DIVIDEND AVAILABILITY AND REGULATORY MATTERS

Holders of Company common stock may receive dividends declared by the Board of Directors out of funds legally available under state law governing the Company and certain federal laws and regulations governing the banking and financial services business. Our ability to pay dividends to our stockholders is subject to the restrictions set forth in Delaware General Corporation Law and certain covenants contained in our subordinated debentures and borrowing agreements. Notification to the FRB is also required prior to our declaring and paying dividends during any period in which our quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements. Should the FRB object to payment of dividends, we would not be able to make the payment until approval is received or we no longer need to provide notice under applicable regulations.

It is possible, depending upon the financial condition of the Bank, and other factors, that the FRB, the FDIC or the California Department of Business Oversight, Division of Financial Institutions (“DBO”), could assert that payment of dividends or other payments is an unsafe or unsound practice. Pacific Western is subject to restrictions under certain federal and state laws and regulations governing banks which limit its ability to transfer funds to the holding company through intercompany loans, advances or cash dividends. Dividends paid by state banks such as Pacific Western are regulated by the DBO and FDIC under their general supervisory authority as it relates to a bank’s capital requirements. A state bank may declare a dividend without the approval of the DBO and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for three previous fiscal years less any dividend paid during such period. During 2014, PacWest received $137.0 million in dividends from the Bank. For the foreseeable future, dividends from the Bank to PacWest will require DBO and FDIC approval.

PacWest, as a bank holding company, is subject to regulation by the FRB under the Bank Holding Company Act of 1956, as amended. The Federal Deposit Insurance Corporation Improvement Act of 1991 required that the federal regulatory agencies adopt regulations defining capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off‑balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk‑weighted assets, and of Tier I capital to average assets (“leverage ratio”). Tier 1 capital includes common stockholders’ equity and trust preferred securities, less goodwill and certain other deductions (including a portion of servicing assets and the after‑tax unrealized net gains and losses on securities available‑for‑sale). Total risk‑based capital includes Tier 1 capital and other items such as subordinated debt and the allowance for credit losses. Both measures are stated as a percentage of risk‑weighted assets, which are measured based on their perceived credit risk and include certain off‑balance sheet exposures, such as unfunded loan commitments and letters of credit. The Company is also subject to a leverage ratio requirement, which is defined as Tier 1 capital as a percentage of average assets, adjusted for goodwill and other non‑qualifying intangible assets and other assets.

Bank holding companies considered to be “adequately capitalized” are required to maintain a minimum total risk‑based capital ratio of 8.0%, a minimum Tier 1 risk‑based capital ratio of 4.0%, and a minimum leverage ratio of 4.0%. Bank holding companies considered to be “well capitalized” must maintain a minimum total risk‑based capital ratio of 10.0%, a minimum Tier 1 risk‑based capital ratio of 6.0%, and a minimum leverage ratio of 5.0%. As of December 31, 2014, the most recent notification date to the regulatory agencies, the Company and the Bank are each “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s or any of the Bank’s categories.

Management believes, as of December 31, 2014, that we have met all capital adequacy requirements to which we are subject.

Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are deducted from regulatory capital. At December 31, 2014, such amount was $156.7 million for the Company and zero for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future.

The following table presents actual capital amounts and ratios for the Company and the Bank as of the dates indicated:



	Actual			Well Capitalized Minimum Requirement			Excess Capital
	Amount	Ratio		Amount	Ratio		Amount
	(Dollars in thousands)
December 31, 2014
Tier I capital (to average assets):
PacWest Bancorp Consolidated	1,722,870	12.34	%	698,109	5.00	%	1,024,761
Pacific Western Bank	1,621,546	11.70	%	693,174	5.00	%	928,372
Tier I capital (to risk‑weighted assets):
PacWest Bancorp Consolidated	1,722,870	13.16	%	785,781	6.00	%	937,089
Pacific Western Bank	1,621,546	12.46	%	780,834	6.00	%	840,712
Total capital (to risk‑weighted assets):
PacWest Bancorp Consolidated	2,104,984	16.07	%	1,309,635	10.00	%	795,349
Pacific Western Bank	1,712,312	13.16	%	1,301,390	10.00	%	410,922
December 31, 2013
Tier I capital (to average assets):
PacWest Bancorp Consolidated	718,800	11.22	%	320,405	5.00	%	398,395
Pacific Western Bank	690,440	10.79	%	319,999	5.00	%	370,441
Tier I capital (to risk‑weighted assets):
PacWest Bancorp Consolidated	718,800	15.12	%	285,163	6.00	%	433,637
Pacific Western Bank	690,440	14.54	%	284,825	6.00	%	405,615
Total capital (to risk‑weighted assets):
PacWest Bancorp Consolidated	778,582	16.38	%	475,271	10.00	%	303,311
Pacific Western Bank	750,152	15.80	%	474,708	10.00	%	275,444

The Company issued subordinated debentures to trusts that were established by us or entities that we have acquired, which, in turn, issued trust preferred securities. The amount of subordinated debentures totaled $433.6 million at December 31, 2014 and includes $300.4 million of debentures assumed in connection with the CapitalSource Inc. merger. The Company includes in Tier 1 capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity less goodwill, net of any related deferred income tax liability. At December 31, 2014, the amount of trust preferred securities included in Tier I capital was $131.0 million. The assumed CapitalSource Inc. trust preferred securities are ineligible for inclusion in Tier 1 capital but are included in Tier 2 capital. The $131.0 million of trust preferred securities are currently grandfathered as Tier 1 capital under the Dodd‑Frank Wall Street Reform and Consumer Protection Act. However, under new capital rules approved in July 2013 by the FRB and FDIC, as a result of the Company having exceeded $15 billion in consolidated total assets, beginning in 2015, only 25% of the Company’s $131.0 million of trust preferred securities currently outstanding will be included in Tier 1 capital, and in 2016, none of the Company’s trust preferred securities will be included in Tier 1 capital. Further, under such rules, trust preferred securities no longer included in the Company’s Tier 1 capital may be included as a component of Tier 2 capital on a permanent basis without phase‑out. If the $131.0 million of trust preferred securities are excluded from regulatory capital at December 31, 2014, we remain “well capitalized.”

Interest payments made by the Company on subordinated debentures are considered dividend payments under the FRB regulations and subject to the same notification requirements for declaring and paying dividends on common stock.