10-Q 1 a03311710-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 March 31, 2017
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
 
 
 
 
 
o Emerging growth company
 
 
 
o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 26, 2017, there were 119,870,416 shares of the registrant's common stock outstanding, excluding 1,537,717 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


PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
ALM
Asset Liability Management
 
FRBSF
Federal Reserve Bank of San Francisco
ASC
Accounting Standards Codification
 
IRR
Interest Rate Risk
ASU
Accounting Standards Update
 
MBS
Mortgage-Backed Securities
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013.
 
MVE
Market Value of Equity
BHCA
Bank Holding Company Act of 1956, as amended
 
NII
Net Interest Income
BOLI
Bank Owned Life Insurance
 
NIM
Net Interest Margin
CapitalSource Inc.
A company acquired on April 7, 2014
 
Non-PCI
Non-Purchased Credit Impaired
CapitalSource Division
A division of Pacific Western Bank, formed at the closing of the CapitalSource Inc. merger
 
OREO
Other Real Estate Owned
C&I
Commercial and Industrial
 
PWEF
Pacific Western Equipment Finance, a leasing unit sold March 31, 2016
CDI
Core Deposit Intangible Assets
 
PCI
Purchased Credit Impaired
CET1
Common Equity Tier 1
 
PRSUs
Performance-Based Restricted Stock Units
CMOs
Collateralized Mortgage Obligations
 
S1AM
Square 1 Asset Management, Inc.
CRI
Customer Relationship Intangible Assets
 
SBA
Small Business Administration
DBO
California Department of Business Oversight
 
SEC
Securities and Exchange Commission
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
Square 1
Square 1 Financial, Inc. (a company acquired on October 6, 2015)
Efficiency Ratio
Noninterest expense (less intangible asset amortization, net foreclosed assets income/expense, and acquisition, integration, and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)
 
Square 1 Bank Division
A division of Pacific Western Bank formed at the closing of the Square 1 acquisition
FASB
Financial Accounting Standards Board
 
Tax Equivalent Net Interest Income
Net interest income adjusted for tax-equivalent adjustments related to tax-exempt income on municipal securities
FCAL
First California Financial Group, Inc. (a company acquired on May 31, 2013)
 
Tax Equivalent NIM
NIM adjusted for tax-equivalent adjustments related to tax-exempt income on municipal securities
FDIC
Federal Deposit Insurance Corporation
 
TDRs
Troubled Debt Restructurings
FHLB
Federal Home Loan Bank of San Francisco
 
TRSAs
Time-Based Restricted Stock Awards
FRB
Board of Governors of the Federal Reserve System
 
U.S. GAAP
U.S. Generally Accepted Accounting Principles


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
 
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
184,608

 
$
337,965

Interest-earning deposits in financial institutions
111,892

 
81,705

Total cash and cash equivalents
296,500

 
419,670

Securities available-for-sale, at fair value
3,336,992

 
3,223,830

Federal Home Loan Bank stock, at cost
17,901

 
21,870

Total investment securities
3,354,893

 
3,245,700

Gross loans and leases
15,622,871

 
15,520,537

Deferred fees, net
(66,182
)
 
(64,583
)
Allowance for loan and lease losses
(161,307
)
 
(157,238
)
Total loans and leases, net
15,395,382

 
15,298,716

Equipment leased to others under operating leases
224,580

 
229,905

Premises and equipment, net
28,908

 
38,594

Foreclosed assets, net
12,842

 
12,976

Deferred tax asset, net
88,765

 
94,112

Goodwill
2,173,949

 
2,173,949

Core deposit and customer relationship intangibles, net
33,302

 
36,366

Other assets
318,133

 
319,779

Total assets
$
21,927,254

 
$
21,869,767

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
6,789,808

 
$
6,659,016

Interest-bearing deposits
9,541,200

 
9,211,595

Total deposits
16,331,008

 
15,870,611

Borrowings
460,609

 
905,812

Subordinated debentures
442,516

 
440,744

Accrued interest payable and other liabilities
185,015

 
173,545

Total liabilities
17,419,148

 
17,390,712

 
 
 
 
Commitments and contingencies (Note 7)


 


 
 
 
 
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, 2017 and
 
 
 
December 31, 2016, 122,968,677 and 122,803,029 shares issued, respectively, including
 
 
 
1,537,717 and 1,476,132 shares of unvested restricted stock, respectively)
1,230

 
1,228

Additional paid-in capital
4,108,478

 
4,162,132

Retained earnings
444,321

 
366,073

Treasury stock, at cost (1,560,544 and 1,519,360 shares at March 31, 2017 and December 31, 2016)
(58,641
)
 
(56,360
)
Accumulated other comprehensive income, net
12,718

 
5,982

Total stockholders' equity
4,508,106

 
4,479,055

Total liabilities and stockholders' equity
$
21,927,254

 
$
21,869,767


See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
Loans and leases
$
224,178

 
$
238,223

 
$
236,375

Investment securities
23,039

 
23,403

 
22,547

Deposits in financial institutions
192

 
147

 
308

Total interest income
247,409

 
261,773

 
259,230

Interest expense:
 
 
 
 
 
Deposits
8,377

 
7,369

 
9,073

Borrowings
1,018

 
631

 
581

Subordinated debentures
5,562

 
5,468

 
4,982

Total interest expense
14,957

 
13,468

 
14,636

Net interest income
232,452

 
248,305

 
244,594

Provision for credit losses
24,728

 
23,215

 
20,140

Net interest income after provision for credit losses
207,724

 
225,090

 
224,454

Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
3,758

 
3,557

 
3,856

Other commissions and fees
10,390

 
12,036

 
11,489

Leased equipment income
9,475

 
8,614

 
8,244

Gain on sale of loans and leases
712

 
119

 
245

Gain (loss) on sale of securities
(99
)
 
515

 
8,110

FDIC loss sharing expense, net

 

 
(2,415
)
Other income
10,878

 
4,054

 
5,010

Total noninterest income
35,114

 
28,895

 
34,539

Noninterest expense:
 
 
 
 
 
Compensation
64,880

 
66,013

 
61,065

Occupancy
11,608

 
12,076

 
12,632

Data processing
7,015

 
6,574

 
5,904

Other professional services
3,378

 
4,880

 
3,572

Insurance and assessments
4,791

 
4,124

 
4,965

Intangible asset amortization
3,064

 
3,176

 
4,746

Leased equipment depreciation
5,625

 
5,291

 
5,024

Foreclosed assets expense (income), net
143

 
2,693

 
(561
)
Acquisition, integration and reorganization costs
500

 

 
200

Other expense
15,540

 
13,795

 
13,141

Total noninterest expense
116,544

 
118,622

 
110,688

Earnings before income taxes
126,294

 
135,363

 
148,305

Income tax expense
(47,626
)
 
(49,716
)
 
(57,849
)
Net earnings
$
78,668

 
$
85,647

 
$
90,456

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
0.65

 
$
0.71

 
$
0.74

Diluted
$
0.65

 
$
0.71

 
$
0.74

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50


See Notes to Condensed Consolidated Financial Statements.


5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(Unaudited)
 
(In thousands)
Net earnings
$
78,668

 
$
85,647

 
$
90,456

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Unrealized net holding gains (losses) on securities
 
 
 
 
 
available-for-sale arising during the period
11,184

 
(111,045
)
 
43,093

Income tax (expense) benefit related to net unrealized
 
 
 
 
 
holding gains (losses) arising during the period
(4,507
)
 
45,259

 
(17,655
)
Unrealized net holding gains (losses) on securities
 
 
 
 
 
available-for-sale, net of tax
6,677

 
(65,786
)
 
25,438

Reclassification adjustment for net (gains) losses
 
 
 
 
 
included in net earnings (1)
99

 
(515
)
 
(8,110
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
adjustment
(40
)
 
210

 
3,323

Reclassification adjustment for net (gains) losses
 
 
 
 
 
included in net earnings, net of tax
59

 
(305
)
 
(4,787
)
Other comprehensive income (loss), net of tax
6,736

 
(66,091
)
 
20,651

Comprehensive income
$
85,404

 
$
19,556

 
$
111,107

___________________________________ 
(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.


6



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

 
Three Months Ended March 31, 2017
 
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, 2016
121,283,669

 
$
1,228

 
$
4,162,132

 
$
366,073

 
$
(56,360
)
 
$
5,982

 
$
4,479,055

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 
711

 
(420
)
 

 

 
291

Net earnings

 

 

 
78,668

 

 

 
78,668

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

 

 

 

 

 
6,736

 
6,736

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
165,648

 
2

 
6,468

 

 

 

 
6,470

Restricted stock surrendered
(41,184
)
 

 

 

 
(2,281
)
 

 
(2,281
)
Cash dividends paid

 

 
(60,833
)
 

 

 

 
(60,833
)
Balance, March 31, 2017
121,408,133

 
$
1,230

 
$
4,108,478

 
$
444,321

 
$
(58,641
)
 
$
12,718

 
$
4,508,106

________________________
(1)
Impact due to adoption on January 1, 2017 of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."




See Notes to Condensed Consolidated Financial Statements.



7



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
78,668

 
$
90,456

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,496

 
8,219

Amortization of net premiums on securities available-for-sale
10,601

 
9,523

Amortization of intangible assets
3,064

 
4,746

Provision for credit losses
24,728

 
20,140

Gain on sale of foreclosed assets

 
(504
)
Gain on sale of loans and leases
(712
)
 
(245
)
Gain on sale of premises and equipment
(560
)
 
(6
)
Loss (gain) on sale of securities
99

 
(8,110
)
Gain on BOLI death benefit
(471
)
 
(542
)
Unrealized loss (gain) on derivatives and foreign currencies, net
202

 
(250
)
Earned stock compensation
6,470

 
5,046

Loss on sale of PWEF leasing unit

 
720

Tax effect included in stockholders' equity of restricted stock vesting

 
(3,795
)
Decrease in accrued and deferred income taxes, net
1,091

 
24,726

Decrease in other assets
661

 
5,756

Decrease (increase) in accrued interest payable and other liabilities
10,852

 
(23,722
)
Net cash provided by operating activities
143,189

 
132,158

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(157,244
)
 
(170,465
)
Proceeds from sales of loans and leases
37,173

 
26,903

Proceeds from maturities and paydowns of securities available-for-sale
92,612

 
61,626

Proceeds from sales of securities available-for-sale
42,996

 
343,031

Purchases of securities available-for-sale
(248,187
)
 
(52,236
)
Net redemptions of Federal Home Loan Bank stock
3,969

 
2,460

Proceeds from sales of foreclosed assets
212

 
4,443

Purchases of premises and equipment, net
(1,944
)
 
(2,896
)
Proceeds from sales of premises and equipment
10,290

 
6

Proceeds from sale of leasing unit

 
138,809

Proceeds from BOLI death benefit
1,192

 
1,853

Net decrease (increase) of equipment leased to others under operating leases
114

 
(12,300
)
Net cash (used in) provided by investing activities
(218,817
)
 
341,234

 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase (decrease) in noninterest-bearing deposits
131,170

 
(31,310
)
Net increase (decrease) in interest-bearing deposits
329,605

 
(193,315
)
Net decrease in borrowings
(445,203
)
 
(68,483
)
Common stock repurchased and restricted stock surrendered
(2,281
)
 
(141
)
Tax effect included in stockholders' equity of restricted stock vesting

 
3,795

Cash dividends paid
(60,833
)
 
(60,906
)
Net cash used in financing activities
(47,542
)
 
(350,360
)
Net (decrease) increase in cash and cash equivalents
(123,170
)
 
123,032

Cash and cash equivalents, beginning of period
419,670

 
396,486

Cash and cash equivalents, end of period
$
296,500

 
$
519,518

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
14,352

 
$
15,080

Cash paid for income taxes
2,834

 
15,773

Loans transferred to foreclosed assets
78

 
129

  
See Notes to Condensed Consolidated Financial Statements.

8



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



NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned 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," 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.
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 74 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 comprehensive deposit and treasury management services to small and middle-market businesses. We offer additional products and services through our CapitalSource and Square 1 Bank divisions. Our CapitalSource Division provides cash flow, asset-based, equipment, and real estate loans and treasury management services to established middle market businesses on a national basis. Our Square 1 Bank Division 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.
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, 2017. 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 12. Subsequent Events, for information regarding the announcement of the CU Bancorp merger.
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, 2016 as filed with the Securities and Exchange Commission ("Form 10-K").
Accounting Standard Adopted in 2017
Effective January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Accounting." ASU 2016-09 changed aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The recognition of excess tax benefits and tax deficiencies in the income statement was adopted prospectively. An income tax benefit of $1.1 million was recognized during the three months ended March 31, 2017 as a result of the adoption of ASU 2016-09. We expect the requirements of ASU 2016-09 to result in fluctuations in our effective tax rate from period to period based upon the timing of share-based award vestings.
In connection with the adoption of ASU 2016-09, we elected to recognize forfeitures on stock-based compensation awards when they occur, instead of estimating forfeitures at the grant date of the awards and throughout the vesting period. The modified retrospective application of this change in accounting principle resulted in a cumulative adjustment charge to retained earnings of $420,000, net of income taxes. We elected to present the classification of excess tax benefits on the statement of cash flows using a prospective transition method and the prior period has not been adjusted.




9



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


Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with 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 condensed 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.
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. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of intangible assets, the 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. Regarding time deposits disclosures, we previously presented the categories as: (1) under $100,000, and (2) $100,000 or more, but now are using the current FDIC insurance limit of $250,000 and presenting the categories as: (1) $250,000 and under, and (2) over $250,000.

10



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


NOTE 2.  GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings.
Our other intangible assets with definite lives include CDI and CRI. 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, 2017 is 5.2 years. The aggregate CDI and CRI amortization expense is expected to be $11.5 million for 2017. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, $3.0 million for 2021, and $1.7 million for 2022.
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,
 
2017
 
2016
 
2016
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
Balance, beginning of period
$
64,187

 
$
73,702

 
$
95,524

Fully amortized portion

 
(9,515
)
 

Reduction due to sale of PWEF leasing unit

 

 
(1,700
)
Balance, end of period
64,187

 
64,187

 
93,824

Accumulated Amortization:
 
 
 
 
 
Balance, beginning of period
(27,821
)
 
(34,160
)
 
(42,304
)
Amortization
(3,064
)
 
(3,176
)
 
(4,746
)
Fully amortized portion

 
9,515

 

Reduction due to sale of PWEF leasing unit

 

 
1,363

Balance, end of period
(30,885
)
 
(27,821
)
 
(45,687
)
Net CDI and CRI, end of period
$
33,302

 
$
36,366

 
$
48,137


11



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


NOTE 3. INVESTMENT SECURITIES     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
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 MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
471,851

 
$
6,088

 
$
(3,383
)
 
$
474,556

 
$
499,185

 
$
6,222

 
$
(2,964
)
 
$
502,443

Agency CMOs
137,720

 
1,661

 
(449
)
 
138,932

 
145,258

 
1,528

 
(497
)
 
146,289

Private label CMOs
147,818

 
3,461

 
(1,879
)
 
149,400

 
122,707

 
4,199

 
(1,437
)
 
125,469

Municipal securities
1,464,306

 
22,686

 
(3,711
)
 
1,483,281

 
1,447,064

 
15,406

 
(6,011
)
 
1,456,459

Agency commercial MBS
718,483

 
2,488

 
(8,900
)
 
712,071

 
555,552

 
1,798

 
(9,658
)
 
547,692

Corporate debt securities
17,000

 
1,211

 

 
18,211

 
47,100

 
680

 
(271
)
 
47,509

Collateralized loan obligations
126,306

 
1,809

 
(142
)
 
127,973

 
155,440

 
1,685

 
(238
)
 
156,887

SBA securities
168,084

 
589

 
(339
)
 
168,334

 
179,085

 
510

 
(750
)
 
178,845

Asset-backed and other securities
63,966

 
460

 
(192
)
 
64,234

 
62,264

 
358

 
(385
)
 
62,237

Total
$
3,315,534

 
$
40,453

 
$
(18,995
)
 
$
3,336,992

 
$
3,213,655

 
$
32,386

 
$
(22,211
)
 
$
3,223,830

As of March 31, 2017, securities available-for-sale with a fair value of $424.7 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, 2017, we sold $43.1 million of securities available-for-sale for a gross realized gain of $204,000 and a gross realized loss of $303,000. During the three months ended March 31, 2016, we sold $334.9 million of securities available-for-sale for a gross realized gain of $8.9 million and a gross realized loss of $0.8 million.
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, 2017
 
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
$
139,928

 
$
(1,802
)
 
$
113,812

 
$
(1,581
)
 
$
253,740

 
$
(3,383
)
Agency CMOs
34,796

 
(312
)
 
18,797

 
(137
)
 
53,593

 
(449
)
Private label CMOs
88,381

 
(1,548
)
 
24,843

 
(331
)
 
113,224

 
(1,879
)
Municipal securities
334,546

 
(3,711
)
 

 

 
334,546

 
(3,711
)
Agency commercial MBS
380,604

 
(8,900
)
 

 

 
380,604

 
(8,900
)
Collateralized loan obligations
17,964

 
(24
)
 
17,067

 
(118
)
 
35,031

 
(142
)
SBA securities
44,618

 
(103
)
 
29,674

 
(236
)
 
74,292

 
(339
)
Asset-backed and other securities
15,972

 
(156
)
 
6,957

 
(36
)
 
22,929

 
(192
)
Total
$
1,056,809

 
$
(16,556
)
 
$
211,150

 
$
(2,439
)
 
$
1,267,959

 
$
(18,995
)

12



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


 
December 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 MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
149,281

 
$
(1,691
)
 
$
122,902

 
$
(1,273
)
 
$
272,183

 
$
(2,964
)
Agency CMOs
44,111

 
(416
)
 
25,316

 
(81
)
 
69,427

 
(497
)
Private label CMOs
49,067

 
(906
)
 
30,155

 
(531
)
 
79,222

 
(1,437
)
Municipal securities
644,424

 
(6,011
)
 

 

 
644,424

 
(6,011
)
Agency commercial MBS
349,550

 
(9,658
)
 

 

 
349,550

 
(9,658
)
Corporate debt securities
29,829

 
(271
)
 

 

 
29,829

 
(271
)
Collateralized loan obligations
12,450

 
(37
)
 
39,231

 
(201
)
 
51,681

 
(238
)
SBA securities
69,293

 
(407
)
 
39,024

 
(343
)
 
108,317

 
(750
)
Asset-backed and other securities
18,213

 
(309
)
 
7,851

 
(76
)
 
26,064

 
(385
)
Total
$
1,366,218

 
$
(19,706
)
 
$
264,479

 
$
(2,505
)
 
$
1,630,697

 
$
(22,211
)
We reviewed the securities that were in a loss position at March 31, 2017, and concluded their losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we periodically 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 securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
March 31, 2017
 
Amortized
 
Fair
Maturity
Cost
 
Value
 
(In thousands)
Due in one year or less
$
18,084

 
$
18,221

Due after one year through five years
235,439

 
238,871

Due after five years through ten years
879,297

 
885,026

Due after ten years
2,182,714

 
2,194,874

Total securities available-for-sale
$
3,315,534

 
$
3,336,992

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.

13



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,
 
2017
 
2016
 
2016
 
(In thousands)
Taxable interest
$
12,166

 
$
11,849

 
$
11,396

Non-taxable interest
10,381

 
10,323

 
10,726

Dividend income
492

 
1,231

 
425

Total interest income on investment securities
$
23,039

 
$
23,403

 
$
22,547

NOTE 4.  LOANS AND LEASES
Our 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 we would be able to collect all contractually required payments, are referred to collectively as Non-PCI loans. Generally, PCI loans are purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was probable that collection of all contractually required payments was unlikely.
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 on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are 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, 2017
 
December 31, 2016
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,904,995

 
$
88,918

 
$
5,993,913

 
$
5,635,675

 
$
92,793

 
$
5,728,468

Real estate construction and land
1,123,123

 
2,326

 
1,125,449

 
975,032

 
2,409

 
977,441

Commercial
8,115,953

 
4,863

 
8,120,816

 
8,426,236

 
12,994

 
8,439,230

Consumer
382,447

 
246

 
382,693

 
375,149

 
249

 
375,398

Total gross loans and leases
15,526,518

 
96,353

 
15,622,871

 
15,412,092

 
108,445

 
15,520,537

Deferred fees, net
(66,164
)
 
(18
)
 
(66,182
)
 
(64,562
)
 
(21
)
 
(64,583
)
Total loans and leases, net of deferred fees
15,460,354

 
96,335

 
15,556,689

 
15,347,530

 
108,424

 
15,455,954

Allowance for loan and lease losses
(149,826
)
 
(11,481
)
 
(161,307
)
 
(143,755
)
 
(13,483
)
 
(157,238
)
Total loans and leases, net
$
15,310,528

 
$
84,854

 
$
15,395,382

 
$
15,203,775

 
$
94,941

 
$
15,298,716




14



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


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, 2017
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
9,218

 
$
3,975

 
$
13,193

 
$
4,365,745

 
$
4,378,938

Residential
844

 
1,879

 
2,723

 
1,505,308

 
1,508,031

Total real estate mortgage
10,062

 
5,854

 
15,916

 
5,871,053

 
5,886,969

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
666,185

 
666,185

Residential

 
362

 
362

 
441,689

 
442,051

Total real estate construction and land

 
362

 
362

 
1,107,874

 
1,108,236

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
598

 
2,915

 
3,513

 
3,129,896

 
3,133,409

Asset-based
500

 
204

 
704

 
2,390,379

 
2,391,083

Venture capital
14,381

 
257

 
14,638

 
1,920,311

 
1,934,949

Equipment finance
251

 

 
251

 
622,986

 
623,237

Total commercial
15,730

 
3,376

 
19,106

 
8,063,572

 
8,082,678

Consumer
77

 

 
77

 
382,394

 
382,471

Total Non-PCI loans and leases
$
25,869

 
$
9,592

 
$
35,461

 
$
15,424,893

 
$
15,460,354


 
December 31, 2016
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
8,590

 
$
3,303

 
$
11,893

 
$
4,341,740

 
$
4,353,633

Residential
5,694

 
1,999

 
7,693

 
1,256,630

 
1,264,323

Total real estate mortgage
14,284

 
5,302

 
19,586

 
5,598,370

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
578,838

 
578,838

Residential
364

 

 
364

 
383,637

 
384,001

Total real estate construction and land
364

 

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
191

 
1,821

 
2,012

 
3,105,380

 
3,107,392

Asset-based
1,500

 
2

 
1,502

 
2,607,543

 
2,609,045

Venture capital
13,589

 
5,769

 
19,358

 
1,963,798

 
1,983,156

Equipment finance
1,417

 
3,051

 
4,468

 
687,499

 
691,967

Total commercial
16,697

 
10,643

 
27,340

 
8,364,220

 
8,391,560

Consumer
224

 

 
224

 
374,951

 
375,175

Total Non-PCI loans and leases
$
31,569

 
$
15,945

 
$
47,514

 
$
15,300,016

 
$
15,347,530


15



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


It is our policy to discontinue accruing interest 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 or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. 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, 2017
 
December 31, 2016
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
66,216

 
$
4,312,722

 
$
4,378,938

 
$
62,454

 
$
4,291,179

 
$
4,353,633

Residential
5,826

 
1,502,205

 
1,508,031

 
6,881

 
1,257,442

 
1,264,323

Total real estate mortgage
72,042

 
5,814,927

 
5,886,969

 
69,335

 
5,548,621

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
666,185

 
666,185

 

 
578,838

 
578,838

Residential
362

 
441,689

 
442,051

 
364

 
383,637

 
384,001

Total real estate construction and land
362

 
1,107,874

 
1,108,236

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
53,611

 
3,079,798

 
3,133,409

 
53,908

 
3,053,484

 
3,107,392

Asset-based
1,165

 
2,389,918

 
2,391,083

 
2,118

 
2,606,927

 
2,609,045

Venture capital
15,289

 
1,919,660

 
1,934,949

 
11,687

 
1,971,469

 
1,983,156

Equipment finance
30,388

 
592,849

 
623,237

 
32,848

 
659,119

 
691,967

Total commercial
100,453

 
7,982,225

 
8,082,678

 
100,561

 
8,290,999

 
8,391,560

Consumer
173

 
382,298

 
382,471

 
339

 
374,836

 
375,175

Total Non-PCI loans and leases
$
173,030

 
$
15,287,324

 
$
15,460,354

 
$
170,599

 
$
15,176,931

 
$
15,347,530

At March 31, 2017, nonaccrual loans and leases totaled $173.0 million and included $9.6 million of loans and leases 90 or more days past due, $4.0 million of loans and leases 30 to 89 days past due, and $159.4 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 $170.6 million at December 31, 2016, including $15.9 million of the loans and leases 90 or more days past due, $3.0 million of loans and leases 30 to 89 days past due, and $151.7 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.
 
March 31, 2017
 
December 31, 2016
 
Classified
 
Nonclassified
 
Total
 
Classified
 
Nonclassified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
100,202

 
$
4,278,736

 
$
4,378,938

 
$
99,641

 
$
4,253,992

 
$
4,353,633

Residential
9,680

 
1,498,351

 
1,508,031

 
17,540

 
1,246,783

 
1,264,323

Total real estate mortgage
109,882

 
5,777,087

 
5,886,969

 
117,181

 
5,500,775

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
403

 
665,782

 
666,185

 
409

 
578,429

 
578,838

Residential
362

 
441,689

 
442,051

 
364

 
383,637

 
384,001

Total real estate construction and land
765

 
1,107,471

 
1,108,236

 
773

 
962,066

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
175,511

 
2,957,898

 
3,133,409

 
177,661

 
2,929,731

 
3,107,392

Asset-based
32,285

 
2,358,798

 
2,391,083

 
28,112

 
2,580,933

 
2,609,045

Venture capital
75,222

 
1,859,727

 
1,934,949

 
52,646

 
1,930,510

 
1,983,156

Equipment finance
30,388

 
592,849

 
623,237

 
32,848

 
659,119

 
691,967

Total commercial
313,406

 
7,769,272

 
8,082,678

 
291,267

 
8,100,293

 
8,391,560

Consumer
346

 
382,125

 
382,471

 
424

 
374,751

 
375,175

Total Non-PCI loans and leases
$
424,399

 
$
15,035,955

 
$
15,460,354

 
$
409,645

 
$
14,937,885

 
$
15,347,530

In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
Non‑PCI nonaccrual loans and leases and performing troubled debt restructured loans are considered impaired for reporting purposes. Troubled debt restructurings are a result of rate reductions, term extensions, fee concessions, and debt forgiveness, or a combination thereof. The following table presents the composition of our impaired loans and leases as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
Performing
 
Total
 
 
 
Performing
 
Total
 
Nonaccrual
 
Troubled
 
Impaired
 
Nonaccrual
 
Troubled
 
Impaired
 
Loans
 
Debt
 
Loans
 
Loans
 
Debt
 
Loans
 
and
 
Restructured
 
and
 
and
 
Restructured
 
and
 
Leases
 
Loans
 
Leases
 
Leases
 
Loans
 
Leases
 
(In thousands)
Real estate mortgage
$
72,042

 
$
47,119

 
$
119,161

 
$
69,335

 
$
54,750

 
$
124,085

Real estate construction and land
362

 
6,321

 
6,683

 
364

 
6,893

 
7,257

Commercial
100,453

 
2,920

 
103,373

 
100,561

 
3,157

 
103,718

Consumer
173

 
141

 
314

 
339

 
152

 
491

Total
$
173,030

 
$
56,501

 
$
229,531

 
$
170,599

 
$
64,952

 
$
235,551




17



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


The following tables present information regarding our Non‑PCI impaired loans and leases by portfolio segment and class as of and for the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
Impaired Loans and Leases