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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission File Number: 00-30747

PACWEST BANCORP
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)
  33-0885320
(I.R.S. Employer
Identification Number)

10250 Constellation Blvd., Suite 1640
Los Angeles, California
(Address of principal executive offices)

 


90067
(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 ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of November 4, 2013, there were 44,316,774 shares of the registrant's common stock outstanding, excluding 1,763,544 shares of unvested restricted stock.

   


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

SEPTEMBER 30, 2013 FORM 10-Q

TABLE OF CONTENTS

 
   
  Page  

PART I—FINANCIAL INFORMATION

    3  

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

    3  

 

Condensed Consolidated Balance Sheets (Unaudited)

    3  

 

Condensed Consolidated Statements of Earnings (Unaudited)

    4  

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

    5  

 

Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)

    6  

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

    7  

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

    8  

ITEM 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    61  

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    116  

ITEM 4.

 

Controls and Procedures

    116  

PART II—OTHER INFORMATION

    117  

ITEM 1.

 

Legal Proceedings

    117  

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    119  

ITEM 6.

 

Exhibits

    120  

SIGNATURES

    121  

2


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)

        


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Par Value and Share Data)

(Unaudited)

 
  September 30,
2013
  December 31,
2012
 

ASSETS

             

Cash and due from banks

  $ 132,467   $ 89,011  

Interest-earning deposits in financial institutions

    11,552     75,393  
           

Total cash and cash equivalents

    144,019     164,404  
           

Securities available-for-sale, at fair value ($39,378 and $44,684 covered by FDIC loss sharing at September 30, 2013 and December 31, 2012)

    1,512,147     1,355,385  

Federal Home Loan Bank stock, at cost

    34,095     37,126  
           

Total investment securities

    1,546,242     1,392,511  
           

Loans and leases, net of unearned income ($510,924 and $543,327 covered by FDIC loss sharing at September 30, 2013 and December 31, 2012)

    4,383,393     3,590,297  

Allowance for loan and lease losses ($23,235 and $26,069 for loans covered by FDIC loss sharing at September 30, 2013 and December 31, 2012)

    (83,786 )   (91,968 )
           

Total loans and leases, net

    4,299,607     3,498,329  
           

Other real estate owned, net ($12,014 and $22,842 covered by FDIC loss sharing at September 30, 2013 and December 31, 2012)

    55,972     56,414  

Premises and equipment, net

    32,683     19,503  

FDIC loss sharing asset

    55,653     57,475  

Cash surrender value of life insurance

    77,512     68,326  

Goodwill

    215,862     79,866  

Core deposit and customer relationship intangibles, net

    18,678     14,723  

Other assets

    170,627     112,107  
           

Total assets

  $ 6,616,855   $ 5,463,658  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 2,328,688   $ 1,939,212  

Interest-bearing deposits

    3,104,456     2,769,909  
           

Total deposits

    5,433,144     4,709,121  

Borrowings

    8,243     12,591  

Subordinated debentures

    132,500     108,250  

Discontinued operations

    155,807      

Accrued interest payable and other liabilities

    70,872     44,575  
           

Total liabilities

    5,800,566     4,874,537  
           

Commitments and contingencies

             

STOCKHOLDERS' EQUITY

             

Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued and outstanding

         

Common stock, $0.01 par value; authorized 75,000,000 shares; 46,528,290 shares issued at September 30, 2013 and 37,772,559 at December 31, 2012 (includes 1,791,462 and 1,698,281 shares of unvested restricted stock)

    465     377  

Additional paid-in capital

    1,282,246     1,062,184  

Accumulated deficit

    (457,531 )   (499,537 )

Treasury stock, at cost; 437,548 and 351,650 shares at September 30, 2013 and December 31, 2012

    (9,218 )   (6,803 )

Accumulated other comprehensive income

    327     32,900  
           

Total stockholders' equity

    816,289     589,121  
           

Total liabilities and stockholders' equity

  $ 6,616,855   $ 5,463,658  
           

   

See "Notes to Condensed Consolidated Financial Statements."

3


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2013
  June 30,
2013
  September 30,
2012
 
 
  2013   2012  

Interest income:

                               

Loans and leases

  $ 75,196   $ 63,168   $ 66,711   $ 199,374   $ 194,775  

Investment securities

    9,871     8,414     8,346     26,501     27,484  

Deposits in financial institutions

    91     49     66     183     154  
                       

Total interest income

    85,158     71,631     75,123     226,058     222,413  
                       

Interest expense:

                               

Deposits

    1,692     2,077     3,292     6,418     10,232  

Borrowings

    108     199     210     451     2,428  

Subordinated debentures

    1,069     882     850     2,734     2,889  
                       

Total interest expense

    2,869     3,158     4,352     9,603     15,549  
                       

Net interest income

    82,289     68,473     70,771     216,455     206,864  
                       

Negative provision for credit losses

    (4,167 )   (1,842 )   (2,141 )   (2,872 )   (8,486 )
                       

Net interest income after negative provision for credit losses

    86,456     70,315     72,912     219,327     215,350  
                       

Noninterest income:

                               

Service charges on deposit accounts

    2,938     2,767     3,108     8,568     9,789  

Other commissions and fees

    2,204     2,154     2,123     6,291     6,101  

Gain on sale of leases

    604     279     132     1,108     1,525  

Gain on sale of securities

                409      

Acquisition-related securities gain

    5,222             5,222      

Other-than-temporary impairment loss on covered security

                    (1,115 )

Increase in cash surrender value of life insurance              

    62     221     304     716     964  

FDIC loss sharing expense, net

    (7,032 )   (5,410 )   (367 )   (15,579 )   (4,048 )

Other income

    1,129     192     382     1,435     599  
                       

Total noninterest income

    5,127     203     5,682     8,170     13,815  
                       

Noninterest expense:

                               

Compensation

    27,963     26,057     23,812     79,370     71,698  

Occupancy

    7,828     7,480     6,964     21,906     21,340  

Data processing

    2,590     2,455     2,310     7,278     6,848  

Other professional services

    2,830     2,240     2,019     7,167     6,167  

Business development

    756     798     635     2,290     1,854  

Communications

    828     622     652     2,063     1,886  

Insurance and assessments

    1,496     1,267     1,398     4,024     4,014  

Non-covered other real estate owned, net

    (88 )   80     1,883     305     3,834  

Covered other real estate owned, net

    (332 )   (94 )   4,290     (1,239 )   7,242  

Intangible asset amortization

    1,512     1,284     1,678     3,972     5,150  

Acquisition and integration

    5,450     17,997     2,101     24,139     2,997  

Debt termination

                    22,598  

Other expense

    5,367     4,030     3,915     13,324     12,509  
                       

Total noninterest expense

    56,200     64,216     51,657     164,599     168,137  
                       

Earnings from continuing operations before income taxes

    35,383     6,302     26,937     62,898     61,028  

Income tax expense

    (11,243 )   (1,906 )   (10,849 )   (20,868 )   (24,119 )
                       

Net earnings from continuing operations

    24,140     4,396     16,088     42,030     36,909  
                       

Earnings (loss) from discontinued operations before income taxes

    39     (81 )       (42 )    

Income tax (expense) benefit

    (16 )   34         18      
                       

Net earnings (loss) from discontinued operations

    23     (47 )       (24 )    
                       

Net earnings

  $ 24,163   $ 4,349   $ 16,088   $ 42,006   $ 36,909  
                       

Basic earnings per share:

                               

Net earnings from continuing operations

  $ 0.53   $ 0.11   $ 0.43   $ 1.03   $ 1.00  

Net earnings

  $ 0.53   $ 0.11   $ 0.43   $ 1.03   $ 1.00  

Diluted earnings per share:

                               

Net earnings from continuing operations

  $ 0.53   $ 0.11   $ 0.43   $ 1.03   $ 1.00  

Net earnings

  $ 0.53   $ 0.11   $ 0.43   $ 1.03   $ 1.00  

Dividends declared per share

  $ 0.25   $ 0.25   $ 0.18   $ 0.75   $ 0.54  

   

See "Notes to Condensed Consolidated Financial Statements."

4


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2013
  June 30,
2013
  September 30,
2012
 
 
  2013   2012  

Net earnings

  $ 24,163   $ 4,349   $ 16,088   $ 42,006   $ 36,909  

Other comprehensive income (loss) related to unrealized gains (losses) on securities available-for-sale:

                               

Unrealized holding gains (losses) arising during the period

    4,070     (48,189 )   12,966     (50,529 )   28,560  

Income tax benefit (expense) related to unrealized holding (losses) gains arising during the period

    483     20,240     (5,445 )   23,415     (11,995 )

Reclassification adjustment for (gain) loss included in net earnings

    (5,222 )           (5,631 )   1,115  

Income tax (benefit) expense related to reclassification adjustment

                172     (468 )
                       

Other comprehensive income (loss)

    (669 )   (27,949 )   7,521     (32,573 )   17,212  
                       

Comprehensive income (loss)

  $ 23,494   $ (23,600 ) $ 23,609   $ 9,433   $ 54,121  
                       

   

See "Notes to Condensed Consolidated Financial Statements."

5


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

 
  Nine Months Ended September 30, 2013  
 
  Common Stock    
   
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Income
   
 
 
  Shares   Par
Value
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Treasury
Stock
  Total  

Balance, December 31, 2012

    37,420,909   $ 377   $ 1,062,184   $ (499,537 ) $ (6,803 ) $ 32,900   $ 589,121  

Net earnings

                42,006             42,006  

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

                        (32,573 )   (32,573 )

Issuance of common stock for acquisition of First California Financial Group, Inc. 

    8,403,119     84     242,184                 242,268  

Restricted stock awarded and earned stock compensation, net of shares forfeited

    352,612     4     6,541                 6,545  

Restricted stock surrendered

    (85,898 )               (2,415 )       (2,415 )

Tax effect from vesting of restricted stock

            985                 985  

Cash dividends paid ($0.75 per share)

            (29,648 )               (29,648 )
                               

Balance, September 30, 2013

    46,090,742   $ 465   $ 1,282,246   $ (457,531 ) $ (9,218 ) $ 327   $ 816,289  
                               

   

See "Notes to Condensed Consolidated Financial Statements."

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Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2013   2012  

Cash flows from operating activities:

             

Net earnings

  $ 42,006   $ 36,909  

Adjustments to reconcile net earnings to net cash provided by operating activities:

             

Depreciation and amortization

    23,768     18,349  

Negative provision for credit losses

    (2,872 )   (8,486 )

Gain on sale of other real estate owned

    (4,006 )   (4,542 )

Provision for losses on other real estate owned

    2,094     13,566  

Gain on sale of leases

    (1,108 )   (1,525 )

(Gain) loss on sale of premises and equipment

    (15 )   158  

Gain on branch sale

        (297 )

Gain on sale of securities

    (409 )    

Acquisition-related securities gain

    (5,222 )    

Other-than-temporary impairment loss on covered security

        1,115  

Earned stock compensation

    6,545     4,631  

Tax effect included in stockholders' equity of restricted stock vesting

    (985 )   (224 )

Decrease in accrued and deferred income taxes, net

    4,267     6,423  

Decrease in FDIC loss sharing asset

    19,063     22,547  

Decrease in other assets

    6,254     3,262  

Decrease in accrued interest payable and other liabilities

    (22,952 )   (19,156 )
           

Net cash provided by operating activities

    66,428     72,730  
           

Cash flows from investing activities:

             

Net cash and cash equivalents acquired (used) in acquisitions

    273,013     (86,931 )

Net cash used in branch sale

        (119,756 )

Net decrease in loans and leases

    221,779     200,080  

Proceeds from sale of loans and leases

    18,812     42,128  

Securities available-for-sale:

             

Proceeds from maturities and paydowns

    264,654     310,273  

Proceeds from sales

    12,810     45,639  

Purchases

    (504,936 )   (320,936 )

Net redemptions of Federal Home Loan Bank stock

    12,549     6,595  

Proceeds from sales of other real estate owned

    28,918     43,881  

Purchases of premises and equipment, net

    (2,246 )   (2,208 )

Proceeds from sales of premises and equipment

    26     700  
           

Net cash provided by investing activities

    325,379     119,465  
           

Cash flows from financing activities:

             

Net increase (decrease) in deposits:

             

Noninterest-bearing

    28,310     339,718  

Interest-bearing

    (405,166 )   (224,165 )

Net decrease in borrowings

    (4,258 )   (222,736 )

Redemption of subordinated debentures

        (18,558 )

Repayment of acquired debt

        (180,796 )

Restricted stock surrendered

    (2,415 )   (1,424 )

Tax effect included in stockholders' equity of restricted stock vesting

    985     224  

Cash dividends paid

    (29,648 )   (19,669 )
           

Net cash used in financing activities

    (412,192 )   (327,406 )
           

Net decrease in cash and cash equivalents

    (20,385 )   (135,211 )

Cash and cash equivalents, beginning of period

    164,404     295,617  
           

Cash and cash equivalents, end of period

  $ 144,019   $ 160,406  
           

Supplemental disclosures of cash flow information:

             

Cash paid for interest

  $ 10,604   $ 17,457  

Cash paid for income taxes

    16,703     17,884  

Loans transferred to other real estate owned

    12,754     32,244  

Common stock issued for First California Financial Group acquisition

    242,268      

   

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

        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.

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

        We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation and general operating expenses. The Bank relies on a foundation of locally generated and relationship-based deposits, with 73 branches located across 10 California counties. The Bank has a relatively low cost of funds due to a high percentage of noninterest-bearing and low cost deposits.

        We have completed 26 acquisitions from May 2000 through September 30, 2013, including the acquisition of First California Financial Group, Inc. ("FCAL") on May 31, 2013. 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 FCAL acquisition and the acquisitions that we made in 2012, and Note 18, Subsequent Events, for information regarding the announcement of the CapitalSource, Inc. merger.

        The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we may refer to as GAAP. All significant intercompany balances and transactions have been eliminated.

        Our financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

Exchange Commission. The interim operating results are not necessarily indicative of operating results for the full year.

        Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the 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. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of intangible assets, the carrying value of the FDIC loss sharing asset, and the realization of deferred tax assets.

        As described in Note 3 below, we completed the acquisition of FCAL on May 31, 2013. The acquired assets and liabilities of FCAL were measured at their estimated fair values. Management made significant estimates and exercised significant judgment in estimating fair values and accounting for the acquired assets and assumed liabilities of FCAL.

        Certain prior period amounts have been reclassified to conform to the current period's presentation format. Starting with the June 30, 2013 quarter-end, loan tables presented non-purchased credit impaired ("Non-PCI") and purchased credit impaired ("PCI") loan categories in addition to covered and non-covered loan information. Previously the loan tables only presented covered and non-covered loan categories.

NOTE 2—DISCONTINUED OPERATIONS

        In connection with the acquisition of FCAL, we acquired Electronic Payment Services ("EPS"), a division of the Bank that is being discontinued. Accordingly, all income and expense related to EPS have been removed from continuing operations and are included in the condensed consolidated statements of earnings under the caption "Earnings (loss) from discontinued operations." For the three months ended September 30, 2013, revenues (net interest income plus noninterest income) and pre-tax income for the EPS division were $1.1 million and $39,000, respectively. For the period from acquisition date to September 30, 2013, revenues and pre-tax loss for the EPS division were $1.6 million and $42,000, respectively. Liabilities of the EPS division, which consist primarily of noninterest-bearing deposits, are included in the condensed consolidated balance sheets under the caption "Discontinued operations." Included in the EPS noninterest-bearing deposits are $104.8 million of brokered deposits. For segment reporting purposes, the EPS division is included in our Banking Segment.

NOTE 3—ACQUISITIONS

        We completed the following acquisitions during the time period of January 1, 2012 to September 30, 2013, using the acquisition method of accounting, and accordingly, the operating results of the acquired entities have been included in our condensed consolidated financial statements from their respective dates of acquisition.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—ACQUISITIONS (Continued)

        The following balance sheets of the acquired entities are presented at estimated fair value as of their respective acquisition dates:

 
  Acquisition and Date Acquired  
 
  First
California
Financial
Group
  American
Perspective
Bank
  Celtic
Capital
Corporation
  Pacific
Western
Equipment
Finance
 
 
  May 31,
2013
  August 1,
2012
  April 3,
2012
  January 3,
2012
 
 
  (In thousands)
 

Assets Acquired:

                         

Cash and due from banks

  $ 6,124   $ 3,370   $ 3,435   $ 7,092  

Interest-earning deposits in financial institutions

    266,889     10,081          

Investment securities available-for-sale

    4,444     48,887          

FHLB stock

    9,518     1,412          

Loans and leases

    1,049,613     197,279     54,963     140,959  

Other real estate owned

    13,772     1,561          

Premises and equipment

    15,322              

FDIC loss sharing asset

    17,241              

Cash surrender value of life insurance

    13,265              

Goodwill

    136,189     15,047     6,645     19,033  

Core deposit and customer relationship intangibles

    7,927     1,924     1,300     1,700  

Other intangible assets

            670     1,420  

Leases in process

                19,162  

Other assets

    40,192     4,234     69     467  
                   

Total assets acquired

  $ 1,580,496   $ 283,795   $ 67,082   $ 189,833  
                   

Liabilities Assumed:

                         

Noninterest-bearing deposits

  $ 361,166   $ 40,673   $   $  

Interest-bearing deposits

    739,713     178,891          

Borrowings from parent

                128,677  

Other borrowings

        5,315     46,804     15,839  

Subordinated debentures

    24,061              

Discontinued operations

    184,619              

Accrued interest payable and other liabilities

    19,369     840     2,278     10,317  
                   

Total liabilities assumed

  $ 1,328,928   $ 225,719   $ 49,082   $ 154,833  
                   

Total consideration paid

  $ 251,568   $ 58,076   $ 18,000   $ 35,000  
                   

Summary of consideration:

                         

Cash paid

  $   $ 58,076   $ 18,000   $ 35,000  

PacWest common stock issued

    242,268              

Cancellation of FCAL common stock owned by

                         

PacWest (at acquisition date fair value)          

    9,300              
                   

Total

  $ 251,568   $ 58,076   $ 18,000   $ 35,000  
                   

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—ACQUISITIONS (Continued)

        On May 31, 2013, PacWest Bancorp ("PacWest") completed the acquisition of First California Financial Group, Inc. ("FCAL"). As part of the acquisition, First California Bank ("FCB"), a wholly-owned subsidiary of FCAL, merged with and into Pacific Western. The acquisition, which was first announced on November 6, 2012, was concluded following receipt of shareholder approval from both institutions and all required regulatory approvals.

        In the FCAL acquisition, each share of FCAL common stock was converted into the right to receive 0.2966 of a share of PacWest common stock. The exchange ratio was calculated based on the volume-weighted average share price of PacWest common stock for the 20 consecutive trading days ending on the second full trading day prior to the receipt of the last of the regulatory approvals required under the merger agreement. PacWest issued an aggregate of approximately 8.4 million shares of PacWest common stock to FCAL stockholders. In addition, approximately one million shares of FCAL common stock previously owned by PacWest were cancelled in the transaction. Based on the closing price of PacWest's common stock on May 31, 2013 of $28.83 per share, the aggregate consideration paid to FCAL common stockholders, plus the acquisition date fair value of the FCAL shares of common stock cancelled in the merger, was $251.6 million.

        The integration of FCB systems and the conversion of FCB's branches to PWB's operating platform were completed in June 2013. FCB had 15 branches, eight of which overlapped with existing PWB branches. Six of the FCB branches and two PWB branches were closed as part of the integration and consolidation plan. As a result PWB added seven locations to its branch network.

        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 throughout Southern California in the Los Angeles, Orange, Riverside, San Bernardino, San Diego, Ventura, and San Luis Obispo Counties. We made this acquisition to expand our presence in Southern California.

        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. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. While the fair values are preliminary we believe there will not be material adjustments to the amounts recorded with the exception of the acquired tax assets, which will be finalized once the final tax returns have been filed. The application of the acquisition method of accounting resulted in goodwill of $136.2 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.

        During the third quarter of 2013, we recorded a $5.2 million non-taxable securities gain in earnings related to the FCAL acquisition. Prior to the closing of the FCAL acquisition, we acquired 1,094,000 shares of FCAL common stock at a cost of $4.1 million. These shares were carried in our securities available-for-sale portfolio at their estimated market value with their unrealized gain of $5.2 million included in stockholders' equity at May 31, 2013. Our accounting for the FCAL acquisition included these shares at their historical cost. We should have included these shares at their estimated fair value

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—ACQUISITIONS (Continued)

and recognized an acquisition-related securities gain of $5.2 million at May 31, 2013. We corrected for this in the third quarter of 2013 by recognizing the gain with an offset to goodwill.

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

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

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

        The following table presents our unaudited pro forma results of operations for the periods presented as if the FCAL acquisition had been completed on January 1, 2012. The unaudited pro forma results of operations include the historical accounts of the Company and FCAL and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the FCAL acquisition been completed at the beginning of 2012. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—ACQUISITIONS (Continued)

        No pro forma results of operations information have been provided for the three months ended September 30, 2013 as FCAL was acquired on May 31, 2013 and the actual results of FCAL and the Company are included together for this three-month period in the condensed consolidated statements of earnings.

 
   
  Nine Months Ended
September 30,
 
 
  Three Months
Ended
September 30,
2012
 
 
  2013   2012  
 
  (In thousands, except per share data)
 

Pro forma revenues (net interest income plus noninterest income)

  $ 95,441   $ 250,155   $ 278,182  

Pro forma net earnings from continuing operations

  $ 19,880   $ 49,692   $ 47,039  

Pro forma net earnings from continuing operations per share:

                   

Basic

  $ 0.44   $ 1.09   $ 1.04  

Diluted

  $ 0.44   $ 1.09   $ 1.04  

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. 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.

        The following table presents the changes in the carrying amount of goodwill for the period indicated:

 
  Goodwill  
 
  (In thousands)
 

Balance, December 31, 2012

  $ 79,866  

Adjustment to APB goodwill

    (193 )

Non-tax deductible addition from the FCAL acquisition

    136,189  
       

Balance, September 30, 2013

  $ 215,862  
       

        Our intangible assets with definite lives are core deposit intangibles, or CDI, and customer relationship intangibles, or CRI. These intangible assets are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan customers acquired. The weighted average amortization period for the CDI addition from the FCAL acquisition is 3.1 years. The weighted average amortization period remaining for all of our CDI and CRI is 3.0 years. The aggregate CDI and CRI amortization expense is expected to be $5.4 million for 2013. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $5.3 million for 2014, $4.8 million for 2015, $3.0 million for 2016, $1.6 million for 2017, and $1.3 million for 2018.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        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,
 
 
  September 30,
2013
  June 30,
2013
  September 30,
2012
 
 
  2013   2012  
 
  (In thousands)
 

Gross Amount of CDI and CRI:

                               

Balance, beginning of period

  $ 53,339   $ 45,412   $ 62,272   $ 45,412   $ 67,100  

Additions

        7,927     1,924     7,927     4,924  

Fully amortized portion

    (4,376 )       (12,918 )   (4,376 )   (20,746 )

Removal due to branch sale

            (5,866 )       (5,866 )
                       

Balance, end of period

    48,963     53,339     45,412     48,963     45,412  
                       

Accumulated Amortization:

                               

Balance, beginning of period

    (33,149 )   (31,865 )   (45,329 )   (30,689 )   (49,685 )

Amortization

    (1,512 )   (1,284 )   (1,678 )   (3,972 )   (5,150 )

Fully amortized portion

    4,376         12,918     4,376     20,746  

Removal due to branch sale

            4,576         4,576  
                       

Balance, end of period

    (30,285 )   (33,149 )   (29,513 )   (30,285 )   (29,513 )
                       

Net CDI and CRI, end of period

  $ 18,678   $ 20,190   $ 15,899   $ 18,678   $ 15,899  
                       

NOTE 5—INVESTMENT SECURITIES

        The following tables present amortized cost, gross unrealized gains and losses, and carrying value of securities available-for-sale as of the dates indicated:

 
  September 30, 2013  
Security Type
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Carrying
Value
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                         

Government agency and government-sponsored enterprise pass through securities

  $ 695,768   $ 19,853   $ (1,659 ) $ 713,962  

Government agency and government-sponsored enterprise collateralized mortgage obligations

    201,531     730     (2,901 )   199,360  

Covered private label collateralized mortgage obligations

    31,503     7,983     (108 )   39,378  

Municipal securities

    460,754     2,150     (23,269 )   439,635  

Corporate debt securities

    84,028     61     (1,983 )   82,106  

Other securities

    37,999     1     (294 )   37,706  
                   

Total securities available-for-sale

  $ 1,511,583   $ 30,778   $ (30,214 ) $ 1,512,147  
                   

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—INVESTMENT SECURITIES (Continued)


 
  December 31, 2012  
Security Type
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Carrying
Value
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                         

Government agency and government-sponsored enterprise pass through securities

  $ 774,677   $ 33,618   $ (453 ) $ 807,842  

Government agency and government-sponsored enterprise collateralized mortgage obligations

    99,956     1,870     (132 )   101,694  

Covered private label collateralized mortgage obligations

    36,078     8,729     (123 )   44,684  

Municipal securities

    339,547     10,445     (1,951 )   348,041  

Corporate debt securities

    42,014     432     (81 )   42,365  

Other securities

    6,389     4,370         10,759  
                   

Total securities available-for-sale

  $ 1,298,661   $ 59,464   $ (2,740 ) $ 1,355,385  
                   

        The covered private label collateralized mortgage obligations ("CMO's") were acquired in the FDIC-assisted acquisition of Affinity Bank in August 2009 and are covered by an FDIC loss sharing agreement. The loss sharing provisions of this agreement expire in the third quarter of 2014 for non-single family covered assets such as these private label CMO's. Other securities consist primarily of asset backed securities and collateralized loan obligations. See Note 11, Fair Value Measurements, for information on fair value measurements and methodology.

        The following table presents the contractual maturity distribution of our available-for-sale securities portfolio based on amortized cost and carrying value as of the date indicated:

 
  September 30, 2013  
Maturity
  Amortized
Cost
  Carrying
Value
 
 
  (In thousands)
 

Due in one year or less

  $ 3,774   $ 3,775  

Due after one year through five years

    24,449     24,707  

Due after five years through ten years

    124,905     124,317  

Due after ten years

    1,358,455     1,359,348  
           

Total securities available-for-sale

  $ 1,511,583   $ 1,512,147  
           

        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.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—INVESTMENT SECURITIES (Continued)

        At September 30, 2013, the estimated fair value of residential mortgage-backed debt securities issued by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") that were held in our portfolio was approximately $774.8 million. We do not own any equity securities issued by Fannie Mae or Freddie Mac.

        As of September 30, 2013, securities available-for-sale with a carrying value of $201.9 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

        There were no securities sold during the three months ended September 30, 2013. However, we recorded a $5.2 million non-taxable gain to recognize our previously-held equity interest in FCAL common stock at its fair value as of the acquisition date rather than at its historical cost. During the three months ended March 31, 2013, we sold $12.4 million in corporate debt securities for which we realized a $409,000 gross gain. These securities were sold as part of our investment portfolio risk management activities to reduce price volatility and duration.

        The following tables present, for those securities that were in a gross unrealized loss position, the carrying values and the gross unrealized losses on securities by length of time the securities were in an unrealized loss position as of the dates indicated:

 
  September 30, 2013  
 
  Less Than 12 Months   12 months or Longer   Total  
Security Type
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                                     

Government agency and government-sponsored enterprise pass through securities

  $ 124,088   $ (1,658 ) $ 43   $ (1 ) $ 124,131   $ (1,659 )

Government agency and government-sponsored enterprise collateralized mortgage obligations

    139,846     (2,856 )   4,610     (45 )   144,456     (2,901 )

Covered private label collateralized mortgage obligations

    543     (19 )   636     (89 )   1,179     (108 )

Municipal securities

    323,419     (23,269 )           323,419     (23,269 )

Corporate debt securities

    61,831     (1,983 )           61,831     (1,983 )

Other securities

    33,942     (294 )           33,942     (294 )
                           

Total

  $ 683,669   $ (30,079 ) $ 5,289   $ (135 ) $ 688,958   $ (30,214 )
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—INVESTMENT SECURITIES (Continued)


 
  December 31, 2012  
 
  Less Than 12 Months   12 months or Longer   Total  
Security Type
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                                     

Government agency and government-sponsored enterprise pass through securities

  $ 67,299   $ (452 ) $ 60   $ (1 ) $ 67,359   $ (453 )

Government agency and government-sponsored enterprise collateralized mortgage obligations

    18,317     (132 )           18,317     (132 )

Covered private label collateralized mortgage obligations

            1,692     (123 )   1,692     (123 )

Municipal securities

    90,303     (1,951 )           90,303     (1,951 )

Corporate debt securities

    16,819     (81 )           16,819     (81 )
                           

Total

  $ 192,738   $ (2,616 ) $ 1,752   $ (124 ) $ 194,490   $ (2,740 )
                           

        We reviewed the securities that were in a continuous loss position less than 12 months and longer than 12 months at September 30, 2013, and concluded that their losses were a result of the level of market interest rates relative to the types of securities and not a result of the underlying issuers' ability to repay. Accordingly, we determined that the securities were temporarily impaired and we did not recognize such impairment in the 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.

        The following table presents the composition of our interest income on investment securities:

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2013
  June 30,
2013
  September 30,
2012
 
Securities Interest by Type:
  2013   2012  
 
  (In thousands)
 

Taxable interest

  $ 6,028   $ 5,388   $ 6,832   $ 16,979   $ 23,716  

Nontaxable interest

    3,302     2,716     1,458     8,443     3,572  

Dividend income

    541     310     56     1,079     196  
                       

Total interest income on investment securities

  $ 9,871   $ 8,414   $ 8,346   $ 26,501   $ 27,484  
                       

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—INVESTMENT SECURITIES (Continued)

        At September 30, 2013, the Company had a $34.1 million investment in Federal Home Loan Bank of San Francisco ("FHLB") stock carried at cost. During the third quarter of 2013, FHLB stock decreased $5.0 million due to redemptions by the FHLB. We evaluated the carrying value of our FHLB stock investment at September 30, 2013, and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

NOTE 6—LOANS AND LEASES

        The Company's loan portfolio consists of (1) purchased credit-impaired ("PCI") loans and (2) non-purchased credit-impaired ("Non-PCI") loans. PCI loans represent acquired loans for which there is, at the acquisition date, evidence of credit deterioration since their origination and it is probable that we would be unable to collect all contractually required payments. Such loans are accounted for in accordance with ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." Non-PCI loans are comprised of originated loans and acquired non-impaired loans for which there is no evidence of credit deterioration at their acquisition date and it is probable that we would be able to collect all contractually required payments. Originated loans are carried at the principal amount outstanding, net of unearned income. Unearned income is recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income when the related loans are paid off or sold. The purchase discount on acquired non-impaired loans is recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method or taken into income when the related loans are paid off or sold.

        We further present our loans by "covered" and "non-covered" loan categories. Covered loans represent loans covered by loss sharing agreements with the FDIC for which we will be reimbursed for a substantial portion of any future losses under the terms of the agreements. Covered loans also include a portion of the loans acquired in the FCAL acquisition as FCB had acquired two failed banks from the FDIC for which the loss sharing agreements with the FDIC remain in effect. Non-covered loans and leases represent loans and leases not covered by FDIC loss sharing agreements.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:

 
  September 30, 2013   December 31, 2012  
 
  Non-PCI
Loans
and Leases
  PCI
Loans
  Total   Non-PCI
Loans
and Leases
  PCI
Loans
  Total  
 
  (In thousands)
 

Non-covered loans and leases

  $ 3,854,129   $ 19,259   $ 3,873,388   $ 3,049,505   $   $ 3,049,505  

Covered loans

    97,426     413,498     510,924     25,442     517,885     543,327  
                           

Total gross loans and leases

    3,951,555     432,757     4,384,312     3,074,947     517,885     3,592,832  

Unearned income

    (919 )       (919 )   (2,535 )       (2,535 )
                           

Total loans and leases, net of unearned income

    3,950,636     432,757     4,383,393     3,072,412     517,885     3,590,297  
                           

Allowance for loan and lease losses:

                                     

Non-covered loans and leases

    (60,551 )       (60,551 )   (65,899 )       (65,899 )

Covered loans

        (23,235 )   (23,235 )       (26,069 )   (26,069 )
                           

Total allowance for loan and lease losses

    (60,551 )   (23,235 )   (83,786 )   (65,899 )   (26,069 )   (91,968 )
                           

Total net loans and leases

  $ 3,890,085   $ 409,522   $ 4,299,607   $ 3,006,513   $ 491,816   $ 3,498,329  
                           

19


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following table presents the composition of our gross loans and leases by portfolio segment as of the dates indicated:

 
  September 30, 2013   December 31, 2012  
 
  Non-PCI
Loans
and Leases
  PCI
Loans
  Total   Non-PCI
Loans
and Leases
  PCI
Loans
  Total  
 
  (In thousands)
 

Non-Covered Loans and Leases

                                     

Real estate mortgage

  $ 2,476,180   $ 17,928   $ 2,494,108   $ 1,917,670   $   $ 1,917,670  

Real estate construction

    180,697     1,296     181,993     129,959         129,959  

Commercial

    918,669         918,669     787,775         787,775  

Leases

    235,791         235,791     174,373         174,373  

Consumer

    30,763     35     30,798     22,487         22,487  

Foreign

    12,029         12,029     17,241         17,241  
                           

Total gross non-covered loans and leases

  $ 3,854,129   $ 19,259   $ 3,873,388   $ 3,049,505   $   $ 3,049,505  
                           

Covered Loans

                                     

Real estate mortgage

  $ 75,601   $ 401,672   $ 477,273   $ 20,843   $ 484,057   $ 504,900  

Real estate construction

    9,260     10,271     19,531         24,645     24,645  

Commercial

    9,500     1,265     10,765     4,113     9,071     13,184  

Consumer

    3,065     290     3,355     486     112     598  
                           

Total gross covered loans

  $ 97,426   $ 413,498   $ 510,924   $ 25,442   $ 517,885   $ 543,327  
                           

Total Loans and Leases

                                     

Real estate mortgage

  $ 2,551,781   $ 419,600   $ 2,971,381   $ 1,938,513   $ 484,057   $ 2,422,570  

Real estate construction

    189,957     11,567     201,524     129,959     24,645     154,604  

Commercial

    928,169     1,265     929,434     791,888     9,071     800,959  

Leases

    235,791         235,791     174,373         174,373  

Consumer

    33,828     325     34,153     22,973     112     23,085  

Foreign

    12,029         12,029     17,241         17,241  
                           

Total gross loans and leases

  $ 3,951,555   $ 432,757   $ 4,384,312   $ 3,074,947   $ 517,885   $ 3,592,832  
                           

20


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following tables present a summary of the activity in the allowance for loan and lease losses on Non-PCI loans and leases and PCI loans by portfolio segment for the periods indicated:

 
  Three Months Ended September 30, 2013  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total
Non-PCI
  Total
PCI
  Total  
 
  (In thousands)
 

Allowance for Loan and Lease Losses:

                                                       

Balance, beginning of period

  $ 31,804   $ 3,432   $ 24,165   $ 2,096   $ 1,667   $ 82   $ 63,246   $ 27,397   $ 90,643  

Charge-offs

    (281 )       (2,439 )       (75 )       (2,795 )       (2,795 )

Recoveries

    152     179     321         15     3     670     5     675  

Provision (negative provision)

    (2,069 )   (66 )   1,022     240     332     (29 )   (570 )   (4,167 )   (4,737 )
                                       

Balance, end of period

  $ 29,606   $ 3,545   $ 23,069   $ 2,336   $ 1,939   $ 56   $ 60,551   $ 23,235   $ 83,786  
                                       

 

 
  Nine Months Ended September 30, 2013  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total
Non-PCI
  Total
PCI
  Total  
 
  (In thousands)
 

Allowance for Loan and Lease Losses:

                                                       

Balance, beginning of period

  $ 38,700   $ 3,221   $ 20,661   $ 1,493   $ 1,726   $ 98   $ 65,899   $ 26,069   $ 91,968  

Charge-offs

    (3,840 )       (4,517 )   (114 )   (111 )       (8,582 )       (8,582 )

Recoveries

    1,665     514     2,025         57     3     4,264     38     4,302  

Provision (negative provision)

    (6,919 )   (190 )   4,900     957     267     (45 )   (1,030 )   (2,872 )   (3,902 )
                                       

Balance, end of period

  $ 29,606   $ 3,545   $ 23,069   $ 2,336   $ 1,939   $ 56   $ 60,551   $ 23,235   $ 83,786  
                                       

Amount of the allowance applicable to loans and leases:

                                                       

Individually evaluated for impairment

  $ 3,225   $ 103   $ 6,147   $   $ 240   $   $ 9,715              
                                           

Collectively evaluated for impairment

  $ 26,381   $ 3,442   $ 16,922   $ 2,336   $ 1,699   $ 56   $ 50,836              
                                           

Acquired with deteriorated credit quality

                                            $ 23,235        
                                                       

Loans and Leases:

                                                       

Ending balance

  $ 2,551,781   $ 189,957   $ 928,169   $ 235,791   $ 33,828   $ 12,029   $ 3,951,555   $ 432,757   $ 4,384,312  
                                       

The ending balance of the loan and lease portfolio is composed of loans and leases:

                                                       

Individually evaluated for impairment

  $ 90,329   $ 14,878   $ 24,839   $ 244   $ 792   $   $ 131,082              
                                           

Collectively evaluated for impairment

  $ 2,461,452   $ 175,079   $ 903,330   $ 235,547   $ 33,036   $ 12,029   $ 3,820,473              
                                           

Acquired with deteriorated credit quality

                                            $ 432,757        
                                                       

21


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

 

 
  Three Months Ended September 30, 2012  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total
Non-PCI
  Total
PCI
  Total  
 
  (In thousands)
 

Allowance for Loan and Lease Losses:

                                                       

Balance, beginning of period

  $ 42,236   $ 5,496   $ 21,979   $ 498   $ 1,735   $ 117   $ 72,061   $ 31,463   $ 103,524  

Charge-offs

    (1,118 )   (492 )   (492 )       (25 )       (2,127 )   (618 )   (2,745 )

Recoveries

    845     11     218         32     2     1,108         1,108  

Provision (negative provision)

    (3,226 )   1,582     (685 )   629     (188 )   (12 )   (1,900 )   (141 )   (2,041 )
                                       

Balance, end of period

  $ 38,737   $ 6,597   $ 21,020   $ 1,127   $ 1,554   $ 107   $ 69,142   $ 30,704   $ 99,846  
                                       

 

 
  Nine Months Ended September 30, 2012  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total
Non-PCI
  Total
PCI
  Total  
 
  (In thousands)
 

Allowance for Loan and Lease Losses:

                                                       

Balance, beginning of period

  $ 50,205   $ 8,697   $ 23,308   $   $ 2,768   $ 335   $ 85,313   $ 31,275   $ 116,588  

Charge-offs

    (5,891 )   (492 )   (2,715 )       (258 )       (9,356 )   (4,085 )   (13,441 )

Recoveries

    1,217     35     1,232         79     22     2,585         2,585  

Provision (negative provision)

    (6,794 )   (1,643 )   (805 )   1,127     (1,035 )   (250 )   (9,400 )   3,514     (5,886 )
                                       

Balance, end of period

  $ 38,737   $ 6,597   $ 21,020   $ 1,127   $ 1,554   $ 107   $ 69,142   $ 30,704   $ 99,846  
                                       

Amount of the allowance applicable to loans and leases:

                                                       

Individually evaluated for impairment

  $ 5,568   $ 2,468   $ 6,051   $   $ 265   $   $ 14,352              
                                           

Collectively evaluated for impairment

  $ 33,169   $ 4,129   $ 14,969   $ 1,127   $ 1,289   $ 107   $ 54,790              
                                           

Acquired with deteriorated credit quality

                                            $ 30,704        
                                                       

Loans and Leases:

                                                       

Ending balance

  $ 1,950,777   $ 152,748   $ 777,365   $ 161,934   $ 21,118   $ 16,126   $ 3,080,068   $ 571,113   $ 3,651,181  
                                       

The ending balance of the loan and lease portfolio is composed of loans and leases:

                                                       

Individually evaluated for impairment

  $ 100,133   $ 31,792   $ 19,051   $ 420   $ 623   $   $ 152,019              
                                           

Collectively evaluated for impairment

  $ 1,850,644   $ 120,956   $ 758,314   $ 161,514   $ 20,495   $ 16,126   $ 2,928,049              
                                           

Acquired with deteriorated credit quality

                                            $ 571,113        
                                                       

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following table presents the composition of loans and leases (excluding PCI loans), which we also refer to as Non-PCI loans and leases, by portfolio segment as of the dates indicated:

 
  September 30, 2013   December 31, 2012  
 
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage

  $ 2,551,781     65 % $ 1,938,513     63 %

Real estate construction

    189,957     5     129,959     4  

Commercial

    928,169     23     791,888     25  

Leases

    235,791     6     174,373     6  

Consumer

    33,828     1     22,973     1  

Foreign

    12,029         17,241     1  
                   

Total gross Non-PCI loans and leases

    3,951,555     100 %   3,074,947     100 %
                       

Less:

                         

Unearned income

    (919 )         (2,535 )      

Allowance for loan and lease losses

    (60,551 )         (65,899 )      
                       

Total net Non-PCI loans and leases

  $ 3,890,085         $ 3,006,513        
                       

        As of May 31, 2013, the fair value of the FCAL Non-PCI loans acquired was $1.0 billion, the related gross contractual amount was $1.3 billion, and the estimated contractual cash flows not expected to be collected was $34.4 million.

        The following table presents the credit risk rating categories for Non-PCI loans and leases by portfolio segment and class as of the dates indicated. Nonclassified loans and leases are those with a

23


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

credit risk rating of either pass or special mention, while classified loans and leases are those with a credit risk rating of either substandard or doubtful.

 
  September 30, 2013   December 31, 2012  
 
  Nonclassified   Classified   Total   Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $ 182,419   $ 5,654   $ 188,073   $ 168,489   $ 12,655   $ 181,144  

SBA 504

    42,621     5,505     48,126     48,372     5,786     54,158  

Other

    2,247,865     67,717     2,315,582     1,653,446     49,765     1,703,211  
                           

Total real estate mortgage

    2,472,905     78,876     2,551,781     1,870,307     68,206     1,938,513  
                           

Real estate construction:

                                     

Residential

    60,390     1,764     62,154     46,591     2,038     48,629  

Commercial

    121,221     6,582     127,803     77,503     3,827     81,330  
                           

Total real estate construction

    181,611     8,346     189,957     124,094     5,865     129,959  
                           

Commercial:

                                     

Collateralized

    538,101     24,392     562,493     442,293     14,802     457,095  

Unsecured

    104,608     1,618     106,226     67,133     2,905     70,038  

Asset-based

    225,110     6,788     231,898     235,075     4,355     239,430  

SBA 7(a)

    21,764     5,788     27,552     18,888     6,437     25,325  
                           

Total commercial

    889,583     38,586     928,169     763,389     28,499     791,888  
                           

Leases

    235,547     244     235,791     174,129     244     174,373  

Consumer

    29,089     4,739     33,828     21,733     1,240     22,973  

Foreign

    12,029         12,029     17,241         17,241  
                           

Total Non-PCI loans and leases

  $ 3,820,764   $ 130,791   $ 3,951,555   $ 2,970,893   $ 104,054   $ 3,074,947  
                           

        In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company's loan risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in higher allowances for credit losses.

24


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following tables present an aging analysis of our Non-PCI loans and leases by portfolio segment and class as of the dates indicated:

 
  September 30, 2013  
 
  30 - 59 Days
Past Due
  60 - 89 Days
Past Due
  Greater
Than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $   $   $   $   $ 188,073   $ 188,073  

SBA 504

            120     120     48,006     48,126  

Other

    4,623     486     3,294     8,403     2,307,179     2,315,582  
                           

Total real estate mortgage

    4,623     486     3,414     8,523     2,543,258     2,551,781  
                           

Real estate construction:

                                     

Residential

                    62,154     62,154  

Commercial

    571             571     127,232     127,803  
                           

Total real estate construction

    571             571     189,386     189,957  
                           

Commercial:

                                     

Collateralized

    2,250     426     6,004     8,680     553,813     562,493  

Unsecured

    82     1,348     225     1,655     104,571     106,226  

Asset-based

    1,490             1,490     230,408     231,898  

SBA 7(a)

    72     868     201     1,141     26,411     27,552  
                           

Total commercial

    3,894     2,642     6,430     12,966     915,203     928,169  
                           

Leases

            244     244     235,547     235,791  

Consumer

    163     5     178     346     33,482     33,828  

Foreign

                    12,029     12,029  
                           

Total non-PCI loans and leases

  $ 9,251   $ 3,133   $ 10,266   $ 22,650   $ 3,928,905   $ 3,951,555  
                           

        At September 30, 2013 and December 31, 2012, the Company had no loans and leases (excluding PCI loans) that were greater than 90 days past due and still accruing interest. It is the Company's policy to discontinue accruing interest when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. At September 30, 2013, nonaccrual loans and leases totaled $50.8 million. Nonaccrual loans and leases include $3.9 million of loans 30 to 89 days past due and $36.6 million of current loans which have been placed on nonaccrual status based on management's judgment regarding their collectability.

25


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

 
  December 31, 2012  
 
  30 - 59 Days
Past Due
  60 - 89 Days
Past Due
  Greater
Than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $   $   $   $   $ 181,144   $ 181,144  

SBA 504

    955         1,727     2,682     51,476     54,158  

Other

    4,098     54     3,271     7,423     1,695,788     1,703,211  
                           

Total real estate mortgage

    5,053     54     4,998     10,105     1,928,408     1,938,513  
                           

Real estate construction:

                                     

Residential

                    48,629     48,629  

Commercial

            1,245     1,245     80,085     81,330  
                           

Total real estate construction

            1,245     1,245     128,714     129,959  
                           

Commercial:

                                     

Collateralized

    964     161     872     1,997     455,098     457,095  

Unsecured

    3     135     230     368     69,670     70,038  

Asset-based

            176     176     239,254     239,430  

SBA 7(a)

    281     547     1,271     2,099     23,226     25,325  
                           

Total commercial

    1,248     843     2,549     4,640     787,248     791,888  
                           

Leases

    225     132     244     601     173,772     174,373  

Consumer

    23     1         24     22,949     22,973  

Foreign

                    17,241     17,241  
                           

Total Non-PCI loans and leases

  $ 6,549   $ 1,030   $ 9,036   $ 16,615   $ 3,058,332   $ 3,074,947  
                           

        Nonaccrual loans totaled $41.8 million at December 31, 2012, including $4.2 million of loans 30 to 89 days past due and $28.6 million of current loans.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following table presents our nonaccrual and performing Non-PCI loans and leases by portfolio segment and class as of the dates indicated:

 
  September 30, 2013   December 31, 2012  
 
  Nonaccrual   Performing   Total   Nonaccrual   Performing   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $   $ 188,073   $ 188,073   $ 6,908   $ 174,236   $ 181,144  

SBA 504

    2,791     45,335     48,126     2,982     51,176     54,158  

Other

    21,628     2,293,954     2,315,582     16,585     1,686,626     1,703,211  
                           

Total real estate mortgage

    24,419     2,527,362     2,551,781     26,475     1,912,038     1,938,513  
                           

Real estate construction:

                                     

Residential

    826     61,328     62,154     1,057     47,572     48,629  

Commercial

    2,857     124,946     127,803     2,715     78,615     81,330  
                           

Total real estate construction

    3,683     186,274     189,957     3,772     126,187     129,959  
                           

Commercial:

                                     

Collateralized

    15,256     547,237     562,493     4,462     452,633     457,095  

Unsecured

    334     105,892     106,226     2,027     68,011     70,038  

Asset-based

    3,381     228,517     231,898     176     239,254     239,430  

SBA 7(a)

    2,934     24,618     27,552     4,181     21,144     25,325  
                           

Total commercial

    21,905     906,264     928,169     10,846     781,042     791,888  
                           

Leases

    244     235,547     235,791     244     174,129     174,373  

Consumer

    594     33,234     33,828     425     22,548     22,973  

Foreign

        12,029     12,029         17,241     17,241  
                           

Total Non-PCI loans and leases

  $ 50,845   $ 3,900,710   $ 3,951,555   $ 41,762   $ 3,033,185   $ 3,074,947  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        Nonaccrual loans and leases and performing restructured loans are considered impaired for reporting purposes. The following table presents the composition of our impaired loans and leases as of the dates indicated:

 
  September 30, 2013   December 31, 2012  
 
  Nonaccrual
Loans/Leases
  Performing
Restructured
Loans
  Total
Impaired
Loans/Leases
  Nonaccrual
Loans/Leases
  Performing
Restructured
Loans
  Total
Impaired
Loans/Leases
 
 
  (In thousands)
 

Real estate mortgage

  $ 24,419   $ 65,910   $ 90,329   $ 26,475   $ 80,723   $ 107,198  

Real estate construction

    3,683     11,195     14,878     3,772     21,678     25,450  

Commercial

    21,905     2,934     24,839     10,846     3,684     14,530  

Leases

    244         244     244         244  

Consumer

    594     198     792     425     203     628  
                           

Total

  $ 50,845   $ 80,237   $ 131,082   $ 41,762   $ 106,288   $ 148,050  
                           

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Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

        The following tables present information regarding our impaired loans and leases (excluding PCI loans) by portfolio segment and class for the dates indicated:

 
  September 30, 2013   December 31, 2012  
 
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
 
 
  (In thousands)
 

With An Allowance Recorded:

                                     

Real estate mortgage:

                                     

Hospitality

  $ 8,770   $ 9,611   $ 319   $ 8,954   $ 9,640   $ 2,396  

SBA 504

    1,649     1,649     231     1,676     1,676     324  

Other

    50,029     50,164     2,675     58,364     60,262     5,107  

Real estate construction:

                                     

Residential

    391     391     82     1,303     1,330     165  

Commercial

    8,541     8,541     21     6,723     6,723     206  

Commercial:

                                     

Collateralized

    4,483     4,752     4,340     2,477     2,731     1,865  

Unsecured

    787     815     361     2,396     3,121     2,234  

Asset-based

    3,381     3,381     1,238              

SBA 7(a)

    1,278     1,351     208     2,871     3,616     426  

Consumer

    429     473     240     466     506     265  

With No Related Allowance Recorded:

                                     

Real estate mortgage:

                                     

SBA 504

  $ 2,791   $ 3,785   $   $ 2,982   $ 3,755   $  

Other

    27,090     40,693         35,222     39,503      

Real estate construction:

                                     

Residential

    435     471                  

Commercial

    5,511     9,923         17,424     21,085      

Commercial:

                                     

Collateralized

    11,813     19,542         3,657     4,994      

Unsecured

    217     298         156     163      

Asset-based

                176     176      

SBA 7(a)

    2,880     4,645         2,797     4,057      

Leases

    244     244         244     244      

Consumer

    363     475         162     233      

Total Non-PCI Loans and Leases With and Without An Allowance Recorded:

                                     

Real estate mortgage

  $ 90,329   $ 105,902   $ 3,225   $ 107,198   $ 114,836   $ 7,827  

Real estate construction

    14,878     19,326     103     25,450     29,138     371  

Commercial

    24,839     34,784     6,147     14,530     18,858     4,525  

Leases

    244     244         244     244      

Consumer

    792     948     240     628     739     265  
                           

Total

  $ 131,082   $ 161,204   $ 9,715   $ 148,050   $ 163,815   $ 12,988  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)


 
  Three Months Ended September 30,  
 
  2013   2012  
 
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
 
 
  (In thousands)
 

With An Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 8,770   $ 109   $ 9,049   $ 21  

SBA 504

    1,649     23     927     25  

Other

    47,411     481     30,884     443  

Real estate construction:

                         

Residential

    391         1,283     3  

Commercial

    8,541     88     18,408     146  

Commercial:

                         

Collateralized

    4,467     7     4,199     17  

Unsecured

    787     8     2,309     5  

Asset-based

    2,377              

SBA 7(a)

    1,278     12     2,042     20  

Consumer

    429     3     474     3  

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

SBA 504

  $ 2,791   $   $ 1,330   $  

Other

    25,540     410     52,200     577  

Real estate construction:

                         

Residential

    435         753     16  

Commercial

    5,511     98     11,348     97  

Commercial:

                         

Collateralized

    8,989     15     4,972     7  

Unsecured

    217         156      

Asset-based

            176      

SBA 7(a)

    2,846     5     3,902     19  

Leases

    244         360      

Consumer

    248         149      

Total Non-PCI Loans and Leases With and Without An Allowance Recorded:

                         

Real estate mortgage

  $ 86,161   $ 1,023   $ 94,390   $ 1,066  

Real estate construction

    14,878     186     31,792     262  

Commercial

    20,961     47     17,756     68  

Leases

    244         360      

Consumer

    677     3     623     3  
                   

Total

  $ 122,921   $ 1,259   $ 144,921   $ 1,399  
                   

(1)
For the loans and leases (excluding PCI loans) reported as impaired at September 30, 2013 and September 30, 2012, amounts were calculated based on the period of time such loans and leases were impaired during the reporting period.

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Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—LOANS AND LEASES (Continued)

 
  Nine Months Ended September 30,  
 
  2013   2012  
 
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
 
 
  (In thousands)
 

With An Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 8,770   $ 355   $ 9,049   $ 57  

SBA 504

    1,649     67     545     17  

Other

    46,401     1,400     27,749     886  

Real estate construction:

                         

Residential

    391         1,283     7  

Commercial

    8,541     268     18,408     407  

Commercial:

                         

Collateralized

    3,000     22     3,773     45  

Unsecured

    787     25     2,302     16  

Asset-based

    870              

SBA 7(a)

    1,278     35     1,996     62  

Consumer

    429     8     370     4  

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

SBA 504

  $ 2,727   $   $ 1,330   $  

Other

    19,826     522     48,441     1,688  

Real estate construction:

                         

Residential

    435         753     49  

Commercial

    4,679     69     10,598     276  

Commercial:

                         

Collateralized

    4,861     15     4,796     20  

Unsecured

    170         156      

Asset-based

            117      

SBA 7(a)

    2,557     15     3,771     61  

Leases

    244         256      

Consumer

    182         149      

Total Non-PCI Loans and Leases With and Without An Allowance Recorded: