10-Q 1 a06301710-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 June 30, 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 July 27, 2017, there were 120,048,067 shares of the registrant's common stock outstanding, excluding 1,397,993 shares of unvested restricted stock.


1



PACWEST BANCORP
JUNE 30, 2017 QUARTERLY REPORT ON FORM 10-Q
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
 
FRB
Board of Governors of the Federal Reserve System
ASC
Accounting Standards Codification
 
FRBSF
Federal Reserve Bank of San Francisco
ASU
Accounting Standards Update
 
IRR
Interest Rate Risk
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013.
 
MBS
Mortgage-Backed Securities
BHCA
Bank Holding Company Act of 1956, as amended
 
MVE
Market Value of Equity
BOLI
Bank Owned Life Insurance
 
NII
Net Interest Income
CapitalSource Inc.
A company acquired on April 7, 2014
 
NIM
Net Interest Margin
CapitalSource Division
A division of Pacific Western Bank, formed at the closing of the CapitalSource Inc. merger
 
Non-PCI
Non-Purchased Credit Impaired
C&I
Commercial and Industrial
 
OREO
Other Real Estate Owned
CDI
Core Deposit Intangible Assets
 
PWEF
Pacific Western Equipment Finance, a leasing unit sold March 31, 2016
CET1
Common Equity Tier 1
 
PCI
Purchased Credit Impaired
CMOs
Collateralized Mortgage Obligations
 
PRSUs
Performance-Based Restricted Stock Units
CRI
Customer Relationship Intangible Assets
 
S1AM
Square 1 Asset Management, Inc.
CUB
CU Bancorp
 
SBA
Small Business Administration
CU Bank
California United Bank
 
SEC
Securities and Exchange Commission
DBO
California Department of Business Oversight
 
Square 1
Square 1 Financial, Inc. (a company acquired on October 6, 2015)
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
Square 1 Bank Division
A division of Pacific Western Bank formed at the closing of the Square 1 acquisition
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)
 
Tax Equivalent Net Interest Income
Net interest income adjusted for tax-equivalent adjustments related to tax-exempt income on municipal securities
FASB
Financial Accounting Standards Board
 
Tax Equivalent NIM
NIM 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)
 
TDRs
Troubled Debt Restructurings
FDIC
Federal Deposit Insurance Corporation
 
TRSAs
Time-Based Restricted Stock Awards
FHLB
Federal Home Loan Bank of San Francisco
 
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
 
June 30,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
 
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
180,330

 
$
337,965

Interest-earning deposits in financial institutions
107,150

 
81,705

Total cash and cash equivalents
287,480

 
419,670

Securities available-for-sale, at fair value
3,474,560

 
3,223,830

Federal Home Loan Bank stock, at cost
22,059

 
21,870

Total investment securities
3,496,619

 
3,245,700

Loans held for sale, at lower of cost or fair value
175,158

 

Gross loans and leases held for investment
15,609,180

 
15,520,537

Deferred fees, net
(65,723
)
 
(64,583
)
Allowance for loan and lease losses
(145,958
)
 
(157,238
)
Total loans and leases held for investment, net
15,397,499

 
15,298,716

Equipment leased to others under operating leases
203,212

 
229,905

Premises and equipment, net
29,108

 
38,594

Foreclosed assets, net
13,278

 
12,976

Deferred tax asset, net
70,354

 
94,112

Goodwill
2,173,949

 
2,173,949

Core deposit and customer relationship intangibles, net
30,237

 
36,366

Other assets
369,983

 
319,779

Total assets
$
22,246,877

 
$
21,869,767

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
6,701,039

 
$
6,659,016

Interest-bearing deposits
10,173,938

 
9,211,595

Total deposits
16,874,977

 
15,870,611

Borrowings
217,454

 
905,812

Subordinated debentures
445,743

 
440,744

Accrued interest payable and other liabilities
148,798

 
173,545

Total liabilities
17,686,972

 
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 June 30, 2017 and
 
 
 
December 31, 2016, 123,116,527 and 122,803,029 shares issued, respectively, including
 
 
 
1,400,254 and 1,476,132 shares of unvested restricted stock, respectively)
1,231

 
1,228

Additional paid-in capital
4,054,895

 
4,162,132

Retained earnings
537,968

 
366,073

Treasury stock, at cost (1,668,206 and 1,519,360 shares at June 30, 2017 and December 31, 2016)
(63,918
)
 
(56,360
)
Accumulated other comprehensive income, net
29,729

 
5,982

Total stockholders' equity
4,559,905

 
4,479,055

Total liabilities and stockholders' equity
$
22,246,877

 
$
21,869,767

See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
234,618

 
$
224,178

 
$
224,326

 
$
458,796

 
$
460,701

Investment securities
24,689

 
23,039

 
22,420

 
47,728

 
44,967

Deposits in financial institutions
237

 
192

 
308

 
429

 
616

Total interest income
259,544

 
247,409

 
247,054

 
506,953

 
506,284

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
10,205

 
8,377

 
7,823

 
18,582

 
16,896

Borrowings
1,066

 
1,018

 
352

 
2,084

 
933

Subordinated debentures
5,800

 
5,562

 
5,122

 
11,362

 
10,104

Total interest expense
17,071

 
14,957

 
13,297

 
32,028

 
27,933

Net interest income
242,473

 
232,452

 
233,757

 
474,925

 
478,351

Provision for credit losses
11,499

 
24,728

 
13,903

 
36,227

 
34,043

Net interest income after provision for credit losses
230,974

 
207,724

 
219,854

 
438,698

 
444,308

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,510

 
3,758

 
3,633

 
7,268

 
7,489

Other commissions and fees
10,583

 
10,390

 
11,073

 
20,973

 
22,562

Leased equipment income
11,635

 
9,475

 
8,523

 
21,110

 
16,767

Gain on sale of loans and leases
649

 
712

 
388

 
1,361

 
633

Gain (loss) on sale of securities
1,651

 
(99
)
 
478

 
1,552

 
8,588

FDIC loss sharing expense, net

 

 
(6,502
)
 

 
(8,917
)
Other income
7,254

 
10,878

 
4,528

 
18,132

 
9,538

Total noninterest income
35,282

 
35,114

 
22,121

 
70,396

 
56,660

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
65,288

 
64,880

 
62,174

 
130,168

 
123,239

Occupancy
11,811

 
11,608

 
12,193

 
23,419

 
24,825

Data processing
6,337

 
7,015

 
5,644

 
13,352

 
11,548

Other professional services
3,976

 
3,378

 
3,401

 
7,354

 
6,973

Insurance and assessments
4,856

 
4,791

 
4,951

 
9,647

 
9,916

Intangible asset amortization
3,065

 
3,064

 
4,371

 
6,129

 
9,117

Leased equipment depreciation
5,232

 
5,625

 
5,286

 
10,857

 
10,310

Foreclosed assets (income) expense, net
(157
)
 
143

 
(3
)
 
(14
)
 
(564
)
Acquisition, integration and reorganization costs
1,700

 
500

 

 
2,200

 
200

Loan expense
3,884

 
3,387

 
2,145

 
7,271

 
4,300

Other expense
11,715

 
12,153

 
9,919

 
23,868

 
20,905

Total noninterest expense
117,707

 
116,544

 
110,081

 
234,251

 
220,769

Earnings before income taxes
148,549

 
126,294

 
131,894

 
274,843

 
280,199

Income tax expense
(54,902
)
 
(47,626
)
 
(49,726
)
 
(102,528
)
 
(107,575
)
Net earnings
$
93,647

 
$
78,668

 
$
82,168

 
$
172,315

 
$
172,624

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.65

 
$
0.68

 
$
1.42

 
$
1.42

Diluted
$
0.77

 
$
0.65

 
$
0.68

 
$
1.42

 
$
1.42

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50

 
$
1.00

 
$
1.00


See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Net earnings
$
93,647

 
$
78,668

 
$
82,168

 
$
172,315

 
$
172,624

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Unrealized net holding gains on securities
 
 
 
 
 
 
 
 
 
available-for-sale arising during the period
30,340

 
11,184

 
56,514

 
41,524

 
99,607

Income tax expense related to net unrealized
 
 
 
 
 
 
 
 
 
holding gains arising during the period
(12,350
)
 
(4,507
)
 
(22,965
)
 
(16,857
)
 
(40,620
)
Unrealized net holding gains on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
17,990

 
6,677

 
33,549

 
24,667

 
58,987

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings (1)
(1,651
)
 
99

 
(478
)
 
(1,552
)
 
(8,588
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
672

 
(40
)
 
194

 
632

 
3,517

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(979
)
 
59

 
(284
)
 
(920
)
 
(5,071
)
Other comprehensive income, net of tax
17,011

 
6,736

 
33,265

 
23,747

 
53,916

Comprehensive income
$
110,658

 
$
85,404

 
$
115,433

 
$
196,062

 
$
226,540

___________________________________ 
(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

 
Six Months Ended June 30, 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

 

 

 
172,315

 

 

 
172,315

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

 

 

 

 

 
23,747

 
23,747

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
313,498

 
3

 
13,716

 

 

 

 
13,719

Restricted stock surrendered
(148,846
)
 

 

 

 
(7,558
)
 

 
(7,558
)
Cash dividends paid

 

 
(121,664
)
 

 

 

 
(121,664
)
Balance, June 30, 2017
121,448,321

 
$
1,231

 
$
4,054,895

 
$
537,968

 
$
(63,918
)
 
$
29,729

 
$
4,559,905

________________________
(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
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
172,315

 
$
172,624

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
15,980

 
16,522

Amortization of net premiums on securities available-for-sale
20,227

 
18,174

Amortization of intangible assets
6,129

 
9,117

Provision for credit losses
36,227

 
34,043

Gain on sale of foreclosed assets
(282
)
 
(534
)
Provision for losses on foreclosed assets
14

 

Gain on sale of loans and leases
(1,361
)
 
(633
)
Gain on sale of premises and equipment
(565
)
 
(23
)
Gain on sale of securities
(1,552
)
 
(8,588
)
Gain on BOLI death benefit
(1,050
)
 
(538
)
Unrealized gain on derivatives and foreign currencies, net
(253
)
 
(569
)
Earned stock compensation
13,719

 
11,600

Loss on sale of PWEF leasing unit

 
720

Tax effect included in stockholders' equity of restricted stock vesting

 
(3,683
)
Decrease in accrued and deferred income taxes, net
7,823

 
68,466

Increase in other assets
(50,973
)
 
(3,031
)
Decrease in accrued interest payable and other liabilities
(31,195
)
 
(40,683
)
Net cash provided by operating activities
185,203

 
272,984

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(388,619
)
 
(380,289
)
Proceeds from sales of loans and leases
83,798

 
78,888

Proceeds from maturities and paydowns of securities available-for-sale
217,399

 
117,684

Proceeds from sales of securities available-for-sale
86,018

 
353,374

Purchases of securities available-for-sale
(532,849
)
 
(177,644
)
Net purchases of Federal Home Loan Bank stock
(189
)
 
(4,504
)
Proceeds from sales of foreclosed assets
1,281

 
6,602

Purchases of premises and equipment, net
(4,037
)
 
(3,951
)
Proceeds from sales of premises and equipment
10,306

 
24

Proceeds from sale of leasing unit

 
138,955

Proceeds from BOLI death benefit
2,478

 
3,034

Net decrease (increase) of equipment leased to others under operating leases
17,262

 
(16,060
)
Net cash (used in) provided by investing activities
(507,152
)
 
116,113

 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposits
44,996

 
53,387

Net increase (decrease) in interest-bearing deposits
962,343

 
(569,414
)
Net (decrease) increase in borrowings
(688,358
)
 
298,324

Restricted stock surrendered
(7,558
)
 
(4,416
)
Tax effect included in stockholders' equity of restricted stock vesting

 
3,683

Cash dividends paid
(121,664
)
 
(121,794
)
Net cash provided by (used in) financing activities
189,759

 
(340,230
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(132,190
)
 
48,867

Cash and cash equivalents, beginning of period
419,670

 
396,486

Cash and cash equivalents, end of period
$
287,480

 
$
445,353



See Notes to Condensed Consolidated Financial Statements.


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
30,478

 
$
28,558

Cash paid for income taxes
118,878

 
44,908

Loans transferred to foreclosed assets
580

 
129

Transfers from loans held for investment to loans held for sale
175,158

 

  

See Notes to Condensed Consolidated Financial Statements.


9



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 June 30, 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.
CU Bancorp Merger Announcement
On April 6, 2017, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest will acquire CUB in a transaction valued at approximately $705 million as of the announcement date.
CUB, headquartered in Los Angeles, California, is the parent of CU Bank, a California state-chartered non-member bank, with approximately $3.0 billion in assets and nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties at June 30, 2017. In connection with the acquisition, CU Bank will be merged into Pacific Western Bank, the principal operating subsidiary of PacWest.
The acquisition, which was approved by the PacWest and CUB boards of directors, is expected to close in the fourth quarter of 2017 and is subject to customary closing conditions, including obtaining approval by CUB’s shareholders and bank regulatory authorities.
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").

10



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


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. Income tax benefits of $1.0 million and $2.1 million were recognized during the three and six months ended June 30, 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.
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. On the condensed consolidated statements of earnings we are presenting a new line for "Loan expense", as that category has exceeded the disclosure materiality threshold, which previously had been included as part of "Other expense." Included in loan expense are costs related to servicing our loans including legal fees. Regarding time deposits disclosures, prior to 2017 we 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.

11



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 June 30, 2017 is 4.9 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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
64,187

 
$
64,187

 
$
93,824

 
$
64,187

 
$
95,524

Fully amortized portion

 

 
(17,311
)
 

 
(17,311
)
Reduction due to sale of PWEF leasing unit

 

 

 

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

 
64,187

 
76,513

 
64,187

 
76,513

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(30,885
)
 
(27,821
)
 
(45,687
)
 
(27,821
)
 
(42,304
)
Amortization
(3,065
)
 
(3,064
)
 
(4,371
)
 
(6,129
)
 
(9,117
)
Fully amortized portion

 

 
17,311

 

 
17,311

Reduction due to sale of PWEF leasing unit

 

 

 

 
1,363

Balance, end of period
(33,950
)
 
(30,885
)
 
(32,747
)
 
(33,950
)
 
(32,747
)
Net CDI and CRI, end of period
$
30,237

 
$
33,302

 
$
43,766

 
$
30,237

 
$
43,766


12



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:
 
June 30, 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
$
402,654

 
$
4,318

 
$
(2,652
)
 
$
404,320

 
$
499,185

 
$
6,222

 
$
(2,964
)
 
$
502,443

Agency CMOs
132,494

 
1,698

 
(400
)
 
133,792

 
145,258

 
1,528

 
(497
)
 
146,289

Private label CMOs
157,187

 
3,372

 
(858
)
 
159,701

 
122,707

 
4,199

 
(1,437
)
 
125,469

Municipal securities
1,492,834

 
43,688

 
(1,968
)
 
1,534,554

 
1,447,064

 
15,406

 
(6,011
)
 
1,456,459

Agency commercial MBS
919,696

 
5,656

 
(7,142
)
 
918,210

 
555,552

 
1,798

 
(9,658
)
 
547,692

Corporate debt securities
17,000

 
2,185

 

 
19,185

 
47,100

 
680

 
(271
)
 
47,509

Collateralized loan obligations
65,521

 
820

 
(40
)
 
66,301

 
155,440

 
1,685

 
(238
)
 
156,887

SBA securities
177,171

 
1,112

 
(227
)
 
178,056

 
179,085

 
510

 
(750
)
 
178,845

Asset-backed and other securities
59,856

 
685

 
(100
)
 
60,441

 
62,264

 
358

 
(385
)
 
62,237

Total
$
3,424,413

 
$
63,534

 
$
(13,387
)
 
$
3,474,560

 
$
3,213,655

 
$
32,386

 
$
(22,211
)
 
$
3,223,830

As of June 30, 2017, securities available-for-sale with a fair value of $430.2 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended June 30, 2017, we sold $41.4 million of securities available-for-sale for a gross realized gain of $1.7 million and a gross realized loss of $76,000. During the three months ended June 30, 2016, we sold $9.9 million of securities available-for-sale for a gross realized gain of $0.6 million and a gross realized loss of $0.1 million.
During the six months ended June 30, 2017, we sold $84.5 million of securities available-for-sale for a gross realized gain of $1.9 million and a gross realized loss of $379,000. During the six months ended June 30, 2016, we sold $344.8 million of securities available-for-sale for a gross realized gain of $9.5 million and a gross realized loss of $0.9 million.

13



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:
 
June 30, 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
$
87,541

 
$
(802
)
 
$
118,268

 
$
(1,850
)
 
$
205,809

 
$
(2,652
)
Agency CMOs
20,041

 
(259
)
 
11,446

 
(141
)
 
31,487

 
(400
)
Private label CMOs
63,938

 
(588
)
 
21,851

 
(270
)
 
85,789

 
(858
)
Municipal securities
97,296

 
(1,968
)
 

 

 
97,296

 
(1,968
)
Agency commercial MBS
304,470

 
(5,643
)
 
48,714

 
(1,499
)
 
353,184

 
(7,142
)
Collateralized loan obligations
9,662

 
(13
)
 
6,930

 
(27
)
 
16,592

 
(40
)
SBA securities
55,951

 
(227
)
 

 

 
55,951

 
(227
)
Asset-backed and other securities
7,208

 
(73
)
 
5,958

 
(27
)
 
13,166

 
(100
)
Total
$
646,107

 
$
(9,573
)
 
$
213,167

 
$
(3,814
)
 
$
859,274

 
$
(13,387
)

 
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 June 30, 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.

14



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:
 
June 30, 2017
 
Amortized
 
Fair
Maturity
Cost
 
Value
 
(In thousands)
Due in one year or less
$
12,649

 
$
12,997

Due after one year through five years
255,563

 
259,332

Due after five years through ten years
1,005,595

 
1,013,932

Due after ten years
2,150,606

 
2,188,299

Total securities available-for-sale
$
3,424,413

 
$
3,474,560

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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Taxable interest
$
13,517

 
$
12,166

 
$
11,406

 
$
25,683

 
$
22,802

Non-taxable interest
10,750

 
10,381

 
10,503

 
21,131

 
21,229

Dividend income
422

 
492

 
511

 
914

 
936

Total interest income on investment securities
$
24,689

 
$
23,039

 
$
22,420

 
$
47,728

 
$
44,967


15



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


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.
Loans Held for Sale
In the second quarter of 2017, we entered into two agreements to sell loans with balances totaling $175.2 million and the associated unfunded commitments of $19.3 million, primarily from our healthcare portfolios. The $175.2 million of loans were reported as loans held for sale at June 30, 2017 and the sales were completed in July. In connection with the transfer of loans to held for sale, we recognized $7.2 million in charge-offs related to our healthcare portfolio loans in order to record the loans at the lower of cost or fair value.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
 
June 30, 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
$
6,089,209

 
$
65,950

 
$
6,155,159

 
$
5,635,675

 
$
92,793

 
$
5,728,468

Real estate construction and land
1,179,616

 
1,774

 
1,181,390

 
975,032

 
2,409

 
977,441

Commercial
7,869,706

 
4,479

 
7,874,185

 
8,426,236

 
12,994

 
8,439,230

Consumer
398,204

 
242

 
398,446

 
375,149

 
249

 
375,398

Total gross loans and leases held for
 
 
 
 
 
 
 
 
 
 
 
investment
15,536,735

 
72,445

 
15,609,180

 
15,412,092

 
108,445

 
15,520,537

Deferred fees, net
(65,704
)
 
(19
)
 
(65,723
)
 
(64,562
)
 
(21
)
 
(64,583
)
Total loans and leases held for investment,
 
 
 
 
 
 
 
 
 
 
 
net of deferred fees
15,471,031

 
72,426

 
15,543,457

 
15,347,530

 
108,424

 
15,455,954

Allowance for loan and lease losses
(138,879
)
 
(7,079
)
 
(145,958
)
 
(143,755
)
 
(13,483
)
 
(157,238
)
Total loans and leases held for
 
 
 
 
 
 
 
 
 
 
 
investment, net
$
15,332,152

 
$
65,347

 
$
15,397,499

 
$
15,203,775

 
$
94,941

 
$
15,298,716


16



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


Non‑PCI Loans and Leases Held for Investment
The following tables present an aging analysis of our Non‑PCI loans and leases held for investment by portfolio segment and class as of the dates indicated:
 
June 30, 2017
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
4,421

 
$
4,008

 
$
8,429

 
$
4,379,267

 
$
4,387,696

Residential
444

 
1,898

 
2,342

 
1,681,760

 
1,684,102

Total real estate mortgage
4,865

 
5,906

 
10,771

 
6,061,027

 
6,071,798

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
690,058

 
690,058

Residential

 

 

 
473,282

 
473,282

Total real estate construction and land

 

 

 
1,163,340

 
1,163,340

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
1,360

 
10,040

 
11,400

 
2,819,212

 
2,830,612

Asset-based

 
203

 
203

 
2,391,921

 
2,392,124

Venture capital
23,171

 
6,531

 
29,702

 
1,971,679

 
2,001,381

Equipment finance
690

 
169

 
859

 
612,691

 
613,550

Total commercial
25,221

 
16,943

 
42,164

 
7,795,503

 
7,837,667

Consumer
298

 
44

 
342

 
397,884

 
398,226

Total (1)
$
30,384

 
$
22,893

 
$
53,277

 
$
15,417,754

 
$
15,471,031

________________________
(1)
Excludes loans held for sale carried at lower of cost or fair value.
 
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
$
31,569

 
$
15,945

 
$
47,514

 
$
15,300,016

 
$
15,347,530



17



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 held for investment by portfolio segment and class as of the dates indicated:  
 
June 30, 2017 (1)
 
December 31, 2016
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
65,599

 
$
4,322,097

 
$
4,387,696

 
$
62,454

 
$
4,291,179

 
$
4,353,633

Residential
5,229

 
1,678,873

 
1,684,102

 
6,881

 
1,257,442

 
1,264,323

Total real estate mortgage
70,828

 
6,000,970

 
6,071,798

 
69,335

 
5,548,621

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
690,058

 
690,058

 

 
578,838

 
578,838

Residential

 
473,282

 
473,282

 
364

 
383,637

 
384,001

Total real estate construction and land

 
1,163,340

 
1,163,340

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
43,169

 
2,787,443

 
2,830,612

 
53,908

 
3,053,484

 
3,107,392

Asset-based
1,718

 
2,390,406

 
2,392,124

 
2,118

 
2,606,927

 
2,609,045

Venture capital
25,278

 
1,976,103

 
2,001,381

 
11,687

 
1,971,469

 
1,983,156

Equipment finance
31,111

 
582,439

 
613,550

 
32,848

 
659,119

 
691,967