10-Q 1 a09301510-q.htm 10-Q 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, 2015
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 29, 2015, there were 120,201,464 shares of the registrant's common stock outstanding, excluding 963,522 shares of unvested restricted stock.


1



PACWEST BANCORP
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,
 
December 31,
 
2015
 
2014
 
(Unaudited)
 
(Dollars in thousands)
ASSETS:
 
 
 
Cash and due from banks
$
154,652

 
$
164,757

Interest-earning deposits in financial institutions
81,642

 
148,469

Total cash and cash equivalents
236,294

 
313,226

Securities available-for-sale, at fair value
1,809,364

 
1,567,177

Federal Home Loan Bank stock, at cost
17,250

 
40,609

Total investment securities
1,826,614

 
1,607,786

Gross loans and leases
12,493,397

 
11,904,684

Deferred fees and costs
(41,192
)
 
(22,252
)
Allowance for loan and lease losses
(103,271
)
 
(84,455
)
Total loans and leases, net
12,348,934

 
11,797,977

Equipment leased to others under operating leases
161,508

 
122,506

Premises and equipment, net
36,475

 
36,551

Foreclosed assets, net
33,216

 
43,721

Goodwill
1,728,380

 
1,720,479

Core deposit and customer relationship intangibles, net
12,704

 
17,204

Deferred tax asset, net
169,760

 
284,411

Other assets
260,220

 
290,744

Total assets
$
16,814,105

 
$
16,234,605

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
3,508,682

 
$
2,931,352

Interest-bearing deposits
8,607,081

 
8,823,776

Total deposits
12,115,763

 
11,755,128

Borrowings
552,497

 
383,402

Subordinated debentures
435,417

 
433,583

Accrued interest payable and other liabilities
128,724

 
156,262

Total liabilities
13,232,401

 
12,728,375

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
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 shares authorized at September 30, 2015 and December 31, 2014;
 
 
 
104,431,508 and 104,219,197 shares issued, respectively, including 988,825 and 1,108,505 shares of
 
 
 
unvested restricted stock, respectively)
1,044

 
1,042

Additional paid-in capital
3,665,173

 
3,807,167

Accumulated deficit
(57,934
)
 
(285,712
)
Treasury stock, at cost (1,377,814 and 1,197,180 shares at September 30, 2015 and December 31, 2014)
(51,038
)
 
(42,647
)
Accumulated other comprehensive income, net
24,459

 
26,380

Total stockholders' equity
3,581,704

 
3,506,230

Total liabilities and stockholders' equity
$
16,814,105

 
$
16,234,605


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,
 
2015
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Dollars in thousands, except per share data)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
193,539

 
$
203,781

 
$
189,961

 
$
599,417

 
$
459,625

Investment securities
13,955

 
14,570

 
12,331

 
40,720

 
35,140

Deposits in financial institutions
178

 
104

 
64

 
304

 
314

Total interest income
207,672

 
218,455

 
202,356

 
640,441

 
495,079

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
10,400

 
11,233

 
8,822

 
32,112

 
17,360

Borrowings
72

 
88

 
74

 
395

 
352

Subordinated debentures
4,680

 
4,582

 
4,614

 
13,787

 
9,973

Total interest expense
15,152

 
15,903

 
13,510

 
46,294

 
27,685

Net interest income
192,520

 
202,552

 
188,846

 
594,147

 
467,394

Provision for credit losses
8,746

 
6,529

 
5,050

 
31,709

 
9,436

Net interest income after provision for credit losses
183,774

 
196,023

 
183,796

 
562,438

 
457,958

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
2,601

 
2,612

 
2,725

 
7,787

 
8,446

Other commissions and fees
6,376

 
7,123

 
6,371

 
18,895

 
14,046

Leased equipment income
5,475

 
5,375

 
5,615

 
16,232

 
11,287

Gain on sale of loans and leases
27

 
163

 
973

 
190

 
594

Gain (loss) on sale of securities
655

 
(186
)
 

 
3,744

 
4,841

FDIC loss sharing expense, net
(4,449
)
 
(5,107
)
 
(7,415
)
 
(13,955
)
 
(27,370
)
Other income
5,073

 
9,643

 
8,045

 
23,359

 
17,640

Total noninterest income
15,758

 
19,623

 
16,314

 
56,252

 
29,484

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
48,152

 
49,033

 
45,861

 
144,922

 
119,569

Occupancy
10,762

 
10,588

 
11,188

 
31,950

 
29,861

Data processing
4,322

 
4,402

 
3,929

 
13,032

 
10,568

Other professional services
3,396

 
3,332

 
3,687

 
9,949

 
8,053

Insurance and assessments
3,805

 
4,716

 
3,020

 
11,546

 
7,792

Intangible asset amortization
1,497

 
1,502

 
1,608

 
4,500

 
4,649

Leased equipment depreciation
3,162

 
3,103

 
2,961

 
9,368

 
6,056

Foreclosed assets expense (income), net
4,521

 
(2,340
)
 
4,827

 
2,517

 
3,463

Acquisition, integration and reorganization costs
747

 
900

 
5,193

 
3,647

 
93,635

Other expense
9,775

 
10,040

 
12,649

 
28,344

 
30,641

Total noninterest expense
90,139

 
85,276

 
94,923

 
259,775

 
314,287

Earnings from continuing operations before taxes
109,393

 
130,370

 
105,187

 
358,915

 
173,155

Income tax expense
(39,777
)
 
(45,287
)
 
(42,911
)
 
(131,137
)
 
(73,744
)
Net earnings from continuing operations
69,616

 
85,083

 
62,276

 
227,778

 
99,411

Loss from discontinued operations before taxes

 

 
(8
)
 

 
(2,572
)
Income tax benefit

 

 
3

 

 
1,067

Net loss from discontinued operations

 

 
(5
)
 

 
(1,505
)
Net earnings
$
69,616

 
$
85,083

 
$
62,271

 
$
227,778

 
$
97,906

Basic earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.68

 
$
0.83

 
$
0.60

 
$
2.21

 
$
1.20

Net earnings
$
0.68

 
$
0.83

 
$
0.60

 
$
2.21

 
$
1.18

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.68

 
$
0.83

 
$
0.60

 
$
2.21

 
$
1.20

Net earnings
$
0.68

 
$
0.83

 
$
0.60

 
$
2.21

 
$
1.18

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.25

 
$
1.50

 
$
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,
 
2015
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(In thousands)
Net earnings
$
69,616

 
$
85,083

 
$
62,271

 
$
227,778

 
$
97,906

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale arising during the period
14,466

 
(21,213
)
 
93

 
616

 
45,395

Income tax (expense) benefit related to unrealized
 
 
 
 
 
 
 
 
 
holding gains (losses) arising during the period
(5,873
)
 
8,614

 
607

 
(364
)
 
(18,342
)
Unrealized holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
8,593

 
(12,599
)
 
700

 
252

 
27,053

Reclassification adjustment for (gains) losses included
 
 
 
 
 
 
 
 
 
in net earnings (1)
(655
)
 
186

 

 
(3,744
)
 
(4,841
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
266

 
(76
)
 

 
1,571

 
1,956

Reclassification adjustment for (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(389
)
 
110

 

 
(2,173
)
 
(2,885
)
Other comprehensive income (loss), net of tax
8,204

 
(12,489
)
 
700

 
(1,921
)
 
24,168

Comprehensive income
$
77,820

 
$
72,594

 
$
62,971

 
$
225,857

 
$
122,074

___________________________________ 
(1)
Entire amounts are recognized in "Gain (loss) on sale of 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, 2015
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Accumulated
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Deficit
 
Stock
 
Income
 
Total
 
(Unaudited)
 
(Dollars in thousands, except share data)
Balance, December 31, 2014
103,022,017

 
$
1,042

 
$
3,807,167

 
$
(285,712
)
 
$
(42,647
)
 
$
26,380

 
$
3,506,230

Net earnings

 

 

 
227,778

 

 

 
227,778

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

 

 

 

 

 
(1,921
)
 
(1,921
)
Restricted stock awarded and earned stock
 
 
 
 
 
 
 
 
 
 
 
 
 
compensation, net of shares forfeited
211,011

 
2

 
11,834

 

 

 

 
11,836

Restricted stock surrendered
(180,634
)
 

 

 

 
(8,391
)
 

 
(8,391
)
Tax effect from vesting of restricted stock

 

 
596

 

 

 

 
596

Cash dividends paid

 

 
(154,482
)
 

 

 

 
(154,482
)
Dividend reinvestment
1,300

 

 
58

 

 

 

 
58

Balance, September 30, 2015
103,053,694

 
$
1,044

 
$
3,665,173

 
$
(57,934
)
 
$
(51,038
)
 
$
24,459

 
$
3,581,704




See Notes to Condensed Consolidated Financial Statements.



6



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
(Unaudited)
 
(Dollars in thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
227,778

 
$
97,906

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,239

 
28,434

Provision for credit losses
31,709

 
9,436

Loss (gain) on sale of foreclosed assets
42

 
(2,746
)
Provision for losses on foreclosed assets
5,163

 
5,065

Gain on sale of loans and leases
(190
)
 
(594
)
Gain on sale of premises and equipment
(54
)
 
(1,523
)
Gain on sale of securities
(3,744
)
 
(4,841
)
Unrealized gain on derivatives and foreign currencies, net
(909
)
 
(2,393
)
Earned stock compensation
11,836

 
33,641

Write-off of goodwill relating to the asset financing segment reorganization

 
6,645

Tax effect included in stockholders' equity of restricted stock vesting
(596
)
 
(4,402
)
Decrease in accrued and deferred income taxes, net
108,553

 
47,938

Decrease in other assets
15,786

 
14,341

Decrease in accrued interest payable and other liabilities
(25,336
)
 
(79,644
)
   Net cash provided by operating activities
403,277

 
147,263

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

 
346,047

Net increase in loan and leases
(612,008
)
 
(433,525
)
Proceeds from sales of loans and leases
10,557

 
35,696

Securities available-for-sale:
 
 
 
Proceeds from maturities and paydowns
93,389

 
95,039

Proceeds from sales
212,169

 
465,608

Purchases
(557,769
)
 
(186,969
)
Collections of securities sales proceeds receivable

 
484,084

Net redemptions of Federal Home Loan Bank stock
23,359

 
28,397

Proceeds from sales of foreclosed assets
18,772

 
20,097

Purchases of premises and equipment, net
(5,872
)
 
(2,283
)
Proceeds from sales of premises and equipment
108

 
3,759

Net (increase) decrease of equipment leased to others under operating leases
(26,174
)
 
30,502

   Net cash (used in) provided by investing activities
(843,469
)
 
886,452

 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits:
 
 
 
   Noninterest-bearing
573,101

 
420,478

   Interest-bearing
(216,717
)
 
(518,012
)
Net increase (decrease) in borrowings
169,095

 
(742,109
)
Restricted stock surrendered
(8,391
)
 
(22,307
)
Tax effect included in stockholders' equity of restricted vesting stock
596

 
4,402

Cash dividends paid
(154,424
)
 
(62,727
)
   Net cash provided by (used in) financing activities
363,260

 
(920,275
)
Net (decrease) increase in cash and cash equivalents
(76,932
)
 
113,440

Cash and cash equivalents at beginning of period
313,226

 
147,422

Cash and cash equivalents at end of period
$
236,294

 
$
260,862

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
51,218

 
$
23,959

Cash paid (received) for income taxes
13,760

 
(3,829
)
Loans transferred to foreclosed assets
13,472

 
667

Partnership interest transferred to equipment leased to others under operating leases
20,833

 

Common stock issued in acquisitions

 
2,594,070

  
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 PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to “PacWest” or to the holding company, we are referring to PacWest Bancorp, the parent company, on a stand‑alone basis. As of September 30, 2015, the Company had total assets of $16.8 billion, gross loans and leases of $12.5 billion, total deposits of $12.1 billion and total stockholders' equity of $3.6 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 and originating loans and leases, including an array of commercial real estate loans and commercial lending products. The Bank serves the financial needs of its customers through 80 full-service branches located primarily in Southern California extending from San Diego County to California’s Central Coast. The Bank also operates three banking offices in the San Francisco Bay area and four banking offices in the Central Valley. The Bank competes actively for relationship-based loans and deposits through its branch network, and emphasizes solicitation of noninterest-bearing deposits.
The CapitalSource Division lends throughout the United States, providing middle-market businesses asset-secured loans, equipment-secured loans and leases, cash flow loans, and real estate loans secured by various property types. The collateral for real estate loans includes healthcare properties, office properties, industrial properties, multi-family properties, hospitality properties, and retail properties. Our leasing operation, Pacific Western Equipment Finance, and our group specializing in asset-based lending, CapitalSource Business Finance Group, are part of the CapitalSource Division. Our commercial loan products include equipment loans and leases, asset based loans, loans to finance companies, and loans secured by borrower future cash flows, as well as other business-oriented products. Our 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 the 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 include 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, 2015. 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 consolidated financial statements from their respective acquisition dates. See Note 3, Acquisitions, for more information about the CapitalSource Inc. merger, and Note 16, Subsequent Events, for information regarding the completion of the Square 1 Financial, Inc. acquisition on October 6, 2015.
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, 2014 as filed with the Securities and Exchange Commission ("Form 10-K").

8


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


Accounting Standard Adopted in 2015
Effective January 1, 2015, the Company adopted Accounting Standards Update 2014-01, new accounting guidance for investments in affordable housing projects that qualify for the low-income housing tax credit. As a result of the adoption of this new guidance, the Company made an accounting policy election to amortize the initial cost of its qualifying investments in proportion to the tax credits and other benefits received and to present the amortization as a component of income tax expense, referred to as the proportional amortization method. Previously, investments in low-income housing tax credits were accounted for under the equity method and such amortization was presented in other expense. The guidance was required to be applied retrospectively and accordingly, prior period amounts for other expense and tax expense have been revised to conform to the current period presentation. The revised amortization amounts for prior periods were not material.
The retrospective application of the adoption of the new accounting guidance for the proportional amortization method resulted in a cumulative effect on retained earnings of a reduction of $195,000.
Basis of Presentation    
Our interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. 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.
Use of Estimates
We have made a number of estimates and assumptions related 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 U.S. 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. 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. On the condensed consolidated balance sheets, the "Other assets" category includes "FDIC loss sharing asset," which was previously reported as a separate category.

9


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


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 First California Financial Group, Inc. ("FCAL") acquisition. Liabilities of the EPS division were $16.9 million and $21.3 million at September 30, 2015 and December 31, 2014, which consisted primarily of noninterest‑bearing deposits, and 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.
Note 3.  Acquisitions    
The following assets acquired and liabilities assumed of CapitalSource Inc. are presented at their estimated fair values as of its April 7, 2014 acquisition date:
 
CapitalSource Inc.
 
(In thousands)
Assets Acquired:
 
Cash and due from banks
$
768,553

Interest‑earning deposits in financial institutions
60,612

Investment securities available‑for‑sale
382,797

FHLB stock
46,060

Loans and leases
6,877,427

Equipment leased to others under operating leases
160,015

Premises and equipment
12,663

Foreclosed assets
6,382

Income tax assets
304,856

Goodwill
1,526,282

Core deposit and customer relationship intangibles
6,720

Other assets
582,985

Total assets acquired
$
10,735,352

Liabilities Assumed:
 
Noninterest‑bearing deposits
$
4,631

Interest‑bearing deposits
6,236,419

Other borrowings
992,109

Subordinated debentures
300,918

Accrued interest payable and other liabilities
124,087

Total liabilities assumed
$
7,658,164

Total consideration paid
$
3,077,188

Summary of consideration:
 
Cash paid
$
483,118

PacWest common stock issued
2,594,070

Total
$
3,077,188




10


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


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. At closing, we formed the CapitalSource Division within the Bank. The Bank provides a full spectrum of financing solutions across numerous industries and property types to middle market businesses nationwide marketed under the CapitalSource Division brand.
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 such fair values and accounting for the acquired assets and liabilities. The application of the acquisition method of accounting resulted in goodwill of $1.5 billion. All of the recognized goodwill was non‑deductible for tax purposes.
Acquisition-Related Charges
The costs shown for the 2014 periods relate to the CapitalSource merger completed on April 7, 2014. The costs shown for the 2015 periods relate to the Square 1 acquisition completed on October 6, 2015. The following table presents the components of acquisition, integration and reorganization costs for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2015
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Acquisition, Integration and Reorganization Costs:
 
 
 
 
 
 
 
 
 
Severance and employee-related
$

 
$

 
$
340

 
$

 
$
54,601

System conversion and integration
427

 

 
412

 
427

 
1,535

Asset write-downs, lease terminations and
 
 
 
 
 
 
 
 
 
   other facilities-related

 

 
150

 

 
5,853

Investment banking deal costs

 

 

 
1,050

 
16,117

Other (legal, accounting, insurance, consulting)
320

 
900

 
4,291

 
2,170

 
15,529

  Total acquisition, integration and
 
 
 
 
 
 
 
 
 
  reorganization costs
$
747

 
$
900

 
$
5,193

 
$
3,647

 
$
93,635


11


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


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 first quarter of 2015, we finalized the estimated fair value of the deferred tax assets acquired in the CapitalSource Inc. merger that resulted in a $7.9 million increase to goodwill.
Goodwill and other intangible assets deemed to have indefinite lives generated from 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 statements of earnings. No impairment losses were recognized during the nine months ended September 30, 2015 and 2014.
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 and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of September 30, 2015 is 3.8 years. The aggregate CDI and CRI amortization expense is expected to be $6.0 million for 2015. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $4.1 million for 2016, $2.3 million for 2017, $2.0 million for 2018, $1.7 million for 2019, and $953,000 for 2020.
The following table presents the changes in the carrying amount of goodwill for the period indicated:    
 
Goodwill
 
(In thousands)
Balance, December 31, 2014
$
1,720,479

Adjustment to acquired CapitalSource Inc. deferred tax assets
7,901

Balance, September 30, 2015
$
1,728,380

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,
 
2015
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
53,090

 
$
53,090

 
$
53,090

 
$
53,090

 
$
48,963

Additions

 

 

 

 
6,720

Fully amortized portion

 

 

 

 
(1,293
)
Write-off due to the asset financing segment reorganization

 

 

 

 
(1,300
)
Balance, end of period
53,090

 
53,090

 
53,090

 
53,090

 
53,090

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(38,889
)
 
(37,387
)
 
(32,659
)
 
(35,886
)
 
(31,715
)
Amortization
(1,497
)
 
(1,502
)
 
(1,608
)
 
(4,500
)
 
(4,649
)
Fully amortized portion

 

 

 

 
1,293

Write-off due to the asset financing segment reorganization

 

 

 

 
804

Balance, end of period
(40,386
)
 
(38,889
)
 
(34,267
)
 
(40,386
)
 
(34,267
)
Net CDI and CRI, end of period
$
12,704

 
$
14,201

 
$
18,823

 
$
12,704

 
$
18,823

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 Company's asset financing segment, which included the sale of Celtic Capital Corporation. These amounts are included in "Acquisition, integration and reorganization costs" in the condensed consolidated statements of earnings.

12


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


Note 5. Investment Securities     
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 the dates indicated:
 
September 30, 2015
 
December 31, 2014
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type:
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
pass-through securities
$
391,904

 
$
15,890

 
$
(196
)
 
$
407,598

 
$
515,902

 
$
20,142

 
$
(372
)
 
$
535,672

Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
206,380

 
5,460

 
(421
)
 
211,419

 
275,513

 
3,513

 
(1,080
)
 
277,946

Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
24,914

 
6,222

 
(110
)
 
31,026

 
26,889

 
7,153

 
(95
)
 
33,947

Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
7,258

 
44

 
(40
)
 
7,262

 
10,961

 
46

 
(93
)
 
10,914

Municipal securities
844,782

 
18,057

 
(4,002
)
 
858,837

 
521,499

 
15,899

 
(1,282
)
 
536,116

Corporate debt securities
47,380

 
139

 
(123
)
 
47,396

 
110,074

 
597

 
(562
)
 
110,109

Collateralized loan obligations
133,159

 
316

 
(1,158
)
 
132,317

 

 

 

 

SBA loan pool securities
51,153

 
395

 

 
51,548

 

 

 

 

Government-sponsored enterprise debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
securities
36,284

 
1,240

 

 
37,524

 
36,232

 
525

 

 
36,757

Other securities
24,972

 
2

 
(537
)
 
24,437

 
25,801

 
33

 
(118
)
 
25,716

Total
$
1,768,186

 
$
47,765

 
$
(6,587
)
 
$
1,809,364

 
$
1,522,871

 
$
47,908

 
$
(3,602
)
 
$
1,567,177

Other securities consist primarily of asset‑backed securities.
As of September 30, 2015, securities available‑for‑sale with a carrying value of $366.2 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the nine months ended September 30, 2015 and 2014, we purchased $557.8 million and $187.0 million in securities available-for-sale.
During the nine months ended September 30, 2015, we sold $49.9 million of government agency and government-sponsored enterprise ("GSE") CMOs for a gain of $609,000, $30.7 million of municipal securities for a gain of $744,000, $67.5 million in corporate debt securities for a loss of $232,000 and $60.3 million in GSE pass-through securities for a gain of $2.6 million. During the nine months ended September 30, 2014, we sold $137.3 million of GSE pass-through securities for a realized gain of $4.8 million and $797,000 in other securities for a realized gain of $89,000. In addition, we sold $323.6 million of the $382.8 million of securities obtained in the CapitalSource Inc. merger for no gain or loss.


13


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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
September 30, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass-through
 
 
 
 
 
 
 
 
 
 
 
securities
$
17,968

 
$
(95
)
 
$
9,552

 
$
(101
)
 
$
27,520

 
$
(196
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations

 

 
14,444

 
(421
)
 
14,444

 
(421
)
Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
1,111

 
(44
)
 
589

 
(66
)
 
1,700

 
(110
)
Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
1,296

 
(2
)
 
1,099

 
(38
)
 
2,395

 
(40
)
Municipal securities
238,631

 
(3,988
)
 
529

 
(14
)
 
239,160

 
(4,002
)
Corporate debt securities
23,013

 
(105
)
 
2,278

 
(18
)
 
25,291

 
(123
)
Collateralized loan obligations
103,409

 
(1,158
)
 

 

 
103,409

 
(1,158
)
Other securities
5,635

 
(102
)
 
16,114

 
(435
)
 
21,749

 
(537
)
     Total
$
391,063

 
$
(5,494
)
 
$
44,605

 
$
(1,093
)
 
$
435,668

 
$
(6,587
)
 
December 31, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass-through
 
 
 
 
 
 
 
 
 
 
 
securities
$
10,711

 
$
(13
)
 
$
27,100

 
$
(359
)
 
$
37,811

 
$
(372
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
23,908

 
(73
)
 
40,652

 
(1,007
)
 
64,560

 
(1,080
)
Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations

 

 
1,000

 
(95
)
 
1,000

 
(95
)
Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
1,618

 
(93
)
 

 

 
1,618

 
(93
)
Municipal securities
11,854

 
(66
)
 
84,822

 
(1,216
)
 
96,676

 
(1,282
)
Corporate debt securities
52,071

 
(547
)
 
10,131

 
(15
)
 
62,202

 
(562
)
Other securities
6,440

 
(90
)
 
10,019

 
(28
)
 
16,459

 
(118
)
Total
$
106,602

 
$
(882
)
 
$
173,724

 
$
(2,720
)
 
$
280,326

 
$
(3,602
)

14


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


We reviewed the securities that were in a loss position at September 30, 2015, and concluded their unrealized 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. Although we occasionally sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired 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, 2015
 
Amortized
 
Fair
Maturity:
Cost
 
Value
 
(In thousands)
Due in one year or less
$
9,304

 
$
9,373

Due after one year through five years
104,445

 
106,653

Due after five years through ten years
310,318

 
321,663

Due after ten years
1,344,119

 
1,371,675

Total securities available-for-sale
$
1,768,186

 
$
1,809,364

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.
FHLB Stock
At September 30, 2015, we had a $17.3 million investment in Federal Home Loan Bank of San Francisco ("FHLB") stock carried at cost. During the nine months ended September 30, 2015, the carrying value of FHLB stock decreased by $23.4 million due to $27.3 million in redemptions, offset partially by $3.9 million in purchases. We evaluated the carrying value of our FHLB stock investment at September 30, 2015, and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring dividends and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment. The FHLB paid us a special dividend of $1.4 million in the second quarter of 2015.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2015
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Taxable interest
$
7,323

 
$
7,577

 
$
7,850

 
$
22,373

 
$
22,438

Non-taxable interest
6,058

 
4,808

 
3,343

 
14,760

 
10,004

Dividend income
574

 
2,185

 
1,138

 
3,587

 
2,698

Total interest income on investment securities
$
13,955

 
$
14,570

 
$
12,331

 
$
40,720

 
$
35,140



15


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


Note 6.  Loans and Leases
The Company’s loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that all contractually required payments would be collected, 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 for which it was deemed 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 are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income on an accelerated basis 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 portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
 
September 30, 2015
 
December 31, 2014
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,521,291

 
$
184,751

 
$
5,706,042

 
$
5,350,827

 
$
256,489

 
$
5,607,316

Real estate construction and land
376,197

 
2,690

 
378,887

 
309,162

 
6,924

 
316,086

Commercial
6,272,807

 
5,606

 
6,278,413

 
5,852,420

 
27,155

 
5,879,575

Consumer
129,762

 
293

 
130,055

 
101,423

 
284

 
101,707

Total gross loans and leases
12,300,057

 
193,340

 
12,493,397

 
11,613,832

 
290,852

 
11,904,684

Deferred fees and costs
(41,141
)
 
(51
)
 
(41,192
)
 
(22,191
)
 
(61
)
 
(22,252
)
Total loans and leases, net of deferred fees
12,258,916

 
193,289

 
12,452,205

 
11,591,641

 
290,791

 
11,882,432

Allowance for loan and lease losses
(92,316
)
 
(10,955
)
 
(103,271
)
 
(70,456
)
 
(13,999
)
 
(84,455
)
Total net loans and leases
$
12,166,600

 
$
182,334

 
$
12,348,934

 
$
11,521,185

 
$
276,792

 
$
11,797,977


16


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


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, 2015
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan and
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
29,908

 
$
3,908

 
$
50,531

 
$
700

 
$
85,047

 
$
14,328

 
$
99,375

Charge-offs
(252
)
 

 
(4,035
)
 
(25
)
 
(4,312
)
 
(1,119
)
 
(5,431
)
Recoveries
288

 
390

 
239

 
164

 
1,081

 

 
1,081

Provision (negative provision)
4,355

 
93

 
6,137

 
(85
)
 
10,500

 
(2,254
)
 
8,246

Balance, end of period
$
34,299

 
$
4,391

 
$
52,872

 
$
754

 
$
92,316

 
$
10,955

 
$
103,271


 
Nine Months Ended September 30, 2015
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan and
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
25,097

 
$
4,248

 
$
39,858

 
$
1,253

 
$
70,456

 
$
13,999

 
$
84,455

Charge-offs
(1,767
)
 

 
(12,964
)
 
(115
)
 
(14,846
)
 
(1,698
)
 
(16,544
)
Recoveries
1,783

 
1,034

 
2,393

 
392

 
5,602

 
112

 
5,714

Provision (negative provision)
9,186

 
(891
)
 
23,585

 
(776
)
 
31,104

 
(1,458
)
 
29,646

Balance, end of period
$
34,299

 
$
4,391

 
$
52,872

 
$
754

 
$
92,316