10-Q 1 a03311610-q.htm 10-Q 10-Q



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of April 27, 2016, there were 120,208,695 shares of the registrant's common stock outstanding, excluding 1,560,386 shares of unvested restricted stock.


1



PACWEST BANCORP
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
Condensed Consolidated Statements of Earnings (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statement Changes in Stockholders' Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Index to Exhibits
Signatures




2



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
March 31,
 
December 31,
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands)
ASSETS:
 
 
 
Cash and due from banks
$
161,977

 
$
161,020

Interest-earning deposits in financial institutions
357,541

 
235,466

Total cash and cash equivalents
519,518

 
396,486

Securities available-for-sale, at fair value
3,240,586

 
3,559,437

Federal Home Loan Bank stock, at cost
17,250

 
19,710

Total investment securities
3,257,836

 
3,579,147

Gross loans and leases
14,542,522

 
14,528,165

Deferred fees and costs
(59,005
)
 
(49,911
)
Allowance for loan and lease losses
(130,361
)
 
(115,111
)
Total loans and leases, net
14,353,156

 
14,363,143

Equipment leased to others under operating leases
205,163

 
197,452

Premises and equipment, net
39,713

 
39,197

Foreclosed assets, net
18,310

 
22,120

Goodwill
2,175,791

 
2,176,291

Core deposit and customer relationship intangibles, net
48,137

 
53,220

Deferred tax asset, net
91,126

 
126,389

Other assets
322,259

 
335,045

Total assets
$
21,031,009

 
$
21,288,490

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
6,139,963

 
$
6,171,455

Interest-bearing deposits
9,301,412

 
9,494,727

Total deposits
15,441,375

 
15,666,182

Borrowings
551,401

 
621,914

Subordinated debentures
438,723

 
436,000

Accrued interest payable and other liabilities
142,918

 
166,703

Total liabilities
16,574,417

 
16,890,799

 
 
 
 
Commitments and contingencies (Note 8)

 

 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)

 

Common stock ($0.01 par value, 200,000,000 shares authorized at March 31, 2016 and December 31, 2015;
 
 
 
123,153,983 and 122,791,729 shares issued, respectively, including 1,562,557 and 1,211,951 shares of
 
 
 
unvested restricted stock, respectively)
1,232

 
1,228

Additional paid-in capital
4,353,706

 
4,405,775

Retained earnings
104,363

 
13,907

Treasury stock, at cost (1,382,731 and 1,378,002 shares at March 31, 2016 and December 31, 2015)
(51,188
)
 
(51,047
)
Accumulated other comprehensive income, net
48,479

 
27,828

Total stockholders' equity
4,456,592

 
4,397,691

Total liabilities and stockholders' equity
$
21,031,009

 
$
21,288,490


See Notes to Condensed Consolidated Financial Statements.

3



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2016
 
2015
 
2015
 
(Unaudited)
 
(Dollars in thousands, except per share data)
Interest income:
 
 
 
 
 
Loans and leases
$
236,375

 
$
219,677

 
$
202,097

Investment securities
22,547

 
23,648

 
12,195

Deposits in financial institutions
308

 
172

 
22

Total interest income
259,230

 
243,497

 
214,314

Interest expense:
 
 
 
 
 
Deposits
9,073

 
9,391

 
10,479

Borrowings
581

 
159

 
235

Subordinated debentures
4,982

 
4,748

 
4,525

Total interest expense
14,636

 
14,298

 
15,239

Net interest income
244,594

 
229,199

 
199,075

Provision for credit losses
20,140

 
13,772

 
16,434

Net interest income after provision for credit losses
224,454

 
215,427

 
182,641

Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
3,856

 
3,901

 
2,574

Other commissions and fees
11,489

 
12,691

 
5,396

Leased equipment income
8,244

 
7,791

 
5,382

Gain on sale of loans and leases
245

 
183

 

Gain on sale of securities
8,110

 

 
3,275

FDIC loss sharing expense, net
(2,415
)
 
(4,291
)
 
(4,399
)
Other income
5,010

 
7,783

 
8,643

Total noninterest income
34,539

 
28,058

 
20,871

Noninterest expense:
 
 
 
 
 
Compensation
61,065

 
58,992

 
47,737

Occupancy
12,632

 
12,194

 
10,600

Data processing
5,904

 
5,585

 
4,308

Other professional services
3,572

 
3,811

 
3,221

Insurance and assessments
4,965

 
5,450

 
3,025

Intangible asset amortization
4,746

 
4,910

 
1,501

Leased equipment depreciation
5,024

 
4,235

 
3,103

Foreclosed assets (income) expense, net
(561
)
 
(3,185
)
 
336

Acquisition, integration and reorganization costs
200

 
17,600

 
2,000

Other expense
13,141

 
12,672

 
8,529

Total noninterest expense
110,688

 
122,264

 
84,360

Earnings before income taxes
148,305

 
121,221

 
119,152

Income tax expense
(57,849
)
 
(49,380
)
 
(46,073
)
Net earnings
$
90,456

 
$
71,841

 
$
73,079

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
0.74

 
$
0.60

 
$
0.71

Diluted
$
0.74

 
$
0.60

 
$
0.71

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50


See Notes to Condensed Consolidated Financial Statements.


4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2016
 
2015
 
2015
 
(Unaudited)
 
(In thousands)
Net earnings
$
90,456

 
$
71,841

 
$
73,079

Other comprehensive income, net of tax:
 
 
 
 
 
Unrealized net holding gains on securities
 
 
 
 
 
available-for-sale arising during the period
43,093

 
5,874

 
7,363

Income tax expense related to net unrealized
 
 
 
 
 
holding gains arising during the period
(17,655
)
 
(2,505
)
 
(3,105
)
Unrealized net holding gains on securities
 
 
 
 
 
available-for-sale, net of tax
25,438

 
3,369

 
4,258

Reclassification adjustment for net gains included
 
 
 
 
 
in net earnings (1)
(8,110
)
 

 
(3,275
)
Income tax expense related to reclassification
 
 
 
 
 
adjustment
3,323

 

 
1,381

Reclassification adjustment for net gains
 
 
 
 
 
included in net earnings, net of tax
(4,787
)
 

 
(1,894
)
Other comprehensive income, net of tax
20,651

 
3,369

 
2,364

Comprehensive income
$
111,107

 
$
75,210

 
$
75,443

___________________________________ 
(1)
Entire amounts are recognized in "Gain on sale of securities" on the Condensed Consolidated Statements of Earnings.

See Notes to Condensed Consolidated Financial Statements.


5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

 
Three Months Ended March 31, 2016
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income
 
Total
 
(Unaudited)
 
(Dollars in thousands, except share data)
Balance, December 31, 2015
121,413,727

 
$
1,228

 
$
4,405,775

 
$
13,907

 
$
(51,047
)
 
$
27,828

 
$
4,397,691

Net earnings

 

 

 
90,456

 

 

 
90,456

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

 

 

 

 

 
20,651

 
20,651

Restricted stock awarded and earned stock
 
 
 
 
 
 
 
 
 
 
 
 
 
compensation, net of shares forfeited
362,254

 
4

 
5,042

 

 

 

 
5,046

Restricted stock surrendered
(4,729
)
 

 

 

 
(141
)
 

 
(141
)
Tax effect from vesting of restricted stock

 

 
3,795

 

 

 

 
3,795

Cash dividends paid

 

 
(60,906
)
 

 

 

 
(60,906
)
Balance, March 31, 2016
121,771,252

 
$
1,232

 
$
4,353,706

 
$
104,363

 
$
(51,188
)
 
$
48,479

 
$
4,456,592




See Notes to Condensed Consolidated Financial Statements.



6



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
90,456

 
$
73,079

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,488

 
10,648

Provision for credit losses
20,140

 
16,434

(Gain) loss on sale of foreclosed assets
(504
)
 
106

Provision for losses on foreclosed assets

 
124

Gain on sale of loans and leases
(245
)
 

Gain on sale of premises and equipment
(6
)
 
(3
)
Gain on sale of securities
(8,110
)
 
(3,275
)
Unrealized gain on derivatives and foreign currencies, net
(250
)
 
(2,715
)
Earned stock compensation
5,046

 
3,112

Loss on sale of leasing unit
720

 

Tax effect included in stockholders' equity of restricted stock vesting
(3,795
)
 

Decrease in accrued and deferred income taxes, net
24,726

 
38,722

Decrease in other assets
5,214

 
19,356

Decrease in accrued interest payable and other liabilities
(23,722
)
 
(29,102
)
   Net cash provided by operating activities
132,158

 
126,486

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loan and leases
(170,465
)
 
(403,438
)
Proceeds from sales of loans and leases
26,903

 

Securities available-for-sale:
 
 
 
Proceeds from maturities and paydowns
61,626

 
27,547

Proceeds from sales
343,031

 
144,945

Purchases
(52,236
)
 
(196,568
)
Net redemptions of Federal Home Loan Bank stock
2,460

 
11,704

Proceeds from sales of foreclosed assets
4,443

 
7,945

Purchases of premises and equipment, net
(2,896
)
 
(1,490
)
Proceeds from sales of premises and equipment
6

 
29

Proceeds from sale of leasing unit
138,809

 

Proceeds from BOLI death benefit
1,853

 

Net increase of equipment leased to others under operating leases
(12,300
)
 

   Net cash provided by (used in) investing activities
341,234

 
(409,326
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (decrease) increase in deposits:
 
 
 
   Noninterest-bearing
(31,310
)
 
97,224

   Interest-bearing
(193,315
)
 
80,914

Net (decrease) increase in borrowings
(68,483
)
 
234,754

Restricted stock surrendered
(141
)
 

Tax effect included in stockholders' equity of restricted vesting stock
3,795

 

Cash dividends paid
(60,906
)
 
(51,424
)
   Net cash (used in) provided by financing activities
(350,360
)
 
361,468

Net increase in cash and cash equivalents
123,032

 
78,628

Cash and cash equivalents at beginning of period
396,486

 
313,226

Cash and cash equivalents at end of period
$
519,518

 
$
391,854

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
15,080

 
$
12,334

Cash paid (received) for income taxes
15,773

 
(7,695
)
Loans transferred to foreclosed assets
129

 
394

  
See Notes to Condensed Consolidated Financial Statements.


7


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


Note 1.  Organization    
PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our wholly-owned banking subsidiary, Pacific Western Bank, which we refer to as “Pacific Western” or the “Bank.” When we say “we,” “our,” or the “Company,” we mean PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to “PacWest” or to the holding company, we are referring to PacWest Bancorp, the parent company, on a stand‑alone basis. As of March 31, 2016, the Company had total assets of $21.0 billion, gross loans and leases of $14.5 billion, total deposits of $15.4 billion and total stockholders' equity of $4.5 billion.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 79 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. We provide commercial banking services, including real estate, construction, and commercial loans and leases, and comprehensive deposit and treasury management services to small and middle market businesses. Pacific Western offers products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource focuses on providing cash flow, asset-based, equipment and real estate loans and treasury management services to established middle-market businesses on a national basis. Square 1 Bank focuses on providing a comprehensive suite of financial products tailored to service entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of Pacific Western Bank that specializes in middle-market lending on a nationwide basis.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.
We have completed 28 acquisitions from May 1, 2000 through March 31, 2016, including the acquisition of Square 1 Financial, Inc. ("Square 1") on October 6, 2015. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 2. Acquisitions, for more information about the Square 1 acquisition.
On March 31, 2016, we sold our Pacific Western Equipment Finance ("PWEF") leasing unit in Midvale, Utah, including approximately $139 million of outstanding lease balances.
Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission ("Form 10-K").
Basis of Presentation    
Our interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
 

8


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


Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value and useful lives of intangible assets, the carrying value of the FDIC loss sharing asset, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
As described in Note 2, Acquisitions, the acquired assets and liabilities of Square 1 were measured at their estimated fair values. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period's presentation format. The operating segments previously reported have been aggregated to one segment to conform to the current period's presentation format.
Note 2.  Acquisitions    
Square 1 Financial, Inc. Acquisition
We acquired Square 1 Financial, Inc. ("Square 1") on October 6, 2015. As part of the acquisition, Square 1 Bank, a wholly-owned subsidiary of Square 1, merged with and into Pacific Western. At closing, we formed the Square 1 Bank Division of the Bank which focuses on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide.
We completed this acquisition to increase our core deposits, expand our nationwide lending platform, and increase our presence in the technology and life-sciences credit markets. The Square 1 acquisition has been accounted for under the acquisition method of accounting. We acquired $4.6 billion of assets and assumed $3.8 billion of liabilities upon closing of the acquisition. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The fair value of the acquired net tax assets, once the final tax returns have been filed, may change. The application of the acquisition method of accounting resulted in goodwill of $447.9 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.

9


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


Acquisition-Related Charges
The costs shown for the three months ended March 31, 2016 and December 31, 2015 relate to the Square 1 acquisition and ongoing systems integration. The following table presents the components of acquisition, integration and reorganization costs for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2016
 
2015
 
2015
 
(In thousands)
Acquisition, Integration and Reorganization Costs:
 
 
 
 
 
Severance and employee-related
$

 
$
10,500

 
$

System conversion and integration
200

 
3,802

 

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

 
125

 

Investment banking deal costs

 

 
1,050

Other (legal, accounting, insurance, consulting)

 
3,173

 
950

  Total acquisition, integration and
 
 
 
 
 
  reorganization costs
$
200

 
$
17,600

 
$
2,000

Note 3.  Goodwill and Other Intangible Assets
Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Our intangible assets with definite lives are core deposit intangibles ("CDI") and customer relationship intangibles ("CRI").
Goodwill and other intangible assets deemed to have indefinite lives generated from business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in “Noninterest expense” in the condensed consolidated statements of earnings.
CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of March 31, 2016 is 6.0 years. The aggregate CDI and CRI amortization expense is expected to be $16.1 million for 2016. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $11.5 million for 2017, $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, and $3.0 million for 2021.
The following table presents the changes in the carrying amount of goodwill for the period indicated:    
 
Goodwill
 
(In thousands)
Balance, December 31, 2015
$
2,176,291

Reduction due to sale of PWEF leasing unit
(500
)
Balance, March 31, 2016
$
2,175,791

Through the sale of the PWEF leasing unit, $500,000 of goodwill was allocated to this business group; such goodwill reduction is included in the loss on sale of the PWEF leasing unit and included in "Other income" in the condensed consolidated statement of earnings.

10


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


The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2016
 
2015
 
2015
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
Balance, beginning of period
$
95,524

 
$
53,090

 
$
53,090

Additions

 
45,426

 

Fully amortized portion

 
(2,992
)
 

Reduction due to sale of PWEF leasing unit
(1,700
)
 

 

Balance, end of period
93,824

 
95,524

 
53,090

Accumulated Amortization:
 
 
 
 
 
Balance, beginning of period
(42,304
)
 
(40,386
)
 
(35,886
)
Amortization
(4,746
)
 
(4,910
)
 
(1,501
)
Fully amortized portion

 
2,992

 

Reduction due to sale of PWEF leasing unit
1,363

 

 

Balance, end of period
(45,687
)
 
(42,304
)
 
(37,387
)
Net CDI and CRI, end of period
$
48,137

 
$
53,220

 
$
15,703


11


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


Note 4. Investment Securities     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and carrying values of securities available-for-sale as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type:
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
pass-through securities
$
642,233

 
$
12,865

 
$
(1,233
)
 
$
653,865

 
$
759,881

 
$
12,075

 
$
(4,159
)
 
$
767,797

Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
431,456

 
12,515

 
(239
)
 
443,732

 
486,065

 
3,584

 
(3,410
)
 
486,239

Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
23,026

 
5,064

 
(227
)
 
27,863

 
24,113

 
5,794

 
(125
)
 
29,782

Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
108,019

 
246

 
(883
)
 
107,382

 
115,952

 
43

 
(981
)
 
115,014

Municipal securities
1,457,795

 
59,886

 
(89
)
 
1,517,592

 
1,508,968

 
39,435

 
(1,072
)
 
1,547,331

US Treasury securities

 

 

 

 
70,196

 

 
(816
)
 
69,380

Corporate debt securities
47,269

 
303

 
(2,089
)
 
45,483

 
49,047

 
327

 
(950
)
 
48,424

Collateralized loan obligations
142,637

 
42

 
(3,107
)
 
139,572

 
133,192

 
128

 
(1,131
)
 
132,189

SBA securities
201,934

 
947

 
(207
)
 
202,674

 
211,946

 
41

 
(830
)
 
211,157

Government-sponsored enterprise debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
securities

 

 

 

 
36,302

 
611

 

 
36,913

Asset-backed and other securities
104,182

 
135

 
(1,894
)
 
102,423

 
116,723

 
119

 
(1,631
)
 
115,211

Total
$
3,158,551

 
$
92,003

 
$
(9,968
)
 
$
3,240,586

 
$
3,512,385

 
$
62,157

 
$
(15,105
)
 
$
3,559,437

As of March 31, 2016, securities available‑for‑sale with a carrying value of $414.6 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended March 31, 2016 and 2015, we purchased $52.2 million and $196.6 million in securities available-for-sale.
During the three months ended March 31, 2016, we sold $334.9 million of various securities, primarily government agency and government-sponsored enterprise ("GSE") pass-through securities and collateralized mortgage obligations, U.S. Treasury securities and GSE debt securities, for a gross realized gain of $8.9 million and a gross realized loss of $0.8 million. During the three months ended March 31, 2015, we sold $141.7 million of various securities, primarily corporate debt securities and GSE pass-through securities, for a gross realized gain of $3.7 million and a gross realized loss of $0.4 million.


12


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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
March 31, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass-through
 
 
 
 
 
 
 
 
 
 
 
securities
$
196,388

 
$
(1,135
)
 
$
9,422

 
$
(98
)
 
$
205,810

 
$
(1,233
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
33,702

 
(239
)
 

 

 
33,702

 
(239
)
Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
1,239

 
(98
)
 
849

 
(129
)
 
2,088

 
(227
)
Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
59,407

 
(838
)
 
1,029

 
(45
)
 
60,436

 
(883
)
Municipal securities
18,108

 
(55
)
 
5,496

 
(34
)
 
23,604

 
(89
)
Corporate debt securities
28,180

 
(2,089
)
 

 

 
28,180

 
(2,089
)
Collateralized loan obligations
106,773

 
(2,121
)
 
23,355

 
(986
)
 
130,128

 
(3,107
)
SBA securities
87,150

 
(207
)
 

 

 
87,150

 
(207
)
Asset-backed and other securities
64,013

 
(1,285
)
 
15,923

 
(609
)
 
79,936

 
(1,894
)
     Total
$
594,960

 
$
(8,067
)
 
$
56,074

 
$
(1,901
)
 
$
651,034

 
$
(9,968
)

13


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


 
December 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass-through
 
 
 
 
 
 
 
 
 
 
 
securities
$
391,642

 
$
(3,893
)
 
$
9,342

 
$
(266
)
 
$
400,984

 
$
(4,159
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
314,284

 
(2,769
)
 
14,230

 
(641
)
 
328,514

 
(3,410
)
Covered private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
1,354

 
(57
)
 
568

 
(68
)
 
1,922

 
(125
)
Other private label collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
92,179

 
(943
)
 
1,070

 
(38
)
 
93,249

 
(981
)
Municipal securities
126,892

 
(1,061
)
 
531

 
(11
)
 
127,423

 
(1,072
)
US Treasury securities
69,380

 
(816
)
 

 

 
69,380

 
(816
)
Corporate debt securities
29,379

 
(950
)
 

 

 
29,379

 
(950
)
Collateralized loan obligations
100,993

 
(1,131
)
 

 

 
100,993

 
(1,131
)
SBA securities
179,942

 
(830
)
 

 

 
179,942

 
(830
)
Asset-backed and other securities
71,619

 
(1,182
)
 
16,091

 
(449
)
 
87,710

 
(1,631
)
Total
$
1,377,664

 
$
(13,632
)
 
$
41,832

 
$
(1,473
)
 
$
1,419,496

 
$
(15,105
)
We reviewed the securities that were in a loss position at March 31, 2016, and concluded their unrealized losses were not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Such unrealized losses were a result of the level of market interest rates and pricing changes caused by shifting supply and demand dynamics relative to the types of securities. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we occasionally sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our available-for-sale securities portfolio based on amortized cost and carrying value as of the date indicated:
 
March 31, 2016
 
Amortized
 
Fair
Maturity:
Cost
 
Value
 
(In thousands)
Due in one year or less
$
12,821

 
$
12,628

Due after one year through five years
216,420

 
219,110

Due after five years through ten years
603,523

 
619,214

Due after ten years
2,325,787

 
2,389,634

Total securities available-for-sale
$
3,158,551

 
$
3,240,586

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.

14


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


Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2016
 
2015
 
2015
 
(In thousands)
Taxable interest
$
11,396

 
$
12,730

 
$
7,473

Non-taxable interest
10,726

 
10,459

 
3,894

Dividend income
425

 
459

 
828

Total interest income on investment securities
$
22,547

 
$
23,648

 
$
12,195

Note 5.  Loans and Leases
The Company’s loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that all contractually required payments would be collected, are referred to collectively as non-purchased credit impaired loans, or "Non-PCI loans." Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was deemed probable that we would be unable to collect all contractually required payments, are referred to as purchased credit impaired loans, or "PCI loans".
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income on an accelerated basis when the related loans are paid off or sold.
PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality". For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,649,282

 
$
160,122

 
$
5,809,404

 
$
5,706,903

 
$
168,725

 
$
5,875,628

Real estate construction and land
584,968

 
2,689

 
587,657

 
534,307

 
2,656

 
536,963

Commercial
8,021,092

 
13,513

 
8,034,605

 
7,977,067

 
17,415

 
7,994,482

Consumer
110,573

 
283

 
110,856

 
120,793

 
299

 
121,092

Total gross loans and leases
14,365,915

 
176,607

 
14,542,522

 
14,339,070

 
189,095

 
14,528,165

Deferred fees and costs
(58,954
)
 
(51
)
 
(59,005
)
 
(49,861
)
 
(50
)
 
(49,911
)
Total loans and leases, net of deferred fees
14,306,961

 
176,556

 
14,483,517

 
14,289,209

 
189,045

 
14,478,254

Allowance for loan and lease losses
(120,807
)
 
(9,554
)
 
(130,361
)
 
(105,534
)
 
(9,577
)
 
(115,111
)
Total net loans and leases
$
14,186,154

 
$
167,002

 
$
14,353,156

 
$
14,183,675

 
$
179,468

 
$
14,363,143




15


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


Non‑Purchased Credit Impaired (Non‑PCI) Loans and Leases
The following tables present an aging analysis of our Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:
 
March 31, 2016
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
16,655

 
$
10,638

 
$
27,293

 
$
4,525,668

 
$
4,552,961

Residential
2,187

 
559

 
2,746

 
1,074,590

 
1,077,336

Total real estate mortgage
18,842

 
11,197

 
30,039

 
5,600,258

 
5,630,297

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
305,529

 
305,529

Residential

 

 

 
269,944

 
269,944

Total real estate construction and land

 

 

 
575,473

 
575,473

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
766

 
2,013

 
2,779

 
3,163,035

 
3,165,814

Asset-based
4

 

 
4

 
2,588,912

 
2,588,916

Venture capital
9,554

 

 
9,554

 
1,493,057

 
1,502,611

Equipment finance
2,244

 
2,140

 
4,384

 
728,844

 
733,228

Total commercial
12,568

 
4,153

 
16,721

 
7,973,848

 
7,990,569

Consumer
30

 
708

 
738

 
109,884

 
110,622

Total Non-PCI loans and leases
$
31,440

 
$
16,058

 
$
47,498

 
$
14,259,463

 
$
14,306,961


 
December 31, 2015
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
3,947

 
$
13,075

 
$
17,022

 
$
4,534,936

 
$
4,551,958

Residential
3,391

 
905

 
4,296

 
1,131,809

 
1,136,105

Total real estate mortgage
7,338

 
13,980

 
21,318

 
5,666,745

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
343,360

 
343,360

Residential

 

 

 
184,360

 
184,360

Total real estate construction and land

 

 

 
527,720

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
2,048

 
1,427

 
3,475

 
3,058,793

 
3,062,268

Asset-based
1

 

 
1

 
2,547,532

 
2,547,533

Venture capital
250

 
700

 
950

 
1,451,477

 
1,452,427

Equipment finance
359

 
94

 
453

 
889,896

 
890,349

Total commercial
2,658

 
2,221

 
4,879

 
7,947,698

 
7,952,577

Consumer
626

 
1,307

 
1,933

 
118,916

 
120,849

Total Non-PCI loans and leases
$
10,622

 
$
17,508

 
$
28,130

 
$
14,261,079

 
$
14,289,209


16


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


It is the Company's policy to discontinue accruing interest 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 or when principal or interest payments are past due 90 days or more unless the loan is both well secured and in the process of collection. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:  
 
March 31, 2016
 
December 31, 2015
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
30,357

 
$
4,522,604

 
$
4,552,961

 
$
52,363

 
$
4,499,595

 
$
4,551,958

Residential
5,807

 
1,071,529

 
1,077,336

 
4,914

 
1,131,191

 
1,136,105

Total real estate mortgage
36,164

 
5,594,133

 
5,630,297

 
57,277

 
5,630,786

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
305,529

 
305,529

 

 
343,360

 
343,360

Residential
370

 
269,574

 
269,944

 
372

 
183,988

 
184,360

Total real estate construction and land
370

 
575,103

 
575,473

 
372

 
527,348

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
39,665

 
3,126,149

 
3,165,814

 
15,800

 
3,046,468

 
3,062,268

Asset-based
2,046

 
2,586,870

 
2,588,916

 
2,505

 
2,545,028

 
2,547,533

Venture capital

 
1,502,611

 
1,502,611

 
124

 
1,452,303

 
1,452,427

Equipment finance
51,247

 
681,981

 
733,228

 
51,410

 
838,939

 
890,349

Total commercial
92,958

 
7,897,611

 
7,990,569

 
69,839

 
7,882,738

 
7,952,577

Consumer
926

 
109,696

 
110,622

 
1,531

 
119,318

 
120,849

Total Non-PCI loans and leases
$
130,418

 
$
14,176,543

 
$
14,306,961

 
$
129,019

 
$
14,160,190

 
$
14,289,209

At March 31, 2016, nonaccrual loans and leases totaled $130.4 million and included $13.5 million of loans and leases 90 or more days past due, $13.7 million of loans and leases 30 to 89 days past due, and $103.2 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $129.0 million at December 31, 2015, including $16.8 million of the loans and leases 90 or more days past due, $3.6 million of loans and leases 30 to 89 days past due, and $108.6 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.

17


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


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 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.
 
March 31, 2016
 
December 31, 2015
 
Classified
 
Nonclassified
 
Total
 
Classified
 
Nonclassified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
65,532

 
$
4,487,429

 
$
4,552,961

 
$
98,436

 
$
4,453,522

 
$
4,551,958

Residential
18,361

 
1,058,975

 
1,077,336

 
12,627

 
1,123,478

 
1,136,105

Total real estate mortgage
83,893

 
5,546,404

 
5,630,297

 
111,063

 
5,577,000

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
558

 
304,971

 
305,529

 
571

 
342,789

 
343,360

Residential
1,382

 
268,562

 
269,944

 
1,395

 
182,965

 
184,360

Total real estate construction and land
1,940

 
573,533

 
575,473

 
1,966

 
525,754

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
209,108

 
2,956,706

 
3,165,814