Note 14. Business Segments

The Company’s reportable segments consist of “Community Banking,” “National Lending,” and “Other.”

As a result of the CapitalSource Inc. merger, Pacific Western Bank established the CapitalSource Division, which we also refer to as the National Lending segment. The CapitalSource Division, or National Lending segment, includes the lending operations gained through the CapitalSource Inc. merger, Pacific Western Equipment Finance, and the CapitalSource Business Finance Group (formerly BFI Business Finance and First Community Financial). We reorganized our asset-based lending and leasing operations when we established the CapitalSource Division combining BFI Business Finance and First Community Financial into the Capital Source Business Finance Group, selling Celtic Capital Corporation in July 2014, and having Pacific Western Equipment Finance and the Capital Source Business Finance Group become part of the CapitalSource Division. The CapitalSource Division provides on a nationwide basis a full spectrum of financing solutions across numerous industries and property types to middle market businesses, including senior secured real estate loans, equipment loans and leases, asset-based loans, lender finance loans and cash flow loans secured by the enterprise value of the borrowing entity. The CapitalSource Division’s loan and lease origination efforts are conducted through offices located in Chevy Chase, Maryland; Los Angeles and San Jose, California; St. Louis, Missouri; Denver, Colorado; Chicago, Illinois; New York, New York; and Midvale, Utah.

The Community Banking and National Lending segments include all of the operations of Pacific Western Bank. The Community Banking segment includes the operations of Pacific Western Bank, excluding the CapitalSource Division, and includes lending and deposit gathering activities conducted primarily through its California-based branch offices and the Bank’s treasury management function and corporate overhead. The Other segment consists of holding company operations which result in expenses principally for compensation, facilities, professional services, interest on subordinated debentures, and the non-bank subsidiary operations including interest income from a loan portfolio and related loan servicing expense.

The accounting policies of the reported segments are the same as those of the Company described in Note 1, “Nature of Operations and Summary of Significant Accounting Policies,” of our Form 10‑K. Transactions between segments consist primarily of borrowed funds and expense allocations for interest, deposit gathering, corporate overhead and credit loss provisions. Intersegment interest expense is allocated from the Community Banking segment to the National Lending segment based upon National Lending’s average interest-earning assets and operating leases, net of a capital allocation, and the Bank’s total cost of deposits. The Community Banking segment further allocates to the National Lending segment noninterest expense for deposit gathering and maintenance costs and the Bank’s corporate overhead. The provision for credit losses is allocated based on actual charge‑offs for the period as well as net portfolio growth and credit quality trends. All costs associated with investing the Bank’s excess liquidity and acquisition, integration, and reorganization costs are housed in the Community Banking segment. The lending and loan servicing activities are housed in our respective segments. Noninterest income and noninterest expense directly attributable to a segment are assigned to it.

The following tables present information regarding our business segments as of and for the periods indicated:



	September 30, 2014
	Community			National						Consolidated
Balance Sheet Data:	Banking			Lending			Other			Company
	(In thousands)
Loans and leases, net of unearned income	$	3,482,125		$	8,064,868		$	27,892		$	11,574,885
Allowance for loan and lease losses	(56,712		)	(25,187		)	—			(81,899		)
Total loans and leases, net	$	3,425,413		$	8,039,681		$	27,892		$	11,492,986
Goodwill	$	327,728		$	1,394,401		$	—		$	1,722,129
Core deposit and customer relationship intangibles, net	17,814			1,009			—			18,823
Total assets	6,492,869			9,182,617			262,859			15,938,345
Total deposits⁽¹⁾	11,826,681			—			(303,244		)	11,523,437

________________________


(1)	The negative balance for total deposits in the “Other” segment represents the elimination of holding company cash held in deposit accounts at the Bank.



	September 30, 2013
	Community			National						Consolidated
Balance Sheet Data:	Banking			Lending			Other			Company
	(In thousands)
Loans and leases, net of unearned income	$	3,912,885		$	470,508		$	—		$	4,383,393
Allowance for loan and lease losses	(76,496		)	(7,290		)	—			(83,786		)
Total loans and leases, net	$	3,836,389		$	463,218		$	—		$	4,299,607
Goodwill	$	190,184		$	25,678		$	—		$	215,862
Core deposit and customer relationship intangibles, net	16,604			2,074			—			18,678
Total assets	6,100,587			507,339			8,929			6,616,855
Total deposits⁽¹⁾	5,467,568			—			(34,424		)	5,433,144

________________________


(1)	The negative balance for total deposits in the “Other” segment represents the elimination of holding company cash held in deposit accounts at the Bank.



	Three Months Ended September 30, 2014
	Community			National						Consolidated
Results of Operations:	Banking			Lending			Other			Company
	(In thousands)
Interest income	$	67,132		$	134,624		$	600		$	202,356
Interest expense	(8,851		)	(45		)	(4,614		)	(13,510		)
Intersegment interest income (expense)	5,250			(5,250		)	—			—
Net interest income (expense)	63,531			129,329			(4,014		)	188,846
Negative provision (provision) for credit losses	6,314			(11,364		)	—			(5,050		)
Gain on securities	—			—			—			—
FDIC loss sharing expense	(7,415		)	—			—			(7,415		)
Other noninterest income	7,566			9,953			6,210			23,729
Total noninterest income	151			9,953			6,210			16,314
Foreclosed assets (expense) income, net	(4,627		)	(322		)	122			(4,827		)
Intangible asset amortization	(1,517		)	(91		)	—			(1,608		)
Acquisition, integration and reorganization costs	(3,953		)	(1,240		)	—			(5,193		)
Other noninterest expense	(53,784		)	(24,835		)	(5,382		)	(84,001		)
Total noninterest expense	(63,881		)	(26,488		)	(5,260		)	(95,629		)
Intersegment noninterest income (expense)	26,411			(26,411		)	—			—
Total noninterest expense - adjusted	(37,470		)	(52,899		)	(5,260		)	(95,629		)
Earnings (loss) from continuing operations before taxes	32,526			75,019			(3,064		)	104,481
Income tax (expense) benefit	(13,870		)	(30,113		)	1,778			(42,205		)
Net earnings (loss) from continuing operations	18,656			44,906			(1,286		)	62,276
Loss from discontinued operations before taxes	(8		)	—			—			(8		)
Income tax benefit	3			—			—			3
Net loss from discontinued operations	(5		)	—			—			(5		)
Net earnings (loss)	$	18,651		$	44,906		$	(1,286	)	$	62,271



	Three Months Ended June 30, 2014
	Community			National						Consolidated
Results of Operations:	Banking			Lending			Other			Company
	(In thousands)
Interest income	$	69,977		$	132,742		$	1,644		$	204,363
Interest expense	(7,450		)	(62		)	(4,318		)	(11,830		)
Intersegment interest income (expense)	4,071			(4,071		)	—			—
Net interest income	66,598			128,609			(2,674		)	192,533
Negative provision (provision) for credit losses	4,418			(9,448		)	—			(5,030		)
Gain on securities	89			—			—			89
FDIC loss sharing expense	(8,525		)	—			—			(8,525		)
Other noninterest income	3,681			12,487			747			16,915
Total noninterest income	(4,755		)	12,487			747			8,479
Foreclosed assets (expense) income, net	(633		)	38			98			(497		)
Intangible asset amortization	(1,530		)	(147		)	—			(1,677		)
Acquisition, integration and reorganization costs	(77,713		)	(7,474		)	(1,055		)	(86,242		)
Other noninterest expense	(51,507		)	(24,484		)	(5,499		)	(81,490		)
Total noninterest expense	(131,383		)	(32,067		)	(6,456		)	(169,906		)
Intersegment noninterest income (expense)	23,533			(23,533		)	—			—
Total noninterest expense - adjusted	(107,850		)	(55,600		)	(6,456		)	(169,906		)
(Loss) earnings from continuing operations before taxes	(41,589		)	76,048			(8,383		)	26,076
Income tax benefit (expense)	12,081			(30,259		)	3,332			(14,846		)
Net (loss) earnings from continuing operations	(29,508		)	45,789			(5,051		)	11,230
Loss from discontinued operations before taxes	(1,151		)	—			—			(1,151		)
Income tax benefit	476			—			—			476
Net loss from discontinued operations	(675		)	—			—			(675		)
Net (loss) earnings	$	(30,183	)	$	45,789		$	(5,051	)	$	10,555



	Three Months Ended September 30, 2013
	Community			National						Consolidated
Results of Operations:	Banking			Lending			Other			Company
	(In thousands)
Interest income	$	72,873		$	12,285		$	—		$	85,158
Interest expense	(1,692		)	(108		)	(1,069		)	(2,869		)
Intersegment interest income (expense)	353			(353		)	—			—
Net interest income	71,534			11,824			(1,069		)	82,289
Negative provision (provision) for credit losses	5,782			(1,615		)	—			4,167
FDIC loss sharing expense	(7,032		)	—			—			(7,032		)
Other noninterest income	5,466			1,443			5,250			12,159
Total noninterest income	(1,566		)	1,443			5,250			5,127
Foreclosed assets income, net	420			—			—			420
Intangible asset amortization	(1,354		)	(158		)	—			(1,512		)
Acquisition, integration and reorganization costs	(5,190		)	—			(260		)	(5,450		)
Other noninterest expense	(42,435		)	(5,822		)	(1,401		)	(49,658		)
Total noninterest expense	(48,559		)	(5,980		)	(1,661		)	(56,200		)
Earnings (loss) from continuing operations before taxes	27,191			5,672			2,520			35,383
Income tax (expense) benefit	(9,996		)	(2,378		)	1,131			(11,243		)
Net earnings (loss) from continuing operations	17,195			3,294			3,651			24,140
Earnings from discontinued operations before taxes	39			—			—			39
Income tax expense	(16		)	—			—			(16		)
Net earnings from discontinued operations	23			—			—			23
Net earnings	$	17,218		$	3,294		$	3,651		$	24,163



	Nine Months Ended September 30, 2014
	Community			National						Consolidated
Results of Operations:	Banking			Lending			Other			Company
	(In thousands)
Interest income	$	214,704		$	278,131		$	2,244		$	495,079
Interest expense	(17,528		)	(184		)	(9,973		)	(27,685		)
Intersegment interest income (expense)	9,543			(9,543		)	—			—
Net interest income (expense)	206,719			268,404			(7,729		)	467,394
Negative provision (provision) for credit losses	11,558			(20,994		)	—			(9,436		)
Gain on securities	4,841			—			—			4,841
FDIC loss sharing expense	(27,370		)	—			—			(27,370		)
Other noninterest income	18,144			26,885			6,984			52,013
Total noninterest income	(4,385		)	26,885			6,984			29,484
Foreclosed assets (expense) income, net	(3,399		)	(284		)	220			(3,463		)
Intangible asset amortization	(4,238		)	(411		)	—			(4,649		)
Acquisition, integration and reorganization costs	(83,866		)	(8,714		)	(1,055		)	(93,635		)
Other noninterest expense	(146,281		)	(55,892		)	(12,484		)	(214,657		)
Total noninterest expense	(237,784		)	(65,301		)	(13,319		)	(316,404		)
Intersegment noninterest income (expense)	49,944			(49,944		)	—			—
Total noninterest expense - adjusted	(187,840		)	(115,245		)	(13,319		)	(316,404		)
Earnings from continuing operations before taxes	26,052			159,050			(14,064		)	171,038
Income tax (expense) benefit	(14,123		)	(63,703		)	6,199			(71,627		)
Net earnings (loss) from continuing operations	11,929			95,347			(7,865		)	99,411
Loss from discontinued operations before taxes	(2,572		)	—			—			(2,572		)
Income tax benefit	1,067			—			—			1,067
Net loss from discontinued operations	(1,505		)	—			—			(1,505		)
Net earnings (loss)	$	10,424		$	95,347		$	(7,865	)	$	97,906



	Nine Months Ended September 30, 2013
	Community			National						Consolidated
Results of Operations:	Banking			Lending			Other			Company
	(In thousands)
Interest income	$	189,101		$	36,957		$	—		$	226,058
Interest expense	(6,422		)	(447		)	(2,734		)	(9,603		)
Intersegment interest income (expense)	1,284			(1,284		)	—			—
Net interest income	183,963			35,226			(2,734		)	216,455
Negative provision (provision) for credit losses	6,053			(3,181		)	—			2,872
Gain on securities	5,631			—			—			5,631
FDIC loss sharing expense	(15,579		)	—			—			(15,579		)
Other noninterest income	10,240			2,579			5,299			18,118
Total noninterest income	292			2,579			5,299			8,170
Foreclosed assets income, net	934			—			—			934
Intangible asset amortization	(3,474		)	(498		)	—			(3,972		)
Acquisition, integration and reorganization costs	(23,879		)	—			(260		)	(24,139		)
Other noninterest expense	(115,352		)	(17,855		)	(4,215		)	(137,422		)
Total noninterest expense	(141,771		)	(18,353		)	(4,475		)	(164,599		)
Earnings (loss) from continuing operations before taxes	48,537			16,271			(1,910		)	62,898
Income tax (expense) benefit	(17,038		)	(6,814		)	2,984			(20,868		)
Net earnings from continuing operations	31,499			9,457			1,074			42,030
Loss from discontinued operations before taxes	(42		)	—			—			(42		)
Income tax benefit	18			—			—			18
Net loss from discontinued operations	(24		)	—			—			(24		)
Net earnings	$	31,475		$	9,457		$	1,074		$	42,006