
%
Total borrowings
$
363,672

 
 
 
$
113,726

 
 
The non‑recourse debt represents the payment stream of certain equipment leases sold to third parties. The debt is secured by the equipment in the leases and all interest rates are fixed. As of September 30, 2014, this debt had a weighted average remaining maturity of 2.2 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 SF, the Federal Reserve Bank of San Francisco (“FRBSF”), or other financial institutions.
FHLB SF Secured Lines of Credit. The borrowing arrangement with the FHLB SF is based on an FHLB program collateralized by a blanket lien on certain qualifying loans in our loan portfolio which were not pledged to the FRBSF. As of September 30, 2014, our borrowing capacity under the FHLB SF secured borrowing lines was $2.4 billion. As of September 30, 2014 and December 31, 2013, the balances outstanding were $360.0 million and $106.6 million, respectively.
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2014, the Bank had secured borrowing capacity of $1.0 billion collateralized by liens covering $1.4 billion of certain qualifying loans. As of September 30, 2014 and December 31, 2013, there were no balances outstanding.
Federal Funds Arrangements with Commercial Banks. As of September 30, 2014, the Bank had unsecured lines of credit of $80.0 million with correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of September 30, 2014 and December 31, 2013, there were no balances outstanding.

30


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
 
September 30, 2014
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date
 
Maturity
 
Rate Index
Series
Amount
 
Rate (1)
 
Amount
 
Rate (2)
 
Issued
 
Date
 
(Quarterly Reset)
 
(Dollars in thousands)
 
 
 
 
 
 
Trust V
$
10,310

 
3.33
%
 
$
10,310

 
3.34
%
 
8/15/2003
 
9/17/2033
 
3 month LIBOR + 3.10
Trust VI
10,310

 
3.28
%
 
10,310

 
3.29
%
 
9/3/2003
 
9/15/2033
 
3 month LIBOR + 3.05
Trust CII
5,155

 
3.18
%
 
5,155

 
3.19
%
 
9/17/2003
 
9/17/2033
 
3 month LIBOR + 2.95
Trust VII
61,856

 
2.99
%
 
61,856

 
2.99
%
 
2/5/2004
 
4/23/2034
 
3 month LIBOR + 2.75
Trust CIII
20,619

 
1.92
%
 
20,619

 
1.93
%
 
8/15/2005
 
9/15/2035
 
3 month LIBOR + 1.69
Trust FCCI
16,495

 
1.83
%
 
16,495

 
1.84
%
 
1/25/2007
 
3/15/2037
 
3 month LIBOR + 1.60
Trust FCBI
10,310

 
1.78
%
 
10,310

 
1.79
%
 
9/30/2005
 
12/15/2035
 
3 month LIBOR + 1.55
Trust CS 2005-1 (3)
82,475

 
2.18
%
 

 

 
11/21/2005
 
12/15/2035
 
3 month LIBOR + 1.95
Trust CS 2005-2 (3)
128,866

 
2.19
%
 

 

 
12/14/2005
 
1/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-1 (3)
51,545

 
2.19
%
 

 

 
2/22/2006
 
4/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-2 (3)
51,550

 
2.19
%
 

 

 
9/27/2006
 
10/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-3 (3)
32,551

 
1.29
%
 

 

 
9/29/2006
 
10/30/2036
 
3 month EURIBOR + 2.05
Trust CS 2006-4 (3)
16,470

 
2.19
%
 

 

 
12/5/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2006-5 (3)
6,650

 
2.19
%
 

 

 
12/19/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2007-2 (3)
39,177

 
2.19
%
 

 

 
6/13/2007
 
7/30/2037
 
3 month LIBOR + 1.95
Gross subordinated debentures
544,339

 
 
 
135,055

 
 
 
 
 
 
 
 
Unamortized discount (4)
(110,794
)
 
 
 
(2,410
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
433,545

 
 
 
$
132,645

 
 
 
 
 
 
 
 
___________________
(1)
As of September 30, 2014.
(2)
As of January 28, 2014.
(3)
Acquired in the CapitalSource Inc. merger.
(4)
Amount represents the fair value adjustment on trust preferred securities assumed in the CapitalSource Inc. and FCAL acquisitions.
Interest payments made by the Company on subordinated debentures are considered dividend payments under the Board of Governors of the Federal Reserve System (“FRB”) regulations. Bank holding companies, such as PacWest, are required to notify the FRB prior to declaring and paying a dividend to stockholders during any period in which quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements.
Brokered Deposits
Brokered time deposits totaled $288.2 million and $49.4 million at September 30, 2014 and December 31, 2013, respectively. During the third quarter, the Company added $200.0 million of brokered time deposits. Brokered time deposits under the Certificate of Deposit Account Registry Service Program ("CDARS Program") totaled $48.2 million and $49.4 million at September 30, 2014 and December 31, 2013, respectively. 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 customers’ deposits.
Note 10. 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 condensed consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

31


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table presents a summary of the financial instruments described above as of the dates indicated:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Loan commitments to extend credit
$
1,818,694

 
$
1,001,740

Standby letters of credit
82,207

 
39,200

Commitments to purchase equipment being acquired for lease to others
6,199

 
8,475

 
$
1,907,100

 
$
1,049,415

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. We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. Most guarantees expire within one year from the date of issuance. If a borrower defaults on its commitments subject to any letter of credit issued under these arrangements, we would be required to meet the borrower's financial obligation but would seek repayment of that financial obligation from the borrower. In some cases, borrowers have pledged cash and investment securities as collateral with us under these arrangements.
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 September 30, 2014 and December 31, 2013, the Company had commitments to contribute capital to these entities totaling $12.9 million and $11.0 million, respectively. In connection with equity investments added from the CapitalSource Inc. merger, we have committed to contribute up to an additional $2.5 million to 11 private equity funds.
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, would not have a material adverse effect on the Company’s financial statements or operations.
Note 11. Fair Value Measurements
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 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.

32


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table presents information on the assets measured and recorded at fair value on a recurring basis as of September 30, 2014:
 
 
Fair Value Measurements as of
 
 
September 30, 2014
Measured on a Recurring Basis:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
 
Government agency and government‑sponsored enterprise
 
 
 
 
 
 
 
 
pass through securities
 
$
555,087

 
$

 
$
555,087

 
$

Government agency and government‑sponsored enterprise
 
 
 
 
 
 
 
 
collateralized mortgage obligations
 
279,791

 

 
279,791

 

Covered private label CMOs
 
35,309

 

 

 
35,309

Other private label CMOs
 
12,593

 

 
12,593

 

Municipal securities
 
482,427

 

 
482,427

 

Corporate debt securities
 
112,143

 

 
112,143

 

Government‑sponsored enterprise debt securities
 
36,382

 

 
36,382

 

Other securities
 
25,949

 
514

 
25,435

 

Total
 
$
1,539,681

 
$
514

 
$
1,503,858

 
$
35,309

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 the three and nine months ended September 30, 2014.
The following table presents information about quantitative inputs and assumptions used to determine 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 September 30, 2014:
 
 
Covered Private Label CMOs
Unobservable Inputs:
 
Range of Inputs
 
Weighted Average Input
Voluntary annual prepayment speeds
0% - 34.2%
 
10.2%
Annual default rates
0% - 9.7%
 
3.2%
Loss severity rates
0% - 65.2%
 
40.9%
Discount rates
0% - 7.1%
 
4.9%
The following table summarizes activity for assets measured at fair value on a recurring basis that are categorized as Level 3 for the period indicated:
 
 
Covered Private Label CMOs (Level 3)
 
 
(In thousands)
Balance, December 31, 2013
 
$
37,904

Total realized in earnings
 
862

Total unrealized gain in comprehensive income
 
76

Net settlements
 
(3,533
)
Balance, September 30, 2014
 
$
35,309


33


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following tables present assets measured at fair value on a non‑recurring basis as of the date indicated and the losses recognized on such assets for the period indicated:
 
Fair Value Measurement as of
 
Gain (Loss)
 
September 30, 2014
 
Three Months Ended
 
Nine Months Ended
 
Total
 
Level 1
 
Level 2
 
Level 3
 
September 30, 2014
Measured on a Non‑Recurring Basis:
(In thousands)
Impaired Non‑PCI loans
$
42,728

 
$

 
$
2,366

 
$
40,362

 
$
(1,374
)
 
$
(10,205
)
Other real estate owned
28,011

 

 
26,352

 
1,659

 
(4,863
)
 
(4,863
)
Total non-recurring
$
70,739

 
$

 
$
28,718

 
$
42,021

 
$
(6,237
)
 
$
(15,068
)
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2014:
Asset
Fair Value
(In thousands)
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
Weighted
Average
Impaired Non-PCI loans
$
36,306

 
Discounted cash flows
 
Discount rates
 
0% - 10.46%
 
6.87%
 
$
4,056

 
Appraisals
 
No discounts
 

 

OREO
$
1,659

 
Appraisals
 
Discount, including selling costs
 
11.19% - 62.61%
 
39.98%
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.
The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:
 
September 30, 2014
 
Carrying or
Contract
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
145,463

 
$
145,463

 
$
145,463

 
$

 
$

Interest‑earning deposits in financial institutions
115,399

 
115,399

 
115,399

 

 

Securities available‑for‑sale
1,539,681

 
1,539,681

 
514

 
1,503,858

 
35,309

Investment in FHLB stock
45,602

 
45,602

 

 
45,602

 

Loans and leases, net
11,492,986

 
11,396,792

 

 
2,366

 
11,394,426

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand, money market, interest checking,
 
 
 
 
 
 
 
 
 
and savings deposits
6,006,958

 
6,006,958

 

 
6,006,958

 

Time deposits
5,516,479

 
5,524,373

 

 
5,524,373

 

Borrowings
363,672

 
363,804

 
360,000

 
3,804

 

Subordinated debentures
433,545

 
417,349

 

 
417,349

 



34


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
December 31, 2013
 
Carrying or
Contract
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
96,424

 
$
96,424

 
$
96,424

 
$

 
$

Interest‑earning deposits in financial institutions
50,998

 
50,998

 
50,998

 

 

Securities available‑for‑sale
1,494,745

 
1,494,745

 
507

 
1,456,334

 
37,904

Investment in FHLB stock
27,939

 
27,939

 

 
27,939

 

Loans and leases, net
4,230,318

 
4,231,078

 

 
2,051

 
4,229,027

SBA loan servicing asset
807

 
807

 

 

 
807

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand, money market, interest checking,
 
 
 
 
 
 
 
 
 
 and savings deposits
4,616,616

 
4,616,616

 

 
4,616,616

 

Time deposits
664,371

 
665,148

 

 
665,148

 

Borrowings
113,726

 
113,726

 
106,600

 
7,126

 

Subordinated debentures
132,645

 
132,498

 

 
132,498

 


The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820, “Fair Value Measurement”) 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 condensed consolidated balance sheets. See Note 5, 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.

35


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Impaired Non‑PCI 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. Nonaccrual Non‑PCI loans with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Nonaccrual Non‑PCI loans with an unpaid principal balance less than $250,000 are not individually assessed for impairment but are instead reserved for under our general reserve component.
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 nine months ended September 30, 2014.
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 impaired Non‑PCI loan balances shown above as measured on a non-recurring basis represent those nonaccrual and restructured loans for which impairment was recognized during the nine months ended September 30, 2014. The amounts shown as net losses include the impairment recognized during the nine months ended September 30, 2014, for the loan balances shown. Of the $88.9 million of nonaccrual Non-PCI loans at September 30, 2014, $2.6 million were written down to their collateral fair values through charge‑offs during the nine months ended September 30, 2014.
Other real estate owned ("OREO"). The fair value of foreclosed real estate 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 during the nine months ended September 30, 2014.
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.
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 dates 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.

36


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


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 September 30, 2014, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
Note 12. Earnings Per Share
The computations of basic and diluted net earnings per share for the periods indicated were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands, except per share data)
Basic earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
62,276

 
$
11,230

 
$
24,140

 
$
99,411

 
$
42,030

Less: earnings allocated to unvested restricted stock(1)
(685
)
 
(290
)
 
(786
)
 
(1,147
)
 
(1,137
)
Net earnings from continuing operations allocated to common shares
61,591

 
10,940

 
23,354

 
98,264

 
40,893

Net (loss) earnings from discontinued operations allocated to common shares

 
(675
)
 
23

 
(1,487
)
 
(24
)
Net earnings allocated to common shares
$
61,591

 
$
10,265

 
$
23,377

 
$
96,777

 
$
40,869

Weighted-average basic shares and unvested restricted stock outstanding
103,029

 
98,817

 
46,091

 
82,758

 
41,306

Less: weighted-average unvested restricted stock outstanding
(1,117
)
 
(678
)
 
(1,795
)
 
(981
)
 
(1,663
)
Weighted-average basic shares outstanding
101,912

 
98,139

 
44,296

 
81,777

 
39,643

Basic earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.60

 
$
0.11

 
$
0.53

 
$
1.20

 
$
1.03

Net loss from discontinued operations

 
(0.01
)
 

 
(0.02
)
 

Net earnings
$
0.60

 
$
0.10

 
$
0.53

 
$
1.18

 
$
1.03

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations allocated to common shares
$
61,591

 
$
10,940

 
$
23,354

 
$
98,264

 
$
40,893

Net (loss) earnings from discontinued operations allocated to common shares

 
(675
)
 
23

 
(1,487
)
 
(24
)
Net earnings allocated to common shares
$
61,591

 
$
10,265

 
$
23,377

 
$
96,777

 
$
40,869

Weighted-average basic shares outstanding
101,912

 
98,139

 
44,296

 
81,777

 
39,643

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.60

 
$
0.11

 
$
0.53

 
$
1.20

 
$
1.03

Net loss from discontinued operations

 
(0.01
)
 

 
(0.02
)
 

Net earnings
$
0.60

 
$
0.10

 
$
0.53

 
$
1.18

 
$
1.03

________________________
(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.


37


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 13. Stock Based Compensation
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 September 30, 2014, the 2003 Plan authorized grants of stock‑based compensation instruments to purchase or issue up to 19,686,565 shares of Company common stock, subject to adjustments provided by the 2003 Plan. The authorized amount includes 10,686,565 shares that were added to the 2003 Plan as a result of the CapitalSource Inc. merger. Such shares were available for grant under the former CapitalSource Inc. Equity Incentive Plan and remain available for: (a) former employees of CapitalSource Inc. and CapitalSource Bank who remain employed with the Company, and (b) newly hired employees of the Company. As of September 30, 2014, there were 13,524,674 shares available for grant under the 2003 Plan, which includes 10,682,069 shares related to those added from the CapitalSource Inc. merger.
Restricted Stock
At September 30, 2014, there were 1,115,550 shares of unvested time‑based restricted common stock outstanding. The awarded shares of time‑based restricted common stock vest over a service period of three to four years from the date of the grant. The time-based restricted common stock vests immediately upon a change in control of the Company, as defined in the 2003 Plan, and upon death of the employee. In April 2014, upon closing of the CapitalSource Inc. merger, 1,013,377 awarded shares of restricted common stock vested due to the triggering of the change of control provision contained within the 2003 Plan. We recorded a $26.1 million charge to earnings for the vesting of such shares. Such amount is included in acquisition, integration and reorganization costs on the accompanying condensed consolidated statements of earnings in the second quarter of 2014.
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 $2.9 million, $2.4 million, and $2.4 million for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively, and $6.9 million and $6.1 million for the nine months ended September 30, 2014 and 2013, respectively. Such amounts are included in compensation expense on the accompanying condensed consolidated statements of earnings.
The amount of unrecognized compensation expense related to all unvested restricted stock as of September 30, 2014 totaled $39.2 million.
Note 14. Business Segments
The Company’s reportable segments consist of “Community Banking,” “National Lending,” and “Other.”
As a result of the CapitalSource Inc. merger, Pacific Western Bank established the CapitalSource Division, which we also refer to as the National Lending segment. The CapitalSource Division, or National Lending segment, includes the lending operations gained through the CapitalSource Inc. merger, Pacific Western Equipment Finance, and the CapitalSource Business Finance Group (formerly BFI Business Finance and First Community Financial). We reorganized our asset-based lending and leasing operations when we established the CapitalSource Division combining BFI Business Finance and First Community Financial into the Capital Source Business Finance Group, selling Celtic Capital Corporation in July 2014, and having Pacific Western Equipment Finance and the Capital Source Business Finance Group become part of the CapitalSource Division. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to middle market businesses, including senior secured real estate loans, equipment loans and leases, asset-based loans, lender finance loans and cash flow loans secured by the enterprise value of the borrowing entity. The CapitalSource Division’s loan and lease origination efforts are conducted through offices located in Chevy Chase, Maryland; Los Angeles and San Jose, California; St. Louis, Missouri; Denver, Colorado; Chicago, Illinois; New York, New York; and Midvale, Utah.
The Community Banking and National Lending segments include all of the operations of Pacific Western Bank. The Community Banking segment includes the operations of Pacific Western Bank, excluding the CapitalSource Division, and includes lending and deposit gathering activities conducted primarily through its California-based branch offices and the Bank’s treasury management function and corporate overhead. The Other segment consists of holding company operations which result in expenses principally for compensation, facilities, professional services, interest on subordinated debentures, and the non-bank subsidiary operations including interest income from a loan portfolio and related loan servicing expense.
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,” of our Form 10‑K. Transactions between segments consist primarily of borrowed funds and expense allocations for interest, deposit gathering, corporate overhead and credit loss provisions. Intersegment interest expense is allocated from the Community Banking segment to the National Lending segment based upon National Lending’s average interest-earning assets and operating leases, net of a capital allocation, and the Bank’s total cost of deposits. The Community Banking segment further allocates to the National Lending segment noninterest expense for deposit

38


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


gathering and maintenance costs and the Bank’s corporate overhead. The provision for credit losses is allocated based on actual charge‑offs for the period as well as net portfolio growth and credit quality trends. All costs associated with investing the Bank’s excess liquidity and acquisition, integration, and reorganization costs are housed in the Community Banking segment. The lending and loan servicing activities are housed in our respective segments. Noninterest income and noninterest expense directly attributable to a segment are assigned to it.
The following tables present information regarding our business segments as of and for the periods indicated:
 
September 30, 2014
 
Community
 
National
 
 
 
Consolidated
Balance Sheet Data:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Loans and leases, net of unearned income
$
3,482,125

 
$
8,064,868

 
$
27,892

 
$
11,574,885

Allowance for loan and lease losses
(56,712
)
 
(25,187
)
 

 
(81,899
)
Total loans and leases, net
$
3,425,413

 
$
8,039,681

 
$
27,892

 
$
11,492,986

Goodwill
$
327,728

 
$
1,394,401

 
$

 
$
1,722,129

Core deposit and customer relationship intangibles, net
17,814

 
1,009

 

 
18,823

Total assets
6,492,869

 
9,182,617

 
262,859

 
15,938,345

Total deposits(1)
11,826,681

 

 
(303,244
)
 
11,523,437

________________________
(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.
 
September 30, 2013
 
Community
 
National
 
 
 
Consolidated
Balance Sheet Data:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Loans and leases, net of unearned income
$
3,912,885

 
$
470,508

 
$

 
$
4,383,393

Allowance for loan and lease losses
(76,496
)
 
(7,290
)
 

 
(83,786
)
Total loans and leases, net
$
3,836,389

 
$
463,218

 
$

 
$
4,299,607

Goodwill
$
190,184

 
$
25,678

 
$

 
$
215,862

Core deposit and customer relationship intangibles, net
16,604

 
2,074

 

 
18,678

Total assets
6,100,587

 
507,339

 
8,929

 
6,616,855

Total deposits(1)
5,467,568

 

 
(34,424
)
 
5,433,144

________________________
(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.

39


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Three Months Ended September 30, 2014
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
67,132

 
$
134,624

 
$
600

 
$
202,356

Interest expense
(8,851
)
 
(45
)
 
(4,614
)
 
(13,510
)
Intersegment interest income (expense)
5,250

 
(5,250
)
 

 

Net interest income (expense)
63,531

 
129,329

 
(4,014
)
 
188,846

Negative provision (provision) for credit losses
6,314

 
(11,364
)
 

 
(5,050
)
Gain on securities

 

 

 

FDIC loss sharing expense
(7,415
)
 

 

 
(7,415
)
Other noninterest income
7,566

 
9,953

 
6,210

 
23,729

Total noninterest income
151

 
9,953

 
6,210

 
16,314

Foreclosed assets (expense) income, net

(4,627
)
 
(322
)
 
122

 
(4,827
)
Intangible asset amortization
(1,517
)
 
(91
)
 

 
(1,608
)
Acquisition, integration and reorganization costs
(3,953
)
 
(1,240
)
 

 
(5,193
)
Other noninterest expense
(53,784
)
 
(24,835
)
 
(5,382
)
 
(84,001
)
Total noninterest expense
(63,881
)
 
(26,488
)
 
(5,260
)
 
(95,629
)
Intersegment noninterest income (expense)
26,411

 
(26,411
)
 

 

Total noninterest expense - adjusted
(37,470
)
 
(52,899
)
 
(5,260
)
 
(95,629
)
Earnings (loss) from continuing operations before taxes
32,526

 
75,019

 
(3,064
)
 
104,481

Income tax (expense) benefit
(13,870
)
 
(30,113
)
 
1,778

 
(42,205
)
Net earnings (loss) from continuing operations
18,656

 
44,906

 
(1,286
)
 
62,276

Loss from discontinued operations before taxes
(8
)
 

 

 
(8
)
Income tax benefit
3

 

 

 
3

Net loss from discontinued operations
(5
)
 

 

 
(5
)
Net earnings (loss)
$
18,651

 
$
44,906

 
$
(1,286
)
 
$
62,271


40


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



 
Three Months Ended June 30, 2014
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
69,977

 
$
132,742

 
$
1,644

 
$
204,363

Interest expense
(7,450
)
 
(62
)
 
(4,318
)
 
(11,830
)
Intersegment interest income (expense)
4,071

 
(4,071
)
 

 

Net interest income
66,598

 
128,609

 
(2,674
)
 
192,533

Negative provision (provision) for credit losses
4,418

 
(9,448
)
 

 
(5,030
)
Gain on securities
89

 

 

 
89

FDIC loss sharing expense
(8,525
)
 

 

 
(8,525
)
Other noninterest income
3,681

 
12,487

 
747

 
16,915

Total noninterest income
(4,755
)
 
12,487

 
747

 
8,479

Foreclosed assets (expense) income, net

(633
)
 
38

 
98

 
(497
)
Intangible asset amortization
(1,530
)
 
(147
)
 

 
(1,677
)
Acquisition, integration and reorganization costs
(77,713
)
 
(7,474
)
 
(1,055
)
 
(86,242
)
Other noninterest expense
(51,507
)
 
(24,484
)
 
(5,499
)
 
(81,490
)
Total noninterest expense
(131,383
)
 
(32,067
)
 
(6,456
)
 
(169,906
)
Intersegment noninterest income (expense)
23,533

 
(23,533
)
 

 

Total noninterest expense - adjusted
(107,850
)
 
(55,600
)
 
(6,456
)
 
(169,906
)
(Loss) earnings from continuing operations before taxes
(41,589
)
 
76,048

 
(8,383
)
 
26,076

Income tax benefit (expense)
12,081

 
(30,259
)
 
3,332

 
(14,846
)
Net (loss) earnings from continuing operations
(29,508
)
 
45,789

 
(5,051
)
 
11,230

Loss from discontinued operations before taxes
(1,151
)
 

 

 
(1,151
)
Income tax benefit
476

 

 

 
476

Net loss from discontinued operations
(675
)
 

 

 
(675
)
Net (loss) earnings
$
(30,183
)
 
$
45,789

 
$
(5,051
)
 
$
10,555


41


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
 
Three Months Ended September 30, 2013
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
72,873

 
$
12,285

 
$

 
$
85,158

Interest expense
(1,692
)
 
(108
)
 
(1,069
)
 
(2,869
)
Intersegment interest income (expense)
353

 
(353
)
 

 

Net interest income
71,534

 
11,824

 
(1,069
)
 
82,289

Negative provision (provision) for credit losses
5,782

 
(1,615
)
 

 
4,167

FDIC loss sharing expense
(7,032
)
 

 

 
(7,032
)
Other noninterest income
5,466

 
1,443

 
5,250

 
12,159

Total noninterest income
(1,566
)
 
1,443

 
5,250

 
5,127

Foreclosed assets income, net
420

 

 

 
420

Intangible asset amortization
(1,354
)
 
(158
)
 

 
(1,512
)
Acquisition, integration and reorganization costs
(5,190
)
 

 
(260
)
 
(5,450
)
Other noninterest expense
(42,435
)
 
(5,822
)
 
(1,401
)
 
(49,658
)
Total noninterest expense
(48,559
)
 
(5,980
)
 
(1,661
)
 
(56,200
)
Earnings (loss) from continuing operations before taxes
27,191

 
5,672

 
2,520

 
35,383

Income tax (expense) benefit
(9,996
)
 
(2,378
)
 
1,131

 
(11,243
)
Net earnings (loss) from continuing operations
17,195

 
3,294

 
3,651

 
24,140

Earnings from discontinued operations before taxes
39

 

 

 
39

Income tax expense
(16
)
 

 

 
(16
)
Net earnings from discontinued operations
23

 

 

 
23

Net earnings
$
17,218

 
$
3,294

 
$
3,651

 
$
24,163


42


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



 
Nine Months Ended September 30, 2014
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
214,704

 
$
278,131

 
$
2,244

 
$
495,079

Interest expense
(17,528
)
 
(184
)
 
(9,973
)
 
(27,685
)
Intersegment interest income (expense)
9,543

 
(9,543
)
 

 

Net interest income (expense)
206,719

 
268,404

 
(7,729
)
 
467,394

Negative provision (provision) for credit losses
11,558

 
(20,994
)
 

 
(9,436
)
Gain on securities
4,841

 

 

 
4,841

FDIC loss sharing expense
(27,370
)
 

 

 
(27,370
)
Other noninterest income
18,144

 
26,885

 
6,984

 
52,013

Total noninterest income
(4,385
)
 
26,885

 
6,984

 
29,484

Foreclosed assets (expense) income, net

(3,399
)
 
(284
)
 
220

 
(3,463
)
Intangible asset amortization
(4,238
)
 
(411
)
 

 
(4,649
)
Acquisition, integration and reorganization costs
(83,866
)
 
(8,714
)
 
(1,055
)
 
(93,635
)
Other noninterest expense
(146,281
)
 
(55,892
)
 
(12,484
)
 
(214,657
)
Total noninterest expense
(237,784
)
 
(65,301
)
 
(13,319
)
 
(316,404
)
Intersegment noninterest income (expense)
49,944

 
(49,944
)
 

 

Total noninterest expense - adjusted
(187,840
)
 
(115,245
)
 
(13,319
)
 
(316,404
)
Earnings from continuing operations before taxes
26,052

 
159,050

 
(14,064
)
 
171,038

Income tax (expense) benefit
(14,123
)
 
(63,703
)
 
6,199

 
(71,627
)
Net earnings (loss) from continuing operations
11,929

 
95,347

 
(7,865
)
 
99,411

Loss from discontinued operations before taxes
(2,572
)
 

 

 
(2,572
)
Income tax benefit
1,067

 

 

 
1,067

Net loss from discontinued operations
(1,505
)
 

 

 
(1,505
)
Net earnings (loss)
$
10,424

 
$
95,347

 
$
(7,865
)
 
$
97,906


43


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



 
Nine Months Ended September 30, 2013
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
189,101

 
$
36,957

 
$

 
$
226,058

Interest expense
(6,422
)
 
(447
)
 
(2,734
)
 
(9,603
)
Intersegment interest income (expense)
1,284

 
(1,284
)
 

 

Net interest income
183,963

 
35,226

 
(2,734
)
 
216,455

Negative provision (provision) for credit losses
6,053

 
(3,181
)
 

 
2,872

Gain on securities
5,631

 

 

 
5,631

FDIC loss sharing expense
(15,579
)
 

 

 
(15,579
)
Other noninterest income
10,240

 
2,579

 
5,299

 
18,118

Total noninterest income
292

 
2,579

 
5,299

 
8,170

Foreclosed assets income, net
934

 

 

 
934

Intangible asset amortization
(3,474
)
 
(498
)
 

 
(3,972
)
Acquisition, integration and reorganization costs
(23,879
)
 

 
(260
)
 
(24,139
)
Other noninterest expense
(115,352
)
 
(17,855
)
 
(4,215
)
 
(137,422
)
Total noninterest expense
(141,771
)
 
(18,353
)
 
(4,475
)
 
(164,599
)
Earnings (loss) from continuing operations before taxes
48,537

 
16,271

 
(1,910
)
 
62,898

Income tax (expense) benefit
(17,038
)
 
(6,814
)
 
2,984

 
(20,868
)
Net earnings from continuing operations
31,499

 
9,457

 
1,074

 
42,030

Loss from discontinued operations before taxes
(42
)
 

 

 
(42
)
Income tax benefit
18

 

 

 
18

Net loss from discontinued operations
(24
)
 

 

 
(24
)
Net earnings
$
31,475

 
$
9,457

 
$
1,074

 
$
42,006


Note 15. Related Party Transactions
In connection with the CapitalSource Inc. merger, the Bank paid an advisory fee of $9 million to Castle Creek Financial LLC (“Castle Creek Financial”) during 2014. In connection with the FCAL acquisition, the Bank paid an advisory fee of $1.3 million to Castle Creek Financial during 2013. Castle Creek Financial is an affiliate of Castle Creek Capital LLC, which the Company's Chairman of the Board, Mr. Eggemeyer, is co-founder and chief executive.
Note 16.  Recently Issued Accounting Standards
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 meet 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. The adoption of this standard permits expenses currently reported in noninterest expense to be reported in income tax expense. Early adoption is permitted. The adoption of this standard in January 2015 is not expected to have a material impact on our financial statements, however, total noninterest expense and income tax expense may 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

44


PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


January 1, 2015 and can be applied either prospectively or using a modified retrospective transition method, and early adoption is permitted. We do not expect the adoption of this standard in January 2015 to have a material impact on our financial statements.
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 is an amendment to Subtopic 205-20 that changes the criteria for reporting discontinued operations by raising the threshold for disposals to qualify as discontinued operations. Effectively, this update aims to reduce the unnecessarily frequent reporting of disposals of small groups of assets that are recurring in nature. The revised definition states that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 is effective for us for all disposals that occur after December 31, 2014. The adoption of this standard is not expected to have a material impact on our financial statements.
ASU 2014-09, "Revenue Recognition (Topic 606): Revenue from Contracts with Customers," was issued May 2014 and will be effective for annual and interim periods beginning after December 15, 2016. Early application is not permitted. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
ASU 2014-12, "Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period," was issued June 2014 and will be effective for annual and interim periods beginning after December 15, 2015. ASU 2014-12 applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide for a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. We do not currently have outstanding performance-based awards and, as a result, ASU 2014-12 would not impact our financial statements and its related disclosures.
In August 2014, the FASB issued ASU 2014-14, "Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure." This ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU 2014-14 is effective for public business entities for reporting periods, including interim periods, beginning after December 15, 2014. The Company is evaluating the effect that ASU 2014-14 will have on its financial statements and related disclosures since we have covered loans with loss sharing agreements with the FDIC, pursuant to which we will be reimbursed for a substantial portion of any future losses under the terms and agreements.
Note 17. Subsequent Events
On October 1, 2014, the Company obtained an unsecured, variable-rate revolving line of credit in the amount of $75 million with an expiration date of September 30, 2015.
On November 5, 2014 the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.50 per common share. The cash dividend is payable on November 26, 2014 to stockholders of record at the close of business on November 17, 2014.
On November 5, 2014, the Board of Directors of the Company approved the Amended and Restated Bylaws (the "Amended and Restated Bylaws"). The Amended and Restated Bylaws changed the voting standard for the election of directors in uncontested elections from a plurality to a majority of the votes cast at any meeting for the election of directors at which a quorum is present. The plurality voting standard continues to apply in any contested elections. The Amended and Restated Bylaws became effective immediately upon their adoption. 
We have evaluated events that have occurred subsequent to September 30, 2014 and have concluded there are no subsequent events that would require recognition in the accompanying consolidated financial statements.

45


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Forward-Looking Information

This Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our net interest income, allowance for loan and lease losses, net interest margin, deposit growth, loan and lease portfolio growth and production, Company and Pacific Western Bank liquidity, effective tax rates, and interest rate risk management. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:

change in interest rates and lending spreads;
compression of spreads on newly originated loans;
unfavorable changes in asset mix;
changes in our loan product could further compress net interest margin;
changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;
higher than anticipated loan losses;
credit quality deterioration or pronounced and sustained reduction in market values or other economic factors which adversely affect our borrowers' ability to repay loans and leases;
continued or worsening credit losses or charge-offs;
higher than anticipated delinquencies and reserves;
a change in the interest rate environment reduces interest margins;
asset/liability repricing risks and liquidity risks reduces interest margins and the value of investments;
our inability to grow deposits and access wholesale funding sources;
legislative or regulatory requirements or changes adversely affecting the Company’s business, including an increase to capital requirements;
loan repayments higher than expected;
reduced demand for our services due to strategic or regulatory reasons;
the success and timing of other business strategies and asset sales;
lower than expected taxable income which adversely affects the value of deferred tax assets;
lower than expected dividends paid from Pacific Western Bank to the holding company;
changes in tax laws or regulations affecting our business;
our inability to generate sufficient earnings;
tax planning or disallowance of tax benefits by tax authorities;
changes in tax filing jurisdictions or entity classifications;
changes in the forward yield curve;
changes in the relationship between yields on investments and loans repaid and yields on assets reinvested; and
other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and documents filed by PacWest with the U.S. Securities and Exchange Commission (“SEC”).

All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.


46


Overview
PacWest Bancorp (“PacWest”) 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.”
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 an array of commercial real estate loans and commercial lending products.  The Bank has a foundation of locally generated and relationship‑based deposits, with 80 full-service branches located throughout the state of California. Our branch operations are located primarily in Southern California extending from San Diego County to California’s Central Coast, and we operate three banking offices in the San Francisco Bay area and two offices in the Central Valley. Our targeted collateral for our real estate loan offerings includes healthcare properties, office properties, industrial properties, multifamily properties, hospitality properties, and retail properties.  Our commercial loan products, available on a nationwide basis, include equipment loans and leases, asset based loans, lender finance loans and loans secured by borrower future cash flows; and providing other business‑oriented products.
As a result of the CapitalSource Inc. merger, Pacific Western Bank established the CapitalSource Division, which we also refer to as the National Lending segment. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to middle market businesses. Pacific Western’s leasing operation, Pacific Western Equipment Finance, and its group specializing in asset-based lending, CapitalSource Business Finance Group (formerly BFI Business Finance and First Community Financial), also became part of the CapitalSource Division. The CapitalSource Division’s loan and lease origination efforts are conducted through offices located in Chevy Chase, Maryland; Los Angeles and San Jose, California; St. Louis, Missouri; Denver, Colorado; Chicago, Illinois; New York, New York; and Midvale, Utah. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of Pacific Western Bank that specializes in middle-market lending on a nationwide basis.
Pacific Western competes actively for deposits, and emphasizes solicitation of noninterest‑bearing deposits. In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year‑to‑date basis, accounted for 94.1% of our net revenues (net interest income plus noninterest income).
As of September 30, 2014, we had total assets of $15.9 billion, total gross loans and leases of $11.6 billion, total deposits of $11.5 billion and stockholders' equity of $3.5 billion. Total assets increased $9.4 billion and gross loans and leases increased $7.3 billion since December 31, 2013 due mainly to the CapitalSource Inc. merger. The gross Non‑PCI loan and lease portfolio totaled $11.2 billion as of September 30, 2014 compared to $3.9 billion as of December 31, 2013. Organic loan and lease growth was $384.8 million in the third quarter, while the PCI loan portfolio, which is comprised mostly of covered loans, decreased $31.4 million during the nine months ended September 30, 2014. The decrease is due to payments and resolutions for the period.
Total liabilities increased $6.7 billion, including a $4.9 billion increase in time deposits and a $1.4 billion increase in core deposits during the nine months ended September 30, 2014 due mainly to the CapitalSource Inc. merger. At September 30, 2014, time deposits totaled $5.5 billion or 48% of total deposits, while core deposits totaled $6.0 billion or 52% of total deposits.
CapitalSource Inc. Merger
On April 7, 2014, we completed the merger with CapitalSource Inc. As part of the merger, CapitalSource Bank (“CSB”), a wholly owned subsidiary of CapitalSource Inc., merged with and into Pacific Western Bank. We completed the merger in order to augment our loan and lease generation capabilities and to diversify our loan portfolio.
Upon closing, we created the CapitalSource Division of the Bank. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to middle market businesses.
In the merger with CapitalSource Inc., each share of CapitalSource Inc. common stock was converted into the right to receive $2.47 in cash and $0.2837 of a share of PacWest common stock. We issued an aggregate of approximately 56.7 million shares of PacWest common stock to CapitalSource Inc. stockholders. Based on the closing price of PacWest’s common stock on April 7, 2014 of $56,601,997.00 per share, the aggregate consideration paid to CapitalSource Inc. common stockholders and holders of equity awards to acquire CapitalSource Inc. common stock was approximately $3.1 billion.
The integration of CSB’s deposit system and the conversion of CSB’s branches to Pacific Western Bank’s operating platform were completed over the weekend of April 12, 2014. CSB had 21 branches, 12 of which were closed in the consolidation with Pacific Western at the close of business on April 11, 2014 and one overlapping Pacific Western branch was closed as well. All remaining branches opened on Monday, April 14, 2014 as Pacific Western branches.

47


For further information, see Note 3, Acquisitions, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).”
First California Financial Group Acquisition
On May 31, 2013, we completed the acquisition of First California Financial Group, Inc. (“FCAL”). As part of the acquisition, First California Bank (“FCB”), a wholly owned subsidiary of FCAL, merged with and into Pacific Western. For further information, see Note 3, Acquisitions, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).”
Key Performance Indicators
Among other factors, our operating results depend generally on the following key performance indicators:
The Level of Our Net Interest Income
Net interest income is the excess of interest earned on our interest‑earning assets over the interest paid on our interest‑bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest‑earning assets. A sustained low interest rate environment combined with low loan growth and high levels of marketplace liquidity may lower both our net interest income and net interest margin going forward.
Our primary interest‑earning assets are loans and investments. Our primary interest‑bearing liabilities are deposits. We attribute our high net interest margin to our high level of noninterest‑bearing deposits and low cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest‑bearing deposits, which have no expectation of yield. As an industrial loan bank, CapitalSource Inc. funded its balance sheet with a large proportion of higher-cost time deposits. We added $5.3 billion of time deposits in the CapitalSource Inc. merger. Over time, our goal is to replace higher-costing time deposits with core deposits through a dedicated deposit transformation initiative that includes sourcing deposits from CapitalSource Division borrowers.
Loan and Lease Growth
We actively seek new lending opportunities under an array of commercial real estate loans and commercial and industrial ("C&I") lending products. Our targeted collateral for our real estate loan offerings includes healthcare properties, office properties, industrial properties, multifamily properties, hospitality properties, and retail properties. Our C&I loan products include equipment loans and leases, asset-based loans, lender finance loans and loans secured by borrower future cash flows. Our loan origination process emphasizes credit quality. We strive to foster lender relationships with borrowers that have had proven loan repayment performance. Our commitment sizes vary by loan product and can range up to $50 million for certain asset-based lending arrangements and multi-property real estate loans. The term of our loans tends to be up to three years with certain loan products having extension options which are subject to credit performance hurdles. We price loans to preserve our interest spread and maintain our net interest margin. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competitive pressure related to loan pricing and loan proceeds, and successful borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize 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 uncollectible are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the 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 originated and acquired non‑impaired loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination or acquisition date. For purchased credit impaired ("PCI") 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 collectibility 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 adverse 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

48



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 loan production and foreclosed asset 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) net revenues are reduced by net FDIC loss sharing expense, gain (loss) on sale of assets, and accelerated discount accretion resulting from early payoffs of acquired loans and (b) noninterest expense is reduced by covered foreclosed assets expense and acquisition, integration and reorganization costs.
We present this non-GAAP financial measure and others for supplemental information purposes only in order to understand the Company's operating results and these non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles ("GAAP").
The consolidated base and adjusted efficiency ratios have been as follows:
Three Months Ended
 
Base
Efficiency
Ratio
 
Adjusted
Efficiency
Ratio
September 30, 2014
 
46.6%
 
43.4%
June 30, 2014
 
84.5%
 
43.1%
March 31, 2014
 
56.1%
 
52.7%
December 31, 2013
 
85.5%
 
56.7%
September 30, 2013
 
64.3%
 
57.3%
We disclose the adjusted efficiency ratio as it shows the trend in recurring overhead‑related noninterest expense relative to recurring net revenues. See “Non‑GAAP Measurements” for the calculations of the base and adjusted efficiency ratios.
Adjusted Net Earnings
Our net earnings for the third quarter of 2014 totaled $62.3 million. Another measure of earnings used as an indicator of earnings generating capability, excluding non-recurring and/or volatile items, is adjusted net earnings. We calculate adjusted net earnings by excluding accelerated discount accretion resulting from the early payoff of acquired loans, net FDIC loss sharing expense, gain (loss) on sale of loans and leases, securities gains and losses, gain on sale of an owned building, covered foreclosed assets expense, and acquisition, integration and reorganization costs. Adjusted net earnings for the third quarter of 2014 totaled $68.4 million. See “Non‑GAAP Measurements” for the calculation of adjusted net earnings.
Critical Accounting Policies
The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses, the carrying values of intangible assets, the realization of deferred income tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. For further information, refer to our Annual Report on Form 10‑K for the year ended December 31, 2013.

49



Non-GAAP Measurements
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. The non-GAAP measures used in this Form 10-Q include the following:
Adjusted net earnings: As analysts and investors view this measure as an indicator of the Company's ability to both generate earnings and absorb credit losses, we disclose this amount in addition to net earnings.
Adjusted return on average assets, adjusted return on average equity, return on average tangible equity, adjusted return on average tangible equity, tangible common equity amounts and ratios, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to return on average assets, return on average equity, equity-to-assets ratio, and book value per share, respectively.
Adjusted efficiency ratio: We disclose this measure in addition to the efficiency ratio as it shows the trend in recurring overhead-related noninterest expense relative to recurring net revenues.
Adjusted allowance for credit losses to loans and leases: As the allowance for credit losses takes into consideration credit deterioration on acquired loans and leases only after the purchase date and an estimate of credit losses is included 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.
The methodology for determining adjusted net earnings, adjusted return on average assets, adjusted return on average equity, return on average tangible equity, adjusted return on average tangible equity, tangible common equity amounts and ratios, tangible book value per share, adjusted efficiency ratio and adjusted allowance for credit losses to loans and leases may differ among companies.

50



The following tables present performance amounts and ratios in accordance with GAAP and a reconciliation of the non‑GAAP financial measurements to the GAAP financial measurements:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Adjusted Net Earnings and Related Ratios:
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Reported net earnings
$
62,271

 
$
10,555

 
$
24,163

 
$
97,906

 
$
42,006

Subtract: Tax benefit on discontinued operations
(3
)
 
(476
)
 
16

 
(1,067
)
 
(18
)
Add: Tax expense on continuing operations
42,205

 
14,846

 
11,243

 
71,627

 
20,868

Reported pre-tax earnings
104,473

 
24,925

 
35,422

 
168,466

 
62,856

Add: Acquisition, integration and reorganization
 
 
 
 
 
 
 
 
 
costs
5,193

 
86,242

 
5,450

 
93,635

 
24,139

Subtract: FDIC loss sharing expense, net
(7,415
)
 
(8,525
)
 
(7,032
)
 
(27,370
)
 
(15,579
)
(Loss) gain on sale of loans and leases
973

 
(485
)
 
604

 
594

 
1,108

Gain on securities

 
89

 
5,222

 
4,841

 
5,631

Covered foreclosed assets (expense) income, net
(452
)
 
185

 
332

 
1,348

 
1,239

Gain on sale of owned office building

 

 

 
1,570

 

Adjusted pre-tax earnings before accelerated
 
 
 
 
 
 
 
 
 
discount accretion
116,560

 
119,903

 
41,746

 
281,118

 
94,596

Subtract: Accelerated discount accretion resulting
 
 
 
 
 
 
 
 
 
from payoffs of acquired loans
4,501

 
15,290

 
2,105

 
27,446

 
2,959

Adjusted pre-tax earnings
112,059

 
104,613

 
39,641

 
253,672

 
91,637

Tax expense (1)
(43,703
)
 
(40,799
)
 
(13,874
)
 
(98,932
)
 
(32,073
)
Adjusted net earnings
$
68,356

 
$
63,814

 
$
25,767

 
$
154,740

 
$
59,564

 
 
 
 
 
 
 
 
 
 
Average assets
$
15,716,539

 
$
15,037,101

 
$
6,660,854

 
$
12,456,182

 
$
5,943,004

 
 
 
 
 
 
 
 
 
 
Average stockholders' equity
$
3,465,119

 
$
3,233,018

 
$
797,725

 
$
2,515,506

 
$
685,216

Less: Average intangible assets
1,744,542

 
1,638,267

 
228,947

 
1,208,266

 
151,360

Average tangible common equity
$
1,720,577

 
$
1,594,751

 
$
568,778

 
$
1,307,240

 
$
533,856

 
 
 
 
 
 
 
 
 
 
Annualized return on average assets (2)
1.57
%
 
0.28
%
 
1.44
%
 
1.05
%
 
0.95
%
Annualized adjusted return on average assets (3)
1.73
%
 
1.70
%
 
1.53
%
 
1.66
%
 
1.34
%
Annualized return on average equity (4)
7.13
%
 
1.31
%
 
12.02
%
 
5.20
%
 
8.20
%
Annualized adjusted return on average equity (5)
7.83
%
 
7.92
%
 
12.81
%
 
8.22
%
 
11.62
%
Annualized return on average tangible equity (6)
14.36
%
 
2.65
%
 
16.85
%
 
10.01
%
 
10.52
%
Annualized adjusted return on average tangible equity (7)
15.76
%
 
16.05
%
 
17.97
%
 
15.83
%
 
14.92
%
_____________________________________
(1)
Full-year expected effective rate of 39% used in 2014 periods (excluding acquisition, integration and reorganization costs) and actual effective rate of 35% used in 2013 periods.
(2)
Annualized net earnings divided by average assets.
(3)
Annualized adjusted net earnings divided by average assets.
(4)
Annualized net earnings divided by average stockholders' equity.
(5)
Annualized adjusted net earnings divided by average stockholders' equity.
(6)
Annualized net earnings divided by average tangible common equity.
(7)
Annualized adjusted net earnings divided by average tangible common equity.



51



 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Adjusted Efficiency Ratio:
2014
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Noninterest expense
$
95,629

 
$
169,906

 
$
56,200

 
$
316,404

 
$
164,599

Less:
Acquisition, integration and reorganization costs
5,193

 
86,242

 
5,450

 
93,635

 
24,139

 
Covered foreclosed assets expense (income), net
452

 
(185
)
 
(332
)
 
(1,348
)
 
(1,239
)
 
Adjusted noninterest expense
$
89,984

 
$
83,849

 
$
51,082

 
$
224,117

 
$
141,699

 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
188,846

 
$
192,533

 
$
82,289

 
$
467,394

 
$
216,455

Noninterest income
16,314

 
8,479

 
5,127

 
29,484

 
8,170

Net revenues
205,160

 
201,012

 
87,416

 
496,878

 
224,625

Less:
FDIC loss sharing expense, net
(7,415
)
 
(8,525
)
 
(7,032
)
 
(27,370
)
 
(15,579
)
 
(Loss) gain on sale of loans and leases
973

 
(485
)
 
604

 
594

 
1,108

 
Gain on securities

 
89

 
5,222

 
4,841

 
5,631

 
Gain on sale of owned office building

 

 

 
1,570

 

 
Accelerated discount accretion resulting from early
 
 
 
 
 
 
 
 
 
 
payoffs of acquired loans
4,501

 
15,290

 
2,105

 
27,446

 
2,959

Adjusted net revenues
$
207,101

 
$
194,643

 
$
86,517

 
$
489,797

 
$
230,506

 
 
 
 
 
 
 
 
 
 
 
Base efficiency ratio(1)
46.6
%
 
84.5
%
 
64.3
%
 
63.7
%
 
73.3
%
Adjusted efficiency ratio(2)
43.4
%
 
43.1
%
 
59.0
%
 
45.8
%
 
61.5
%
_______________________________________ 
(1)
Noninterest expense divided by net revenues.
(2)
Adjusted noninterest expense divided by adjusted net revenues.


52



Tangible Common Equity:
September 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
PacWest Bancorp Consolidated:
 
 
 
Stockholders’ equity
$
3,478,246

 
$
809,093

Less: Intangible assets
1,740,951

 
225,991

Tangible common equity
$
1,737,295

 
$
583,102

Total assets
$
15,938,345

 
$
6,533,363

Less: Intangible assets
1,740,951

 
225,991

Tangible assets
$
14,197,394

 
$
6,307,372

Equity to assets ratio
21.8
%
 
12.4
%
Tangible common equity ratio(1)
12.2
%
 
9.2
%
Book value per share
$
33.76

 
$
17.66

Tangible book value per share
$
16.86

 
$
12.73

Shares outstanding
103,027,830

 
45,822,834

Pacific Western Bank:
 
 
 
Stockholders’ equity
$
3,357,138

 
$
911,200

Less: Intangible assets
1,740,951

 
225,991

Tangible common equity
$
1,616,187

 
$
685,209

Total assets
$
15,675,486

 
$
6,507,288

Less: Intangible assets
1,740,951

 
224,627

Tangible assets
$
13,934,535

 
$
6,282,661

Equity to assets ratio
21.4
%
 
14.0
%
Tangible common equity ratio(1)
11.6
%
 
10.9
%
_______________________________________ 
(1)
Tangible common equity divided by tangible assets.

Adjusted Allowance for Credit Losses to Loans and
Leases (Excludes PCI Loans):
September 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
Allowance for credit losses
$
68,997

 
$
67,816

Less: Allowance related to acquired Non-PCI loans and leases
3,038

 
607

Adjusted allowance for credit losses
$
65,959

 
$
67,209

Gross Non-PCI loans and leases
$
11,239,964

 
$
3,930,539

Less: Carrying value of acquired Non‑PCI loans and leases
7,039,518

 
1,060,172

Adjusted loans and leases
$
4,200,446

 
$
2,870,367

Allowance for credit losses to loans and leases(1)
0.61
%
 
1.73
%
Adjusted allowance for credit losses to loans and leases(2)
1.57
%
 
2.34
%
_______________________________________
(1)
Allowance for credit losses divided by gross Non-PCI loans and leases.
(2)
Adjusted allowance for credit losses divided by adjusted loans and leases.
Results of Operations
Acquisitions Impact Earnings Performance
The comparability of financial information is affected by our acquisitions. We completed the FCAL and CapitalSource Inc. acquisitions on May 31, 2013 ($1.6 billion in assets) and April 7, 2014 ($9.1 billion in assets), respectively. The transactions have been accounted for using the acquisition method of accounting and, accordingly, the related operating results have been included in the consolidated financial statements from the respective acquisition dates.

53



Earnings Performance
The following table presents profitability metrics for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
Profitability Measures:
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.60

 
$
0.10

 
$
0.53

 
$
1.18

 
$
1.03

Annualized return on:
 
 
 
 
 
 
 
 
 
Average assets
1.57
%
 
0.28
%
 
1.44
%
 
1.05
%
 
0.95
%
Average equity
7.13
%
 
1.31
%
 
12.02
%
 
5.20
%
 
8.20
%
Average tangible equity (1)
14.36
%
 
2.65
%
 
16.85
%
 
10.01
%
 
10.52
%
Annualized adjusted return on:
 
 
 
 
 
 
 
 
 
Average assets (2)
1.73
%
 
1.70
%
 
1.53
%
 
1.66
%
 
1.34
%
Average tangible equity (2)
15.76
%
 
16.05
%
 
17.97
%
 
15.83
%
 
14.92
%
Net interest margin
5.78
%
 
6.24
%
 
5.46
%
 
5.99
%
 
5.36
%
Core net interest margin (3)
5.64
%
 
5.74
%
 
5.32
%
 
5.64
%
 
5.28
%
Base efficiency ratio
46.60
%
 
84.50
%
 
64.30
%
 
63.68
%
 
73.28
%
Adjusted efficiency ratio (2)
43.45
%
 
43.08
%
 
59.04
%
 
45.76
%
 
61.47
%
_____________________________
(1)
Calculation reduces average equity by average intangible assets.
(2)
See "Non-GAAP Measurements" for the calculation of this item.
(3)
Excludes accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans.

Third Quarter of 2014 Compared to Second Quarter of 2014
Net earnings were $62.3 million, or $0.60 per diluted share, for the third quarter of 2014, compared to $10.6 million, or $0.10 per diluted share, for the second quarter of 2014. The quarter‑over‑quarter increase of $51.7 million in net earnings was due mostly to: (a) the $74.3 million decrease in noninterest expense, which was comprised of an $81.0 million decrease in acquisition, integration and reorganization costs offset by a $4.3 million increase in foreclosed assets expense and $2.6 million increase in operating expense, and (b) the $7.8 million increase in noninterest income. These items were offset partially by the $3.7 million decrease in net interest income. When certain income and expense items are excluded, adjusted net earnings were $68.4 million for the third quarter compared to $63.8 million for the prior quarter. The $4.6 million increase in adjusted net earnings was driven by higher net interest income from higher average average loan and lease balances offset by higher foreclosed assets expense and operating expense. The adjusted efficiency ratio remained flat at 43.4% for the third quarter compared to 43.1% for the prior quarter. The third quarter of 2014 adjusted return on assets and adjusted return on tangible equity stood at 1.73% and 15.76%, respectively.
Third Quarter of 2014 Compared to Third Quarter of 2013
Net earnings for the third quarter of 2014 were $62.3 million, or $0.60 per diluted share, compared to net earnings for the third quarter of 2013 of $24.2 million, or $0.53 per diluted share. The $38.1 million increase in net earnings was due to the $106.6 million increase in net interest income and the $11.2 million increase in noninterest income, offset partially by the $39.4 million increase in noninterest expense. All of the changes from period to period are due mostly to the CapitalSource Inc. merger.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Net earnings for the nine months ended September 30, 2014 were $97.9 million, or $1.18 per diluted share, compared to net earnings for the nine months ended September 30, 2013 of $42.0 million, or $1.03 per diluted share. The $55.9 million increase in net earnings was due to the $250.9 million increase in net interest income and the $21.3 million increase in noninterest income, offset partially by the $151.8 million increase in noninterest expense. The noninterest expense increase was comprised of a $71.9 million increase in operating expense, a $69.5 million increase in acquisition, integration and reorganization costs, a $6.1 million increase in leased equipment depreciation and a $4.4 million increase in foreclosed assets expense. When certain income and expense items are excluded, adjusted net earnings are $154.7 million for the nine months ended September 30, 2014 compared to $59.6 million for the same period in 2013. The $95.1 million increase was due mostly to the growth through the CapitalSource Inc. and FCAL acquisitions.

54



Net Interest Income
Net interest income, which is our principal source of revenue, 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. Net interest income is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities.
The following tables present, 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:
 
Three Months Ended
 
September 30, 2014
 
June 30, 2014
 
September 30, 2013
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
(Dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases, net of unearned income(1)
$
11,285,689

 
$
189,961

 
6.68
%
 
$
10,500,521

 
$
192,201

 
7.34
%
 
$
4,320,770

 
$
75,196

 
6.90
%
Investment securities(2)
1,584,811

 
12,331

 
3.09
%
 
1,606,848

 
11,986

 
2.99
%
 
1,518,256

 
9,871

 
2.58
%
Deposits in financial institutions
99,276

 
64

 
0.26
%
 
276,095

 
176

 
0.26
%
 
140,785

 
91

 
0.26
%
Total interest‑earning assets
12,969,776

 
202,356

 
6.19
%
 
12,383,464

 
204,363

 
6.62
%
 
5,979,811

 
85,158

 
5.65
%
Other assets
2,746,763

 
 
 
 
 
2,653,637

 
 
 
 
 
681,043

 
 
 
 
Total assets
$
15,716,539

 
 
 
 
 
$
15,037,101

 
 
 
 
 
$
6,660,854

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
605,288

 
$
86

 
0.06
%
 
$
601,958

 
$
77

 
0.05
%
 
$
619,884

 
$
83

 
0.05
%
Money market deposits
1,733,445

 
908

 
0.21
%
 
1,691,115

 
874

 
0.21
%
 
1,567,976

 
730

 
0.18
%
Savings deposits
759,177

 
575

 
0.30
%
 
722,808

 
548

 
0.30
%
 
216,174

 
14

 
0.03
%
Time deposits
5,680,732

 
7,253

 
0.51
%
 
5,613,601

 
5,814

 
0.42
%
 
765,890

 
865

 
0.45
%
Total interest‑bearing deposits
8,778,642

 
8,822

 
0.40
%
 
8,629,482

 
7,313

 
0.34
%
 
3,169,924

 
1,692

 
0.21
%
Borrowings
96,711

 
74

 
0.30
%
 
39,931

 
199

 
2.00
%
 
9,012

 
108

 
4.75
%
Subordinated debentures
434,625

 
4,614

 
4.21
%
 
409,934

 
4,318

 
4.22
%
 
132,413

 
1,069

 
3.20
%
Total interest‑bearing liabilities
9,309,978

 
13,510

 
0.58
%
 
9,079,347

 
11,830

 
0.52
%
 
3,311,349

 
2,869

 
0.34
%
Noninterest‑bearing demand deposits
2,778,260

 
 
 
 
 
2,546,540

 
 
 
 
 
2,329,197

 
 
 
 
Other liabilities
163,182

 
 
 
 
 
178,196

 
 
 
 
 
222,583

 
 
 
 
Total liabilities
12,251,420

 
 
 
 
 
11,804,083

 
 
 
 
 
5,863,129

 
 
 
 
Stockholders’ equity
3,465,119

 
 
 
 
 
3,233,018

 
 
 
 
 
797,725

 
 
 
 
Total liabilities and stockholders’
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
equity
$
15,716,539

 
 
 
 
 
$
15,037,101

 
 
 
 
 
$
6,660,854

 
 
 
 
Net interest income
 
 
$
188,846

 
 
 
 
 
$
192,533

 
 
 
 
 
$
82,289

 
 
Net interest rate spread
 
 
 
 
5.61
%
 
 
 
 
 
6.10
%
 
 
 
 
 
5.31
%
Net interest margin
 
 
 
 
5.78
%
 
 
 
 
 
6.24
%
 
 
 
 
 
5.46
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (3)
$
11,556,902

 
$
8,822

 
0.30
%
 
$
11,176,022

 
$
7,313

 
0.26
%
 
$
5,499,121

 
$
1,692

 
0.12
%
Funding sources (4)
$
12,088,238

 
$
13,510

 
0.44
%
 
$
11,625,887

 
$
11,830

 
0.41
%
 
$
5,640,546

 
$
2,869

 
0.20
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees.
(2)
The tax‑equivalent yield on investment securities was 3.39%, 3.35% and 2.74% for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively.
(3)
Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(4)
Funding sources is the sum of interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.


55



 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
(Dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Loans and leases, net of unearned income(1)
$
8,698,351

 
$
459,625

 
7.06
%
 
$
3,865,463

 
$
199,374

 
6.90
%
Investment securities(2)
1,568,382

 
35,140

 
3.00
%
 
1,436,650

 
26,501

 
2.47
%
Deposits in financial institutions
164,613

 
314

 
0.26
%
 
95,456

 
183

 
0.26
%
Total interest‑earning assets
10,431,346

 
495,079

 
6.35
%
 
5,397,569

 
226,058

 
5.60
%
Other assets
2,024,836

 
 
 
 
 
545,435

 
 
 
 
Total assets
$
12,456,182

 
 
 
 
 
$
5,943,004

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
611,499

 
$
241

 
0.05
%
 
$
567,295

 
$
220

 
0.05
%
Money market deposits
1,626,539

 
2,400

 
0.20
%
 
1,362,219

 
1,800

 
0.18
%
Savings deposits
570,317

 
1,137

 
0.27
%
 
185,527

 
49

 
0.04
%
Time deposits
4,005,299

 
13,582

 
0.45
%
 
772,735

 
4,349

 
0.75
%
Total interest‑bearing deposits
6,813,654

 
17,360

 
0.34
%
 
2,887,776

 
6,418

 
0.30
%
Borrowings
51,894

 
352

 
0.91
%
 
14,030

 
451

 
4.30
%
Subordinated debentures
326,858

 
9,973

 
4.08
%
 
119,309

 
2,734

 
3.06
%
Total interest‑bearing liabilities
7,192,406

 
27,685

 
0.51
%
 
3,021,115

 
9,603

 
0.42
%
Noninterest‑bearing demand deposits
2,568,396

 
 
 
 
 
2,115,608

 
 
 
 
Other liabilities
179,874

 
 
 
 
 
121,065

 
 
 
 
Total liabilities
9,940,676

 
 
 
 
 
5,257,788

 
 
 
 
Stockholders’ equity
2,515,506

 
 
 
 
 
685,216

 
 
 
 
Total liabilities and stockholders’ equity
$
12,456,182

 
 
 
 
 
$
5,943,004

 
 
 
 
Net interest income

 
$
467,394

 
 
 
 
 
$
216,455

 
 
Net interest rate spread
 
 
 
 
5.84
%
 
 
 
 
 
5.18
%
Net interest margin
 
 
 
 
5.99
%
 
 
 
 
 
5.36
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (3)
$
9,382,050

 
$
17,360

 
0.25
%
 
$
5,003,384

 
$
6,418

 
0.17
%
Funding sources (4)
$
9,760,802

 
$
27,685

 
0.38
%
 
$
5,136,723

 
$
9,603

 
0.25
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees.
(2)
The tax‑equivalent yield for investment securities was 3.41% and 2.84% for the nine months ended September 30, 2014 and 2013, respectively.
(3)
Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(4)
Funding sources is the sum of interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.



56



The net interest margin (“NIM”) and loan and lease yields are impacted by accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans, which causes volatility from period to period. The effects of this item on the NIM and loan and lease yield are shown in the following tables for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
NIM:
 
 
 
 
 
 
 
 
 
Reported
5.78
 %
 
6.24
 %
 
5.46
 %
 
5.99
 %
 
5.36
 %
Less: Accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans
(0.14
)%
 
(0.50
)%
 
(0.14
)%
 
(0.35
)%
 
(0.08
)%
Core
5.64
 %
 
5.74
 %
 
5.32
 %
 
5.64
 %
 
5.28
 %
Loan and Lease Yield:
 
 
 
 
 
 
 
 
 
Reported
6.68
 %
 
7.34
 %
 
6.90
 %
 
7.06
 %
 
6.90
 %
Less: Accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans
(0.16
)%
 
(0.58
)%
 
(0.19
)%
 
(0.42
)%
 
(0.10
)%
Core
6.52
 %
 
6.76
 %
 
6.71
 %
 
6.64
 %
 
6.80
 %
The following table present the impact on the NIM from all purchase accounting items as indicated in the table below for the period indicated:
 
Three Months Ended
 
September 30, 2014
 
Amount
 
Impact on NIM
 
(Dollars in thousands)
NIM - as reported
$
188,846

 
5.78
 %
Less: accelerated accretion of acquisition discounts
 
 
 
from early acquired loan payoffs
(4,501
)
 
(0.14
)%
Remaining accretion of Non-PCI loan acquisition
 
 
 
discounts
(15,072
)
 
(0.46
)%
Amortization of TruPS discount
1,402

 
0.04
 %
Accretion of time deposits premium
(5,081
)
 
(0.16
)%
 
(23,252
)
 
(0.72
)%
NIM - excluding purchase accounting
$
165,594

 
5.06
 %
The following table presents the loan and lease yields and related average balances for our Non‑PCI loans and leases, PCI loans, and total loan and lease portfolio for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Yields:
 
 
 
 
 
 
 
 
 
Non‑PCI loans and leases
6.41
%
 
7.06
%
 
6.35
%
 
6.63
%
 
6.48
%
PCI loans
14.74
%
 
15.08
%
 
11.88
%
 
17.07
%
 
9.93
%
Total loans and leases
6.68
%
 
7.34
%
 
6.90
%
 
7.06
%
 
6.90
%
Average Balances:
 
 
 
 
 
 
 
 
 
Non‑PCI loans and leases
$
10,922,640

 
$
10,125,327

 
$
3,889,780

 
$
8,339,072

 
$
3,397,398

PCI loans
363,049

 
375,194

 
430,990

 
359,278

 
468,065

Total loans and leases
$
11,285,689

 
$
10,500,521

 
$
4,320,770

 
$
8,698,350

 
$
3,865,463


57



Third Quarter of 2014 Compared to Second Quarter of 2014
Net interest income decreased by $3.7 million to $188.8 million for the third quarter of 2014 compared to $192.5 million for the second quarter of 2014 due to lower accelerated discount accretion resulting from early payoffs of acquired loans partially offset by higher interest income from higher average loan and lease balances.
Our NIM for the third quarter of 2014 was 5.78% compared to 6.24% for the second quarter of 2014. The 46 basis point decrease in NIM was driven by the lower accelerated discount accretion resulting from early payoffs of acquired loans.
The yield on loans and leases decreased to 6.68% for the third quarter of 2014 from 7.34% for the second quarter of 2014. The accelerated discount accretion resulting from early payoffs of acquired loans totaled $4.5 million for the third quarter and $15.3 million for the second quarter, a decrease of $10.8 million. When accelerated discount accretion is excluded, the core yield on loans and leases was 6.52% for the third quarter and 6.76% for the second quarter.
The yield on PCI loans decreased to 14.74% for the third quarter of 2014 from 15.08% for the second quarter of 2014. The accelerated discount accretion resulting from early payoffs of PCI loans totaled $1.8 million for the third quarter and $3.0 million for the second quarter, a decrease of $1.2 million. When accelerated accretion is excluded, the core PCI loan yield was 12.70% for the third quarter compared to 11.83% for the second quarter.
The cost of all funding sources increased in the third quarter due to $1.6 million lower premium accretion on time deposits acquired in the CapitalSource Inc. merger. The cost of average funding sources increased 3 basis points to 0.44% for the third quarter of 2014 from 0.41% for the second quarter of 2014. This increase includes the all‑in deposit cost which increased 4 basis points to 0.30% for the current quarter compared to the prior quarter. The cost of total interest‑bearing deposits increased 6 basis points to 0.40% and total interest‑bearing liabilities increased 6 basis points to 0.58%, respectively, for the third quarter. At the acquisition date, the weighted average contractual rate of the acquired CapitalSource Inc. time deposits was 98 basis points and the weighted average effective rate was 70 basis points. The effective rate is lower than the contractual rate due to the $5.1 million accretion of the purchase accounting premium on such acquired time deposits that lowered interest expense in the quarter. The remaining unamortized time deposit premium as of September 30, 2014 was $5.9 million and has a weighted average life of eleven months. The purchase accounting discount accretion on acquired time deposits lowered the all-in deposit cost by 16 basis points in the third quarter.
Third Quarter of 2014 Compared to Third Quarter of 2013
Net interest income increased by $106.6 million to $188.8 million for the third quarter of 2014 compared to $82.3 million for the third quarter 2013 due to the significant increase in interest-earning assets acquired in the CapitalSource Inc. merger.
The NIM increased 32 basis points to 5.78% for the third quarter of 2014 compared to 5.46% for the same quarter last year driven by the increase in interest-earning assets, which resulted from the loans and leases added with the CapitalSource Inc. merger and organic loan growth during the period. The increase in the NIM was also a result of loans and leases being a higher percentage of interest-earning assets than in the prior period.
The yield on loans and leases decreased 22 basis points to 6.68% for the third quarter of 2014 compared to 6.90% for the same quarter of 2013. This decrease was due to rates on newly originated loans being lower than the average portfolio rate and the higher-yielding PCI loan portfolio being a smaller percentage of the entire loan portfolio in the current quarter.
The cost of all funding sources increased in the third quarter of 2014 due to the addition of the higher-cost time deposits and subordinated debt from CapitalSource Inc. The cost of average funding sources increased 24 basis points to 0.44% for the third quarter of 2014 from 0.20% for the third quarter of 2013. This includes the all‑in deposit cost which increased 18 basis points to 0.30% for the current quarter from 0.12% for the same quarter last year. The cost of total interest‑bearing liabilities increased 24 basis points to 0.58% for the third quarter of 2014 from 0.34% for the same quarter last year.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Net interest income increased by $250.9 million to $467.4 million for the nine months ended September 30, 2014 compared to $216.5 million for the same period of 2013 due to the significant increase in interest-earning assets acquired in the CapitalSource Inc. merger.
The NIM increased 63 basis points to 5.99% for the nine months ended September 30, 2014 compared to 5.36% for the same period last year driven by the increase in interest-earning assets, which resulted from the loans and leases added with the CapitalSource Inc. merger and organic loan growth during the period. The increase in the NIM was also a result of loans and leases being a higher percentage of interest-earning assets than in the prior period.

58



The yield on loans and leases increased 16 basis points to 7.06% for the nine months ended September 30, 2014 compared to 6.90% for the same period of 2013. This increase was due to higher accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans. Such accelerated accretion totaled $27.4 million for the first nine months of 2014 and $3.0 million for the first nine months of 2013. When accelerated accretion is excluded, the core yield on loans and leases was 6.64% for the nine months ended September 30, 2014 and 6.80% for the same period of 2013.
The cost of all funding sources increased in the nine months ended September 30, 2014 due to the addition of the higher-cost time deposits and subordinated debt from CapitalSource Inc. The cost of average funding sources increased 13 basis points to 0.38% for the nine months ended September 30, 2014 from 0.25% for the same period of 2013. The increase in the cost of average funding sources in the first nine months of 2014 was due to noninterest-bearing deposits becoming a smaller percentage of funding liabilities than in the prior period. The cost of total interest‑bearing deposits increased 4 basis points to 0.34% and total interest‑bearing liabilities increased 9 basis points to 0.51% for the nine months ended September 30, 2014.
Provision for Credit Losses
The following table sets forth the details of the provision for credit losses and allowance for credit losses data for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
 
 
 
 
Addition to (reduction in) allowance
 
 
 
 
 
 
 
 
 
for Non‑PCI loans and leases
$
3,684

 
$
5,131

 
$
(570
)
 
$
9,415

 
$
(1,030
)
Addition to (reduction in) reserve for
 
 
 
 
 
 
 
 
 
unfunded loan commitments
(931
)
 
(131
)
 
570

 
(1,662
)
 
1,030

Total provision (negative
 
 
 
 
 
 
 
 
 
provision) for Non‑PCI loans
 
 
 
 
 
 
 
 
 
and leases
2,753

 
5,000

 

 
7,753

 

Provision (negative provision) for
 
 
 
 
 
 
 
 
 
PCI loans
2,297

 
30

 
(4,167
)
 
1,683

 
(2,872
)
Total provision (negative
 
 
 
 
 
 
 
 
 
provision) for credit losses
$
5,050

 
$
5,030

 
$
(4,167
)
 
$
9,436

 
$
(2,872
)
 
 
 
 
 
 
 
 
 
 
Non‑PCI Credit Quality Metrics:
 
 
 
 
 
 
 
 
 
Net charge‑offs (recoveries) on
 
 
 
 
 
 
 
 
 
Non‑PCI loans and leases
$
6,123

 
$
(412
)
 
$
2,125

 
$
6,572

 
$
4,318

Annualized net charge‑offs to
 
 
 
 
 
 
 
 
 
average Non‑PCI loans and leases
0.22
%
 
(0.02
)%
 
0.22
%
 
0.11
%
 
0.17
%
At Period End:
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
$
63,084

 
$
65,523

 
$
60,551

 
 
 
 
Allowance for credit losses
68,997

 
72,367

 
67,801

 
 
 
 
Non‑PCI nonaccrual loans and leases
88,948

 
96,802

 
50,845

 
 
 
 
Non‑PCI classified loans and leases
260,986

 
304,627

 
130,791

 
 
 
 
Allowance for credit losses to
 
 
 
 
 
 
 
 
 
Non‑PCI loans and leases
0.61
%
 
0.67
 %
 
1.72
%
 
 
 
 
Allowance for credit losses to
 
 
 
 
 
 
 
 
 
Non‑PCI nonaccrual loans
 
 
 
 
 
 
 
 
 
and leases
77.6
%
 
74.8
 %
 
133.3
%
 
 
 
 

59



Provisions for credit losses are charged to earnings for both on and off‑balance sheet credit exposures. We have a provision for credit losses on our Non‑PCI loans and leases and a provision for credit losses on our 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 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 and commitments. 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.
Our Non‑PCI loans and leases at September 30, 2014, included $7.0 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 takes into consideration those acquired loans and leases whose credit quality has deteriorated since their acquisition dates. At September 30, 2014, $3.0 million of our allowance for credit losses applies 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 $3.0 million is excluded from the allowance for credit losses, the result is an adjusted coverage ratio of our allowance for credit losses to Non‑PCI loans and leases of 1.57% at September 30, 2014; the comparable ratio at June 30, 2014 was 2.07%. The decrease in coverage ratio results from the combination of charge-offs on loans that were reserved for in the second quarter, the full payoff of a significant classified loan in the third quarter, and a lower balance of unamortized discount.
Non-PCI loans and leases include $4.2 billion of originated loans and leases that were not obtained through acquisitions. The allowance related to these loans and leases totaled $60.0 million, or 1.43% of the outstanding balance.
Increased provisions for credit losses may be required in the future based on loan and lease 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 further discussion in “Balance Sheet Analysis - Allowance for Credit Losses on Non‑PCI Loans” and “Balance Sheet Analysis - Allowance for Credit Losses on PCI Loans” contained herein.
Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Noninterest Income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
$
2,725

 
$
2,719

 
$
2,938

 
$
8,446

 
$
8,568

Other commissions and fees
6,371

 
5,743

 
2,204

 
14,046

 
6,291

Leased equipment income
5,615

 
5,672

 

 
11,287

 

Gain (loss) on sale of loans and leases
973

 
(485
)
 
604

 
594

 
1,108

Gain on securities

 
89

 
5,222

 
4,841

 
5,631

FDIC loss sharing expense, net
(7,415
)
 
(8,525
)
 
(7,032
)
 
(27,370
)
 
(15,579
)
Other income:
 
 
 
 
 
 
 
 
 
Dividends and realized gains on equity investments
3,625

 
658

 

 
4,283

 
 
Foreign currency translation net gains
2,253

 
251

 

 
2,504

 
 
Income recognized on early repayment of leases
510

 
961

 

 
4,976

 

Gain on sale of owned office building

 

 

 
1,570

 

Other
1,657

 
1,396

 
1,191

 
4,307

 
2,151

Total noninterest income
$
16,314

 
$
8,479

 
$
5,127

 
$
29,484

 
$
8,170


60



The following table presents the details of FDIC loss sharing expense, net for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
FDIC Loss Sharing Expense, Net:
 
 
 
 
 
 
 
 
 
(Loss) gain on FDIC loss sharing asset(1)
$
(1,735
)
 
$
(991
)
 
$
269

 
$
(4,932
)
 
$
4,229

FDIC loss sharing asset amortization, net
(6,074
)
 
(7,270
)
 
(6,971
)
 
(21,256
)
 
(18,718
)
Net reimbursement to FDIC for covered OREOs(2)
491

 
(175
)
 
(276
)
 
(908
)
 
(1,039
)
Other
(97
)
 
(89
)
 
(54
)
 
(274
)
 
(51
)
Total FDIC loss sharing expense, net
$
(7,415
)
 
$
(8,525
)
 
$
(7,032
)
 
$
(27,370
)
 
$
(15,579
)
_______________________
(1)
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.
(2)
Represents amounts to be reimbursed to the FDIC for gains on covered OREO sales and due from the FDIC for covered OREO write‑downs.
Third Quarter of 2014 Compared to Second Quarter of 2014
Noninterest income increased by $7.8 million to $16.3 million for the third quarter of 2014 from $8.5 million for the second quarter of 2014. The increase was due mostly to higher gain on sales of loans and leases, lower FDIC loss sharing expense and higher other income. The increase in other income is attributable to higher dividends on other equity investments and higher foreign currency translation net gains. We have approximately $38.8 million of other equity investments that may generate principal returns, dividends and/or gains on sale each period. We have approximately $54.3 million in loans denominated in Canadian Dollars, Euros and the British Pound and hedged with cross currency swaps with a notional value of $58.0 million. In addition, we have $32.6 million of subordinated debt denominated in Euros which is unhedged. The FDIC loss sharing expense decreased $1.1 million due mostly to lower amortization of the FDIC loss sharing asset as one of the Bank's loss sharing agreements reached the end of its initial indemnification period during the quarter.
Third Quarter of 2014 Compared to Third Quarter of 2013
Noninterest income increased by $11.2 million to $16.3 million for the third quarter of 2014 compared to $5.1 million for the third quarter of 2013. The increase was due mostly to income streams acquired in connection with the CapitalSource Inc. merger, including certain other commissions and fees, certain dividends and gains on other equity investments and foreign currency translation net gains. The increase in other commissions and fees is due to higher loan-related fees (unused commitment fees and prepayment fees) of $3.3 million and leased equipment income increased by $5.6 million, all attributable to the added CapitalSource Division operations.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Noninterest income increased by $21.3 million to $29.5 million for the nine months ended September 30, 2014 compared to $8.2 million for the same period of 2013. The increase was due mostly to the described income streams acquired in the CapitalSource Inc. merger, offset by higher FDIC loss sharing expense. The increase in FDIC loss sharing expense was due mainly to higher losses on the FDIC loss sharing asset and amortization of the FDIC loss sharing asset. The 2014 period also includes a gain on the sale of an owned office building of $1.6 million which was not present in the 2013 period.

61



Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Noninterest Expense:
 
 
 
 
 
 
 
 
 
Compensation and benefits
$
45,861

 
$
45,081

 
$
27,963

 
$
119,569

 
$
79,370

Occupancy
11,188

 
11,078

 
7,828

 
29,861

 
21,906

Data processing
3,929

 
4,099

 
2,590

 
10,568

 
7,278

Other professional services
3,687

 
2,843

 
1,906

 
8,053

 
4,984

Insurance and assessments
3,020

 
3,179

 
1,496

 
7,792

 
4,024

Intangible asset amortization
1,608

 
1,677

 
1,512

 
4,649

 
3,972

Other expense:
 
 
 
 
 
 
 
 
 
Loan expense
3,711

 
3,024

 
1,378

 
7,929

 
3,304

Communications
1,369

 
1,421

 
828

 
3,527

 
2,063

Other
8,275

 
7,670

 
5,669

 
21,302

 
14,493

Total operating expense
82,648

 
80,072

 
51,170

 
213,250

 
141,394

Leased equipment depreciation
2,961

 
3,095

 

 
6,056

 

Foreclosed assets expense (income), net
4,827

 
497

 
(420
)
 
3,463

 
(934
)
Acquisition, integration and reorganization costs
5,193

 
86,242

 
5,450

 
93,635

 
24,139

Total noninterest expense
$
95,629

 
$
169,906

 
$
56,200

 
$
316,404

 
$
164,599

The following tables present the components of foreclosed assets expense (income), net for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Foreclosed Assets Expense:
 
 
 
 
 
 
 
 
 
Provision for losses
$
4,698

 
$
274

 
$
617

 
$
5,065

 
$
2,094

Maintenance costs
177

 
606

 
367

 
1,152

 
978

Gain on sale
(48
)
 
(383
)
 
(1,404
)
 
(2,754
)
 
(4,006
)
Total foreclosed assets expense (income), net
$
4,827

 
$
497

 
$
(420
)
 
$
3,463

 
$
(934
)
Third Quarter of 2014 Compared to Second Quarter of 2014
Noninterest expense decreased by $74.3 million to $95.6 million for the third quarter of 2014 compared to $169.9 million for the second quarter of 2014. The decrease was due mostly to lower acquisition, integration and reorganization costs, which decreased $81.0 million, offset by higher foreclosed assets expense of $4.3 million and higher operating expense of $2.6 million. The increase in foreclosed assets expense was due mostly to write-downs on existing properties. Operating expenses increased to $82.6 million for the third quarter of 2014 compared to $80.1 million for the second quarter of 2014 due to increases in compensation, other professional services and other expenses. Compensation expense was affected by a number of items including (a) lower base salaries and payroll taxes of $1.8 million; (b) higher incentive compensation expense of $1.9 million largely due to the level of loan and lease originations; and (c) higher restricted stock expense of $600,000 as new awards were made in May 2014. Other professional services increased due to higher legal and other consulting expenses related to corporate initiatives. Other expense increased due to higher loan-related expenses related to origination and work-out activities and an accrual for loan-related litigation exposure.

62



Third Quarter of 2014 Compared to Third Quarter of 2013
Noninterest expense increased by $39.4 million to $95.6 million for the third quarter of 2014 compared to $56.2 million for the third quarter of 2013. The increase was in all expense categories as a result of including the CapitalSource Inc. operations after its acquisition date.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Noninterest expense increased by $151.8 million to $316.4 million for the nine months ended September 30, 2014 compared to $164.6 million for the same period of 2013. The increase was due mostly to higher acquisition, integration and reorganization costs, which increased $69.5 million, and higher operating expenses of $71.9 million as a result of including the CapitalSource Inc. and FCAL operations after their respective acquisition dates.
Income Taxes
The effective tax rate for the third quarter of 2014 was 40.4% compared to 57.7% for the second quarter of 2014 and 31.8% for the third quarter of 2013. The second quarter of 2014 effective tax rate was driven higher than normal by the non-deductibility and and tax treatment of certain acquisition, integration and reorganization costs. When these items are excluded, the adjusted effective tax rate was 40.2% for the second quarter. The Company operates primarily in the states of California and Maryland and the blended statutory tax rate for federal and states is 41%.
Business Segments
The Company’s reportable segments consist of “Community Banking,” “National Lending,” and “Other.”
As a result of the CapitalSource Inc. merger, Pacific Western Bank established the CapitalSource Division, which we also refer to as the National Lending segment. The CapitalSource Division, or National Lending segment, includes the lending operations gained through the CapitalSource Inc. merger, Pacific Western Equipment Finance, and the CapitalSource Business Finance Group (formerly BFI Business Finance and First Community Financial). We reorganized our asset-based lending and leasing operations when we established the CapitalSource Division combining BFI Business Finance and First Community Financial into the Capital Source Business Finance Group, selling Celtic Capital Corporation in July 2014, and having Pacific Western Equipment Finance and the Capital Source Business Finance Group become part of the CapitalSource Division. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to middle market businesses, including senior secured real estate loans, equipment loans and leases, asset-based loans, lender finance loans and cash flow loans secured by the enterprise value of the borrowing entity. The CapitalSource Division’s loan and lease origination efforts are conducted through offices located in Chevy Chase, Maryland; Los Angeles and San Jose, California; St. Louis, Missouri; Denver, Colorado; Chicago, Illinois; New York, New York; and Midvale, Utah.
The Community Banking and National Lending segments include all of the operations of Pacific Western Bank. The Community Banking segment includes the operations of Pacific Western Bank, excluding the CapitalSource Division, and includes lending and deposit gathering activities conducted primarily through its California-based branch offices and the Bank’s treasury management function and corporate overhead. The Other segment consists of holding company operations which result in expenses principally for compensation, facilities, professional services, interest on subordinated debentures, and the non-bank subsidiary operations including interest income from a loan portfolio and related loan servicing expense. For further information, see Note 15, Business Segments, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

63



The following tables present information regarding our business segments as of and for the periods indicated:
 
September 30, 2014
 
Community
 
National
 
 
 
Consolidated
Balance Sheet Data:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Loans and leases, net of unearned income
$
3,482,125

 
$
8,064,868

 
$
27,892

 
$
11,574,885

Allowance for loan and lease losses
(56,712
)
 
(25,187
)
 

 
(81,899
)
Total loans and leases, net
$
3,425,413

 
$
8,039,681

 
$
27,892

 
$
11,492,986

Goodwill
$
327,728

 
$
1,394,401

 
$

 
$
1,722,129

Core deposit and customer relationship intangibles, net
17,814

 
1,009

 

 
18,823

Total assets
6,492,869

 
9,182,617

 
262,859

 
15,938,345

Total deposits(1)
11,826,681

 

 
(303,244
)
 
11,523,437

_______________________________________ 
(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.
 
September 30, 2013
 
Community
 
National
 
 
 
Consolidated
Balance Sheet Data:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Loans and leases, net of unearned income
$
3,912,885

 
$
470,508

 
$

 
$
4,383,393

Allowance for loan and lease losses
(76,496
)
 
(7,290
)
 

 
(83,786
)
Total loans and leases, net
$
3,836,389

 
$
463,218

 
$

 
$
4,299,607

Goodwill
$
190,184

 
$
25,678

 
$

 
$
215,862

Core deposit and customer relationship intangibles, net
16,604

 
2,074

 

 
18,678

Total assets
6,100,587

 
507,339

 
8,929

 
6,616,855

Total deposits(1)
5,467,568

 

 
(34,424
)
 
5,433,144

______________________________________
(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.


64



 
Three Months Ended September 30, 2014
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
67,132

 
$
134,624

 
$
600

 
$
202,356

Interest expense
(8,851
)
 
(45
)
 
(4,614
)
 
(13,510
)
Intersegment interest income (expense)
5,250

 
(5,250
)
 

 

Net interest income (expense)
63,531

 
129,329

 
(4,014
)
 
188,846

Negative provision (provision) for credit losses
6,314

 
(11,364
)
 

 
(5,050
)
Gain on securities

 

 

 

FDIC loss sharing expense
(7,415
)
 

 

 
(7,415
)
Other noninterest income
7,566

 
9,953

 
6,210

 
23,729

Total noninterest income
151

 
9,953

 
6,210

 
16,314

Foreclosed assets (expense) income, net
(4,627
)
 
(322
)
 
122

 
(4,827
)
Intangible asset amortization
(1,517
)
 
(91
)
 

 
(1,608
)
Acquisition, integration and reorganization costs
(3,953
)
 
(1,240
)
 

 
(5,193
)
Other noninterest expense
(53,784
)
 
(24,835
)
 
(5,382
)
 
(84,001
)
Total noninterest expense
(63,881
)
 
(26,488
)
 
(5,260
)
 
(95,629
)
Intersegment noninterest income (expense)
26,411

 
(26,411
)
 

 

Total noninterest expense - adjusted
(37,470
)
 
(52,899
)
 
(5,260
)
 
(95,629
)
Earnings (loss) from continuing operations before taxes
32,526

 
75,019

 
(3,064
)
 
104,481

Income tax (expense) benefit
(13,870
)
 
(30,113
)
 
1,778

 
(42,205
)
Net earnings (loss) from continuing operations
18,656

 
44,906

 
(1,286
)
 
62,276

Loss from discontinued operations before taxes
(8
)
 

 

 
(8
)
Income tax benefit
3

 

 

 
3

Net loss from discontinued operations
(5
)
 

 

 
(5
)
Net earnings (loss)
$
18,651

 
$
44,906

 
$
(1,286
)
 
$
62,271



65



 
Three Months Ended June 30, 2014
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
69,977

 
$
132,742

 
$
1,644

 
$
204,363

Interest expense
(7,450
)
 
(62
)
 
(4,318
)
 
(11,830
)
Intersegment interest income (expense)
4,071

 
(4,071
)
 

 

Net interest income
66,598

 
128,609

 
(2,674
)
 
192,533

Negative provision (provision) for credit losses
4,418

 
(9,448
)
 

 
(5,030
)
Gain on securities
89

 

 

 
89

FDIC loss sharing expense
(8,525
)
 

 

 
(8,525
)
Other noninterest income
3,681

 
12,487

 
747

 
16,915

Total noninterest income
(4,755
)
 
12,487

 
747

 
8,479

Foreclosed assets (expense) income, net
(633
)
 
38

 
98

 
(497
)
Intangible asset amortization
(1,530
)
 
(147
)
 

 
(1,677
)
Acquisition, integration and reorganization costs
(77,713
)
 
(7,474
)
 
(1,055
)
 
(86,242
)
Other noninterest expense
(51,507
)
 
(24,484
)
 
(5,499
)
 
(81,490
)
Total noninterest expense
(131,383
)
 
(32,067
)
 
(6,456
)
 
(169,906
)
Intersegment noninterest income (expense)
23,533

 
(23,533
)
 

 

Total noninterest expense - adjusted
(107,850
)
 
(55,600
)
 
(6,456
)
 
(169,906
)
(Loss) earnings from continuing operations before taxes
(41,589
)
 
76,048

 
(8,383
)
 
26,076

Income tax benefit (expense)
12,081

 
(30,259
)
 
3,332

 
(14,846
)
Net (loss) earnings from continuing operations
(29,508
)
 
45,789

 
(5,051
)
 
11,230

Loss from discontinued operations before taxes
(1,151
)
 

 

 
(1,151
)
Income tax benefit
476

 

 

 
476

Net loss from discontinued operations
(675
)
 

 

 
(675
)
Net (loss) earnings
$
(30,183
)
 
$
45,789

 
$
(5,051
)
 
$
10,555



66



 
Three Months Ended September 30, 2013
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
72,873

 
$
12,285

 
$

 
$
85,158

Interest expense
(1,692
)
 
(108
)
 
(1,069
)
 
(2,869
)
Intersegment interest income (expense)
353

 
(353
)
 

 

Net interest income
71,534

 
11,824

 
(1,069
)
 
82,289

Negative provision (provision) for credit losses
5,782

 
(1,615
)
 

 
4,167

FDIC loss sharing expense
(7,032
)
 

 

 
(7,032
)
Other noninterest income
5,466

 
1,443

 
5,250

 
12,159

Total noninterest income
(1,566
)
 
1,443

 
5,250

 
5,127

Foreclosed assets income, net
420

 

 

 
420

Intangible asset amortization
(1,354
)
 
(158
)
 

 
(1,512
)
Acquisition, integration and reorganization costs
(5,190
)
 

 
(260
)
 
(5,450
)
Other noninterest expense
(42,435
)
 
(5,822
)
 
(1,401
)
 
(49,658
)
Total noninterest expense
(48,559
)
 
(5,980
)
 
(1,661
)
 
(56,200
)
Earnings (loss) from continuing operations before taxes
27,191

 
5,672

 
2,520

 
35,383

Income tax (expense) benefit
(9,996
)
 
(2,378
)
 
1,131

 
(11,243
)
Net earnings (loss) from continuing operations
17,195

 
3,294

 
3,651

 
24,140

Earnings from discontinued operations before taxes
39

 

 

 
39

Income tax expense
(16
)
 

 

 
(16
)
Net earnings from discontinued operations
23

 

 

 
23

Net earnings
$
17,218

 
$
3,294

 
$
3,651

 
$
24,163



67



 
Nine Months Ended September 30, 2014
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
214,704

 
$
278,131

 
$
2,244

 
$
495,079

Interest expense
(17,528
)
 
(184
)
 
(9,973
)
 
(27,685
)
Intersegment interest income (expense)
9,543

 
(9,543
)
 

 

Net interest income (expense)
206,719

 
268,404

 
(7,729
)
 
467,394

Negative provision (provision) for credit losses
11,558

 
(20,994
)
 

 
(9,436
)
Gain on securities
4,841

 

 

 
4,841

FDIC loss sharing expense
(27,370
)
 

 

 
(27,370
)
Other noninterest income
18,144

 
26,885

 
6,984

 
52,013

Total noninterest income
(4,385
)
 
26,885

 
6,984

 
29,484

Foreclosed assets (expense) income, net
(3,399
)
 
(284
)
 
220

 
(3,463
)
Intangible asset amortization
(4,238
)
 
(411
)
 

 
(4,649
)
Acquisition, integration and reorganization costs
(83,866
)
 
(8,714
)
 
(1,055
)
 
(93,635
)
Other noninterest expense
(146,281
)
 
(55,892
)
 
(12,484
)
 
(214,657
)
Total noninterest expense
(237,784
)
 
(65,301
)
 
(13,319
)
 
(316,404
)
Intersegment noninterest income (expense)
49,944

 
(49,944
)
 

 

Total noninterest expense - adjusted
(187,840
)
 
(115,245
)
 
(13,319
)
 
(316,404
)
Earnings from continuing operations before taxes
26,052

 
159,050

 
(14,064
)
 
171,038

Income tax (expense) benefit
(14,123
)
 
(63,703
)
 
6,199

 
(71,627
)
Net earnings (loss) from continuing operations
11,929

 
95,347

 
(7,865
)
 
99,411

Loss from discontinued operations before taxes
(2,572
)
 

 

 
(2,572
)
Income tax benefit
1,067

 

 

 
1,067

Net loss from discontinued operations
(1,505
)
 

 

 
(1,505
)
Net earnings (loss)
$
10,424

 
$
95,347

 
$
(7,865
)
 
$
97,906


68



 
Nine Months Ended September 30, 2013
 
Community
 
National
 
 
 
Consolidated
Results of Operations:
Banking
 
Lending
 
Other
 
Company
 
(In thousands)
Interest income
$
189,101

 
$
36,957

 
$

 
$
226,058

Interest expense
(6,422
)
 
(447
)
 
(2,734
)
 
(9,603
)
Intersegment interest income (expense)
1,284

 
(1,284
)
 

 

Net interest income
183,963

 
35,226

 
(2,734
)
 
216,455

Negative provision (provision) for credit losses
6,053

 
(3,181
)
 

 
2,872

Gain on securities
5,631

 

 

 
5,631

FDIC loss sharing expense
(15,579
)
 

 

 
(15,579
)
Other noninterest income
10,240

 
2,579

 
5,299

 
18,118

Total noninterest income
292

 
2,579

 
5,299

 
8,170

Foreclosed assets income, net
934

 

 

 
934

Intangible asset amortization
(3,474
)
 
(498
)
 

 
(3,972
)
Acquisition, integration and reorganization costs
(23,879
)
 

 
(260
)
 
(24,139
)
Other noninterest expense
(115,352
)
 
(17,855
)
 
(4,215
)
 
(137,422
)
Total noninterest expense
(141,771
)
 
(18,353
)
 
(4,475
)
 
(164,599
)
Earnings (loss) from continuing operations before taxes
48,537

 
16,271

 
(1,910
)
 
62,898

Income tax (expense) benefit
(17,038
)
 
(6,814
)
 
2,984

 
(20,868
)
Net earnings from continuing operations
31,499

 
9,457

 
1,074

 
42,030

Loss from discontinued operations before taxes
(42
)
 

 

 
(42
)
Income tax benefit
18

 

 

 
18

Net loss from discontinued operations
(24
)
 

 

 
(24
)
Net earnings
$
31,475

 
$
9,457

 
$
1,074

 
$
42,006

Third Quarter of 2014 Compared to Third Quarter of 2013
Net earnings for the Community Banking segment increased $1.4 million for the third quarter of 2014 to $18.6 million, compared to net earnings of $17.2 million in the third quarter of 2013. Net earnings before taxes increased $5.3 million as a result of lower noninterest expense of $11.1 million and higher noninterest income of $1.7 million, offset by lower net interest income of $8.0 million. The decrease in noninterest expense is due mostly to a higher allocation of expenses from the Community Banking segment to the National Lending segment than in the prior year, offset by higher noninterest expense which is a result of the growth in the Bank's lending and deposit operations. The increase in noninterest income is primarily due to higher gains on early repayment of leases. Net interest income decreased compared to the prior year period due to lower average loan and lease balances as $523 million of loans were transferred from the Community Banking segment to the National Lending segment in the second quarter of 2014.
For further information on the Community Banking segment regarding results of operations, loans, credit quality, deposits and liquidity, see the sections titled “Results of Operations” and “Balance Sheet Analysis”.
Net earnings for the National Lending segment increased $41.6 million for the third quarter of 2014 to $44.9 million, compared to $3.3 million for the third quarter of 2013. The increase in net earnings was a result of the CapitalSource Inc. merger which increased interest-earning assets and net interest income in 2014. Loans increased $7.6 billion to $8.1 billion in the third quarter of 2014 from $470.5 million for the third quarter of 2013. Noninterest expense for the National Lending segment increased $46.9 million largely as a result of the addition of the CapitalSource Division operations.
The net loss for the Other segment increased $4.9 million for the third quarter of 2014 as compared to third quarter 2013 due primarily to higher interest expense of $3.5 million due to a higher balance of subordinated debentures acquired in connection with the CapitalSource Inc. merger. The Other segment consists of holding company operations resulting in expenses principally for compensation, facilities, professional services and interest on subordinated debentures, and non-bank subsidiary operations

69



including interest income from a $28 million loan portfolio that is being wound down and loan servicing costs paid to the National Lending segment for such portfolio.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Net earnings for the Community Banking segment decreased $21.1 million for the first nine months of 2014 to $10.4 million, compared to earnings of $31.5 million in the same period of 2013. The decrease in net earnings was due mainly to the $60.0 million increase in acquisition, integration and reorganization costs. Excluding acquisition, integration and reorganization costs, net earnings before taxes increased $37.5 million due to (a) higher net interest income of $22.8 million, (b) lower provision for credit losses of $5.5 million, and (c) higher allocation of expenses from the Community Banking segment to the National Lending segment of $49.9 million offset by higher noninterest expense of $36.0 million and lower noninterest income of $4.7 million. The 2014 net interest income for the Community Banking segment increased $22.8 million due mostly to an increase in the discount accretion on loans acquired during 2014 and 2013. Noninterest expense increased due to the growth in the Bank's lending and deposit operations which was mostly a result of the CapitalSource Inc. merger and FCAL acquisition. Noninterest income decreased due to higher FDIC loss sharing expense.
For further information on the Community Banking segment regarding results of operations, loans, credit quality, deposits and liquidity, see the sections titled “Results of Operations” and “Balance Sheet Analysis”.
Net earnings for the National Lending segment increased $85.9 million for the first nine months of 2014 compared to 2013. The increase was primarily the result of the April 2014 CapitalSource Inc. merger, which increased interest-earning assets and net interest income in 2014. Loans increased $7.6 billion to $8.1 billion in the third quarter of 2014 from $470.5 million for the third quarter of 2013.
Balance Sheet Analysis
Investment Portfolio
The following table presents the components, yields, and durations of our securities available-for-sale as of the date indicated:
 
September 30, 2014
Security Type:
Amortized Cost
 
Fair Value
 
Yield(1)
 
Duration (in years)
 
(Dollars in thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Government agency and government-sponsored enterprise
 
 
 
 
 
 
 
pass through securities
$
537,969

 
$
555,087

 
2.79%
 
3.8
Government agency and government-sponsored enterprise
 
 
 
 
 
 
 
collateralized mortgage obligations
280,820

 
279,791

 
2.57%
 
4.9
Private label collateralized mortgage obligations
40,393

 
47,902

 
7.57%
 
2.3
Municipal securities (2)
473,426

 
482,427

 
2.96%
 
5.7
Corporate debt securities
110,032

 
112,143

 
3.84%
 
2.5
Government-sponsored enterprise debt securities
36,214

 
36,382

 
 
 
 
Other securities
26,044

 
25,949

 
0.62%
 
3.6
Total securities available-for-sale (2)
$
1,504,898

 
$
1,539,681

 
2.98%
 
4.5
_______________________________________ 
(1)
Represents the yield for the month of September 30, 2014.
(2)
The tax equivalent yield was 4.32% and 3.41% for municipal securities and total securities available-for-sale, respectively.

70




The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
 
September 30, 2014
Municipal Securities by State:
Carrying Value
 
% of Total
 
(Dollars in thousands)
 
 
 
 
Texas
$
91,831

 
19
%
Washington
45,208

 
9
%
New York
34,069

 
7
%
Colorado
30,251

 
6
%
Illinois
26,686

 
6
%
Ohio
25,183

 
5
%
California
22,213

 
5
%
Hawaii
16,562

 
3
%
Massachusetts
15,808

 
3
%
Florida
15,799

 
3
%
Total of 10 largest states
323,610

 
66
%
All other states
158,817

 
34
%
Total municipal securities
$
482,427

 
100
%


71


Loan and Leases
The following table presents the balance of our total gross loans and leases by portfolio segment and class as of the dates indicated:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Hospitality
$
530,628

 
5
%
 
$
560,832

 
5
%
 
$
181,735

 
4
%
SBA
357,923

 
3
%
 
352,492

 
3
%
 
45,166

 
1
%
Commercial real estate
2,492,883

 
22
%
 
2,390,066

 
22
%
 
1,712,125

 
40
%
Healthcare real estate
1,006,164

 
9
%
 
976,539

 
9
%
 
189,737

 
4
%
Multi-family
811,234

 
7
%
 
857,907

 
8
%
 
330,229

 
8
%
Other
514,283

 
3
%
 
457,746

 
4
%
 
334,249

 
8
%
Total real estate mortgage
5,713,115

 
49
%
 
5,595,582

 
51
%
 
2,793,241

 
65
%
Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
Residential
72,881

 
1
%
 
73,488

 
1
%
 
58,898

 
1
%
Commercial
218,389

 
2
%
 
235,019

 
2
%
 
159,308

 
4
%
Total real estate construction
291,270

 
3
%
 
308,507

 
3
%
 
218,206

 
5
%
Total real estate loans
6,004,385

 
52
%
 
5,904,089

 
54
%
 
3,011,447

 
70
%
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
429,011

 
4
%
 
446,754

 
4
%
 
587,326

 
13
%
Unsecured
127,150

 
1
%
 
145,632

 
1
%
 
153,881

 
4
%
Asset-based
1,594,488

 
14
%
 
1,488,267

 
13
%
 
202,428

 
5
%
Cash flow
2,341,511

 
20
%
 
2,167,135

 
19
%
 

 
%
Equipment finance
928,460

 
8
%
 
932,554

 
8
%
 
273,483

 
6
%
SBA
41,129

 
%
 
42,333

 
%
 
28,641

 
1
%
Total commercial
5,461,749

 
47
%
 
5,222,675

 
45
%
 
1,245,759

 
29
%
Consumer
108,751

 
1
%
 
63,341

 
1
%
 
55,146

 
1
%
Total gross loans and leases(1)
$
11,574,885

 
100
%
 
$
11,190,105

 
100
%
 
$
4,312,352

 
100
%
_______________________________________ 
(1)
Includes PCI loans of $351.4 million, $398.4 million and $382.8 million at September 30, 2014, June 30, 2014 and December 31, 2013, respectively, of which the majority are Other Real Estate Mortgage loans.

The following table presents a roll forward of the loan and lease portfolio by segment for the period indicated:
 
Three Months Ended September 30, 2014
 
Community
 
National
 
 
Loan and Lease Roll Forward by Portfolio Segment(1):
Banking
 
Lending
 
Total
 
(In thousands)
Beginning balance
$
3,521,367

 
$
7,668,738

 
$
11,190,105

Loans and leases originated and purchased
236,384

 
738,274

 
974,658

Existing loans and leases:
 
 
 
 
 
    Principal repayments, net(2)
(269,365
)
 
(266,393
)
 
(535,758
)
    Loan and lease sales
(223
)
 
(12,816
)
 
(13,039
)
    Transfers to held for sale

 
(33,125
)
 
(33,125
)
    Charge-offs
(6,038
)
 
(1,918
)
 
(7,956
)
Ending balance
$
3,482,125

 
$
8,092,760

 
$
11,574,885

_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws) and other changes within the loan portfolio.

72


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 refinance the loan, either with us or another lender, or pay off the loan, by selling the underlying collateral.
At September 30, 2014, we had $410.0 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 loans may be considered troubled debt restructurings ("TDRs") even though they performed throughout their terms. 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 TDR has occurred. Higher levels of TDRs 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:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
Loan Category:
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
(Dollars in thousands)
Commercial real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Industrial/warehouse
$
487,902

 
9
%
 
$
489,043

 
9
%
 
$
354,345

 
13
%
Retail
453,835

 
8
%
 
446,080

 
8
%
 
346,370

 
12
%
Office buildings
821,076

 
14
%
 
732,807

 
13
%
 
432,204

 
16
%
Owner-occupied
584,937

 
10
%
 
577,029

 
10
%
 
233,195

 
8
%
Hotel
532,991

 
9
%
 
563,248

 
10
%
 
181,735

 
7
%
Healthcare
1,006,164

 
19
%
 
976,539

 
19
%
 
189,737

 
7
%
Mixed use
131,101

 
2
%
 
60,514

 
1
%
 
68,966

 
2
%
Gas station
12,654

 
%
 
13,127

 
%
 
35,224

 
1
%
Self storage
62,820

 
1
%
 
67,077

 
1
%
 
73,760

 
3
%
Restaurant
18,262

 
%
 
24,459

 
%
 
21,510

 
1
%
Land acquisition/development
7,907

 
%
 
8,858

 
%
 
4,420

 
%
Unimproved land
7,870

 
%
 
8,702

 
%
 
12,517

 
%
Other
260,079

 
5
%
 
312,446

 
6
%
 
174,780

 
6
%
Total commercial real estate mortgage
4,387,598

 
77
%
 
4,279,929

 
77
%
 
2,128,763

 
76
%
Residential real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
811,234

 
15
%
 
857,907

 
16
%
 
330,229

 
12
%
Single family owner-occupied
183,211

 
3
%
 
185,990

 
3
%
 
212,508

 
8
%
Single family nonowner-occupied
251,559

 
4
%
 
192,413

 
3
%
 
33,741

 
1
%
Mixed use
11,478

 
%
 
11,305

 
%
 
10,701

 
%
HELOCs
68,035

 
1
%
 
68,038

 
1
%
 
77,299

 
3
%
Total residential real estate mortgage
1,325,517

 
23
%
 
1,315,653

 
23
%
 
664,478

 
24
%
Total gross real estate mortgage loans
$
5,713,115

 
100
%
 
$
5,595,582

 
100
%
 
$
2,793,241

 
100
%

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 “Accrued interest payable and other liabilities” on the condensed consolidated balance sheets. Generally, as unfunded commitments are funded, the related amount in the reserve for unfunded loan commitments is transferred from the reserve for unfunded loan commitments to the allowance for loan and lease losses. The following discussion is for Non-PCI loans and leases and the allowance for credit losses thereon. Refer to “Balance Sheet Analysis-Allowance for Credit Losses on PCI Loans” for the policy on PCI loans. For loans and leases acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or other inherent risks related to these acquired assets that may occur after the purchase date.

73


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 our continual review of the credit quality of the loan and lease portfolio which includes loan and lease payment performance and related historical payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial performance, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to pay. Loans and leases that are deemed to be uncollectible 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 allowance for loan and lease losses contains a specific reserve component for loans and leases determined to be impaired and a general reserve component for loans and leases with no credit impairment.
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 assess our loans for impairment on an on-going basis using certain criteria such as payment performance, borrower reported financial results and budgets, and other external factors when appropriate. 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. 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. To the extent a loan or lease exceeds the estimated collectible value, a specific reserve or charge-off is recorded depending upon the certainty of the estimate of loss. Smaller balance loans (under $250,000), with a few exceptions for certain loan types, are generally not individually assessed for impairment but are evaluated collectively.
The methodology we use to estimate the general reserve component of our allowance for credit losses considers both objective and subjective criteria. The objective criteria uses our actual historical loan and lease charge-off experience on pools of similar loans and leases to establish loss factors that are applied to our current loan and lease balances to estimate credit losses. The pools used to establish the loss factors for estimating the general reserve component are comprised of similar loan products and consider the credit risk ratings and the migration of the ratings over a historical timeframe. Greater reserve weight is placed on loans with more adverse credit risk ratings. The migration of the ratings is updated quarterly based on historic losses and movement of loans between ratings. 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. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the ratings assigned to loans on an on-going basis. The subjective inputs used to establish the loss factors consider delinquency and nonaccrual trends, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to pay.
The reserve for unfunded commitments is estimated by applying to the unfunded commitment amounts the same methodology used for the allowance for loan and lease losses. For unfunded commitments related to loans with borrowing availability, we compute the reserve for unfunded commitments based only on the expected usage of such borrowing availability.
The credit risk ratings which are applied to every loan and lease is one of the following four categories: "pass," "special mention," "substandard," and "doubtful," which we define as follows:
Pass: Loans and leases classified as "pass" are not adversely classified and collection and repayment in full is expected.
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 additional information on classified loans and leases, see Note 6, Loans and Leases, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
Management believes that the allowance for credit losses is appropriate for the known and inherent risks in our Non-PCI loan and lease portfolio and 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 result in a significant impact 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. 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

74


levels of classified loans and leases generally result in higher allowances for credit losses. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the established allowance will be sufficient to absorb related losses in the future.
The following table presents information regarding the allowance for credit losses on Non-PCI loans and leases as of the dates indicated:
Non-PCI Allowance for Credit Losses Data:
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
September 30, 2013
 
(Dollars in thousands)
Allowance for loan and lease losses
$
63,084

 
$
65,523

 
$
60,241

 
$
60,551

Reserve for unfunded loan commitments
5,913

 
6,844

 
7,575

 
7,250

Total allowance for credit losses
$
68,997

 
$
72,367

 
$
67,816

 
$
67,801

 
 
 
 
 
 
 
 
Allowance for credit losses to loans and leases
0.61
%
 
0.67
%
 
1.73
%
 
1.72
%
Adjusted allowance for credit losses to loans and leases
1.57
%
 
2.07
%
 
2.34
%
 
2.43
%
Allowance for credit losses to nonaccrual loans and leases
77.6
%
 
74.8
%
 
145.0
%
 
133.3
%
Allowance for credit losses to nonperforming assets
53.3
%
 
48.0
%
 
66.1
%
 
63.5
%
The following table presents the changes in our allowance for credit losses on Non-PCI loans and leases for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Non-PCI Allowance for Credit Losses:
2014
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Allowance for credit losses, beginning of period
$
72,367

 
$
66,955

 
$
69,926

 
$
67,816

 
$
72,119

Provision for credit losses:
 
 
 
 
 
 
 
 
 
Addition to (reduction in) allowance for loan and lease losses
3,684

 
5,131

 
(570
)
 
9,415

 
(1,030
)
Addition to (reduction in) reserve for unfunded loan
 
 
 
 
 
 
 
 
 
commitments
(931
)
 
(131
)
 
570

 
(1,662
)
 
1,030

Provision for credit losses
2,753

 
5,000

 

 
7,753

 

Loans and leases charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
(395
)
 
(487
)
 
(281
)
 
(976
)
 
(3,840
)
Commercial
(7,282
)
 
(326
)
 
(2,439
)
 
(9,049
)
 
(4,631
)
Consumer
(171
)
 
(17
)
 
(75
)
 
(203
)
 
(111
)
Total loans and leases charged off
(7,848
)
 
(830
)
 
(2,795
)
 
(10,228
)
 
(8,582
)
Recoveries on loans charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
1,312

 
376

 
152

 
1,949

 
1,665

Real estate construction
24

 
64

 
179

 
112

 
514

Commercial
337

 
587

 
324

 
1,301

 
2,028

Consumer
52

 
215

 
15

 
294

 
57

Total recoveries on loans charged off
1,725

 
1,242

 
670

 
3,656

 
4,264

Net (charge-offs) recoveries
(6,123
)
 
412

 
(2,125
)
 
(6,572
)
 
(4,318
)
Allowance for credit losses, end of period
$
68,997

 
$
72,367

 
$
67,801

 
$
68,997

 
$
67,801

Ratios:
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average loans and leases
0.22
%
 
0.02
%
 
0.22
%
 
0.11
%
 
0.17
%
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.

75


The following table presents the changes in our allowance for credit losses on PCI loans for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
PCI Allowance for Credit Losses:
2014
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Allowance for credit losses on PCI loans, beginning of period
$
16,626

 
$
21,200

 
$
27,397

 
$
21,793

 
$
26,069

Provision (negative provision)
2,297

 
30

 
(4,167
)
 
1,683

 
(2,872
)
Net (charge-offs) recoveries
(108
)
 
(4,604
)
 
5

 
(4,661
)
 
38

Allowance for credit losses on PCI loans, end of period
$
18,815

 
$
16,626

 
$
23,235

 
$
18,815

 
$
23,235

Nonperforming Assets and Performing Restructured Loans
The following table presents nonperforming assets and performing restructured loans information as of the dates indicated:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
September 30, 2013
 
(Dollars in thousands)
Nonaccrual Non-PCI loans and leases
$
88,948

 
$
96,802

 
$
46,774

 
$
50,845

Nonaccrual PCI loans(1)
27,670

 
38,467

 

 

Total nonaccrual loans
116,618

 
135,269

 
46,774

 
50,845

Foreclosed assets, net
40,524

 
53,821

 
55,891

 
55,972

Total nonperforming assets
$
157,142

 
$
189,090

 
$
102,665

 
$
106,817

 
 
 
 
 
 
 
 
Performing restructured loans(3)
$
34,308

 
$
33,741

 
$
41,648

 
$
80,237

Nonaccrual loans and leases to loans and leases (2)
1.01
%
 
1.21
%
 
1.19
%
 
1.29
%
Nonperforming assets to loans and leases and foreclosed
 
 
 
 
 
 
 
assets, net (2)
1.35
%
 
1.68
%
 
2.48
%
 
2.67
%
_______________________________________ 
(1)
Represents legacy CapitalSource borrowing relationships placed on nonaccrual status as of the acquisition date.
(2)
Calculation includes total loans and leases as of September 30, 2014 and June 30, 2014. For prior periods, calculation excludes PCI loans.
(3)
Excludes PCI loans.
Nonperforming assets include Non-PCI and PCI nonaccrual loans and leases and foreclosed assets and totaled $157.1 million at September 30, 2014 compared to $189.1 million at June 30, 2014. The $32.0 million decrease in nonperforming assets was due to a $18.7 million decrease in nonaccrual loans and leases due to resolutions and charge-offs for the period and a $13.3 million decrease in foreclosed assets due to sales and write-downs for the period. The nonperforming assets ratio decreased to 1.35% at September 30, 2014 from 1.68% at June 30, 2014.
Nonaccrual Loans and Leases
The $18.7 million decrease in nonaccrual loans and leases during the third quarter of 2014 was attributable mainly to (1) an $8.6 million change in Day 1 estimated goodwill related to the fair value adjustment of a PCI nonaccrual loan added in the CapitalSource Inc. merger, (2) $6.8 million in charge-offs, and (3) $10.2 million in principal payments, returns to accrual status, and other reductions, offset partially by $6.9 million in additions.

76


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
 
Accruing and
 
September 30, 2014
 
June 30, 2014
 
30 - 89 Days Past Due
 
Amount
 
% of
Loan
Category
 
Amount
 
% of
Loan
Category
 
September 30, 2014
 
June 30, 2014
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Hospitality
$
6,451

 
1.0
%
 
$
6,552

 
1.2
%
 
$

 
$

SBA
7,483

 
2.0
%
 
8,032

 
2.3
%
 
529

 
1,233

Other
26,575

 
1.0
%
 
28,098

 
0.6
%
 
4,014

 
1,427

Total real estate mortgage
40,509

 
1.0
%
 
42,682

 
0.8
%
 
4,543

 
2,660

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
Residential
925

 
1.0
%
 
927

 
1.3
%
 

 

Commercial
2,703

 
1.0
%
 
2,737

 
1.2
%
 
1,190

 

Total real estate construction
3,628

 
1.0
%
 
3,664

 
1.2
%
 
1,190

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Collateralized
5,165

 
1.0
%
 
11,247

 
2.5
%
 

 
575

Unsecured
226

 
%
 
322

 
0.2
%
 
1

 
145

Asset-based
5,003

 
%
 
4,874

 
0.3
%
 

 

Cash flow

15,958

 
1.0
%
 
15,793

 
0.7
%
 

 

Equipment finance
12,885

 
1.0
%
 
10,576

 
1.1
%
 

 

SBA
2,039

 
5.0
%
 
4,096

 
9.7
%
 

 
75

Total commercial
41,276

 
1.0
%
 
46,908

 
0.9
%
 
1

 
795

Consumer
3,535

 
3.0
%
 
3,548

 
0.6
%
 
165

 
128

Total Non-PCI loans and leases
$
88,948

 
1.0
%
 
$
96,802

 
0.9
%
 
$
5,899

 
$
3,583

The following table lists the ten largest Non-PCI lending relationships on nonaccrual status, excluding SBA-related loans, as of the date indicated:
September 30,
2014
Nonaccrual
Amount
 
Description
(In thousands)
 
 
$
15,723

 
Two healthcare cash flow loans secured by enterprise value. Borrower is current on principal and interest payments, but credit risk has increased due a decline in performance.
6,451

 
Two loans, each secured by a hotel in San Diego County. The borrower is paying according to the restructured terms of each loan.
5,847

 
Loan secured by 2nd trust deeds on two single family residences in Los Angeles County.
4,616

 
Loans secured by equipment used for coal production. Borrower is current on principal and interest payments but operating performance has declined.(1)
4,469

 
Asset based loan secured by consumer sales installment contracts. Although operating performance of the borrower has declined, loan payments have remained current and the loan is fully secured by performing receivables.
3,484

 
Two loans secured by various residential and commercial properties located predominantly in San Luis Obispo County.
3,240

 
Equipment leases secured by coal mining equipment. Borrower is current on lease payments.
3,154

 
Loan secured by an industrial building in Santa Barbara County.
2,652

 
Two loans that are both unsecured. The borrower is paying according to the restructured terms of each loan.
2,436

 
Two equipment leases secured by the inventory management system of a specialty retailer. Lease payments are current.
$
52,073

 
Total
_________________________________ 
(1)
New nonaccrual in third quarter of 2014.



77


Foreclosed Assets
The following table presents the components of foreclosed assets (primarily other real estate owned, or OREO) as of the dates indicated:
Property Type:
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
September 30, 2013
 
(In thousands)
Commercial real estate
$
2,559

 
$
10,770

 
$
15,753

 
$
18,826

Construction and land development
27,731

 
32,682

 
35,063

 
36,131

Multi-family
835

 
835

 
835

 
989

Single family residence
13

 
31

 
186

 
26

Total OREO, net
31,138

 
44,318

 
51,837

 
55,972

Other foreclosed assets
9,386

 
9,503

 
4,054

 

Total foreclosed assets
$
40,524

 
$
53,821

 
$
55,891

 
$
55,972

Foreclosed assets decreased $13.3 million during the third quarter of 2014 as a result of sales of $8.6 million and write downs of $4.7 million.
Performing Restructured Loans
Non-PCI performing restructured loans increased by $0.6 million during the third quarter of 2014 to $34.3 million at September 30, 2014. The increase was attributable primarily to $2.7 million in additions, offset partially by $2.3 million in payoffs. At September 30, 2014, we had $19.2 million in real estate mortgage loans, $9.1 million in real estate construction loans, $5.9 million in commercial loans, and $120,000 in consumer loans that were accruing interest under the terms of troubled debt restructurings.
The majority of the performing restructured loans were on accrual status prior to the loan modifications and have 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 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, we anticipate loan restructurings to continue.
PCI Delinquent and Nonaccrual Loans
Loans accounted for as PCI are generally considered accruing and performing loans as the loans accrete their discount to 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 are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of September 30, 2014, there are $27.7 million of PCI loans on nonaccrual status and included in the delinquency table below.
The following table presents a summary of the borrowers' underlying payment status of PCI loans as of the dates indicated:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
September 30, 2013
 
(In thousands)
Current
$
309,129

 
$
319,074

 
$
326,152

 
$
368,487

30 to 89 days past due
3,685

 
29,610

 
4,784

 
16,321

90 days or more past due
38,565

 
49,752

 
51,860

 
47,949

Total
$
351,379

 
$
398,436

 
$
382,796

 
$
432,757




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Deposits
The following table presents the balance of each major category of deposits at the dates indicated:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
Deposit Category:
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
(Dollars in thousands)
Noninterest-bearing deposits
$
2,842,488

 
25
%
 
$
2,701,434

 
23
%
 
$
2,318,446

 
44
%
Interest checking deposits
683,014

 
6

 
587,418

 
5

 
620,622

 
12

Money market deposits
1,721,563

 
15

 
1,688,773

 
14

 
1,458,910

 
28

Savings deposits
759,893

 
6

 
760,553

 
7

 
218,638

 
4

Total core deposits
6,006,958

 
52

 
5,738,178

 
49

 
4,616,616

 
88

Time deposits under $100,000
2,267,013

 
20

 
2,251,473

 
19

 
225,360

 
4

Time deposits $100,000 and over
3,249,466

 
28

 
3,678,146

 
32

 
439,011

 
8

Total time deposits
5,516,479

 
48

 
5,929,619

 
51

 
664,371

 
12

Total deposits
$
11,523,437

 
100
%
 
$
11,667,797

 
100
%
 
$
5,280,987

 
100
%
Total deposits decreased $0.1 billion during the third quarter to $11.5 billion at September 30, 2014, due to a decrease in time deposits of $0.4 billion partially offset by an increase in core deposits of $0.3 billion. The remaining unamortized purchase accounting premium on acquired CapitalSource Inc. time deposits as of September 30, 2014 was $5.9 million with a weighted average life of eleven months. Organic core deposit growth was $269 million in the third quarter, including $85 million generated from CapitalSource Division borrowers.
The following table summarizes time deposits together with their weighted average contractual rate and estimated effective rate for the maturity horizons as of the date indicated:
 
September 30, 2014
Maturity:
Time
Deposits
Under
$100,000
 
Time
Deposits
$100,000
or More
 
Total Time
Deposits
 
Contractual Rate
 
Estimated Effective Rate
 
(Dollars in thousands)
Due in three months or less
$
611,767

 
$
925,768

 
$
1,537,535

 
0.81%
 
0.65%
Due in over three months through six months
539,313

 
735,895

 
1,275,208

 
0.77%
 
0.67%
Due in over six months through twelve months
892,299

 
1,327,287

 
2,219,586

 
0.78%
 
0.72%
Due in over 12 months through 24 months
152,307

 
179,141

 
331,448

 
1.01%
 
0.72%
Due in over 24 months
71,327

 
81,375

 
152,702

 
0.97%
 
0.70%
Total
$
2,267,013

 
$
3,249,466

 
$
5,516,479

 
0.80%
 
0.69%

Regulatory Matters
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 “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5%, a minimum Tier 1 risk-based capital ratio of 6.0%, and a minimum total risk-based capital ratio of 10%. 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 September 30, 2014, such amount was $178.6 million for the Company and $1.0 million for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future. See "New Capital Rules" below for information on the new capital standards effective January 1, 2015.

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The following table presents regulatory capital requirements and our regulatory capital ratios as of the date indicated:
 
September 30, 2014
 
Pacific Western Bank
 
PacWest Bancorp Consolidated
 
Well Capitalized Requirement
Tier-1 Leverage
11.74
%
 
12.17
%
 
5.00
%
Tier-1 Risk-Based Capital
12.74

 
13.24

 
6.00

Total Risk-Based Capital
13.44

 
16.24

 
10.00

Tangible common equity ratio
11.60

 
12.24

 
N/A

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. The amount of subordinated debentures totaled $433.5 million at September 30, 2014 and includes $301.9 million of debentures acquired in connection with the CapitalSource Inc. merger. 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 September 30, 2014, the amount of trust preferred securities included in Tier I capital was $131.0 million, which is comprised of the trust preferred securities issued by us or bank holding companies we have acquired. The acquired CapitalSource Inc. trust preferred securities are ineligible for inclusion in Tier 1 capital but are included in Tier 2 capital. The $131.0 million of 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, as a result of the Company having exceeded $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. See “-New Capital Rules” below. If the $131 million of trust preferred securities are excluded from regulatory capital, we remain “well capitalized” at September 30, 2014.
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. Our preliminary analysis indicates both the Company and the Bank will remain "well-capitalized" under the New Capital Rules.
Dividends on Common Stock and Interest on Subordinated Debentures
Bank holding companies, such as PacWest Bancorp, are required to notify the Board of Governors of the Federal Reserve System (“FRB”) prior to declaring and paying a dividend to stockholders during any period in which 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.

80



Liquidity Management
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 Management ALM Committee, or Executive ALM Committee, which is comprised of members of senior management and is 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 SF and the Federal Reserve Bank of San Francisco (“FRBSF”), which we refer to as our secondary liquidity. In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit, subject to availability, of $80.0 million with correspondent banks for purchase of overnight funds.
The following table provides a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Primary Liquidity-On-Balance Sheet:
 
 
 
 
 
Cash and due from banks
$
145,463

 
$
243,583

 
$
96,424

Interest-earning deposits at financial institutions
115,399

 
119,782

 
50,998

Investment securities available-for-sale
1,539,681

 
1,552,115

 
1,494,745

Less: pledged securities
(294,574
)
 
(327,432
)
 
(208,340
)
Total primary liquidity
$
1,505,969

 
$
1,588,048

 
$
1,433,827

Ratio of primary liquidity to total deposits
13.1
%
 
13.6
%
 
27.2
%
 
 
 
 
 
 
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Secondary Liquidity-Off-Balance Sheet Available Secured Borrowing Capacity:
 
 
 
 
 
Total secured borrowing capacity with the FHLB SF
$
2,367,424

 
$
2,410,157

 
$
1,329,512

Less: secured advances outstanding
(360,000
)
 
(150
)
 
(106,600
)
Net secured borrowing capacity with the FHLB SF
2,007,424

 
2,410,007

 
1,222,912

Secured credit line with the FRBSF
1,034,484

 
529,993

 
563,560

Total secondary liquidity
$
3,041,908

 
$
2,940,000

 
$
1,786,472

During the three months ended September 30, 2014, the Bank’s primary liquidity decreased $82.1 million due to a $98.1 million decrease in cash and due from banks offset partially by a $20.4 million increase in unpledged investment securities available-for-sale. The Bank’s secondary liquidity increased $101.9 million during the third quarter due to a $504.5 million increase in the borrowing capacity on the secured credit line with the FRBSF due to additional loans pledged as collateral, offset partially by a decline in available borrowings on the secured credit line with the FHLB SF due to an increase in outstanding borrowings.
At September 30, 2014, $1.4 billion of certain qualifying loans were specifically pledged as collateral for the secured borrowing line maintained with the FRBSF. The FHLB SF borrowing lines are secured by a blanket lien on certain qualifying loans in our loan portfolio which are not pledged to the FRBSF.
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 September 30, 2014, such deposits totaled $6.0 billion and represented 52% of the Bank's total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long-standing relationships and stable funding sources.

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Deposits from our customers may decline if interest rates increase significantly or if corporate customers move funds from the Bank generally. In order to address the Bank’s liquidity risk as deposit balances may fluctuate, the Bank maintains adequate levels of available liquidity.
The following table provides a summary of the Bank’s core deposits at the dates indicated:
 
September 30, 2014
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Core Deposits:
 
 
 
 
 
Noninterest-bearing demand
$
2,842,488

 
$
2,701,434

 
$
2,318,446

Interest checking
683,014

 
587,418

 
620,622

Money market deposits
1,721,563

 
1,688,773

 
1,458,910

Savings deposits
759,893

 
760,553

 
218,638

Total core deposits
$
6,006,958

 
$
5,738,178

 
$
4,616,616

Our liquidity policy establishes various liquidity guidelines for the Bank. 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 September 30, 2014, we were in compliance with all liquidity guidelines established in the liquidity 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 September 30, 2014, the Bank had $288.2 million of brokered deposits. During the third quarter, the Company added $200.0 million of brokered time deposits. Brokered time deposits under the Certificate of Deposit Account Registry Service Program ("CDARS Program") totaled $48.2 million and $49.4 million at September 30, 2014 and December 31, 2013, respectively. 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 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 the Bank, are regulated by the California Department of Business Oversight (“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 the three and nine months ended September 30, 2014, PacWest received $15.0 million and $81.0 million in dividends from the Bank. For the foreseeable future, any dividends from the Bank to the Company require DBO approval.
At September 30, 2014, the Company had, on a stand-alone basis, $303.4 million in cash, of which the majority is on deposit at the Bank. We believe this amount of cash, along with anticipated dividends from the Bank, will be sufficient to fund the Company’s cash flow needs over the next 12 months.
On October 1, 2014, we obtained an unsecured, variable-rate revolving line of credit in the amount of $75 million with an expiration date of September 30, 2015. This borrowing facility provides additional available liquidity to the Company.

82



Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of September 30, 2014:
 
September 30, 2014
 
Due Within One Year
 
Due in One to Three Years
 
Due in Three to Five Years
 
Due After Five Years
 
Total
 
(In thousands)
Time deposits(1)
$
5,028,332

 
$
420,562

 
$
59,775

 
$
1,146

 
$
5,509,815

Overnight FHLB advance
360,000

 

 

 

 
360,000

Long-term debt obligations(1)
1,825

 
1,681

 
155

 
547,074

 
550,735

Contractual interest(2)
14,000

 
6,571

 
2,376

 
59

 
23,006

Operating lease obligations
23,323

 
34,894

 
22,561

 
30,286

 
111,064

Other contractual obligations
14,037

 
4,859

 
238

 
203

 
19,337

Total
$
5,441,517

 
$
468,567

 
$
85,105

 
$
578,768

 
$
6,573,957

_______________________________________ 
(1)
Excludes purchase accounting fair value adjustments.
(2)
Excludes interest on subordinated debentures as these instruments are floating rate.
Long-term debt obligations include subordinated debentures. Debt obligations are also discussed in Note 9, Borrowings, Subordinated Debentures and Brokered Deposits, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).” Operating lease obligations are discussed in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. 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 believe 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 September 30, 2014, our loan and lease-related commitments, including standby letters of credit, totaled $1.9 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 have been and are expected to be sufficient to meet the cash requirements of our lending activities.

83



Asset/Liability Management and Interest Rate Sensitivity
Interest Rate 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 Management ALM Committee and the Board Asset Liability Committee 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 September 30, 2014, the results of which are presented below. Our net interest income and market value of equity simulations indicate that our balance sheet is asset sensitive. An asset sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated net interest income and market value of equity, while a liability sensitive profile would suggest that these amounts would decrease. 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 September 30, 2014. 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 yield curve at September 30, 2014. In order to arrive at the base case, we extend our balance sheet at September 30, 2014 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products' pricing as of September 30, 2014. 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. The repricing of certain floating-rate loans is limited by interest rate floors or hybrid-arm note structures, which contain an initial fixed-rate period before becoming floating-rate. 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 31, 2013, we decreased the assumed pricing sensitivity of money market and savings deposits to changes in market interest rates (the "deposit pricing beta"), based on an updated study of the historical repricing relationship. This assumption change resulted in lower interest expense in rising interest rate scenarios, which caused the Bank's net interest income simulation results to be more asset sensitive. 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, the actual deposit pricing beta, 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.

84



The following table presents as of September 30, 2014, 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:
 
 
 
 
 
 
 
Estimated
 
Estimated
 
Percentage
 
Estimated
 
Net Interest
September 30, 2014
Net Interest
 
Change
 
Net Interest
 
Margin Change
Interest Rate Scenario:
Income
 
From Base
 
Margin
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Up 300 basis points
$
808.9

 
14.3%
 
5.91%
 
0.72%
Up 200 basis points
$
765.6

 
8.2%
 
5.60%
 
0.41%
Up 100 basis points
$
726.5

 
2.7%
 
5.33%
 
0.14%
BASE CASE
$
707.7

 
 
5.19%
 
Down 100 basis points
$
710.5

 
0.4%
 
5.21%
 
0.02%
Down 200 basis points
$
710.2

 
0.4%
 
5.21%
 
0.02%
Down 300 basis points
$
710.1

 
0.3%
 
5.21%
 
0.02%
The net interest income ("NII") simulation model prepared as of September 30, 2014 suggests our balance sheet is asset sensitive. The degree of asset sensitivity in the third quarter’s NII rate shock results increased slightly compared to the prior quarter because of changes in the mix of floating and fixed-rate loans and an increase in noninterest-bearing demand deposits, along with interest checking and money market accounts.
Although $8.8 billion of the $11.6 billion of total loans in the portfolio have variable interest rate terms, only $2.0 billion of those variable-rate loans would immediately reprice at September 30, 2014 under the modeled scenarios. Of the remaining variable-rate loans, $6.0 billion would not immediately reprice because the loans' fully-indexed rates are below their floor rates. Of these $6.0 billion of loans at their floors, the fully-indexed rates would rise off of the floors and reprice as follows:
September 30, 2014
 
 
Rate
Cumulative
 
Increase
Amount of
 
Needed to
Loans
 
Reprice
(Dollars in millions)
 
 
$
4,584

 
100 bps
$
5,472

 
200 bps
$
5,654

 
300 bps
Additionally, certain variable-rate hybrid ARM loans do 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, was approximately $118.0 million, $360.1 million, and $489.7 million in the next one, two, and three years, respectively.
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

85



discount rates to the estimated cash flows from the different types of assets, liabilities and off-balance sheet items existing at September 30, 2014.
The following table shows the projected change in the market value of equity for the set of rate scenarios presented as of September 30, 2014:
September 30, 2014
Interest Rate Scenario:
Estimated
Market
Value
 
Dollar
Change
From Base
 
Percentage
Change
From Base
 
Percentage
of Total
Assets
 
Ratio of
Estimated
Market Value
to Book Value
 
(Dollars in millions)
Up 300 basis points
$
4,077.2

 
$
129.1

 
3.3
 %
 
25.6
%
 
117.2
%
Up 200 basis points
$
4,024.9

 
$
76.8

 
1.9
 %
 
25.3
%
 
115.7
%
Up 100 basis points
$
3,976.7

 
$
28.6

 
0.7
 %
 
25.0
%
 
114.3
%
BASE CASE
$
3,948.1

 
$

 

 
24.8
%
 
113.5
%
Down 100 basis points
$
3,934.3

 
$
(13.8
)
 
(0.3
)%
 
24.7
%
 
113.1
%
Down 200 basis points
$
3,923.9

 
$
(24.2
)
 
(0.6
)%
 
24.6
%
 
112.8
%
Down 300 basis points
$
3,921.5

 
$
(26.6
)
 
(0.7
)%
 
24.6
%
 
112.7
%
In comparing the September 30, 2014 simulation results to December 31, 2013, our base case estimated market value of equity has increased while our overall profile has become more asset sensitive. Base case market value of equity increased $2.9 billion compared to December 31, 2013; this increase was due primarily to the increase in shareholders’ equity attributable to the CapitalSource Inc. merger.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please see the section above titled "Asset/Liability Management and Interest Rate Sensitivity" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" which provides an update to our quantitative and qualitative disclosure about market risk. This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosure About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2013, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. 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, taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.
ITEM 1A. RISK FACTORS
There have been no material changes to risk factors as previously disclosed in the "Risk Factors" section of our Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed with the SEC on August 8, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

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ITEM 6. INDEX TO EXHIBITS
Exhibit Number
Description
3.1
Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).

3.2
Certificate of Amendment, dated May 14, 2010, to Certificate of Incorporation of PacWest Bancorp (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated herein by this reference).

3.3
Certificate of Merger filed with the Delaware Secretary of State, dated April 7, 2014.

3.4
Certificate of Correction of Certificate of Merger filed with the Delaware Secretary of State, dated April 14, 2014.

3.5
Amended and Restated Bylaws of PacWest Bancorp, a Delaware corporation, dated November 5, 2014. *
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. *

31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. *

32.1
Section 1350 Certification of Chief Executive Officer. *

32.2
Section 1350 Certification of Chief Financial Officer. *

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Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) the Condensed Consolidated Statements of Earnings for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013 and the six months ended September 30, 2014 and 2013, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013 and the six months ended September 30, 2014 and 2013, (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended September 30, 2014 and 2013, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013, and (vi) the Notes to Condensed Consolidated Financial Statements.

_____________________
* Filed herewith.

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Signatures
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.


 
PACWEST BANCORP
 
 
Date: November 7, 2014
/s/    VICTOR R. SANTORO
 
Victor R. Santoro
 
Executive Vice President and Chief Financial Officer
 


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