10-Q 1 a09301610-q.htm 10-Q Document



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 26, 2016, there were 120,279,633 shares of the registrant's common stock outstanding, excluding 1,393,373 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

 
September 30,
 
December 31,
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
286,371

 
$
161,020

Interest-earning deposits in financial institutions
253,994

 
235,466

Total cash and cash equivalents
540,365

 
396,486

Securities available-for-sale, at fair value
3,341,335

 
3,559,437

Federal Home Loan Bank stock, at cost
19,386

 
19,710

Total investment securities
3,360,721

 
3,579,147

Gross loans and leases
14,806,427

 
14,528,165

Deferred fees, net
(63,581
)
 
(49,911
)
Allowance for loan and lease losses
(147,976
)
 
(115,111
)
Total loans and leases, net
14,594,870

 
14,363,143

Equipment leased to others under operating leases
198,931

 
197,452

Premises and equipment, net
38,977

 
39,197

Foreclosed assets, net
15,113

 
22,120

Goodwill
2,173,949

 
2,176,291

Core deposit and customer relationship intangibles, net
39,542

 
53,220

Deferred tax asset, net
27,073

 
126,389

Other assets
325,750

 
335,045

Total assets
$
21,315,291

 
$
21,288,490

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
6,521,946

 
$
6,171,455

Interest-bearing deposits
9,123,722

 
9,494,727

Total deposits
15,645,668

 
15,666,182

Borrowings
541,011

 
621,914

Subordinated debentures
441,112

 
436,000

Accrued interest payable and other liabilities
144,905

 
166,703

Total liabilities
16,772,696

 
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 September 30, 2016 and December 31,
 
 
 
2015, 123,320,121 and 122,791,729 shares issued, respectively, including 1,397,715 and 1,211,951
 
 
 
shares of unvested restricted stock, respectively)
1,233

 
1,228

Additional paid-in capital
4,244,521

 
4,405,775

Retained earnings
280,426

 
13,907

Treasury stock, at cost (1,502,597 and 1,378,002 shares at September 30, 2016 and December 31, 2015)
(55,658
)
 
(51,047
)
Accumulated other comprehensive income, net
72,073

 
27,828

Total stockholders' equity
4,542,595

 
4,397,691

Total liabilities and stockholders' equity
$
21,315,291

 
$
21,288,490


See Notes to Condensed Consolidated Financial Statements.

3



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
225,370

 
$
224,326

 
$
193,539

 
$
686,071

 
$
599,417

Investment securities
22,187

 
22,420

 
13,955

 
67,154

 
40,720

Deposits in financial institutions
298

 
308

 
178

 
914

 
304

Total interest income
247,855

 
247,054

 
207,672

 
754,139

 
640,441

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
7,247

 
7,823

 
10,400

 
24,143

 
32,112

Borrowings
695

 
352

 
72

 
1,628

 
395

Subordinated debentures
5,278

 
5,122

 
4,680

 
15,382

 
13,787

Total interest expense
13,220

 
13,297

 
15,152

 
41,153

 
46,294

Net interest income
234,635

 
233,757

 
192,520

 
712,986

 
594,147

Provision for credit losses
8,471

 
13,903

 
8,746

 
42,514

 
31,709

Net interest income after provision for credit losses
226,164

 
219,854

 
183,774

 
670,472

 
562,438

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,488

 
3,633

 
2,601

 
10,977

 
7,787

Other commissions and fees
12,528

 
11,073

 
6,376

 
35,090

 
18,895

Leased equipment income
8,538

 
8,523

 
5,475

 
25,305

 
16,232

Gain on sale of loans and leases
157

 
388

 
27

 
790

 
190

Gain on sale of securities
382

 
478

 
655

 
8,970

 
3,744

FDIC loss sharing expense, net

 
(6,502
)
 
(4,449
)
 
(8,917
)
 
(13,955
)
Other income
1,827

 
4,528

 
5,073

 
11,365

 
23,359

Total noninterest income
26,920

 
22,121

 
15,758

 
83,580

 
56,252

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
62,661

 
62,174

 
48,152

 
185,900

 
144,922

Occupancy
12,010

 
12,193

 
10,762

 
36,835

 
31,950

Data processing
6,234

 
5,644

 
4,322

 
17,782

 
13,032

Other professional services
4,625

 
3,401

 
3,396

 
11,598

 
9,949

Insurance and assessments
4,324

 
4,951

 
3,805

 
14,240

 
11,546

Intangible asset amortization
4,224

 
4,371

 
1,497

 
13,341

 
4,500

Leased equipment depreciation
5,298

 
5,286

 
3,162

 
15,608

 
9,368

Foreclosed assets (income) expense, net
(248
)
 
(3
)
 
4,521

 
(812
)
 
2,517

Acquisition, integration and reorganization costs

 

 
747

 
200

 
3,647

Other expense
11,582

 
12,064

 
9,775

 
36,787

 
28,344

Total noninterest expense
110,710

 
110,081

 
90,139

 
331,479

 
259,775

Earnings before income taxes
142,374

 
131,894

 
109,393

 
422,573

 
358,915

Income tax expense
(48,479
)
 
(49,726
)
 
(39,777
)
 
(156,054
)
 
(131,137
)
Net earnings
$
93,895

 
$
82,168

 
$
69,616

 
$
266,519

 
$
227,778

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

Diluted
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50

 
$
1.50

 
$
1.50


See Notes to Condensed Consolidated Financial Statements.


4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(In thousands)
Net earnings
$
93,895

 
$
82,168

 
$
69,616

 
$
266,519

 
$
227,778

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Unrealized net holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale arising during the period
(15,954
)
 
56,514

 
14,466

 
83,653

 
616

Income tax (expense) benefit related to net unrealized
 
 
 
 
 
 
 
 
 
holding gains (losses) arising during the period
6,509

 
(22,965
)
 
(5,873
)
 
(34,111
)
 
(364
)
Unrealized net holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
(9,445
)
 
33,549

 
8,593

 
49,542

 
252

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings (1)
(382
)
 
(478
)
 
(655
)
 
(8,970
)
 
(3,744
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
156

 
194

 
266

 
3,673

 
1,571

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(226
)
 
(284
)
 
(389
)
 
(5,297
)
 
(2,173
)
Other comprehensive income (loss), net of tax
(9,671
)
 
33,265

 
8,204

 
44,245

 
(1,921
)
Comprehensive income
$
84,224

 
$
115,433

 
$
77,820

 
$
310,764

 
$
225,857

___________________________________ 
(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

 
Nine Months Ended September 30, 2016
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income
 
Total
 
(Unaudited)
 
(Dollars in thousands)
Balance, December 31, 2015
121,413,727

 
$
1,228

 
$
4,405,775

 
$
13,907

 
$
(51,047
)
 
$
27,828

 
$
4,397,691

Net earnings

 

 

 
266,519

 

 

 
266,519

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

 

 

 

 

 
44,245

 
44,245

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
528,392

 
5

 
17,270

 

 

 

 
17,275

Restricted stock surrendered
(124,595
)
 

 

 

 
(4,611
)
 

 
(4,611
)
Tax effect from vesting of
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted stock

 

 
4,226

 

 

 

 
4,226

Cash dividends paid

 

 
(182,750
)
 

 

 

 
(182,750
)
Balance, September 30, 2016
121,817,524

 
$
1,233

 
$
4,244,521

 
$
280,426

 
$
(55,658
)
 
$
72,073

 
$
4,542,595




See Notes to Condensed Consolidated Financial Statements.



6



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2016
 
2015
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
266,519

 
$
227,778

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
66,114

 
33,239

Provision for credit losses
42,514

 
31,709

(Gain) loss on sale of foreclosed assets
(837
)
 
42

Provision for losses on foreclosed assets

 
5,163

Gain on sale of loans and leases
(790
)
 
(190
)
Gain on sale of premises and equipment
(23
)
 
(54
)
Gain on sale of securities
(8,970
)
 
(3,744
)
Unrealized gain on derivatives and foreign currencies, net
(374
)
 
(909
)
Earned stock compensation
17,275

 
11,836

Loss on sale of leasing unit
720

 

Tax effect included in stockholders' equity of restricted stock vesting
(4,226
)
 
(596
)
Decrease in accrued and deferred income taxes, net
74,946

 
108,553

Decrease in other assets
2,070

 
15,786

Decrease in accrued interest payable and other liabilities
(23,600
)
 
(25,336
)
   Net cash provided by operating activities
431,338

 
403,277

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(514,224
)
 
(612,008
)
Proceeds from sales of loans and leases
106,109

 
10,557

Securities available-for-sale:
 
 
 
Proceeds from maturities and paydowns
184,644

 
93,389

Proceeds from sales
392,841

 
212,169

Purchases
(303,742
)
 
(557,769
)
Net redemptions of Federal Home Loan Bank stock
324

 
23,359

Proceeds from sales of foreclosed assets
7,973

 
18,772

Purchases of premises and equipment, net
(6,185
)
 
(5,872
)
Proceeds from sales of premises and equipment
24

 
108

Proceeds from sale of leasing unit
138,955

 

Proceeds from BOLI death benefit
1,853

 

Net increase of equipment leased to others under operating leases
(15,802
)
 
(26,174
)
   Net cash used in investing activities
(7,230
)
 
(843,469
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits:
 
 
 
   Noninterest-bearing
352,784

 
573,101

   Interest-bearing
(371,005
)
 
(216,717
)
Net (decrease) increase in borrowings
(78,873
)
 
169,095

Common stock repurchased
(4,611
)
 
(8,391
)
Tax effect included in stockholders' equity of restricted stock vesting
4,226

 
596

Cash dividends paid
(182,750
)
 
(154,424
)
   Net cash (used in) provided by financing activities
(280,229
)
 
363,260

Net increase (decrease) in cash and cash equivalents
143,879

 
(76,932
)
Cash and cash equivalents, beginning of period
396,486

 
313,226

Cash and cash equivalents, end of period
$
540,365

 
$
236,294

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
41,392

 
$
51,218

Cash paid for income taxes
82,721

 
13,760

Loans transferred to foreclosed assets
129

 
13,472

Partnership interest transferred to equipment leased to others under operating leases

 
20,833

  
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. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” "us," “our,” or the “Company,” refer to 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 September 30, 2016, the Company had total assets of $21.3 billion, gross loans and leases of $14.8 billion, total deposits of $15.6 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. The Bank provides 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 additional products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource provides 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 offers a comprehensive suite of financial services focused on 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.
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 September 30, 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 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 into one segment to conform to the current period's presentation format.
Note 2.  Acquisitions    
Square 1 Financial, Inc. Acquisition
We acquired 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 Pacific Western to focus on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide. When we refer to "Square 1", we are referring to the company acquired on October 6, 2015, and when we refer to the "Square 1 Bank Division", we are referring to a division of Pacific Western.
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. The application of the acquisition method of accounting resulted in goodwill of $446.1 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)


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 September 30, 2016 is 5.6 years. The aggregate CDI and CRI amortization expense is expected to be $16.5 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

Adjustment to acquired Square 1 tax assets
(1,842
)
Reduction due to sale of PWEF leasing unit
(500
)
Balance, September 30, 2016
$
2,173,949

Goodwill adjustments include the finalization of the acquired Square 1 net tax assets and the reduction of goodwill in connection with the sale of the PWEF leasing unit. The finalization of the day 1 fair value of the acquired tax assets is due to completion of the 2015 tax returns. Through the sale of the PWEF leasing unit on March 31, 2016, $0.5 million of goodwill was allocated to this business group; such goodwill reduction is included in the $0.7 million loss on sale of the PWEF leasing unit and included in "Other income" in the condensed consolidated statements of earnings.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
76,513

 
$
93,824

 
$
53,090

 
$
95,524

 
$
53,090

Fully amortized portion
(2,811
)
 
(17,311
)
 

 
(20,122
)
 

Reduction due to sale of PWEF leasing unit

 

 

 
(1,700
)
 

Balance, end of period
73,702

 
76,513

 
53,090

 
73,702

 
53,090

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(32,747
)
 
(45,687
)
 
(38,889
)
 
(42,304
)
 
(35,886
)
Amortization
(4,224
)
 
(4,371
)
 
(1,497
)
 
(13,341
)
 
(4,500
)
Fully amortized portion
2,811

 
17,311

 

 
20,122

 

Reduction due to sale of PWEF leasing unit

 

 

 
1,363

 

Balance, end of period
(34,160
)
 
(32,747
)
 
(40,386
)
 
(34,160
)
 
(40,386
)
Net CDI and CRI, end of period
$
39,542

 
$
43,766

 
$
12,704

 
$
39,542

 
$
12,704


10


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:
 
September 30, 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 ("MBS") and collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations ("CMOs"):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
518,996

 
$
10,639

 
$
(694
)
 
$
528,941

 
$
660,069

 
$
11,517

 
$
(3,746
)
 
$
667,840

Agency CMOs
154,216

 
3,196

 
(181
)
 
157,231

 
193,148

 
2,633

 
(1,026
)
 
194,755

Private label CMOs
133,917

 
5,377

 
(669
)
 
138,625

 
140,065

 
5,837

 
(1,106
)
 
144,796

Municipal securities
1,437,952

 
84,571

 
(29
)
 
1,522,494

 
1,508,968

 
39,435

 
(1,072
)
 
1,547,331

Agency commercial MBS
517,163

 
15,299

 
(1,189
)
 
531,273

 
392,729

 
1,509

 
(2,797
)
 
391,441

Corporate debt securities
47,155

 
1,856

 

 
49,011

 
49,047

 
327

 
(950
)
 
48,424

Collateralized loan obligations
155,373

 
1,511

 
(237
)
 
156,647

 
133,192

 
128

 
(1,131
)
 
132,189

SBA securities
185,639

 
1,909

 
(248
)
 
187,300

 
211,946

 
41

 
(830
)
 
211,157

US Treasury securities

 

 

 

 
70,196

 

 
(816
)
 
69,380

Agency debt securities

 

 

 

 
36,302

 
611

 

 
36,913

Asset-backed and other securities
69,189

 
722

 
(98
)
 
69,813

 
116,723

 
119

 
(1,631
)
 
115,211

Total
$
3,219,600

 
$
125,080

 
$
(3,345
)
 
$
3,341,335

 
$
3,512,385

 
$
62,157

 
$
(15,105
)
 
$
3,559,437

As of September 30, 2016, securities available-for-sale with a carrying value of $342.2 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended September 30, 2016, we sold $39.1 million of securities available-for-sale for a gross realized gain of $1.0 million and a gross realized loss of $0.6 million. During the three months ended September 30, 2015, we sold $52.0 million of securities available-for-sale for a gross realized gain of $0.7 million.
During the nine months ended September 30, 2016, we sold $383.9 million of securities available-for-sale for a gross realized gain of $10.5 million and a gross realized loss of $1.6 million. During the nine months ended September 30, 2015, we sold $208.4 million of securities available-for-sale for a gross realized gain of $4.4 million and a gross realized loss of $0.7 million.

11


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:
 
September 30, 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 MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
33,817

 
$
(100
)
 
$
130,786

 
$
(594
)
 
$
164,603

 
$
(694
)
Agency CMOs
18,893

 
(95
)
 
26,476

 
(86
)
 
45,369

 
(181
)
Private label CMOs
14,552

 
(98
)
 
29,058

 
(571
)
 
43,610

 
(669
)
Municipal securities
5,338

 
(29
)
 

 

 
5,338

 
(29
)
Agency commercial MBS
77,706

 
(1,189
)
 

 

 
77,706

 
(1,189
)
Collateralized loan obligations
2,506

 
(5
)
 
39,197

 
(232
)
 
41,703

 
(237
)
SBA securities
2,956

 
(9
)
 
39,842

 
(239
)
 
42,798

 
(248
)
Asset-backed and other securities
5

 
(2
)
 
14,974

 
(96
)
 
14,979

 
(98
)
     Total
$
155,773

 
$
(1,527
)
 
$
280,333

 
$
(1,818
)
 
$
436,106

 
$
(3,345
)
 
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 MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
352,042

 
$
(3,480
)
 
$
9,342

 
$
(266
)
 
$
361,384

 
$
(3,746
)
Agency CMOs
117,786

 
(1,026
)
 

 

 
117,786

 
(1,026
)
Private label CMOs
93,533

 
(1,000
)
 
1,638

 
(106
)
 
95,171

 
(1,106
)
Municipal securities
126,892

 
(1,061
)
 
531

 
(11
)
 
127,423

 
(1,072
)
Agency commercial MBS
236,098

 
(2,156
)
 
14,230

 
(641
)
 
250,328

 
(2,797
)
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 September 30, 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.

12


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


Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
September 30, 2016
 
Amortized
 
Fair
Maturity:
Cost
 
Value
 
(In thousands)
Due in one year or less
$
8,352

 
$
8,562

Due after one year through five years
252,427

 
259,096

Due after five years through ten years
714,467

 
738,034

Due after ten years
2,244,354

 
2,335,643

Total securities available-for-sale
$
3,219,600

 
$
3,341,335

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.
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
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Taxable interest
$
11,446

 
$
11,406

 
$
7,323

 
$
34,248

 
$
22,373

Non-taxable interest
10,333

 
10,503

 
6,058

 
31,562

 
14,760

Dividend income
408

 
511

 
574

 
1,344

 
3,587

Total interest income on investment securities
$
22,187

 
$
22,420

 
$
13,955

 
$
67,154

 
$
40,720


13


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


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:
 
September 30, 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
$
5,481,922

 
$
104,896

 
$
5,586,818

 
$
5,706,903

 
$
168,725

 
$
5,875,628

Real estate construction and land
843,097

 
2,423

 
845,520

 
534,307

 
2,656

 
536,963

Commercial
8,104,711

 
12,649

 
8,117,360

 
7,977,067

 
17,415

 
7,994,482

Consumer
256,476

 
253

 
256,729

 
120,793

 
299

 
121,092

Total gross loans and leases
14,686,206

 
120,221

 
14,806,427

 
14,339,070

 
189,095

 
14,528,165

Deferred fees, net
(63,559
)
 
(22
)
 
(63,581
)
 
(49,861
)
 
(50
)
 
(49,911
)
Total loans and leases, net of deferred fees
14,622,647

 
120,199

 
14,742,846

 
14,289,209

 
189,045

 
14,478,254

Allowance for loan and lease losses
(136,747
)
 
(11,229
)
 
(147,976
)
 
(105,534
)
 
(9,577
)
 
(115,111
)
Total net loans and leases
$
14,485,900

 
$
108,970

 
$
14,594,870

 
$
14,183,675

 
$
179,468

 
$
14,363,143




14


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:
 
September 30, 2016
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
10,489

 
$
5,772

 
$
16,261

 
$
4,262,571

 
$
4,278,832

Residential
266

 
2,520

 
2,786

 
1,183,323

 
1,186,109

Total real estate mortgage
10,755

 
8,292

 
19,047

 
5,445,894

 
5,464,941

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial
1,245

 

 
1,245

 
507,166

 
508,411

Residential

 

 

 
323,104

 
323,104

Total real estate construction and land
1,245

 

 
1,245

 
830,270

 
831,515

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
66

 
2,128

 
2,194

 
3,063,297

 
3,065,491

Asset-based
6,644

 
15

 
6,659

 
2,565,142

 
2,571,801

Venture capital

 
1,095

 
1,095

 
1,760,517

 
1,761,612

Equipment finance
3,304

 
350

 
3,654

 
667,129

 
670,783

Total commercial
10,014

 
3,588

 
13,602

 
8,056,085

 
8,069,687

Consumer

 
4

 
4

 
256,500

 
256,504

Total Non-PCI loans and leases
$
22,014

 
$
11,884

 
$
33,898

 
$
14,588,749

 
$
14,622,647


 
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


15


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:  
 
September 30, 2016
 
December 31, 2015
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
74,606

 
$
4,204,226

 
$
4,278,832

 
$
52,363

 
$
4,499,595

 
$
4,551,958

Residential
5,089

 
1,181,020

 
1,186,109

 
4,914

 
1,131,191

 
1,136,105

Total real estate mortgage
79,695

 
5,385,246

 
5,464,941

 
57,277

 
5,630,786

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,245

 
507,166

 
508,411

 

 
343,360

 
343,360

Residential
366

 
322,738

 
323,104

 
372

 
183,988

 
184,360

Total real estate construction and land
1,611

 
829,904

 
831,515

 
372

 
527,348

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
27,831

 
3,037,660

 
3,065,491

 
15,800

 
3,046,468

 
3,062,268

Asset-based
4,044

 
2,567,757

 
2,571,801

 
2,505

 
2,545,028

 
2,547,533

Venture capital
10,782

 
1,750,830

 
1,761,612

 
124

 
1,452,303

 
1,452,427

Equipment finance
46,916

 
623,867

 
670,783

 
51,410

 
838,939

 
890,349

Total commercial
89,573

 
7,980,114

 
8,069,687

 
69,839

 
7,882,738

 
7,952,577

Consumer
206

 
256,298

 
256,504

 
1,531

 
119,318

 
120,849

Total Non-PCI loans and leases
$
171,085

 
$
14,451,562

 
$
14,622,647

 
$
129,019

 
$
14,160,190

 
$
14,289,209

At September 30, 2016, nonaccrual loans and leases totaled $171.1 million and included $11.9 million of loans and leases 90 or more days past due, $13.2 million of loans and leases 30 to 89 days past due, and $146.0 million of loans and leases current with respect to contractual payments 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.

16


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.
 
September 30, 2016
 
December 31, 2015
 
Classified
 
Nonclassified
 
Total
 
Classified
 
Nonclassified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
104,914

 
$
4,173,918

 
$
4,278,832