09.30.14 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