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PACWEST BANCORP - Quarter Report: 2016 September (Form 10-Q)




 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of October 26, 2016, there were 120,279,633 shares of the registrant's common stock outstanding, excluding 1,393,373 shares of unvested restricted stock.


1



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




2



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

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

 
$
161,020

Interest-earning deposits in financial institutions
253,994

 
235,466

Total cash and cash equivalents
540,365

 
396,486

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

 
3,559,437

Federal Home Loan Bank stock, at cost
19,386

 
19,710

Total investment securities
3,360,721

 
3,579,147

Gross loans and leases
14,806,427

 
14,528,165

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

 
14,363,143

Equipment leased to others under operating leases
198,931

 
197,452

Premises and equipment, net
38,977

 
39,197

Foreclosed assets, net
15,113

 
22,120

Goodwill
2,173,949

 
2,176,291

Core deposit and customer relationship intangibles, net
39,542

 
53,220

Deferred tax asset, net
27,073

 
126,389

Other assets
325,750

 
335,045

Total assets
$
21,315,291

 
$
21,288,490

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

 
$
6,171,455

Interest-bearing deposits
9,123,722

 
9,494,727

Total deposits
15,645,668

 
15,666,182

Borrowings
541,011

 
621,914

Subordinated debentures
441,112

 
436,000

Accrued interest payable and other liabilities
144,905

 
166,703

Total liabilities
16,772,696

 
16,890,799

 
 
 
 
Commitments and contingencies (Note 8)


 


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

 

Common stock ($0.01 par value, 200,000,000 shares authorized at September 30, 2016 and December 31,
 
 
 
2015, 123,320,121 and 122,791,729 shares issued, respectively, including 1,397,715 and 1,211,951
 
 
 
shares of unvested restricted stock, respectively)
1,233

 
1,228

Additional paid-in capital
4,244,521

 
4,405,775

Retained earnings
280,426

 
13,907

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

 
27,828

Total stockholders' equity
4,542,595

 
4,397,691

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

 
$
21,288,490


See Notes to Condensed Consolidated Financial Statements.

3



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

 
$
224,326

 
$
193,539

 
$
686,071

 
$
599,417

Investment securities
22,187

 
22,420

 
13,955

 
67,154

 
40,720

Deposits in financial institutions
298

 
308

 
178

 
914

 
304

Total interest income
247,855

 
247,054

 
207,672

 
754,139

 
640,441

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
7,247

 
7,823

 
10,400

 
24,143

 
32,112

Borrowings
695

 
352

 
72

 
1,628

 
395

Subordinated debentures
5,278

 
5,122

 
4,680

 
15,382

 
13,787

Total interest expense
13,220

 
13,297

 
15,152

 
41,153

 
46,294

Net interest income
234,635

 
233,757

 
192,520

 
712,986

 
594,147

Provision for credit losses
8,471

 
13,903

 
8,746

 
42,514

 
31,709

Net interest income after provision for credit losses
226,164

 
219,854

 
183,774

 
670,472

 
562,438

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,488

 
3,633

 
2,601

 
10,977

 
7,787

Other commissions and fees
12,528

 
11,073

 
6,376

 
35,090

 
18,895

Leased equipment income
8,538

 
8,523

 
5,475

 
25,305

 
16,232

Gain on sale of loans and leases
157

 
388

 
27

 
790

 
190

Gain on sale of securities
382

 
478

 
655

 
8,970

 
3,744

FDIC loss sharing expense, net

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

 
4,528

 
5,073

 
11,365

 
23,359

Total noninterest income
26,920

 
22,121

 
15,758

 
83,580

 
56,252

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
62,661

 
62,174

 
48,152

 
185,900

 
144,922

Occupancy
12,010

 
12,193

 
10,762

 
36,835

 
31,950

Data processing
6,234

 
5,644

 
4,322

 
17,782

 
13,032

Other professional services
4,625

 
3,401

 
3,396

 
11,598

 
9,949

Insurance and assessments
4,324

 
4,951

 
3,805

 
14,240

 
11,546

Intangible asset amortization
4,224

 
4,371

 
1,497

 
13,341

 
4,500

Leased equipment depreciation
5,298

 
5,286

 
3,162

 
15,608

 
9,368

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

 
(812
)
 
2,517

Acquisition, integration and reorganization costs

 

 
747

 
200

 
3,647

Other expense
11,582

 
12,064

 
9,775

 
36,787

 
28,344

Total noninterest expense
110,710

 
110,081

 
90,139

 
331,479

 
259,775

Earnings before income taxes
142,374

 
131,894

 
109,393

 
422,573

 
358,915

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

 
$
82,168

 
$
69,616

 
$
266,519

 
$
227,778

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

Diluted
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50

 
$
1.50

 
$
1.50


See Notes to Condensed Consolidated Financial Statements.


4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 
$
82,168

 
$
69,616

 
$
266,519

 
$
227,778

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

 
14,466

 
83,653

 
616

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

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

 
8,593

 
49,542

 
252

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

 
194

 
266

 
3,673

 
1,571

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

 
8,204

 
44,245

 
(1,921
)
Comprehensive income
$
84,224

 
$
115,433

 
$
77,820

 
$
310,764

 
$
225,857

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

See Notes to Condensed Consolidated Financial Statements.


5



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

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

 
$
1,228

 
$
4,405,775

 
$
13,907

 
$
(51,047
)
 
$
27,828

 
$
4,397,691

Net earnings

 

 

 
266,519

 

 

 
266,519

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

 

 

 

 

 
44,245

 
44,245

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

 
5

 
17,270

 

 

 

 
17,275

Restricted stock surrendered
(124,595
)
 

 

 

 
(4,611
)
 

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

 

 
4,226

 

 

 

 
4,226

Cash dividends paid

 

 
(182,750
)
 

 

 

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

 
$
1,233

 
$
4,244,521

 
$
280,426

 
$
(55,658
)
 
$
72,073

 
$
4,542,595




See Notes to Condensed Consolidated Financial Statements.



6



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

 
$
227,778

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

 
33,239

Provision for credit losses
42,514

 
31,709

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

Provision for losses on foreclosed assets

 
5,163

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

 
11,836

Loss on sale of leasing unit
720

 

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

 
108,553

Decrease in other assets
2,070

 
15,786

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

 
403,277

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

 
10,557

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

 
93,389

Proceeds from sales
392,841

 
212,169

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

 
23,359

Proceeds from sales of foreclosed assets
7,973

 
18,772

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

 
108

Proceeds from sale of leasing unit
138,955

 

Proceeds from BOLI death benefit
1,853

 

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

 
573,101

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

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

 
596

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

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

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

 
313,226

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

 
$
236,294

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

 
$
51,218

Cash paid for income taxes
82,721

 
13,760

Loans transferred to foreclosed assets
129

 
13,472

Partnership interest transferred to equipment leased to others under operating leases

 
20,833

  
See Notes to Condensed Consolidated Financial Statements.


7


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


Note 1.  Organization    
PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our wholly-owned banking subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” "us," “our,” or the “Company,” refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to “PacWest” or to the holding company, we are referring to PacWest Bancorp, the parent company, on a stand‑alone basis. As of September 30, 2016, the Company had total assets of $21.3 billion, gross loans and leases of $14.8 billion, total deposits of $15.6 billion and total stockholders' equity of $4.5 billion.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 79 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. The Bank provides commercial banking services, including real estate, construction, and commercial loans and leases, and comprehensive deposit and treasury management services to small and middle-market businesses. Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle-market businesses on a national basis. Square 1 Bank offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of Pacific Western.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.
We have completed 28 acquisitions from May 1, 2000 through September 30, 2016, including the acquisition of Square 1 Financial, Inc. ("Square 1") on October 6, 2015. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 2. Acquisitions, for more information about the Square 1 acquisition.
On March 31, 2016, we sold our Pacific Western Equipment Finance ("PWEF") leasing unit in Midvale, Utah, including approximately $139 million of outstanding lease balances.
Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission ("Form 10-K").
Basis of Presentation    
Our interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
 

8


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


Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value and useful lives of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
As described in Note 2. Acquisitions, the acquired assets and liabilities of Square 1 were measured at their estimated fair values. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period's presentation format. The operating segments previously reported have been aggregated into one segment to conform to the current period's presentation format.
Note 2.  Acquisitions    
Square 1 Financial, Inc. Acquisition
We acquired Square 1 on October 6, 2015. As part of the acquisition, Square 1 Bank, a wholly-owned subsidiary of Square 1, merged with and into Pacific Western. At closing, we formed the Square 1 Bank Division of Pacific Western to focus on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide. When we refer to "Square 1", we are referring to the company acquired on October 6, 2015, and when we refer to the "Square 1 Bank Division", we are referring to a division of Pacific Western.
We completed this acquisition to increase our core deposits, expand our nationwide lending platform, and increase our presence in the technology and life-sciences credit markets. The Square 1 acquisition has been accounted for under the acquisition method of accounting. We acquired $4.6 billion of assets and assumed $3.8 billion of liabilities upon closing of the acquisition. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. The application of the acquisition method of accounting resulted in goodwill of $446.1 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.


9


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


Note 3.  Goodwill and Other Intangible Assets
Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Our intangible assets with definite lives are core deposit intangibles ("CDI") and customer relationship intangibles ("CRI").
Goodwill and other intangible assets deemed to have indefinite lives generated from business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in “Noninterest expense” in the condensed consolidated statements of earnings.
CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of September 30, 2016 is 5.6 years. The aggregate CDI and CRI amortization expense is expected to be $16.5 million for 2016. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $11.5 million for 2017, $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, and $3.0 million for 2021.
The following table presents the changes in the carrying amount of goodwill for the period indicated:    
 
Goodwill
 
(In thousands)
Balance, December 31, 2015
$
2,176,291

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

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

 
$
93,824

 
$
53,090

 
$
95,524

 
$
53,090

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

 
(20,122
)
 

Reduction due to sale of PWEF leasing unit

 

 

 
(1,700
)
 

Balance, end of period
73,702

 
76,513

 
53,090

 
73,702

 
53,090

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

 
17,311

 

 
20,122

 

Reduction due to sale of PWEF leasing unit

 

 

 
1,363

 

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

 
$
43,766

 
$
12,704

 
$
39,542

 
$
12,704


10


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


Note 4. Investment Securities     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and carrying values of securities available-for-sale as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type:
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
securities ("MBS") and collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations ("CMOs"):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
518,996

 
$
10,639

 
$
(694
)
 
$
528,941

 
$
660,069

 
$
11,517

 
$
(3,746
)
 
$
667,840

Agency CMOs
154,216

 
3,196

 
(181
)
 
157,231

 
193,148

 
2,633

 
(1,026
)
 
194,755

Private label CMOs
133,917

 
5,377

 
(669
)
 
138,625

 
140,065

 
5,837

 
(1,106
)
 
144,796

Municipal securities
1,437,952

 
84,571

 
(29
)
 
1,522,494

 
1,508,968

 
39,435

 
(1,072
)
 
1,547,331

Agency commercial MBS
517,163

 
15,299

 
(1,189
)
 
531,273

 
392,729

 
1,509

 
(2,797
)
 
391,441

Corporate debt securities
47,155

 
1,856

 

 
49,011

 
49,047

 
327

 
(950
)
 
48,424

Collateralized loan obligations
155,373

 
1,511

 
(237
)
 
156,647

 
133,192

 
128

 
(1,131
)
 
132,189

SBA securities
185,639

 
1,909

 
(248
)
 
187,300

 
211,946

 
41

 
(830
)
 
211,157

US Treasury securities

 

 

 

 
70,196

 

 
(816
)
 
69,380

Agency debt securities

 

 

 

 
36,302

 
611

 

 
36,913

Asset-backed and other securities
69,189

 
722

 
(98
)
 
69,813

 
116,723

 
119

 
(1,631
)
 
115,211

Total
$
3,219,600

 
$
125,080

 
$
(3,345
)
 
$
3,341,335

 
$
3,512,385

 
$
62,157

 
$
(15,105
)
 
$
3,559,437

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

11


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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
September 30, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
33,817

 
$
(100
)
 
$
130,786

 
$
(594
)
 
$
164,603

 
$
(694
)
Agency CMOs
18,893

 
(95
)
 
26,476

 
(86
)
 
45,369

 
(181
)
Private label CMOs
14,552

 
(98
)
 
29,058

 
(571
)
 
43,610

 
(669
)
Municipal securities
5,338

 
(29
)
 

 

 
5,338

 
(29
)
Agency commercial MBS
77,706

 
(1,189
)
 

 

 
77,706

 
(1,189
)
Collateralized loan obligations
2,506

 
(5
)
 
39,197

 
(232
)
 
41,703

 
(237
)
SBA securities
2,956

 
(9
)
 
39,842

 
(239
)
 
42,798

 
(248
)
Asset-backed and other securities
5

 
(2
)
 
14,974

 
(96
)
 
14,979

 
(98
)
     Total
$
155,773

 
$
(1,527
)
 
$
280,333

 
$
(1,818
)
 
$
436,106

 
$
(3,345
)
 
December 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
352,042

 
$
(3,480
)
 
$
9,342

 
$
(266
)
 
$
361,384

 
$
(3,746
)
Agency CMOs
117,786

 
(1,026
)
 

 

 
117,786

 
(1,026
)
Private label CMOs
93,533

 
(1,000
)
 
1,638

 
(106
)
 
95,171

 
(1,106
)
Municipal securities
126,892

 
(1,061
)
 
531

 
(11
)
 
127,423

 
(1,072
)
Agency commercial MBS
236,098

 
(2,156
)
 
14,230

 
(641
)
 
250,328

 
(2,797
)
US Treasury securities
69,380

 
(816
)
 

 

 
69,380

 
(816
)
Corporate debt securities
29,379

 
(950
)
 

 

 
29,379

 
(950
)
Collateralized loan obligations
100,993

 
(1,131
)
 

 

 
100,993

 
(1,131
)
SBA securities
179,942

 
(830
)
 

 

 
179,942

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

 
(1,182
)
 
16,091

 
(449
)
 
87,710

 
(1,631
)
Total
$
1,377,664

 
$
(13,632
)
 
$
41,832

 
$
(1,473
)
 
$
1,419,496

 
$
(15,105
)
We reviewed the securities that were in a loss position at September 30, 2016, and concluded their unrealized losses were not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Such unrealized losses were a result of the level of market interest rates and pricing changes caused by shifting supply and demand dynamics relative to the types of securities. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we occasionally sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.

12


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


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

 
$
8,562

Due after one year through five years
252,427

 
259,096

Due after five years through ten years
714,467

 
738,034

Due after ten years
2,244,354

 
2,335,643

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

 
$
3,341,335

Mortgage-backed securities have contractual terms to maturity but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Taxable interest
$
11,446

 
$
11,406

 
$
7,323

 
$
34,248

 
$
22,373

Non-taxable interest
10,333

 
10,503

 
6,058

 
31,562

 
14,760

Dividend income
408

 
511

 
574

 
1,344

 
3,587

Total interest income on investment securities
$
22,187

 
$
22,420

 
$
13,955

 
$
67,154

 
$
40,720


13


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


Note 5.  Loans and Leases
The Company’s loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that all contractually required payments would be collected, are referred to collectively as non-purchased credit impaired loans, or "Non-PCI loans." Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was deemed probable that we would be unable to collect all contractually required payments, are referred to as purchased credit impaired loans, or "PCI loans".
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income on an accelerated basis when the related loans are paid off or sold.
PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality". For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,481,922

 
$
104,896

 
$
5,586,818

 
$
5,706,903

 
$
168,725

 
$
5,875,628

Real estate construction and land
843,097

 
2,423

 
845,520

 
534,307

 
2,656

 
536,963

Commercial
8,104,711

 
12,649

 
8,117,360

 
7,977,067

 
17,415

 
7,994,482

Consumer
256,476

 
253

 
256,729

 
120,793

 
299

 
121,092

Total gross loans and leases
14,686,206

 
120,221

 
14,806,427

 
14,339,070

 
189,095

 
14,528,165

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

 
120,199

 
14,742,846

 
14,289,209

 
189,045

 
14,478,254

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

 
$
108,970

 
$
14,594,870

 
$
14,183,675

 
$
179,468

 
$
14,363,143




14


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


Non‑Purchased Credit Impaired (Non‑PCI) Loans and Leases
The following tables present an aging analysis of our Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:
 
September 30, 2016
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
10,489

 
$
5,772

 
$
16,261

 
$
4,262,571

 
$
4,278,832

Residential
266

 
2,520

 
2,786

 
1,183,323

 
1,186,109

Total real estate mortgage
10,755

 
8,292

 
19,047

 
5,445,894

 
5,464,941

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial
1,245

 

 
1,245

 
507,166

 
508,411

Residential

 

 

 
323,104

 
323,104

Total real estate construction and land
1,245

 

 
1,245

 
830,270

 
831,515

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
66

 
2,128

 
2,194

 
3,063,297

 
3,065,491

Asset-based
6,644

 
15

 
6,659

 
2,565,142

 
2,571,801

Venture capital

 
1,095

 
1,095

 
1,760,517

 
1,761,612

Equipment finance
3,304

 
350

 
3,654

 
667,129

 
670,783

Total commercial
10,014

 
3,588

 
13,602

 
8,056,085

 
8,069,687

Consumer

 
4

 
4

 
256,500

 
256,504

Total Non-PCI loans and leases
$
22,014

 
$
11,884

 
$
33,898

 
$
14,588,749

 
$
14,622,647


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

 
$
13,075

 
$
17,022

 
$
4,534,936

 
$
4,551,958

Residential
3,391

 
905

 
4,296

 
1,131,809

 
1,136,105

Total real estate mortgage
7,338

 
13,980

 
21,318

 
5,666,745

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
343,360

 
343,360

Residential

 

 

 
184,360

 
184,360

Total real estate construction and land

 

 

 
527,720

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
2,048

 
1,427

 
3,475

 
3,058,793

 
3,062,268

Asset-based
1

 

 
1

 
2,547,532

 
2,547,533

Venture capital
250

 
700

 
950

 
1,451,477

 
1,452,427

Equipment finance
359

 
94

 
453

 
889,896

 
890,349

Total commercial
2,658

 
2,221

 
4,879

 
7,947,698

 
7,952,577

Consumer
626

 
1,307

 
1,933

 
118,916

 
120,849

Total Non-PCI loans and leases
$
10,622

 
$
17,508

 
$
28,130

 
$
14,261,079

 
$
14,289,209


15


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


It is the Company's policy to discontinue accruing interest when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business or when principal or interest payments are past due 90 days or more unless the loan is both well secured and in the process of collection. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:  
 
September 30, 2016
 
December 31, 2015
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
74,606

 
$
4,204,226

 
$
4,278,832

 
$
52,363

 
$
4,499,595

 
$
4,551,958

Residential
5,089

 
1,181,020

 
1,186,109

 
4,914

 
1,131,191

 
1,136,105

Total real estate mortgage
79,695

 
5,385,246

 
5,464,941

 
57,277

 
5,630,786

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,245

 
507,166

 
508,411

 

 
343,360

 
343,360

Residential
366

 
322,738

 
323,104

 
372

 
183,988

 
184,360

Total real estate construction and land
1,611

 
829,904

 
831,515

 
372

 
527,348

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
27,831

 
3,037,660

 
3,065,491

 
15,800

 
3,046,468

 
3,062,268

Asset-based
4,044

 
2,567,757

 
2,571,801

 
2,505

 
2,545,028

 
2,547,533

Venture capital
10,782

 
1,750,830

 
1,761,612

 
124

 
1,452,303

 
1,452,427

Equipment finance
46,916

 
623,867

 
670,783

 
51,410

 
838,939

 
890,349

Total commercial
89,573

 
7,980,114

 
8,069,687

 
69,839

 
7,882,738

 
7,952,577

Consumer
206

 
256,298

 
256,504

 
1,531

 
119,318

 
120,849

Total Non-PCI loans and leases
$
171,085

 
$
14,451,562

 
$
14,622,647

 
$
129,019

 
$
14,160,190

 
$
14,289,209

At September 30, 2016, nonaccrual loans and leases totaled $171.1 million and included $11.9 million of loans and leases 90 or more days past due, $13.2 million of loans and leases 30 to 89 days past due, and $146.0 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $129.0 million at December 31, 2015, including $16.8 million of the loans and leases 90 or more days past due, $3.6 million of loans and leases 30 to 89 days past due, and $108.6 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.

16


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


The following table presents the credit risk rating categories for Non‑PCI loans and leases by portfolio segment and class as of the dates indicated. Nonclassified loans and leases are those with a credit risk rating of either pass or special mention, while classified loans and leases are those with a credit risk rating of either substandard or doubtful.
 
September 30, 2016
 
December 31, 2015
 
Classified
 
Nonclassified
 
Total
 
Classified
 
Nonclassified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
104,914

 
$
4,173,918

 
$
4,278,832

 
$
98,436

 
$
4,453,522

 
$
4,551,958

Residential
15,876

 
1,170,233

 
1,186,109

 
12,627

 
1,123,478

 
1,136,105

Total real estate mortgage
120,790

 
5,344,151

 
5,464,941

 
111,063

 
5,577,000

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,839

 
506,572

 
508,411

 
571

 
342,789

 
343,360

Residential
366

 
322,738

 
323,104

 
1,395

 
182,965

 
184,360

Total real estate construction and land
2,205

 
829,310

 
831,515

 
1,966

 
525,754

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
174,490

 
2,891,001

 
3,065,491

 
183,726

 
2,878,542

 
3,062,268

Asset-based
34,791

 
2,537,010

 
2,571,801

 
19,340

 
2,528,193

 
2,547,533

Venture capital
37,986

 
1,723,626

 
1,761,612

 
19,105

 
1,433,322

 
1,452,427

Equipment finance
46,916

 
623,867

 
670,783

 
54,054

 
836,295

 
890,349

Total commercial
294,183

 
7,775,504

 
8,069,687

 
276,225

 
7,676,352

 
7,952,577

Consumer
363

 
256,141

 
256,504

 
2,500

 
118,349

 
120,849

Total Non-PCI loans and leases
$
417,541

 
$
14,205,106

 
$
14,622,647

 
$
391,754

 
$
13,897,455

 
$
14,289,209

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 higher allowances for credit losses.
Non‑PCI nonaccrual loans and leases and performing troubled debt restructured loans are considered impaired for reporting purposes. The following table presents the composition of our impaired loans and leases as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
 
 
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
$
79,695

 
$
59,793

 
$
139,488

 
$
57,277

 
$
27,133

 
$
84,410

Real estate construction and land
1,611

 
7,089

 
8,700

 
372

 
7,631

 
8,003

Commercial
89,573

 
3,250

 
92,823

 
69,839

 
5,221

 
75,060

Consumer
206

 
216

 
422

 
1,531

 
197

 
1,728

Total
$
171,085

 
$
70,348

 
$
241,433

 
$
129,019

 
$
40,182

 
$
169,201


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:
 
September 30, 2016
 
December 31, 2015
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
 
Investment
 
Balance
 
Allowance
 
Investment
 
Balance
 
Allowance
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
67,821

 
$
68,852

 
$
7,055

 
$
17,967

 
$
19,219

 
$
777

Residential
2,517

 
2,573

 
244

 
2,278

 
2,435

 
681

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential
736

 
736

 
11

 
747

 
747

 
26

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
25,936

 
26,971

 
4,686

 
14,072

 
20,312

 
7,079

Asset-based
4,136

 
4,584

 
2,899

 
3,901

 
4,423

 
2,511

Venture capital
10,781

 
10,856

 
3,331

 

 

 

Equipment finance
46,916

 
52,908

 
12,715

 
11,193

 
11,894

 
8,032

Consumer
346

 
355

 
179

 
365

 
372

 
157

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
59,090

 
$
68,390

 
 
 
$
58,678

 
$
68,333

 
 
Residential
10,060

 
15,309

 
 
 
5,487

 
11,406

 
 
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
7,964

 
7,964

 
 
 
7,256

 
7,256

 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
2,519

 
4,783

 
 
 
2,825

 
5,121

 
 
Asset-based
2,535

 
2,575

 
 
 
2,729

 
2,726

 
 
Venture capital

 

 
 
 
124

 
125

 
 
Equipment finance

 
11,709

 
 
 
40,216

 
44,194

 
 
Consumer
76

 
146

 
 
 
1,363

 
1,945

 
 
Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
139,488

 
$
155,124

 
$
7,299

 
$
84,410

 
$
101,393

 
$
1,458

Real estate construction and land
8,700

 
8,700

 
11

 
8,003

 
8,003

 
26

Commercial
92,823

 
114,386

 
23,631

 
75,060

 
88,795

 
17,622

Consumer
422

 
501

 
179

 
1,728

 
2,317

 
157

Total
$
241,433

 
$
278,711

 
$
31,120

 
$
169,201

 
$
200,508

 
$
19,263












18


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


 
Three Months Ended September 30,
 
2016
 
2015
 
Weighted
 
Interest
 
Weighted
 
Interest
 
Average
 
Income
 
Average
 
Income
 
Balance(1)
 
Recognized
 
Balance(1)
 
Recognized
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
18,580

 
$
262

 
$
13,230

 
$
152

Residential
2,505

 
15

 
2,478

 
9

Real estate construction and land:
 
 
 
 
 
 
 
Residential
736

 
4

 
751

 
4

Commercial:
 
 
 
 
 
 
 
Cash flow
25,933

 
9

 
13,653

 
13

Asset-based
2,730

 
5

 
4,906

 
48

Venture capital
6,878

 

 

 

Equipment finance
42,913

 

 
9,654

 

Consumer
346

 
3

 
394

 
4

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
59,090

 
$
518

 
$
36,534

 
$
243

Residential
9,573

 
70

 
6,061

 
14

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
7,870

 
57

 
7,193

 
62

Commercial:
 
 
 
 
 
 
 
Cash flow
2,330

 
1

 
2,942

 
1

Asset-based
2,535

 
37

 
1,487

 
21

Equipment finance

 

 
43,406

 

Consumer
76

 

 
3,208

 

Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
89,748

 
$
865

 
$
58,303

 
$
418

Real estate construction and land
8,606

 
61

 
7,944

 
66

Commercial
83,319

 
52

 
76,048

 
83

Consumer
422

 
3

 
3,602

 
4

Total
$
182,095

 
$
981

 
$
145,897

 
$
571

_________________________
(1)
For Non-PCI loans and leases reported as impaired at September 30, 2016 and 2015, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.


19


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


 
Nine Months Ended September 30,
 
2016
 
2015
 
Weighted
 
Interest
 
Weighted
 
Interest
 
Average
 
Income
 
Average
 
Income
 
Balance(1)
 
Recognized
 
Balance(1)
 
Recognized
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
18,220

 
$
781

 
$
13,155

 
$
449

Residential
2,325

 
42

 
2,334

 
24

Real estate construction and land:
 
 
 
 
 
 
 
Residential
736

 
11

 
751

 
12

Commercial:
 
 
 
 
 
 
 
Cash flow
20,417

 
26

 
13,225

 
35

Asset-based
2,278

 
14

 
3,906

 
67

Venture capital
2,542

 

 

 

Equipment finance
41,587

 

 
6,905

 

Consumer
330

 
8

 
375

 
11

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
54,747

 
$
1,209

 
$
33,263

 
$
674

Residential
6,990

 
130

 
5,046

 
26

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
7,106

 
169

 
7,021

 
176

Commercial:
 
 
 
 
 
 
 
Cash flow
2,232

 
1

 
2,917

 
86

Asset-based
1,828

 
77

 
1,238

 
51

Equipment finance

 

 
29,088

 

Consumer
74

 
1

 
3,208

 

Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
82,282

 
$
2,162

 
$
53,798

 
$
1,173

Real estate construction and land
7,842

 
180

 
7,772

 
188

Commercial
70,884

 
118

 
57,279

 
239

Consumer
404

 
9

 
3,583

 
11

Total
$
161,412

 
$
2,469

 
$
122,432

 
$
1,611

_________________________
(1)
For Non-PCI loans and leases reported as impaired at September 30, 2016 and 2015, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.





20


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


Troubled debt restructurings are a result of rate reductions, term extensions, fee concessions, and debt forgiveness or a combination thereof. The following tables present new troubled debt restructurings of Non-PCI loans for the periods indicated:
 
Three Months Ended September 30,
 
2016
 
2015
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number
 
Recorded
 
Recorded
 
Number
 
Recorded
 
Recorded
Troubled Debt Restructurings:
of Loans
 
Investment
 
Investment
 
of Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
2

 
$
1,147

 
$
1,147

 
3

 
$
574

 
$
574

Residential
1

 
93

 
93

 
2

 
382

 
382

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
1,245

 
1,245

 
3

 
7,333

 
7,333

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
2

 
25

 
25

 
9

 
883

 
883

Asset-based
1

 
25

 
25

 
1

 
3,431

 
3,431

Equipment finance
1

 
39,912

 
39,912

 

 

 

Consumer
1

 
21

 
21

 
1

 
106

 
106

Total
9

 
$
42,468

 
$
42,468

 
19

 
$
12,709

 
$
12,709

 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number
 
Recorded
 
Recorded
 
Number
 
Recorded
 
Recorded
Troubled Debt Restructurings:
of Loans
 
Investment
 
Investment
 
of Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
7

 
$
5,287

 
$
5,287

 
15

 
$
7,080

 
$
7,031

Residential
7

 
5,136

 
5,136

 
14

 
2,426

 
2,260

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
1,245

 
1,245

 
6

 
16,947

 
16,947

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
12

 
30,582

 
30,582

 
17

 
1,756

 
1,577

Asset-based
5

 
2,158

 
2,158

 
13

 
8,139

 
8,139

Equipment finance
7

 
44,196

 
42,572

 
9

 
53,338

 
53,338

Consumer
4

 
819

 
111

 
2

 
197

 
197

Total
43

 
$
89,423

 
$
87,091

 
76

 
$
89,883

 
$
89,489


21


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


The following tables present troubled debt restructurings that subsequently defaulted for the periods indicated:
 
Three Months Ended September 30,
 
 
2016
 
2015
 
Troubled Debt Restructurings
Number
 
Recorded
 
Number
 
Recorded
 
That Subsequently Defaulted:
of Loans
 
Investment(1)
 
of Loans
 
Investment(1)
 
 
(Dollars in thousands)
 
Real estate mortgage:
 
 
 
 
 
 
 
 
Commercial

 
$

 
1

 
$
1,761

 
Residential

 

 
2

 
276

 
Real estate construction:
 
 
 
 
 
 
 
 
Commercial
1

 
1,245

 

 

 
Commercial:
 
 
 
 
 
 
 
 
Asset-based
1

 
2

 

 

 
Total
2

 
$
1,247

(2)
3

 
$
2,037

(3)
_________________________
(1)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled restructurings in those classes for which the recorded investment was zero at the end of the period.
(2)
Represents the balance at September 30, 2016, and there were no charge-offs.
(3)
Represents the balance at September 30, 2015, and there were no charge-offs.
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
Troubled Debt Restructurings
Number
 
Recorded
 
Number
 
Recorded
 
That Subsequently Defaulted:
of Loans
 
Investment(1)
 
of Loans
 
Investment(1)
 
 
(Dollars in thousands)
 
Real estate mortgage:
 
 
 
 
 
 
 
 
Commercial

 
$

 
2

 
$
2,710

 
Residential

 

 
3

 
530

 
Real estate construction and land:
 
 
 
 
 
 
 
 
Commercial
1

 
1,245

 

 

 
Commercial:
 
 
 
 
 
 
 
 
Asset-based
1

 
2

 

 

 
Equipment finance
1

 
39,912

(4)

 

 
Total
3

 
$
41,159

(2)
5

 
$
3,240

(3)
_________________________
(1)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled restructurings in those classes for which the recorded investment was zero at the end of the period.
(2)
Represents the balance at September 30, 2016, and there were no charge-offs.
(3)
Represents the balance at September 30, 2015, and there were no charge-offs.
(4)
The term of the modification for this loan expired in the second quarter of 2016 and was not renewed until the third quarter of 2016. Thus, the loan was in payment default under the loan's original terms at June 30, 2016.

22


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


Allowance for Loan and Lease Losses
The following tables present a summary of the activity in the allowance for loan and lease losses on Non‑PCI loans and leases by portfolio segment and PCI loans for the periods indicated:
 
Three Months Ended September 30, 2016
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan and
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
29,331

 
$
7,853

 
$
93,404

 
$
1,412

 
$
132,000

 
$
11,289

 
$
143,289

Charge-offs
(302
)
 

 
(9,606
)
 
(16
)
 
(9,924
)
 
(531
)
 
(10,455
)
Recoveries
2,414

 
27

 
3,553

 
56

 
6,050

 

 
6,050

Provision
5,498

 
803

 
2,240

 
80

 
8,621

 
471

 
9,092

Balance, end of period
$
36,941

 
$
8,683

 
$
89,591

 
$
1,532

 
$
136,747

 
$
11,229

 
$
147,976


 
Nine Months Ended September 30, 2016
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan and
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
36,654

 
$
7,137

 
$
61,082

 
$
661

 
$
105,534

 
$
9,577

 
$
115,111

Charge-offs
(1,905
)
 

 
(14,306
)
 
(798
)
 
(17,009
)
 
(862
)
 
(17,871
)
Recoveries
4,352

 
185

 
4,179

 
95

 
8,811

 

 
8,811

Provision (negative provision)
(2,160
)
 
1,361

 
38,636

 
1,574

 
39,411

 
2,514

 
41,925

Balance, end of period
$
36,941

 
$
8,683

 
$
89,591

 
$
1,532

 
$
136,747

 
$
11,229

 
$
147,976

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of the allowance
 
 
 
 
 
 
 
 
 
 
 
 
 
applicable to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
7,299

 
$
11

 
$
23,631

 
$
179

 
$
31,120

 
 
 
 
Collectively evaluated for impairment
$
29,642

 
$
8,672

 
$
65,960

 
$
1,353

 
$
105,627

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
11,229

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The ending balance of the
 
 
 
 
 
 
 
 
 
 
 
 
 
loan and lease portfolio is
 
 
 
 
 
 
 
 
 
 
 
 
 
composed of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
139,059

 
$
8,700

 
$
92,637

 
$
376

 
$
240,772

 
 
 
 
Collectively evaluated for impairment
$
5,325,882

 
$
822,815

 
$
7,977,050

 
$
256,128

 
$
14,381,875

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
120,199

 
 
Ending balance of
 
 
 
 
 
 
 
 
 
 
 
 
 
loans and leases
$
5,464,941

 
$
831,515

 
$
8,069,687

 
$
256,504

 
$
14,622,647

 
$
120,199

 
$
14,742,846




23


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


 
Three Months Ended September 30, 2015
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan and
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
29,908

 
$
3,908

 
$
50,531

 
$
700

 
$
85,047

 
$
14,328

 
$
99,375

Charge-offs
(252
)
 

 
(4,035
)
 
(25
)
 
(4,312
)
 
(1,119
)
 
(5,431
)
Recoveries
288

 
390

 
239

 
164

 
1,081

 

 
1,081

Provision (negative provision)
4,355

 
93

 
6,137

 
(85
)
 
10,500

 
(2,254
)
 
8,246

Balance, end of period
$
34,299

 
$
4,391

 
$
52,872

 
$
754

 
$
92,316

 
$
10,955

 
$
103,271


 
Nine Months Ended September 30, 2015
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan and
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
25,097

 
$
4,248

 
$
39,858

 
$
1,253

 
$
70,456

 
$
13,999

 
$
84,455

Charge-offs
(1,767
)
 

 
(12,964
)
 
(115
)
 
(14,846
)
 
(1,698
)
 
(16,544
)
Recoveries
1,783

 
1,034

 
2,393

 
392

 
5,602

 
112

 
5,714

Provision (negative provision)
9,186

 
(891
)
 
23,585

 
(776
)
 
31,104

 
(1,458
)
 
29,646

Balance, end of period
$
34,299

 
$
4,391

 
$
52,872

 
$
754

 
$
92,316

 
$
10,955

 
$
103,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of the allowance
 
 
 
 
 
 
 
 
 
 
 
 
 
applicable to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,443

 
$
31

 
$
10,343

 
$
158

 
$
11,975

 
 
 
 
Collectively evaluated for impairment
$
32,856

 
$
4,360

 
$
42,529

 
$
596

 
$
80,341

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
10,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The ending balance of the
 
 
 
 
 
 
 
 
 
 
 
 
 
loan and lease portfolio is
 
 
 
 
 
 
 
 
 
 
 
 
 
composed of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
58,393

 
$
8,047

 
$
76,088

 
$
3,540

 
$
146,068

 
 
 
 
Collectively evaluated for impairment
$
5,446,694

 
$
364,433

 
$
6,175,440

 
$
126,281

 
$
12,112,848

 
 
 
 
Acquired loans with deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
193,289

 
 
Ending balance of
 
 
 
 
 
 
 
 
 
 
 
 
 
loans and leases
$
5,505,087

 
$
372,480

 
$
6,251,528

 
$
129,821

 
$
12,258,916

 
$
193,289

 
$
12,452,205


24


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


Note 6.  Foreclosed Assets
The following table summarizes foreclosed assets as of the dates indicated:
 
September 30,
 
December 31,
Property Type:
2016
 
2015
 
(In thousands)
Commercial real estate
$

 
$
487

Construction and land development
13,800

 
13,801

Single family residence

 
952

Total other real estate owned, net
13,800

 
15,240

Other foreclosed assets
1,313

 
6,880

Total foreclosed assets, net
$
15,113

 
$
22,120

The following table presents the changes in foreclosed assets, net of the valuation allowance, for the period indicated:
 
Foreclosed
 
Assets
 
(In thousands)
Balance, December 31, 2015
$
22,120

Foreclosures
129

Reductions related to sales
(7,136
)
Balance, September 30, 2016
$
15,113

Note 7. Borrowings and Subordinated Debentures
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
1,011

 
6.31
%
 
$
3,914

 
5.49
%
FHLB secured advances
410,000

 
0.37
%
 
618,000

 
0.27
%
FHLB unsecured overnight advance
90,000

 
0.35
%
 

 
%
American Financial Exchange overnight borrowing
40,000

 
0.55
%
 

 
%
Total borrowings
$
541,011

 
 
 
$
621,914

 
 
The non‑recourse debt represents the payment stream of certain equipment leases sold to third parties. The debt is secured by the leased equipment and all interest rates are fixed. As of September 30, 2016, this debt had a weighted average remaining maturity of 2.0 years.
The Bank has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, the Federal Reserve Bank of San Francisco (“FRBSF”), and other financial institutions.
FHLB Secured Lines of Credit. The borrowing arrangement with the FHLB is based on an FHLB program collateralized by a blanket lien on certain qualifying loans that are not pledged to the FRBSF. As of September 30, 2016, the borrowing capacity under the FHLB secured borrowing lines was $2.0 billion. As of September 30, 2016, the balance outstanding was $410.0 million, which consisted of a $210.0 million overnight advance and a $200.0 million one-month advance with an October 31, 2016 maturity date. As of December 31, 2015, the entire outstanding balance of $618.0 million was an overnight advance.


25


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


FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2016, the Bank had secured borrowing capacity of $2.4 billion collateralized by liens covering $3.3 billion of certain qualifying loans. As of September 30, 2016 and December 31, 2015, there were no balances outstanding.
Federal Funds Arrangements with Commercial Banks. As of September 30, 2016, the Bank had uncommitted unsecured lines of credit of $80.0 million with correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of September 30, 2016 and December 31, 2015, there were no balances outstanding. In March 2016, the Bank became a member of the American Financial Exchange, through which it may either borrow or lend funds on an overnight basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2016, the balance outstanding was $40.0 million.
FHLB Unsecured Line of Credit. The Bank has a $99.0 million unsecured line of credit with the FHLB for the purchase of overnight funds of which $90.0 million was outstanding at September 30, 2016. There was no balance outstanding at December 31, 2015.
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
Date
 
Maturity
 
Rate Index
Series:
Amount
 
Rate
 
Amount
 
Rate
 
Issued
 
Date
 
(Quarterly Reset)
 
(Dollars in thousands)
 
 
 
 
 
 
Trust V
$
10,310

 
3.96
%
 
$
10,310

 
3.63
%
 
8/15/2003
 
9/17/2033
 
3 month LIBOR + 3.10
Trust VI
10,310

 
3.90
%
 
10,310

 
3.39
%
 
9/3/2003
 
9/15/2033
 
3 month LIBOR + 3.05
Trust CII
5,155

 
3.81
%
 
5,155

 
3.35
%
 
9/17/2003
 
9/17/2033
 
3 month LIBOR + 2.95
Trust VII
61,856

 
3.51
%
 
61,856

 
3.07
%
 
2/5/2004
 
4/23/2034
 
3 month LIBOR + 2.75
Trust CIII
20,619

 
2.54
%
 
20,619

 
2.20
%
 
8/15/2005
 
9/15/2035
 
3 month LIBOR + 1.69
Trust FCCI
16,495

 
2.45
%
 
16,495

 
2.11
%
 
1/25/2007
 
3/15/2037
 
3 month LIBOR + 1.60
Trust FCBI
10,310

 
2.40
%
 
10,310

 
2.06
%
 
9/30/2005
 
12/15/2035
 
3 month LIBOR + 1.55
Trust CS 2005-1
82,475

 
2.80
%
 
82,475

 
2.46
%
 
11/21/2005
 
12/15/2035
 
3 month LIBOR + 1.95
Trust CS 2005-2
128,866

 
2.71
%
 
128,866

 
2.27
%
 
12/14/2005
 
1/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-1
51,545

 
2.71
%
 
51,545

 
2.27
%
 
2/22/2006
 
4/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-2
51,550

 
2.71
%
 
51,550

 
2.27
%
 
9/27/2006
 
10/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-3 (1)
28,940

 
1.75
%
 
28,007

 
1.98
%
 
9/29/2006
 
10/30/2036
 
3 month EURIBOR + 2.05
Trust CS 2006-4
16,470

 
2.71
%
 
16,470

 
2.27
%
 
12/5/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2006-5
6,650

 
2.71
%
 
6,650

 
2.27
%
 
12/19/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2007-2
39,177

 
2.71
%
 
39,177

 
2.27
%
 
6/13/2007
 
7/30/2037
 
3 month LIBOR + 1.95
Gross subordinated debentures
540,728

 
 
 
539,795

 
 
 
 
 
 
 
 
Unamortized discount (2)
(99,616
)
 
 
 
(103,795
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
441,112

 
 
 
$
436,000

 
 
 
 
 
 
 
 
___________________
(1)
Denomination is in Euros with a value of €25.8 million.
(2)
Amount represents the fair value adjustment on subordinated debentures assumed in acquisitions.
Interest payments made by the Company on subordinated debentures are considered dividend payments under the Board of Governors of the Federal Reserve System (“FRB”) regulations. Bank holding companies, such as PacWest, are required to notify the FRB prior to declaring and paying a dividend during any period in which quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements.


26


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


Note 8. Commitments and Contingencies
Lending Commitments
The Company is a party to financial instruments with off‑balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commitments to purchase equipment being acquired for lease to others. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The following table presents a summary of the financial instruments described above as of the dates indicated:
 
September 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Loan commitments to extend credit
$
4,156,147

 
$
3,580,655

Standby letters of credit
204,616

 
210,292

Commitments to purchase equipment being acquired for lease to others

 
6,663

 
$
4,360,763

 
$
3,797,610

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. Most guarantees expire within one year from the date of issuance. If a borrower defaults on its commitments subject to any letter of credit issued under these arrangements, we would be required to meet the borrower's financial obligation but would seek repayment of that financial obligation from the borrower. In some cases, borrowers have pledged cash and investment securities as collateral with us under these arrangements.
In addition, we invest in low income housing project partnerships, which provide income tax credits, and in small business investment companies that call for capital contributions up to an amount specified in the partnership agreements. As of September 30, 2016 and December 31, 2015, we had commitments to contribute capital to these entities totaling $25.6 million and $19.2 million. We also had commitments to contribute up to an additional $3.0 million and $2.8 million to private equity funds at September 30, 2016 and December 31, 2015. In addition, at September 30, 2016 we had commitments to purchase approximately $105 million of loans, which commitments terminate in June 2017. The amount purchased will be based, in part, on the amount of portfolio paydowns which occur during the commitment period.
Legal Matters
In the ordinary course of our business, the Company is party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon currently available information, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.
Kinde Durkee Investigation
The United States Attorney's Office for the Eastern District of California is conducting an investigation relating to the handling by First California Bank ("FCB") of its banking relationship with Kinde Durkee. Ms. Durkee, who had maintained certain of her accounts with FCB, was convicted in 2012 of embezzling funds from certain California politicians, among others. FCB was acquired by PacWest Bancorp and merged into Pacific Western Bank in May 2013. We understand that the investigation is focused on whether any civil or criminal laws were violated by FCB or its employees. Pacific Western is cooperating with the investigation.

27


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


Note 9.  Fair Value Measurements
ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes municipal securities, agency residential and commercial MBS, collateralized loan obligations, registered publicly rated private label CMOs and asset-backed securitizations.
Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, and includes our non-rated private label CMOs, non-rated private label asset-backed securities, and equity warrants.
We use fair value to measure certain assets and liabilities on a recurring basis, primarily securities available‑for‑sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, core deposit intangibles, and other long‑lived assets.
The following tables present information on the assets and liabilities measured and recorded at fair value on a recurring basis as of the dates indicated:
 
Fair Value Measurements as of
 
September 30, 2016
Measured on a Recurring Basis:
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
Residential MBS and CMOs:
 
 
 
 
 
 
 
Agency MBS
$
528,941

 
$

 
$
528,941

 
$

Agency CMOs
157,231

 

 
157,231

 

Private label CMOs
138,625

 

 
75,804

 
62,821

Municipal securities
1,522,494

 

 
1,522,494

 

Agency commercial MBS
531,273

 

 
531,273

 

Corporate debt securities
49,011

 

 
49,011

 

Collateralized loan obligations
156,647

 

 
156,647

 

SBA securities
187,300

 

 
187,300

 

Asset-backed and other securities
69,813

 
2,177

 
52,612

 
15,024

Total securities available-for-sale
3,341,335

 
2,177

 
3,261,313

 
77,845

Derivative assets
1,261

 

 
1,261

 

Equity warrants
5,108

 

 

 
5,108

Total recurring assets
$
3,347,704

 
$
2,177

 
$
3,262,574

 
$
82,953

Derivative liabilities
$
1,829

 
$

 
$
1,829

 
$


28


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


 
Fair Value Measurements as of
 
December 31, 2015
Measured on a Recurring Basis:
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
Residential MBS and CMOs:
 
 
 
 
 
 
 
Agency MBS
$
667,840

 
$

 
$
667,840

 
$

Agency CMOs
194,755

 

 
194,755

 

Private label CMOs
144,796

 

 
63,555

 
81,241

Municipal securities
1,547,331

 

 
1,547,331

 

Agency commercial MBS
391,441

 

 
391,441

 

Corporate debt securities
48,424

 

 
48,424

 

Collateralized loan obligations
132,189

 

 
132,189

 

SBA securities
211,157

 

 
211,157

 

US Treasury securities
69,380

 
69,380

 

 

Agency debt securities
36,913

 

 
36,913

 

Asset-backed and other securities
115,211

 
2,562

 
94,449

 
18,200

Total securities available-for-sale
3,559,437

 
71,942

 
3,388,054

 
99,441

Derivative assets
11,919

 

 
11,919

 

Equity warrants
4,914

 

 

 
4,914

Total recurring assets
$
3,576,270

 
$
71,942

 
$
3,399,973

 
$
104,355

Derivative liabilities
$
1,397

 
$

 
$
1,397

 
$

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis during the nine months ended September 30, 2016.
The following table presents information about quantitative inputs and assumptions used to determine the fair values provided by our third party pricing service for our Level 3 private label CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of September 30, 2016:
 
Private Label CMOs
 
Asset-Backed Securities
 
 
 
Weighted
 
 
 
Weighted
 
Range
 
Average
 
Range
 
Average
Unobservable Inputs:
of Inputs
 
Input
 
of Inputs
 
Input
Voluntary annual prepayment speeds
0.0% - 27.6%
 
11.5%
 
5% - 40%
 
14.7%
Annual default rates
0.0% - 15.0%
 
2.1%
 
1% - 8%
 
3.7%
Loss severity rates
0.0% - 94.5%
 
33.1%
 
10% - 91%
 
54.3%
Discount rates
0.9% - 15.0%
 
3.6%
 
2.1% - 7.2%
 
2.9%










29


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


The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of September 30, 2016:
 
Equity Warrants
 
Weighted
 
Average
Unobservable Inputs:
Input
Volatility
19.3%
Risk-free interest rate
1.0%
Remaining life assumption (in years)
3.8
The following table summarizes activity for our Level 3 private label CMOs available-for-sale, asset-backed securities available-for-sale, and equity warrants measured at fair value on a recurring basis for the period indicated:
 
Private
 
Asset-Backed
 
Equity
 
Label CMOs
 
Securities
 
Warrants
 
(In thousands)
Balance, December 31, 2015
$
81,241

 
$
18,200

 
$
4,914

Total included in earnings
1,252

 
47

 
301

Total included in other comprehensive income
(1,399
)
 
(5
)
 

Sales

 

 
(1,597
)
Issuances

 

 
1,490

Net settlements
(18,273
)
 
(3,218
)
 

Balance, September 30, 2016
$
62,821

 
$
15,024

 
$
5,108

The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:
 
Fair Value Measurement as of
 
September 30, 2016
Measured on a Non‑Recurring Basis:
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired Non‑PCI loans
$
131,149

 
$

 
$
817

 
$
130,332

 
Fair Value Measurement as of
 
December 31, 2015
Measured on a Non‑Recurring Basis:
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired Non‑PCI loans
$
40,817

 
$

 
$
9,367

 
$
31,450

Other real estate owned
14,101

 

 
14,101

 

Investments carried at cost
107

 

 

 
107

Total non-recurring
$
55,025

 
$

 
$
23,468

 
$
31,557







30


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


The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Losses on Assets Measured on a Non‑Recurring Basis:
2016
 
2015
 
2016
 
2015
 
(In thousands)
Impaired Non‑PCI loans
$
12,935

 
$
873

 
$
27,301

 
$
7,623

Other real estate owned

 
4,758

 

 
4,882

Total losses
$
12,935

 
$
5,631

 
$
27,301

 
$
12,505

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2016:
 
 
 
 
Valuation
 
Unobservable
 
 
 
Weighted
Asset:
 
Fair Value
 
Technique
 
Inputs
 
Range
 
Average
 
 
(In thousands)
 
 
 
 
 
 
 
 
Impaired Non-PCI loans
 
$
45,571

 
Discounted cash flows
 
Discount rates
 
0% - 8.00%
 
6.12%
 
 
73,775

 
Third party appraisals
 
Discounts
 
9.00% - 22.00%
 
17.17%
 
 
10,986

 
Third party appraisals
 
No discounts
 
 
 
 
Total non-recurring Level 3
 
$
130,332

 
 
 
 
 
 
 
 
ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:
 
September 30, 2016
 
Carrying or
Contract
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
286,371

 
$
286,371

 
$
286,371

 
$

 
$

Interest‑earning deposits in financial institutions
253,994

 
253,994

 
253,994

 

 

Securities available‑for‑sale
3,341,335

 
3,341,335

 
2,177

 
3,261,313

 
77,845

Investment in FHLB stock
19,386

 
19,386

 

 
19,386

 

Investments carried at cost
1,700

 
4,408

 

 

 
4,408

Loans and leases, net
14,594,870

 
14,707,667

 

 
817

 
14,706,850

Derivative assets
1,261

 
1,261

 

 
1,261

 

Equity warrants
5,108

 
5,108

 

 

 
5,108

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand, money market, interest checking,
 
 
 
 
 
 
 
 
 
and savings deposits
13,092,753

 
13,092,753

 

 
13,092,753

 

Time deposits
2,552,915

 
2,549,662

 

 
2,549,662

 

Borrowings
541,011

 
541,067

 
340,000

 
201,067

 

Subordinated debentures
441,112

 
424,874

 

 
424,874

 

Derivative liabilities
1,829

 
1,829

 

 
1,829

 


31


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


 
December 31, 2015
 
Carrying or
Contract
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
161,020

 
$
161,020

 
$
161,020

 
$

 
$

Interest‑earning deposits in financial institutions
235,466

 
235,466

 
235,466

 

 

Securities available‑for‑sale
3,559,437

 
3,559,437

 
71,942

 
3,388,054

 
99,441

Investment in FHLB stock
19,710

 
19,710

 

 
19,710

 

Investments carried at cost
2,267

 
6,789

 

 

 
6,789

Loans and leases, net
14,363,143

 
14,393,558

 

 
9,367

 
14,384,191

Derivative assets
11,919

 
11,919

 

 
11,919

 

Equity warrants
4,914

 
4,914

 

 

 
4,914

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand, money market, interest checking,
 
 
 
 
 
 
 
 
 
and savings deposits
11,513,826

 
11,513,826

 

 
11,513,826

 

Time deposits
4,152,356

 
4,152,920

 

 
4,152,920

 

Borrowings
621,914

 
622,438

 
618,000

 
4,438

 

Subordinated debentures
436,000

 
419,762

 

 
419,762

 

Derivative liabilities
1,397

 
1,397

 

 
1,397

 

For information regarding the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825), see Note 1. Nature of Operations and Summary of Significant Accounting Policies, and Note 13. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2015 Annual Report on Form 10-K.
Limitations
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of September 30, 2016, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

32


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


Note 10. Earnings Per Share
The following table presents the computations of basic and diluted net earnings per share for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings
$
93,895

 
$
82,168

 
$
69,616

 
$
266,519

 
$
227,778

Less: Earnings allocated to unvested restricted stock (1)
(1,048
)
 
(863
)
 
(649
)
 
(2,983
)
 
(2,213
)
Net earnings allocated to common shares
$
92,847

 
$
81,305

 
$
68,967

 
$
263,536

 
$
225,565

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares and unvested restricted
 
 
 
 
 
 
 
 
 
stock outstanding
121,818

 
121,799

 
103,048

 
121,739

 
103,038

Less: Weighted-average unvested restricted stock
 
 
 
 
 
 
 
 
 
outstanding
(1,401
)
 
(1,481
)
 
(985
)
 
(1,425
)
 
(1,055
)
Weighted-average basic shares outstanding
120,417

 
120,318

 
102,063

 
120,314

 
101,983

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

 
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings allocated to common shares
$
92,847

 
$
81,305

 
$
68,967

 
$
263,536

 
$
225,565

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
120,417

 
120,318

 
102,063

 
120,314

 
101,983

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

________________________
(1)
Represents cash dividends paid to holders of unvested restricted stock, net of estimated forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
Note 11. Stock-Based Compensation
The Company’s 2003 Stock Incentive Plan, or the 2003 Plan, permits stock-based compensation awards to officers, directors, key employees and consultants. As of September 30, 2016, the 2003 Plan authorized grants of stock‑based compensation instruments to purchase or issue up to 19,686,565 shares of Company common stock, subject to adjustments provided by the 2003 Plan. As of September 30, 2016, there were 12,450,068 shares available for grant under the 2003 Plan.
Restricted stock amortization totaled $5.6 million, $6.0 million, and $3.8 million for the three months ended September 30, 2016, June 30, 2016 and September 30, 2015 and, $16.6 million and $11.2 million for the nine months ended September 30, 2016 and 2015. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings. The amount of unrecognized compensation expense related to unvested time-based restricted stock awards ("TRSAs") and performance-based restricted stock units ("PRSUs") as of September 30, 2016 totaled $45.7 million.
Time-Based Restricted Stock Awards
At September 30, 2016, there were 1,397,715 shares of unvested TRSAs outstanding. The TRSAs generally vest over a service period of three or four years from the date of the grant or immediately upon the death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight‑line method.

33


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


Performance-Based Restricted Stock Units
At September 30, 2016, there were 153,715 units of unvested PRSUs outstanding. The PRSUs will vest only if performance goals with respect to certain financial metrics are met over a three-year performance period. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award date and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion of the previously recognized amortization is reversed and also suspended. In the case where the performance target for the PRSU’s is based on a market condition (such as total shareholder return), the amortization is neither reversed nor suspended if it is subsequently determined that the attainment of the performance target is less than probable or improbable.
Note 12.  Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue Recognition (Topic 606): Revenue from Contracts with Customers." ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to annual and interim periods beginning after December 15, 2017, while earlier application is permitted only for annual and interim periods beginning after December 31, 2016. The Company has not yet selected a transition method and does not expect the provisions of ASU 2014-09 to have a material impact on its consolidated financial position or results of operations. The Company will adopt this standard effective January 1, 2018.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which will significantly change the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities when the fair value option is elected. For equity investments with readily determinable fair values, entities must measure these investments at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost, adjusted for changes in observable prices, minus impairment. Changes in measurement under either alternative must be recognized in net income. ASU 2016-01 will be effective for annual and interim periods beginning after December 15, 2017. The Company is evaluating the effect that ASU 2016-01 will have on its financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which, among other things, requires lessees to recognize most leases on-balance sheet, which will result in an increase in their reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes Topic 840, Leases. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. ASU 2016-07 is effective for interim and annual periods in fiscal years beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. ASU 2016-07 does not require additional disclosures at transition. The Company does not expect the effect of ASU 2016-06 to have a material impact on its financial statements and related disclosures.







34


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


In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes 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. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. If an entity early adopts the amendments after the first interim period, the adoption date is as of the beginning of the year for the issues adopted by the cumulative-effect and prospective methods and any adjustments to previously reported interim periods of that fiscal year should be included in the year-to-date results. If those previously reported interim results appear in any future filings, they are reported on the revised basis. The Company does not expect the effect of ASU 2016-09 to have a material impact on its financial statements and related disclosures in the period of adoption. In subsequent periods, 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 June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. ASU 2016-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. The Company is evaluating the effect that ASU 2016-13 will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed eight issues related to the statement of cash flows, including proceeds from the settlement of bank-owned life insurance ("BOLI") policies. ASU 2016-15 is effective for interim and annual periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2016-15 in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendment in the same period. Entities should apply ASU 2016-15 using a retrospective transition method to each period presented. If it is impracticable for an entity to apply ASU 2016-15 retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. ASU 2016-15 will result in some changes in classification in the consolidated statements of cash flows, which the Company does not expect will be significant, and will not have any impact on its consolidated financial position or results of operations.
Note 13. Subsequent Events
Stock Repurchase Program
On October 17, 2016, PacWest’s Board of Directors authorized a new stock repurchase program (the “Stock Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. The common stock repurchases may be effected through open market purchases or in privately negotiated transactions, and may utilize any derivative or similar instrument to effect share repurchase transactions (including without limitation, accelerated share repurchase contracts, equity forward transactions, equity option transactions, equity swap transactions, cap transactions, collar transactions, floor transactions or other similar transactions or any combination of the foregoing transactions). The Stock Repurchase Program expires on December 31, 2017. The amount and exact timing of any repurchases will depend upon market conditions and other factors. The Stock Repurchase Program may be suspended or discontinued at any time.
Common Stock Dividends
On November 1, 2016, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.50 per common share. The cash dividend is payable on November 30, 2016 to stockholders of record at the close of business on November 15, 2016.
We have evaluated events that have occurred subsequent to September 30, 2016 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.


35



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our acquisition of Square 1, capital management, including reducing excess capital, intentions to expand the Bank’s lending business; net interest income, net interest margin, allowance for loan and lease losses, deposit growth, loan and lease portfolio growth and production, liquidity, profitability, goodwill, interest rate risk management, realization of deferred tax assets, and effective tax rates. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:
our ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames;
business disruption following the Square 1 acquisition;
the reaction to the Square 1 acquisition of the companies’ customers, employees and counterparties;
changes in our stock price;
the need to retain capital for strategic or regulatory reasons;
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on our business and business strategies;
compression of the net interest margin due to changes in our interest rate environment, loan products, spreads on newly originated loans and leases and/or asset mix;
credit quality deterioration or pronounced and sustained reduction in market values or other economic factors which adversely affect our borrowers’ ability to repay loans and leases and/or require an increased provision for loan and lease losses;
changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;
reduced demand for our services due to strategic or regulatory reasons;
our inability to grow deposits and access wholesale funding sources;
legislative or regulatory requirements or changes could negatively impact our business, including an increase to capital requirements;
higher than expected loan repayments;
higher than anticipated delinquencies, charge-offs, and loan and lease losses;
the impact of asset/liability repricing risk and liquidity risk on net interest margin and the value of investments;
increased costs to manage and sell foreclosed assets;
higher than anticipated increases in operating expenses;
lower than expected dividends paid from the Bank to the holding company;
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a noncash charge to net income;
the success and timing of other business strategies;
changes in the forward yield curve;
changes in tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and documents filed by PacWest with the U.S. Securities and Exchange Commission (“SEC”).


36


All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
Overview
PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our Los Angeles‑based wholly-owned banking subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” “us,” "our," or the “Company” refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to “PacWest” or to the “holding company,” we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 79 full-service branches located throughout the state of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. The Bank provides commercial banking services, including real estate, construction, and commercial loans and leases, and comprehensive deposit and treasury management services to small and middle-market businesses. Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle-market businesses on a national basis. Square 1 Bank offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year-to-date basis in 2016, accounted for 89.5% of our net revenues (net interest income plus noninterest income).
At September 30, 2016, we had total assets of $21.3 billion, including $14.7 billion of loans and leases, net of deferred fees, compared to $21.3 billion of total assets, including $14.5 billion of loans and leases, net of deferred fees, at December 31, 2015. Total assets increased $26.8 million during the nine months ended September 30, 2016 due to a $264.6 million increase in loans and leases, net of deferred fees, driven by new production, and an increase of $143.9 million in cash and cash equivalents, offset partially by a $218.1 million decrease in securities available-for-sale due to sales from ongoing portfolio management activities and a $99.3 million decrease in deferred tax assets.
At September 30, 2016, we had total liabilities of $16.8 billion, including total deposits of $15.6 billion and borrowings of $541.0 million compared to $16.9 billion of total liabilities, including $15.7 billion of total deposits and $621.9 million of borrowings at December 31, 2015. The $118.1 million decrease in total liabilities since year-end is due to a $1.6 billion decrease in higher-cost time deposits and an $80.9 million decrease in borrowings, primarily overnight FHLB advances, offset by a $1.4 billion increase in lower-cost core deposits and a $139.9 million increase in brokered non-maturity deposits. At September 30, 2016, core deposits totaled $12.0 billion, or 77% of total deposits, and time deposits totaled $2.6 billion, or 16% of total deposits.
On March 31, 2016, we sold our Pacific Western Equipment Finance leasing unit in Midvale, Utah, including approximately $139 million of outstanding lease balances.

37



Recent Events
Stock Repurchase Program
On October 17, 2016, PacWest’s Board of Directors authorized a new stock repurchase program (the “Stock Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. The common stock repurchases may be effected through open market purchases or in privately negotiated transactions, and may utilize any derivative or similar instrument to effect share repurchase transactions (including without limitation, accelerated share repurchase contracts, equity forward transactions, equity option transactions, equity swap transactions, cap transactions, collar transactions, floor transactions or other similar transactions or any combination of the foregoing transactions).
The Stock Repurchase Program expires on December 31, 2017. The amount and exact timing of any repurchases will depend upon market conditions and other factors. The Stock Repurchase Program may be suspended or discontinued at any time.
Sale of Branches
On September 30, 2016 Pacific Western entered into a definitive agreement to sell two branches to First Foundation Bank (the “Transaction”). The branches are located in Laguna Hills and Seal Beach, California (the “Branches”). As of September 30, 2016, the deposits of the Branches totaled approximately $200 million, principally comprised of time deposits. No loans are being sold in connection with the Transaction. The Transaction is expected to be completed during the fourth quarter of 2016 subject to regulatory approval and customary closing conditions.
Square 1 Financial, Inc. Acquisition
PacWest acquired Square 1 Financial, Inc. (“Square 1”) on October 6, 2015. As part of the acquisition, Square 1 Bank, a wholly-owned subsidiary of Square 1, merged with and into Pacific Western. At closing, we formed the Square 1 Bank Division of the Pacific Western which focuses on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide. We completed this acquisition to increase our core deposits, expand our lending products across the nation, and increase our presence in the technology and life-sciences credit markets. We recorded the assets and liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date and increased total assets by approximately $4.6 billion. The application of the acquisition method of accounting resulted in goodwill of $446.1 million. For further information, see Note 2. Acquisitions, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).”
Key Performance Indicators
Among other factors, our operating results depend generally on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest‑earning assets over the interest paid on our interest‑bearing liabilities. Net interest margin is net interest income (annualized) expressed as a percentage of average interest‑earning assets. Tax equivalent net interest income is net interest income increased by an adjustment for tax-exempt income on certain municipal securities based on a 35% federal statutory tax rate. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets. A sustained low interest rate environment combined with low loan growth and high levels of marketplace liquidity may reduce both our net interest income and net interest margin going forward.

38


Our primary interest‑earning assets are loans and investment securities, and our primary interest‑bearing liabilities are deposits. Contributing to our high net interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest‑bearing deposits. As a result of the CapitalSource Inc. merger, $5.3 billion of time deposits were assumed. Our goal is to continue replacing these higher-costing time deposits with core deposits. The acquisition of Square 1 accelerated this shift in deposit mix as nearly all of the $3.8 billion of acquired deposits were core deposits. The Square 1 acquisition increased our on-balance sheet liquidity and enables us to maintain adequate liquidity as we manage down the level of higher-cost time deposits.
Loan and Lease Growth
We actively seek new lending opportunities under an array of commercial real estate loans and commercial and industrial ("C&I") lending products. Our targeted collateral for our real estate loan offerings includes healthcare properties, office properties, industrial properties, multifamily properties, hospitality properties, and retail properties. Our C&I loan products include equipment-secured loans and leases, asset-secured loans, loans to finance companies, and cash flow loans (which are loans secured by borrower future cash flows and borrower enterprise value) and venture capital-backed loans to entrepreneurial companies to support early-stage operations. Our loan origination process emphasizes credit quality. We foster lender relationships with borrowers that have proven loan repayment performance. Our commitment sizes vary by loan product and can range up to $100 million for certain asset-based lending arrangements and multi-property real estate loans. We price loans to preserve our interest spread and maintain our net interest margin. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and successful borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified and nonperforming assets and net charge‑offs. We maintain an allowance for credit losses on loans and leases, which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off‑balance sheet credit exposure. Loans and leases which are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology which considers various credit performance measures such as historical and current net charge‑offs, the levels and trends of nonaccrual and classified loans and leases, the migration of loans and leases into various risk classifications, and the overall level of outstanding loans and leases. For originated and acquired non‑impaired loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively. For purchased credit impaired ("PCI") loans, a provision for credit losses may be recorded to reflect decreases in expected cash flows on such loans compared to those previously estimated.
We regularly review our loans and leases to determine whether there has been any deterioration in credit quality stemming from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the rate of inflation, the unemployment rate, increases in the general level of interest rates, declines in real estate values, changes in commodity prices (such as crude oil), and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because of our concentration in commercial real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, and other professional services. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio. We calculate the efficiency ratio by dividing noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), and acquisition, integration and reorganization costs) by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities).

39


The following table presents the calculation of our efficiency ratio for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Efficiency Ratio:
2016
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in thousands)
Noninterest expense
$
110,710

 
$
110,081

 
$
90,139

 
$
331,479

 
$
259,775

Less:
Intangible asset amortization
4,224

 
4,371

 
1,497

 
13,341

 
4,500

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

 
(812
)
 
2,517

 
Acquisition, integration, and reorganization costs

 

 
747

 
200

 
3,647

Noninterest expense used for efficiency ratio
$
106,734

 
$
105,713

 
$
83,374

 
$
318,750

 
$
249,111

 
 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
239,473

 
$
238,667

 
$
195,274

 
$
727,680

 
$
600,855

Noninterest income
26,920

 
22,121

 
15,758

 
83,580

 
56,252

Net revenues
266,393

 
260,788

 
211,032

 
811,260

 
657,107

Less:
Gain on sale of securities
382

 
478

 
655

 
8,970

 
3,744

Net revenues used for efficiency ratio
$
266,011

 
$
260,310

 
$
210,377

 
$
802,290

 
$
653,363

 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio
40.1
%
 
40.6
%
 
39.6
%
 
39.7
%
 
38.1
%
Critical Accounting Policies
The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses, the fair value estimates of assets acquired and liabilities assumed in acquisitions, the carrying values of intangible assets, and the realization of deferred income tax assets. For further information, refer to our Annual Report on Form 10‑K for the year ended December 31, 2015.
Non-GAAP Measurements
The Company uses certain non‑GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. The non-GAAP measures used in this Form 10-Q include the following:
Core net interest margin and core loan and lease yield: The tax equivalent net interest margin ("NIM") and loan and lease yield are impacted by volatility in accelerated accretion of acquisition discounts due to the prepayment of acquired loans and leases. We disclose the core NIM and core loan and lease yield to provide an indication of what these measures would be without the effects of accelerated accretion as this indicates a "normalized" measure and a more accurate indicator of future performance. See “-Results of Operations-Net Interest Income” for a reconciliation of these non-GAAP measurements to the GAAP measurements for the periods presented.
Adjusted allowance for credit losses to loans and leases: As the allowance for credit losses takes into consideration credit deterioration on acquired loans and leases only after the purchase date and an estimate of credit losses is included in their initial fair values, we disclose two adjusted allowance for credit losses to loans and leases ratios in addition to the allowance for credit losses to loans and leases. The first adjusted allowance for credit losses to loans and leases excludes the allowance related to acquired loans and leases from the numerator and the acquired loans and leases from the denominator. The second ratio excludes the remaining unamortized purchase discount from both the numerator and the denominator. We disclose these ratios to more clearly illustrate the amounts established on our balance sheet for credit losses related to acquired loans in addition to the allowance for credit losses. See "-Balance Sheet Analysis-Allowance for Credit Losses on Non-PCI Loans and Leases" for a reconciliation of these non-GAAP measurements to the GAAP measurement as of the dates presented.

40



Return on average tangible equity, tangible common equity ratio, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to the related GAAP measures of return on average equity, equity to assets ratio, and book value per share, respectively. The reconciliation of these non-GAAP measurements to the GAAP measurements is presented in the following tables for and as of the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Return on Average Tangible Equity
2016
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in thousands)
Net earnings
$
93,895

 
$
82,168

 
$
69,616

 
$
266,519

 
$
227,778

 
 
 
 
 
 
 
 
 
 
 
Average stockholders' equity
$
4,530,701

 
$
4,483,593

 
$
3,572,765

 
$
4,484,468

 
$
3,551,763

Less:
Average intangible assets
2,217,564

 
2,222,007

 
1,741,902

 
2,222,346

 
1,740,911

Average tangible common equity
$
2,313,137

 
$
2,261,586

 
$
1,830,863

 
$
2,262,122

 
$
1,810,852

 
 
 
 
 
 
 
 
 
 
 
Return on average equity (1)
8.24
%
 
7.37
%
 
7.73
%
 
7.94
%
 
8.57
%
Return on average tangible equity (2)
16.15
%
 
14.61
%
 
15.09
%
 
15.74
%
 
16.82
%
_____________________________________
(1)
Annualized net earnings divided by average stockholders' equity.
(2)
Annualized net earnings divided by average tangible common equity.

Tangible Common Equity Ratio/
September 30,
 
December 31,
Tangible Book Value Per Share
2016
 
2015
 
(Dollars in thousands, except per share data)
PacWest Bancorp Consolidated:
 
 
 
Stockholders’ equity
$
4,542,595

 
$
4,397,691

Less: Intangible assets
2,213,491

 
2,229,511

Tangible common equity
$
2,329,104

 
$
2,168,180

Total assets
$
21,315,291

 
$
21,288,490

Less: Intangible assets
2,213,491

 
2,229,511

Tangible assets
$
19,101,800

 
$
19,058,979

Equity to assets ratio
21.31
%
 
20.66
%
Tangible common equity ratio(1)
12.19
%
 
11.38
%
Book value per share
$
37.29

 
$
36.22

Tangible book value per share
$
19.12

 
$
17.86

Shares outstanding
121,817,524

 
121,413,727

 
 
 
 
Pacific Western Bank:
 
 
 
Stockholder's equity
$
4,416,623

 
$
4,276,279

Less: Intangible assets
2,213,491

 
2,229,511

Tangible common equity
$
2,203,132

 
$
2,046,768

Total assets
$
21,266,705

 
$
21,180,689

Less: Intangible assets
2,213,491

 
2,229,511

Tangible assets
$
19,053,214

 
$
18,951,178

Equity to assets ratio
20.77
%
 
20.19
%
Tangible common equity ratio(1)
11.56
%
 
10.80
%
_______________________________________ 
(1)
Tangible common equity divided by tangible assets.

41


Results of Operations
Acquisitions Impact Earnings Performance
The comparability of financial information is affected by our acquisitions. We completed the Square 1 acquisition on October 6, 2015, adding assets of $4.6 billion. This transaction has been accounted for using the acquisition method of accounting and, accordingly, the related operating results have been included in the consolidated financial statements from the acquisition date.
Earnings Performance
The following table presents performance metrics for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
Performance Measures:
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.77

 
$
0.68

 
$
0.68

 
$
2.19

 
$
2.21

Annualized return on:
 
 
 
 
 
 
 
 
 
Average assets
1.77
%
 
1.57
%
 
1.65
%
 
1.69
%
 
1.85
%
Average tangible equity (1)(2)
16.15
%
 
14.61
%
 
15.09
%
 
15.74
%
 
16.82
%
Net interest margin (tax equivalent)
5.26
%
 
5.33
%
 
5.46
%
 
5.37
%
 
5.76
%
Core net interest margin (tax equivalent) (2)(3)
5.08
%
 
5.11
%
 
5.19
%
 
5.09
%
 
5.31
%
Efficiency ratio
40.1
%
 
40.6
%
 
39.6
%
 
39.7
%
 
38.1
%
_____________________________
(1)
Calculation reduces average stockholder's equity by average intangible assets.
(2)
See "Non-GAAP Measurements."
(3)
Calculation excludes accelerated accretion of acquisition discounts from early payoffs of acquired loans.
Third Quarter of 2016 Compared to Second Quarter of 2016
Net earnings were $93.9 million, or $0.77 per diluted share, for the third quarter of 2016, compared to $82.2 million, or $0.68 per diluted share, for the second quarter of 2016. The quarter‑over‑quarter increase of $11.7 million in net earnings was due to a lower provision for credit losses of $5.4 million, higher noninterest income of $4.8 million, and a lower effective tax rate as compared to the second quarter of 2016. The decrease in the provision for credit losses was due in part to a $4.8 million increase in recoveries of previously charged off loans. The increase in noninterest income was due to the elimination of FDIC loss sharing expense. The second quarter expense of $6.5 million included a pre-tax charge attributable to the early termination of all FDIC loss sharing agreements. The effective tax rate for the third quarter was lower due to certain discrete items associated with completion of the 2015 tax returns.
Third Quarter of 2016 Compared to Third Quarter of 2015
Net earnings for the third quarter of 2016 were $93.9 million, or $0.77 per diluted share, compared to net earnings for the third quarter of 2015 of $69.6 million, or $0.68 per diluted share. The $24.3 million increase in net earnings was due to higher net interest income of $42.1 million and higher noninterest income of $11.2 million offset by higher noninterest expense of $20.6 million. These increases were due primarily to including the operations of Square 1 subsequent to the October 6, 2015 acquisition date. The increase in net interest income was attributable to higher average balances for loans and leases and investment securities and lower interest expense, offset by lower discount accretion on acquired loans and lower yields on average loans and leases and investment securities. The increase in noninterest income was due mainly to higher other commissions and fees, higher leased equipment income, and lower FDIC loss sharing expense, offset by lower dividends and realized gains on equity investments.

42


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Net earnings for the nine months ended September 30, 2016 were $266.5 million, or $2.19 per diluted share, compared to net earnings for the nine months ended September 30, 2015 of $227.8 million, or $2.21 per diluted share. The $38.7 million increase in net earnings was due to higher net interest income of $118.8 million and higher noninterest income of $27.3 million, offset by higher noninterest expense of $71.7 million and a higher provision for credit losses of $10.8 million. These increases were due primarily to including the operations of Square 1 subsequent to the October 6, 2015 acquisition date. The increase in net interest income was attributable to higher average interest-earning asset balances and lower interest expense, offset by lower discount accretion on acquired loans and lower yields on average loans and leases and investment securities. The increase in noninterest income was due mainly to higher other commissions and fees, higher leased equipment income, higher gain on sale of securities, lower FDIC loss sharing expense, and higher service charges on deposit accounts, offset by lower dividends and realized gains on equity investments.

43


Net Interest Income
Net interest income is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities.
The following table presents, for the periods indicated, the distribution of average assets, liabilities and stockholders’ equity, as well as interest income and yields earned on average interest‑earning assets and interest expense and rates paid on average interest‑bearing liabilities presented on a tax equivalent basis:
 
Three Months Ended
 
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
 
Interest
Yields
 
 
Interest
Yields
 
 
Interest
Yields
 
Average
Income/
and
 
Average
Income/
and
 
Average
Income/
and
 
Balance
Expense
Rates
 
Balance
Expense
Rates
 
Balance
Expense
Rates
 
(Dollars in thousands)
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
PCI loans
$
117,781

$
5,868

19.82
%
 
$
147,270

$
8,484

23.17
%
 
$
193,094

$
7,505

15.42
%
Non-PCI loans and leases
14,417,170

219,502

6.06
%
 
14,321,320

215,842

6.06
%
 
11,919,787

186,034

6.19
%
Total loans and leases (1)
14,534,951

225,370

6.17
%
 
14,468,590

224,326

6.24
%
 
12,112,881

193,539

6.34
%
Investment securities (2)
3,338,209

27,025

3.22
%
 
3,288,819

27,330

3.34
%
 
1,806,628

16,709

3.67
%
Deposits in financial institutions
238,425

298

0.50
%
 
245,666

308

0.50
%
 
278,973

178

0.25
%
Total interest‑earning assets (2)
18,111,585

252,693

5.55
%
 
18,003,075

251,964

5.63
%
 
14,198,482

210,426

5.88
%
Other assets
2,960,468

 
 
 
2,996,867

 
 
 
2,491,695

 
 
Total assets
$
21,072,053

 
 
 
$
20,999,942

 
 
 
$
16,690,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
1,161,931

604

0.21
%
 
$
1,024,763

501

0.20
%
 
$
787,271

300

0.15
%
Money market deposits
4,514,525

3,303

0.29
%
 
4,321,533

2,886

0.27
%
 
2,417,280

1,218

0.20
%
Savings deposits
764,415

341

0.18
%
 
766,309

412

0.22
%
 
746,362

449

0.24
%
Time deposits
2,666,434

2,999

0.45
%
 
3,086,492

4,024

0.52
%
 
5,042,768

8,433

0.66
%
Total interest‑bearing deposits
9,107,305

7,247

0.32
%
 
9,199,097

7,823

0.34
%
 
8,993,681

10,400

0.46
%
Borrowings
583,982

695

0.47
%
 
300,428

352

0.47
%
 
70,171

72

0.41
%
Subordinated debentures
439,970

5,278

4.77
%
 
439,081

5,122

4.69
%
 
434,420

4,680

4.27
%
Total interest‑bearing liabilities
10,131,257

13,220

0.52
%
 
9,938,606

13,297

0.54
%
 
9,498,272

15,152

0.63
%
Noninterest‑bearing demand deposits
6,274,294

 
 
 
6,437,720

 
 
 
3,486,780

 
 
Other liabilities
135,801

 
 
 
140,023

 
 
 
132,360

 
 
Total liabilities
16,541,352

 
 
 
16,516,349

 
 
 
13,117,412

 
 
Stockholders’ equity
4,530,701

 
 
 
4,483,593

 
 
 
3,572,765

 
 
Total liabilities and stockholders’ equity
$
21,072,053

 
 
 
$
20,999,942

 
 
 
$
16,690,177

 
 
Net interest income (tax equivalent) (2)
 
$
239,473

 
 
 
$
238,667

 
 
 
$
195,274

 
Net interest rate spread
 
 
5.03
%
 
 
 
5.09
%
 
 
 
5.25
%
Net interest margin
 
 
5.26
%
 
 
 
5.33
%
 
 
 
5.46
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (3)
$
15,381,599

$
7,247

0.19
%
 
$
15,636,817

$
7,823

0.20
%
 
$
12,480,461

$
10,400

0.33
%
Funding sources (4)
$
16,405,551

$
13,220

0.32
%
 
$
16,376,326

$
13,297

0.33
%
 
$
12,985,052

$
15,152

0.46
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees.
(2)
Includes tax-equivalent adjustments of $4.8 million, $4.9 million, and $2.8 million for the three months ended September 30, 2016, June 30, 2016, and September 30, 2015, respectively, related to tax-exempt income on municipal securities. The federal statutory tax rate utilized was 35% for the periods.
(3)
Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(4)
Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.

44


 
Nine Months Ended September 30,
 
2016
 
2015
 
 
Interest
Yields
 
 
Interest
Yields
 
Average
Income/
and
 
Average
Income/
and
 
Balance
Expense
Rates
 
Balance
Expense
Rates
 
(Dollars in thousands)
ASSETS:
 
 
 
 
 
 
 
PCI loans
$
144,129

$
34,425

31.90
%
 
$
227,072

$
25,563

15.05
%
Non-PCI loans and leases
14,347,598

651,646

6.07
%
 
11,865,330

573,854

6.47
%
Total loans and leases (1)
14,491,727

686,071

6.32
%
 
12,092,402

599,417

6.63
%
Investment securities (2)
3,362,352

81,848

3.25
%
 
1,698,254

47,428

3.73
%
Deposits in financial institutions
238,129

914

0.51
%
 
158,708

304

0.26
%
Total interest‑earning assets (2)
18,092,208

768,833

5.68
%
 
13,949,364

647,149

6.20
%
Other assets
2,997,922

 
 
 
2,535,453

 
 
Total assets
$
21,090,130

 
 
 
$
16,484,817

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Interest checking deposits
$
1,038,103

1,488

0.19
%
 
$
752,217

696

0.12
%
Money market deposits
4,229,315

8,604

0.27
%
 
2,108,317

3,251

0.21
%
Savings deposits
761,376

1,197

0.21
%
 
747,902

1,575

0.28
%
Time deposits
3,202,436

12,854

0.54
%
 
5,359,911

26,590

0.66
%
Total interest‑bearing deposits
9,231,230

24,143

0.35
%
 
8,968,347

32,112

0.48
%
Borrowings
460,165

1,628

0.47
%
 
190,502

395

0.28
%
Subordinated debentures
438,534

15,382

4.69
%
 
433,233

13,787

4.25
%
Total interest‑bearing liabilities
10,129,929

41,153

0.54
%
 
9,592,082

46,294

0.65
%
Noninterest‑bearing demand deposits
6,328,223

 
 
 
3,199,843

 
 
Other liabilities
147,510

 
 
 
141,129

 
 
Total liabilities
16,605,662

 
 
 
12,933,054

 
 
Stockholders’ equity
4,484,468

 
 
 
3,551,763

 
 
Total liabilities and stockholders’ equity
$
21,090,130

 
 
 
$
16,484,817

 
 
Net interest income (tax equivalent) (2)
 
$
727,680

 
 
 
$
600,855

 
Net interest rate spread
 
 
5.14
%
 
 
 
5.55
%
Net interest margin
 
 
5.37
%
 
 
 
5.76
%
 
 
 
 
 
 
 
 
Total deposits (3)
$
15,559,453

$
24,143

0.21
%
 
$
12,168,190

$
32,112

0.35
%
Funding sources (4)
$
16,458,152

$
41,153

0.33
%
 
$
12,791,925

$
46,294

0.48
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees.
(2)
Includes tax-equivalent adjustments of $14.7 million and $6.7 million for the nine months ended September 30, 2016, and September 30, 2015 related to tax-exempt income on municipal securities. The federal statutory tax rate utilized was 35% for the periods.
(3)
Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(4)
Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.

45


The tax equivalent NIM and loan and lease yields are impacted by accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans, which causes volatility from period to period. The effects of this item on the NIM and loan and lease yield are shown in the following table for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
NIM:
 
 
 
 
 
 
 
 
 
Reported
5.26
 %
 
5.33
 %
 
5.46
 %
 
5.37
 %
 
5.76
 %
Less: Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
 
 
from early payoffs of acquired loans
(0.18
)%
 
(0.22
)%
 
(0.27
)%
 
(0.28
)%
 
(0.45
)%
Core
5.08
 %
 
5.11
 %
 
5.19
 %
 
5.09
 %
 
5.31
 %
Loan and Lease Yield:
 
 
 
 
 
 
 
 
 
Reported
6.17
 %
 
6.24
 %
 
6.34
 %
 
6.32
 %
 
6.63
 %
Less: Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
 
 
from early payoffs of acquired loans
(0.23
)%
 
(0.27
)%
 
(0.32
)%
 
(0.35
)%
 
(0.51
)%
Core
5.94
 %
 
5.97
 %
 
6.02
 %
 
5.97
 %
 
6.12
 %
The following table presents the impact on tax equivalent net interest income and NIM from all purchase accounting items as indicated in the table below for the periods indicated:
 
Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016
 
2016
 
2016
 
2015
 
2015
 
(Dollars in thousands)
Impact on Net Interest Income:
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
239,473

 
$
238,667

 
$
249,540

 
$
233,959

 
$
195,274

Less:
 
 
 
 
 
 
 
 
 
Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
 
 
from early payoffs of acquired loans
(8,226
)
 
(9,780
)
 
(19,465
)
 
(5,511
)
 
(9,659
)
Remaining accretion of Non-PCI loan acquisition
 
 
 
 
 
 
 
 
 
discounts
(5,997
)
 
(6,407
)
 
(8,403
)
 
(10,553
)
 
(7,485
)
Total accretion of loan acquisition discounts
(14,223
)
 
(16,187
)
 
(27,868
)
 
(16,064
)
 
(17,144
)
Amortization of TruPS discount
1,391

 
1,393

 
1,395

 
1,397

 
1,399

Accretion of time deposits premium
(121
)
 
(172
)
 
(270
)
 
(384
)
 
(576
)
Total purchase accounting adjustments
(12,953
)
 
(14,966
)
 
(26,743
)
 
(15,051
)
 
(16,321
)
Net interest income - excluding purchase accounting
$
226,520

 
$
223,701

 
$
222,797

 
$
218,908

 
$
178,953

 
 
 
 
 
 
 
 
 
 
Impact on Net Interest Margin:
 
 
 
 
 
 
 
 
 
Net interest margin (tax equivalent)
5.26
 %
 
5.33
 %
 
5.53
 %
 
5.22
 %
 
5.46
 %
Less:
 
 
 
 
 
 
 
 
 
Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
 
 
from early payoffs of acquired loans
(0.18
)%
 
(0.22
)%
 
(0.43
)%
 
(0.12
)%
 
(0.27
)%
Remaining accretion of Non-PCI loan acquisition
 
 
 
 
 
 
 
 
 
discounts
(0.13
)%
 
(0.14
)%
 
(0.19
)%
 
(0.24
)%
 
(0.21
)%
Total accretion of loan acquisition discounts
(0.31
)%
 
(0.36
)%
 
(0.62
)%
 
(0.36
)%
 
(0.48
)%
Amortization of TruPS discount
0.03
 %
 
0.03
 %
 
0.03
 %
 
0.03
 %
 
0.04
 %
Accretion of time deposits premium
 %
 
 %
 
(0.01
)%
 
(0.01
)%
 
(0.02
)%
Total purchase accounting adjustments
(0.28
)%
 
(0.33
)%
 
(0.60
)%
 
(0.34
)%
 
(0.46
)%
Net interest margin - excluding purchase accounting
4.98
 %
 
5.00
 %
 
4.93
 %
 
4.88
 %
 
5.00
 %


46


Third Quarter of 2016 Compared to Second Quarter of 2016
Net interest income increased by $0.9 million to $234.6 million for the third quarter of 2016 compared to $233.8 million for the second quarter of 2016 due to a higher average loan and lease balance, higher nonaccrual interest recoveries, and one additional day in the period, offset by a lower loan and lease yield. The loan and lease yield for the third quarter of 2016 was 6.17% compared to 6.24% for the second quarter of 2016. The decrease in the loan and lease yield was due to the lower discount accretion on acquired loans and the lower yield on new production compared to the current portfolio yield. Total discount accretion on acquired loans was $14.2 million in the third quarter of 2016 (39 basis points on the loan and lease yield) compared to $16.2 million in the second quarter of 2016 (45 basis points on the loan and lease yield). Excluding accelerated accretion, the core loan and lease yield was 5.94% in the third quarter compared to 5.97% in the second quarter.
The tax equivalent NIM for the third quarter of 2016 was 5.26% compared to 5.33% for the second quarter of 2016. The decrease in the tax equivalent NIM was due to lower discount accretion on acquired loans. Total discount accretion on acquired loans contributed 31 basis points to the NIM in the third quarter of 2016 and 36 basis points in the second quarter of 2016. Excluding accelerated accretion, the core NIM was 5.08% for the third quarter and 5.11% for the second quarter. Tax-exempt interest income contributed 11 points to the tax equivalent NIM for the third and second quarters of 2016.
Included in net interest income for the third quarter of 2016 was $3.0 million of interest resulting from the payoff in full of a nonperforming loan. This recovery contributed seven basis points to the third quarter 2016 NIM and eight basis points of loan and lease yield for the third quarter of 2016.
The cost of total deposits decreased to 0.19% in the third quarter of 2016 from 0.20% in the second quarter of 2016 due to a lower average cost and balance of time deposits.
Third Quarter of 2016 Compared to Third Quarter of 2015
Net interest income increased by $42.1 million to $234.6 million for the third quarter of 2016 compared to $192.5 million for the third quarter of 2015 due mainly to higher average balances for loans and leases and investment securities attributable to the Square 1 acquisition, offset partially by a lower loan and lease yield. The loan and lease yield for the third quarter of 2016 was 6.17% compared to 6.34% for the same quarter of 2015. The decrease in the loan and lease yield was due mainly to the lower discount accretion on acquired loans and yields on newly originated loans being lower than the average portfolio yield. Total discount accretion on acquired loans was $14.2 million in the third quarter of 2016 (39 basis points on the loan and lease yield) compared to $17.1 million in the third quarter of 2015 (57 basis points on the loan and lease yield).
The tax equivalent NIM for the third quarter of 2016 was 5.26% compared to 5.46% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the loan and lease yield as described above, the lower yield on average investment securities and loans and leases comprising a lower percentage of average interest-earning assets. Total discount accretion on acquired loans contributed 31 basis points to the NIM for the third quarter of 2016 compared to 48 basis points for the third quarter of 2015. Tax-exempt interest income contributed 11 basis points to the tax equivalent NIM for the third quarter of 2016 and eight basis points for the third quarter of 2015.
The cost of total deposits decreased to 0.19% for the third quarter of 2016 from 0.33% for the third quarter of 2015 due mainly to the $3.8 billion of lower-cost core deposits added in the Square 1 acquisition, a lower level of higher-cost time deposits, and a lower average cost of interest-bearing deposits.

47


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Net interest income increased by $118.8 million to $713.0 million for the nine months ended September 30, 2016 compared to $594.1 million for the nine months ended September 30, 2015 due mainly to higher average interest-earning asset balances attributable to the Square 1 acquisition, offset partially by lower discount accretion on acquired loans and lower yields on average loans and leases and investment securities. The loan and lease yield for the first nine months of 2016 was 6.32% compared to 6.63% for the same period in 2015. The decrease in the loan and lease yield was due mainly to the lower discount accretion on acquired loans and yields on new production being lower than the average portfolio yield. Total discount accretion on acquired loans was $58.3 million during the nine months ended September 30, 2016 (54 basis points on the loan and lease yield) compared to $73.6 million during the nine months ended September 30, 2015 (81 basis points on the loan and lease yield). Discount accretion for the 2016 period includes $12.1 million of accelerated accretion from the payoff of a nonaccrual PCI loan, resulting in the higher PCI loan yield.
The tax equivalent NIM for the first nine months of 2016 was 5.37% compared to 5.76% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the decrease in loan and lease yield as described above and loans and leases comprising a lower percentage of average interest-earning assets. Total discount accretion on acquired loans contributed 43 basis points to the NIM for the nine months ended September 30, 2016 compared to 71 basis points for the nine months ended September 30, 2015. Tax-exempt interest income contributed 11 basis points to the tax equivalent NIM for the first six months of 2016 and six basis points for the same period last year.
The cost of total deposits decreased to 0.21% for the nine months ended September 30, 2016 from 0.35% for the nine months ended September 30, 2015 due mainly to the $3.8 billion of lower-cost core deposits added in the Square 1 acquisition, a lower level of higher-cost time deposits, and a lower average cost of interest-bearing deposits.

48


Provision for Credit Losses
The following table sets forth the details of the provision for credit losses and allowance for credit losses data for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
 
 
 
 
Addition to allowance for Non‑PCI loans and leases
$
8,621

 
$
11,625

 
$
10,500

 
$
39,411

 
$
31,104

Addition to reserve for unfunded loan commitments
(621
)
 
375

 
500

 
589

 
2,063

Total provision for Non‑PCI loans and leases
8,000

 
12,000

 
11,000

 
40,000

 
33,167

Provision for PCI Loans
471

 
1,903

 
(2,254
)
 
2,514

 
(1,458
)
Total provision for credit losses
$
8,471

 
$
13,903

 
$
8,746

 
$
42,514

 
$
31,709

 
 
 
 
 
 
 
 
 
 
Non‑PCI Credit Quality Metrics:
 
 
 
 
 
 
 
 
 
Net charge‑offs on Non-PCI
 
 
 
 
 
 
 
 
 
loans and leases
$
3,874

 
$
432

 
$
3,231

 
$
8,198

 
$
9,244

Annualized net charge‑offs to
 
 
 
 
 
 
 
 
 
average Non-PCI loans and leases
0.11
%
 
0.01
%
 
0.11
%
 
0.08
%
 
0.10
%
At period end:
 
 
 
 
 
 
 
 
 
Allowance for credit losses
154,070

 
149,944

 
100,690

 
 
 
 
Non‑PCI nonaccrual loans and leases
171,085

 
127,655

 
107,190

 
 
 
 
Non‑PCI classified loans and leases
417,541

 
441,035

 
328,038

 
 
 
 
Allowance for credit losses to Non‑PCI
 
 
 
 
 
 
 
 
 
loans and leases
1.05
%
 
1.03
%
 
0.82
%
 
 
 
 
Allowance for credit losses to Non‑PCI
 
 
 
 
 
 
 
 
 
nonaccrual loans and leases
90.1
%
 
117.5
%
 
93.9
%
 
 
 
 
Provisions for credit losses are charged to earnings for both on and off‑balance sheet credit exposures. We have a provision for credit losses on our Non‑PCI loans and leases and a provision for credit losses on our PCI loans. The provision for credit losses on our Non‑PCI loans and leases is based on our allowance methodology and is an expense, or contra‑expense, that, in our judgment, is required to maintain an adequate allowance for credit losses. Our allowance methodology uses our actual historical loan and lease charge-off experience on pools of similar loans and leases, considers the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings, and considers subjective criteria such as current economic trends and forecasts, current commercial real estate values and performance trends, and the loan portfolio credit performance trends. The provision for credit losses on our PCI loans results from decreases or increases in expected cash flows on such loans compared to those previously estimated.
We recorded a total provision for credit losses of $8.5 million in the third quarter of 2016, $13.9 million in the second quarter of 2016 and $8.7 million in the third quarter of 2015 in accordance with our allowance methodology. The provision for the nine months ended September 30, 2016 was $42.5 million compared to $31.7 million in the same period last year and increased due to net portfolio growth, portfolio mix and asset quality, including the level of net charge-offs and specific reserves.
Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances are net loan and lease and unfunded commitment growth, an increased amount of loan and lease charge-offs, changes in economic conditions, such as the rate of economic growth, the rate of inflation, the unemployment rate, increases in the general level of interest rates, declines in real estate values and adverse conditions in borrowers’ businesses. See further discussion in “-Balance Sheet Analysis-Allowance for Credit Losses on Non‑PCI Loans” and “-Balance Sheet Analysis-Allowance for Credit Losses on PCI Loans” contained herein.

49


Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Noninterest Income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
$
3,488

 
$
3,633

 
$
2,601

 
$
10,977

 
$
7,787

Other commissions and fees
12,528

 
11,073

 
6,376

 
35,090

 
18,895

Leased equipment income
8,538

 
8,523

 
5,475

 
25,305

 
16,232

Gain on sale of loans and leases
157

 
388

 
27

 
790

 
190

Gain on sale of securities
382

 
478

 
655

 
8,970

 
3,744

FDIC loss sharing expense, net

 
(6,502
)
 
(4,449
)
 
(8,917
)
 
(13,955
)
Other income:
 
 
 
 
 
 
 
 
 
Dividends and realized gains on equity investments
377

 
2,185

 
4,357

 
2,808

 
16,003

Foreign currency translation net (losses) gains
(224
)
 
324

 
(373
)
 
706

 
847

Other
1,674

 
2,019

 
1,089

 
7,851

 
6,509

Total noninterest income
$
26,920

 
$
22,121

 
$
15,758

 
$
83,580

 
$
56,252


Third Quarter of 2016 Compared to Second Quarter of 2016
Noninterest income increased by $4.8 million to $26.9 million for the third quarter of 2016 compared to $22.1 million for the second quarter of 2016 due mostly to a $6.5 million decrease in FDIC loss sharing expense and a $1.5 million increase in other commissions and fees, offset by a $1.8 million decrease in dividends and realized gains on equity investments and a $0.5 million decrease in foreign currency translation net gains. The elimination of FDIC loss sharing expense was due to the early termination of all FDIC loss sharing agreements for which a $6.0 million pre-tax charge was recognized in the second quarter. Other commissions and fees increased due to higher prepayment and other loan-related fees.
Third Quarter of 2016 Compared to Third Quarter of 2015
Noninterest income increased by $11.2 million to $26.9 million for the third quarter of 2016 compared to $15.8 million for the third quarter of 2015. The increase was due mostly to higher other commissions and fees of $6.2 million, higher leased equipment income of $3.1 million, and lower FDIC loss sharing expense of $4.4 million, offset by lower dividends and realized gains on equity investments of $4.0 million. The increase in other commissions and fees included $3.1 million from loan prepayment penalty fees, $1.7 million from foreign exchange fees, $0.8 million from credit card fees, and $0.5 million from letter of credit fees. The revenue streams from foreign exchange fees and credit card fees were gained in the Square 1 acquisition. The elimination of FDIC loss sharing expense was due to the early termination of our loss sharing agreements with the FDIC in the second quarter of 2016.


50


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Noninterest income increased by $27.3 million to $83.6 million for the nine months ended September 30, 2016 compared to $56.3 million for the nine months ended September 30, 2015. The increase was due mostly to higher other commissions and fees of $16.2 million, higher leased equipment income of $9.1 million, higher gain on sales of securities of $5.2 million, lower FDIC loss sharing expense of $5.0 million, and higher service charges on deposit accounts of $3.2 million, offset by lower dividends and realized gains on equity investments of $13.2 million. The increase in other commissions and fees was comprised mostly of $6.2 million from loan prepayment penalty fees, $5.5 million from foreign exchange fees, $2.3 million from credit card fees, and $1.4 million from letter of credit fees. The increases in foreign exchange fees and credit card fees were due to the Square 1 acquisition. The decrease in FDIC loss sharing expense was due mainly to lower amortization of the FDIC loss sharing asset, offset partially by the $6.0 million pre-tax charge recognized in the second quarter of 2016 to terminate all FDIC loss sharing agreements. The increase in service charges on deposits was due primarily to increased deposits as a result of the Square 1 acquisition.
Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Noninterest Expense:
 
 
 
 
 
 
 
 
 
Compensation
$
62,661

 
$
62,174

 
$
48,152

 
$
185,900

 
$
144,922

Occupancy
12,010

 
12,193

 
10,762

 
36,835

 
31,950

Data processing
6,234

 
5,644

 
4,322

 
17,782

 
13,032

Other professional services
4,625

 
3,401

 
3,396

 
11,598

 
9,949

Insurance and assessments
4,324

 
4,951

 
3,805

 
14,240

 
11,546

Intangible asset amortization
4,224

 
4,371

 
1,497

 
13,341

 
4,500

Leased equipment depreciation
5,298

 
5,286

 
3,162

 
15,608

 
9,368

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

 
(812
)
 
2,517

Acquisition, integration and reorganization costs

 

 
747

 
200

 
3,647

Other expense:
 
 
 
 
 
 
 
 
 
Loan expense
1,931

 
2,145

 
1,494

 
6,231

 
3,319

Other
9,651

 
9,919

 
8,281

 
30,556

 
25,025

Total noninterest expense
$
110,710

 
$
110,081

 
$
90,139

 
$
331,479

 
$
259,775

The following table presents the components of foreclosed assets (income) expense, net for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Foreclosed Assets (Income) Expense:
 
 
 
 
 
 
 
 
 
Provision for losses
$

 
$

 
$
4,757

 
$

 
$
5,163

Operating (income) expense
55

 
27

 
(152
)
 
25

 
(2,688
)
(Gain) loss on sale
(303
)
 
(30
)
 
(84
)
 
(837
)
 
42

Total foreclosed assets (income) expense, net
$
(248
)
 
$
(3
)
 
$
4,521

 
$
(812
)
 
$
2,517



51


Third Quarter of 2016 Compared to Second Quarter of 2016
Noninterest expense increased by $0.6 million to $110.7 million for the third quarter of 2016 compared to $110.1 million for the second quarter of 2016. The expense category with the highest increase was other professional services, which increased $1.2 million primarily due to higher litigation expense.
Third Quarter of 2016 Compared to Third Quarter of 2015
Noninterest expense increased by $20.6 million to $110.7 million for the third quarter of 2016 compared to $90.1 million for the third quarter of 2015. The increase was due primarily to including the operations of Square 1 subsequent to its October 6, 2015 acquisition date, offset by lower foreclosed assets expense of $4.8 million. Foreclosed assets expense decreased due mainly to lower write-downs on existing properties.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Noninterest expense increased by $71.7 million to $331.5 million for the nine months ended September 30, 2016 compared to $259.8 million for the nine months ended September 30, 2015. The increase was due primarily to including the operations of Square 1 subsequent to its October 6, 2015 acquisition date, offset by lower acquisition, integration and reorganization costs of $3.4 million and lower foreclosed assets expense of $3.3 million. Foreclosed assets expense decreased due mainly to lower write-downs on existing properties, offset partially by lower operating income.
Income Taxes
The effective tax rate for the third quarter of 2016 was 34.1% compared to 37.7% for the second quarter of 2016 and 36.4% for the third quarter of 2015. The effective tax rate for the third quarter of 2016 was lower due to the net favorable treatment of certain items associated with completion of the 2015 tax returns. The expected effective tax rate for the calendar year 2016 is approximately 37.5%. The Company's blended statutory tax rate for federal and state is 41%.


52



Balance Sheet Analysis
Investment Portfolio
The following table presents the components, yields, and durations of our securities available-for-sale as of the date indicated:
 
September 30, 2016
 
Amortized
 
Fair
 
 
 
Duration
Security Type:
Cost
 
Value
 
Yield(1)(2)
 
(in years)
 
(Dollars in thousands)
Residential mortgage-backed securities ("MBS")
 
 
 
 
 
 
 
and collateralized mortgage obligations ("CMOs"):
 
 
 
 
 
 
 
Agency MBS
$
518,996

 
$
528,941

 
2.08%
 
2.8
Agency CMOs
154,216

 
157,231

 
2.04%
 
2.2
Private label CMOs
133,917

 
138,625

 
5.00%
 
2.7
Municipal securities
1,437,952

 
1,522,494

 
4.13%
 
6.4
Agency commercial MBS
517,163

 
531,273

 
2.84%
 
5.4
Corporate debt securities
47,155

 
49,011

 
7.33%
 
5.1
Collateralized loan obligations
155,373

 
156,647

 
3.05%
 
0.1
SBA securities
185,639

 
187,300

 
0.30%
 
1.9
Asset-backed and other securities
69,189

 
69,813

 
2.71%
 
3.1
Total securities available-for-sale
$
3,219,600

 
$
3,341,335

 
3.29%
 
4.7
______________________________________ 
(1)
Represents the yield for the month of September 30, 2016.
(2)
Tax-equivalent basis.
The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
 
September 30, 2016
 
Carrying
 
% of
Municipal Securities by State:
Value
 
Total
 
(Dollars in thousands)
 California
$
217,170

 
14
%
 New York
187,238

 
12
%
 Washington
171,032

 
11
%
 Texas
117,842

 
8
%
 Ohio
97,965

 
6
%
 District of Columbia
68,227

 
4
%
 Massachusetts
67,631

 
4
%
 Florida
53,652

 
4
%
 Oregon
45,133

 
3
%
 Illinois
40,559

 
3
%
Total of 10 largest states
1,066,449

 
69
%
All other states
456,045

 
31
%
Total municipal securities
$
1,522,494

 
100
%


53



Loans and Leases
The following table presents the composition of our total loans and leases as of the dates indicated:
 
September 30, 2016
 
June 30, 2016
 
December 31, 2015
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Healthcare real estate
$
959,993

 
7
%
 
$
1,152,433

 
8
%
 
$
1,230,787

 
9
%
Hospitality
666,523

 
5
%
 
712,900

 
5
%
 
656,750

 
5
%
SBA program
468,138

 
3
%
 
473,465

 
3
%
 
473,960

 
3
%
Other commercial real estate
2,232,911

 
15
%
 
2,180,411

 
15
%
 
2,284,036

 
16
%
Total commercial real estate
4,327,565

 
30
%
 
4,519,209

 
31
%
 
4,645,533

 
33
%
Income producing residential
1,070,842

 
7
%
 
1,011,651

 
7
%
 
1,035,164

 
7
%
Owner-occupied residential
171,412

 
1
%
 
153,133

 
1
%
 
176,045

 
1
%
Total residential real estate
1,242,254

 
8
%
 
1,164,784

 
8
%
 
1,211,209

 
8
%
Total real estate mortgage
5,569,819

 
38
%
 
5,683,993

 
39
%
 
5,856,742

 
41
%
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
510,831

 
3
%
 
417,144

 
3
%
 
345,991

 
2
%
Residential
323,104

 
2
%
 
281,788

 
2
%
 
184,382

 
1
%
Total real estate construction and land
833,935

 
5
%
 
698,932

 
5
%
 
530,373

 
3
%
Total real estate loans
6,403,754

 
43
%
 
6,382,925

 
44
%
 
6,387,115

 
44
%
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Technology cash flow
1,097,041

 
7
%
 
1,002,709

 
7
%
 
978,283

 
7
%
Security cash flow
416,648

 
3
%
 
430,591

 
3
%
 
450,544

 
3
%
Healthcare cash flow
751,580

 
5
%
 
821,698

 
6
%
 
865,355

 
6
%
Other cash flow
806,337

 
5
%
 
793,441

 
5
%
 
779,783

 
5
%
Total cash flow
3,071,606

 
20
%
 
3,048,439

 
21
%
 
3,073,965

 
21
%
Lender finance & timeshare
1,654,585

 
11
%
 
1,730,870

 
12
%
 
1,587,577

 
11
%
Healthcare asset-based
174,362

 
1
%
 
214,242

 
1
%
 
228,445

 
2
%
Other asset-based
744,490

 
5
%
 
738,801

 
5
%
 
731,643

 
5
%
Total asset-based
2,573,437

 
17
%
 
2,683,913

 
18
%
 
2,547,665

 
18
%
Equity funds group
282,874

 
2
%
 
270,722

 
2
%
 
228,863

 
2
%
Early stage
412,537

 
3
%
 
369,803

 
3
%
 
347,298

 
2
%
Expansion stage
790,117

 
5
%
 
725,482

 
5
%
 
600,541

 
4
%
Later stage
280,981

 
2
%
 
300,345

 
2
%
 
281,311

 
2
%
Venture capital
1,766,509

 
12
%
 
1,666,352

 
12
%
 
1,458,013

 
10
%
Equipment finance
670,783

 
5
%
 
646,940

 
4
%
 
890,349

 
6
%
Total commercial
8,082,335

 
54
%
 
8,045,644

 
55
%
 
7,969,992

 
55
%
Consumer
256,757

 
3
%
 
212,891

 
1
%
 
121,147

 
1
%
Total loans and leases, net of deferred fees
$
14,742,846

 
100
%
 
$
14,641,460

 
100
%
 
$
14,478,254

 
100
%
 
Our real estate loan portfolio exposes us to risks associated with mortgage loans on commercial property. Commercial real estate mortgage loan repayments typically do not rely on the sale of the underlying collateral, but instead rely on the income producing potential of the collateral as the source of repayment. However, due to the loan amortization period generally being greater than the contractual loan term, the borrower may be required to refinance the loan, either with us or another lender, or pay off the loan, by selling the underlying collateral.


54



The following table presents the geographic composition of our real estate loans by the top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
 
 
% of
 
 
 
% of
Real Estate Loans by State:
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
California
$
3,199,545

 
50
%
 
$
3,121,801

 
49
%
Florida
464,758

 
7
%
 
488,793

 
8
%
New York
448,448

 
7
%
 
315,433

 
5
%
Texas
301,872

 
5
%
 
342,815

 
5
%
Virginia
188,766

 
3
%
 
182,040

 
3
%
Illinois
179,118

 
3
%
 
157,431

 
2
%
Pennsylvania
149,345

 
2
%
 
215,945

 
4
%
Arizona
148,267

 
2
%
 
144,177

 
2
%
Georgia
124,487

 
2
%
 
71,992

 
1
%
Maryland
93,545

 
2
%
 
71,747

 
1
%
Total of 10 largest states
5,298,151

 
83
%
 
5,112,174

 
80
%
All other states
1,105,603

 
17
%
 
1,274,941

 
20
%
Total real estate loans
$
6,403,754

 
100
%
 
$
6,387,115

 
100
%
The following table presents a roll forward of the loan and lease portfolio for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
Loan and Lease Roll Forward: (1)
September 30, 2016
 
September 30, 2016
 
(Dollars in thousands)
Beginning balance
$
14,641,460

 
$
14,478,254

New production
1,071,943

 
2,845,430

Existing loans and leases:
 
 
 
    Principal repayments, net(2)
(933,037
)
 
(2,318,321
)
    Loan and lease sales
(27,065
)
 
(105,319
)
    Transfers to foreclosed assets

 
(129
)
    Charge-offs
(10,455
)
 
(17,871
)
Sale of Pacific Western Equipment Finance ("PWEF")

 
(139,198
)
Ending balance
$
14,742,846

 
$
14,742,846

 
 
 
 
Weighted average rate on new production
5.11
%
 
4.95
%
_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), loan participation sales and other changes within the loan portfolio.

55



Credit Exposure Affected by Low Oil Prices
At September 30, 2016, we had 14 outstanding loan and lease relationships totaling $101.7 million to borrowers and lessees primarily involved in the oil and gas industry down from $137.3 million at December 31, 2015. The obligors under these loans and leases either conduct oil and gas extraction or provide industrial support services to such types of businesses. The collateral for these loans and leases includes primarily equipment, such as drilling and mining equipment and transportation vehicles, used directly and indirectly in these activities. At September 30, 2016, two relationships totaling $40.3 million were on nonaccrual status and were classified, down from three relationships totaling $47.1 million at December 31, 2015. The largest of these relationships had an aggregate outstanding balance of $39.9 million at September 30, 2016. Reserves related to our total oil and gas services industry exposure were approximately 14% at September 30, 2016, which included reserves of approximately 24% related to our impaired oil and gas services industry exposure. Unfunded commitments related to the oil and gas portfolio totaled $21.6 million at September 30, 2016 and relate to three relationships governed with a borrowing base for accounts receivable and inventory.
The following table presents loan and lease relationships with exposure to the oil and gas industry as of the date indicated:
 
September 30, 2016
 
Obligors
 
Amount
 
% of Total
 
(Dollars in thousands)
Nonaccrual
2

 
$
40,262

 
39
%
Large, rated companies(1)
2

 
41,410

 
41
%
All others
10

 
20,058

 
20
%
Total oil & gas support services
14

 
$
101,730

 
100
%
_______________________________________ 
(1)
Borrowing entity or obligor contractual counterpart rated BB- or higher.
Allowance for Credit Losses on Non-PCI Loans and Leases
The allowance for credit losses on non-purchased credit impaired ("Non-PCI") loans and leases is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The following discussion is for Non-PCI loans and leases and the allowance for credit losses thereon. Refer to "-Balance Sheet Analysis-Allowance for Credit Losses on PCI Loans" for the policy on PCI loans. For loans and leases acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or other inherent risks related to these acquired assets that may occur after the acquisition date.
The allowance for loan and lease losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon our continual review of the credit quality of the loan and lease portfolio, which includes loan and lease payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial performance, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to pay. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses contains a general reserve component for loans and leases with no credit impairment and a specific reserve component for loans and leases determined to be impaired.

56



A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We assess our loans for impairment on an ongoing basis using certain criteria such as payment performance, borrower reported financial results and budgets, and other external factors when appropriate. We measure impairment of a loan based upon the fair value of the loan’s collateral if the loan is collateral-dependent or the present value of cash flows, discounted at the loan’s effective interest rate, if the loan is not collateral-dependent. We measure impairment of a lease based upon the present value of the scheduled lease and residual cash flows, discounted at the lease's effective interest rate. To the extent a loan or lease balance exceeds the estimated collectable value, a specific reserve or charge-off is recorded depending upon the certainty of the estimate of loss. Smaller balance loans (under $250,000), with a few exceptions for certain loan types, are generally not individually assessed for impairment but are evaluated collectively.
The methodology we use to estimate the general reserve component of our allowance for credit losses considers both quantitative and qualitative criteria. The quantitative criteria uses our actual historical loan and lease charge-off experience on pools of similar loans and leases to establish loss factors that are applied to our current loan and lease balances to estimate inherent credit losses. When estimating the general reserve component for the various pools of similar loan types, the loss factors applied to the loan pools consider the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings. We recognize that the determination of the allowance for loan and lease losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the ratings assigned to loans on an ongoing basis.
The qualitative criteria considered when establishing the loss factors include the following:
current economic trends and forecasts;
current commercial real estate values, performance trends, and overall outlook in the markets where we lend;
legal and regulatory matters that could impact our borrowers’ ability to repay our loans and leases;
our loan and lease portfolio composition and any loan concentrations;
our current lending policies and the effects of any new policies or policy amendments;
our new loan and lease origination volume and the nature of it;
our loan and lease portfolio credit performance trends; and
the results of our ongoing independent credit review.
The reserve for unfunded commitments is estimated using the same loss factors as used for the allowance for loan and lease losses and is computed based only on the expected usage of the unfunded commitments.
The credit risk ratings assigned to every loan and lease are either “pass,” “special mention,” “substandard” or “doubtful” and defined as follows:
Pass: Loans and leases classified as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: Loans and leases classified as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
Substandard: Loans and leases classified as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
Doubtful: Loans and leases classified as "doubtful" have all the weaknesses of those classified as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 5. Loans and Leases, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

57



Management believes the allowance for credit losses is appropriate for the known and inherent risks in our Non-PCI loan and lease portfolio and the credit risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes in collateral values, or negative changes in economic and business conditions that adversely affect our borrowers, our classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the established allowance will be sufficient to absorb related losses in the future.
The following table presents information regarding the allowance for credit losses on Non-PCI loans and leases as of the dates indicated:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
Non-PCI Allowance for Credit Losses Data:
2016
 
2016
 
2015
 
2015
 
(Dollars in thousands)
Allowance for loan and lease losses
$
136,747

 
$
132,000

 
$
105,534

 
$
92,316

Reserve for unfunded loan commitments
17,323

 
17,944

 
16,734

 
8,374

Total allowance for credit losses
$
154,070

 
$
149,944

 
$
122,268

 
$
100,690

 
 
 
 
 
 
 
 
Allowance for credit losses to loans and leases
1.05
%
 
1.03
%
 
0.85
%
 
0.82
%
Allowance for credit losses to nonaccrual loans and leases
90.1
%
 
117.5
%
 
94.8
%
 
93.9
%
All acquired loans are recorded initially at their estimated fair value with such initial fair value including an estimate of credit losses. Two additional credit coverage ratios shown in the table below are presented to give an indication of overall credit risk coverage:
 
September 30, 2016
 
June 30, 2016
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
Non-PCI Adjusted Allowance for
Loans and
 
Allowance/
 
Coverage
 
Loans and
 
Allowance/
 
Coverage
Credit Losses to Loans and Leases:
Leases
 
Discount
 
Ratio
 
Leases
 
Discount
 
Ratio
 
(Dollars in thousands)
Adjustment for acquired loans and leases
 
 
 
 
 
 
 
 
 
 
 
and related allowance:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
14,686,206

 
$
154,070

 
1.05
%
 
$
14,566,425

 
$
149,944

 
1.03
%
Acquired loans and leases
(4,612,787
)
 
(46,039
)
 
 
 
(5,131,674
)
 
(37,440
)
 
 
     Adjusted balance
$
10,073,419

 
$
108,031

 
1.07
%
 
$
9,434,751

 
$
112,504

 
1.19
%
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for unamortized purchase
 
 
 
 
 
 
 
 
 
 
 
discount on acquired loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
14,686,206

 
$
154,070

 
1.05
%
 
$
14,566,425

 
$
149,944

 
1.03
%
Unamortized purchase discount
53,041

 
53,041

 
 
 
65,391

 
65,391

 
 
     Adjusted balance
$
14,739,247

 
$
207,111

 
1.41
%
 
$
14,631,816

 
$
215,335

 
1.47
%

58



The first additional credit coverage ratio calculation makes adjustments for acquired loans and leases and the related allowance. Our Non‑PCI loans and leases at September 30, 2016, included $4.6 billion in loans and leases acquired in acquisitions. These acquired loans and leases were initially recorded at their estimated fair values and such initial fair values included an estimate of credit losses. The allowance calculation for Non‑PCI loans and leases takes into consideration those acquired loans and leases whose credit quality has deteriorated since their acquisition dates. At September 30, 2016, our allowance for credit losses included $46.0 million related to these acquired loans and leases. When these acquired loans and leases are excluded from the total of Non‑PCI loans and leases and the related allowance is excluded from the allowance for credit losses, the result is an adjusted coverage ratio of our allowance for credit losses to Non‑PCI loans and leases of 1.07% at September 30, 2016; at June 30, 2016, this ratio was 1.19%.
The second additional credit coverage ratio calculation makes an adjustment for the unamortized purchase discount on acquired loans and leases. Our acquired Non-PCI loans and leases included an unamortized purchase discount of $53.0 million at September 30, 2016, which is assigned specifically to those loans and leases only. Such discount represents the acquisition date fair value adjustment based on market, liquidity, interest rate and credit risk. When the unamortized purchase discount is added back separately to both our Non-PCI loans and leases and allowance for credit losses, the result is an adjusted coverage ratio of our allowance for credit losses to Non-PCI loans and leases of 1.41% at September 30, 2016; at June 30, 2016, this ratio was 1.47%.
The unamortized purchase discount is being accreted to interest income over the remaining life of the respective loans and leases primarily using the interest method. Use of the interest method results in steadily declining amounts being taken into income in each reporting period. The remaining discount of $53.0 million at September 30, 2016 is expected to be substantially accreted to income by the end of 2018.
The following table presents the changes in our allowance for credit losses on Non-PCI loans and leases for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Non-PCI Allowance for Credit Losses:
2016
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Allowance for credit losses, beginning of period
$
149,944

 
$
138,376

 
$
92,921

 
$
122,268

 
$
76,767

Provision for credit losses:
 
 
 
 
 
 
 
 
 
Addition to allowance for loan and lease losses
8,621

 
11,625

 
10,500

 
39,411

 
31,104

Addition to reserve for unfunded loan commitments
(621
)
 
375

 
500

 
589

 
2,063

Provision for credit losses
8,000

 
12,000

 
11,000

 
40,000

 
33,167

Loans and leases charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
(302
)
 
(866
)
 
(252
)
 
(1,905
)
 
(1,767
)
Commercial
(9,606
)
 
(655
)
 
(4,035
)
 
(14,306
)
 
(12,964
)
Consumer
(16
)
 
(191
)
 
(25
)
 
(798
)
 
(115
)
Total loans and leases charged off (1)
(9,924
)
 
(1,712
)
 
(4,312
)
 
(17,009
)
 
(14,846
)
Recoveries on loans charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
2,414

 
939

 
288

 
4,352

 
1,783

Real estate construction and land
27

 
6

 
390

 
185

 
1,034

Commercial
3,553

 
312

 
239

 
4,179

 
2,393

Consumer
56

 
23

 
164

 
95

 
392

Total recoveries on loans charged off
6,050

 
1,280

 
1,081

 
8,811

 
5,602

Net (charge-offs) recoveries
(3,874
)
 
(432
)
 
(3,231
)
 
(8,198
)
 
(9,244
)
Allowance for credit losses, end of period
$
154,070

 
$
149,944

 
$
100,690

 
$
154,070

 
$
100,690

 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs (recoveries) to
 
 
 
 
 
 
 
 
 
average loans and leases
0.11
%
 
0.01
%
 
0.11
%
 
0.08
%
 
0.10
%
_______________________________________ 
(1)
The third quarter 2016 Non-PCI charge-offs included $9.7 million of loans and leases that were fully reserved at June 30, 2016.


59



Allowance for Credit Losses on PCI Loans
The PCI loans are subject to our internal and external credit review. For PCI loans, the allowance for loan losses is measured at the end of each financial reporting period based on expected cash flows. Decreases or (increases) in the amount and changes in the timing of expected cash flows on the PCI loans as of the financial reporting date compared to those previously estimated are usually recognized by recording a provision or a (negative provision) for credit losses on such loans. If deterioration in the expected cash flows results in a reserve requirement, a provision for credit losses is charged to earnings.
The following table presents the changes in our allowance for credit losses on PCI loans for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
PCI Allowance for Credit Losses:
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Allowance for credit losses, beginning of period
$
11,289

 
$
9,554

 
$
14,328

 
$
9,577

 
$
13,999

Provision (negative provision)
471

 
1,903

 
(2,254
)
 
2,514

 
(1,458
)
Net charge-offs
(531
)
 
(168
)
 
(1,119
)
 
(862
)
 
(1,586
)
Allowance for credit losses, end of period
$
11,229

 
$
11,289

 
$
10,955

 
$
11,229

 
$
10,955

Nonperforming Assets, Performing Troubled Debt Restructured Loans, and Classified Loans and Leases
The following table presents nonperforming assets, performing troubled debt restructured loans, and classified loans and leases information as of the dates indicated:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
 
2016
 
2016
 
2015
 
2015
 
(Dollars in thousands)
Nonaccrual Non-PCI loans and leases
$
171,085

 
$
127,655

 
$
129,019

 
$
107,190

Nonaccrual PCI loans
3,478

 
2,025

 
4,596

 
4,823

Total nonaccrual loans and leases
174,563

 
129,680

 
133,615

 
112,013

Accruing Non-PCI loans contractually past due 90 days or more

 

 
700

 

Foreclosed assets, net
15,113

 
16,181

 
22,120

 
33,216

Total nonperforming assets
$
189,676

 
$
145,861

 
$
156,435

 
$
145,229

 
 
 
 
 
 
 
 
Performing troubled debt restructured loans(1)
$
70,348

 
$
71,709

 
$
40,182

 
$
39,956

Classified Non-PCI loans and leases
$
417,541

 
$
441,035

 
$
391,754

 
$
323,038

Nonaccrual loans and leases to loans and leases
1.18
%
 
0.88
%
 
0.92
%
 
0.90
%
Nonperforming assets to loans and leases and foreclosed assets, net
1.28
%
 
0.99
%
 
1.08
%
 
1.16
%
Classified Non-PCI loans and leases to Non-PCI loans and leases
2.84
%
 
3.03
%
 
2.73
%
 
2.67
%
_______________________________________ 
(1)
Excludes PCI loans.

Nonperforming assets include Non-PCI and PCI nonaccrual loans and leases and foreclosed assets and totaled $189.7 million at September 30, 2016 compared to $145.9 million at June 30, 2016. The $43.8 million increase in nonperforming assets during the third quarter of 2016 was due to a $44.9 million increase in nonaccrual loans and leases and a $1.1 million decrease in foreclosed assets. The ratio of nonperforming assets to loans and leases and foreclosed assets increased to 1.28% at September 30, 2016 from 0.99% at June 30, 2016. During the third quarter of 2016, Non-PCI classified loans and leases decreased by $23.5 million to $417.5 million as resolutions, including repayment in full of four loans totaling $49.9 million, exceeded new downgrades.

60



Nonaccrual Loans and Leases
During the third quarter of 2016, nonaccrual loan and leases increased by $44.9 million to $174.6 million at September 30, 2016 due mainly to new nonaccrual additions of $72.0 million, offset by $27.1 million in principal payments and other reductions. Additions included a $49.8 million healthcare real estate loan secured by a continuing care retirement facility which migrated to nonaccrual status due to continued weak operating performance and cash flow difficulties.
The following table presents our Non-PCI nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by portfolio segment and class as of the dates indicated:
 
Nonaccrual Loans and Leases
 
Accruing and
 
September 30, 2016
 
June 30, 2016
 
30 - 89 Days Past Due
 
 
 
% of
 
 
 
% of
 
September 30,
 
June 30,
 
 
 
Loan
 
 
 
Loan
 
2016
 
2015
 
Amount
 
Category
 
Amount
 
Category
 
Amount
 
Amount
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
74,606

 
1.7
%
 
$
29,183

 
0.7
%
 
$
2,146

 
$
2,126

Residential
5,089

 
0.4
%
 
4,238

 
0.4
%
 

 
171

Total real estate mortgage
79,695

 
1.5
%
 
33,421

 
0.6
%
 
2,146

 
2,297

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,245

 
0.2
%
 

 
%
 

 

Residential
366

 
0.1
%
 
368

 
0.1
%
 

 

Total real estate construction and land
1,611

 
0.2
%
 
368

 
0.1
%
 

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
27,831

 
0.9
%
 
38,146

 
1.3
%
 
21

 
389

Asset-based
4,044

 
0.2
%
 
1,986

 
0.1
%
 
6,644

 

Venture capital
10,782

 
0.6
%
 
1,088

 
0.1
%
 

 
3,548

Equipment finance (1)
46,916

 
7.0
%
 
52,432

 
8.1
%
 

 

Total commercial
89,573

 
1.1
%
 
93,652

 
1.2
%
 
6,665

 
3,937

Consumer
206

 
0.1
%
 
214

 
0.1
%
 

 

Total Non-PCI loans and leases
$
171,085

 
1.2
%
 
$
127,655

 
0.9
%
 
$
8,811

 
$
6,234

_______________________________________ 
(1)
Includes nonaccrual loans and leases to companies involved in the oil and gas industries of $40.3 million and $48.5 million at September 30, 2016 and June 30, 2016.

As of September 30, 2016, the Company's ten largest Non-PCI loan relationships on nonaccrual status had an aggregate carrying value of $145 million and represented 84.5% of total Non-PCI nonaccrual loans and leases. The largest of these relationships had an aggregate carrying value of $49.8 million and is described earlier in this "-Nonaccrual Loans and Leases" section.

61



Foreclosed Assets
The following table presents the components of foreclosed assets (primarily other real estate owned, or OREO) as of the dates indicated:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
Property Type:
2016
 
2016
 
2015
 
2015
 
(In thousands)
Commercial real estate
$

 
$

 
$
487

 
$
3,558

Construction and land development
13,800

 
13,800

 
13,801

 
14,343

Multi-family

 

 

 
3,481

Single family residence

 
852

 
952

 
1,663

Total OREO, net
13,800

 
14,652

 
15,240

 
23,045

Other foreclosed assets
1,313

 
1,529

 
6,880

 
10,171

Total foreclosed assets
$
15,113

 
$
16,181

 
$
22,120

 
$
33,216

During the third quarter of 2016, foreclosed assets decreased by $1.1 million to $15.1 million at September 30, 2016 due to sales of $1.1 million.
Performing Troubled Debt Restructured Loans
During the third quarter of 2016, Non-PCI performing troubled debt restructured loans decreased by $1.4 million to $70.3 million as the result of $1.4 million in payoffs and other reductions. At September 30, 2016, we had $59.8 million in real estate mortgage loans, $7.1 million in real estate construction and land loans, $3.3 million in commercial loans, and $0.2 million in consumer loans that were accruing interest under the terms of troubled debt restructurings.
The majority of the number of performing troubled debt restructured loans were on accrual status prior to the loan restructurings and have remained on accrual status after the loan restructurings due to the borrowers making payments before and after the restructurings.

Deposits
The following table presents the balance of each major category of deposits at the dates indicated:
 
September 30, 2016
 
June 30, 2016
 
December 31, 2015
 
 
 
% of
 
 
 
% of
 
 
 
% of
Deposit Category:
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
6,521,946

 
42
%
 
$
6,222,696

 
41
%
 
$
6,171,455

 
39
%
Interest checking deposits
1,184,350

 
8

 
1,035,395

 
7

 
874,349

 
5

Money market deposits
3,532,050

 
22

 
3,392,811

 
22

 
2,782,974

 
18

Savings deposits
772,293

 
5

 
761,090

 
5

 
742,795

 
5

Total core deposits
12,010,639

 
77

 
11,411,992

 
75

 
10,571,573

 
67

Brokered non-maturity deposits
1,082,114

 
7

 
972,820

 
7

 
942,253

 
6

Total non-maturity deposits
13,092,753

 
84

 
12,384,812

 
82

 
11,513,826

 
73

Time deposits under $100,000
1,180,428

 
7

 
1,114,074

 
7

 
1,656,227

 
11

Time deposits $100,000 and over
1,372,487

 
9

 
1,649,123

 
11

 
2,496,129

 
16

Total time deposits
2,552,915

 
16

 
2,763,197

 
18

 
4,152,356

 
27

Total deposits
$
15,645,668

 
100
%
 
$
15,148,009

 
100
%
 
$
15,666,182

 
100
%

62



Total deposits increased by $497.7 million during the third quarter to $15.6 billion, due mainly to an increase in core deposits of $598.6 million offset partially by a decrease in time deposits of $210.3 million. At September 30, 2016, core deposits totaled $12.0 billion, or 77% of total deposits, including $6.5 billion of noninterest-bearing demand deposits, or 42% of total deposits.
The following table summarizes the maturities of time deposits, together with their weighted average contractual rate, as of the date indicated:
 
September 30, 2016
 
Time
 
Time
 
 
 
 
 
Deposits
 
Deposits
 
Total
 
 
 
Under
 
$100,000
 
Time
 
Contractual
Maturity:
$100,000
 
or More
 
Deposits
 
Rate
 
(Dollars in thousands)
Due in three months or less
$
402,305

 
$
473,136

 
$
875,441

 
0.43%
Due in over three months through six months
277,632

 
361,539

 
639,171

 
0.35%
Due in over six months through twelve months
388,867

 
411,147

 
800,014

 
0.36%
Due in over 12 months through 24 months
86,228

 
89,603

 
175,831

 
0.66%
Due in over 24 months
25,396

 
37,062

 
62,458

 
0.77%
Total
$
1,180,428

 
$
1,372,487

 
$
2,552,915

 
0.41%
 
 
 
 
 
 
 
 
At June 30, 2016
$
1,114,074

 
$
1,649,123

 
$
2,763,197

 
0.49%
Brokered time deposits totaled $404.5 million and $151.7 million at September 30, 2016 and June 30, 2016.
At September 30, 2016 and June 30, 2016, we had $461 million and $537 million, respectively, of time deposits that exceeded the FDIC insurance limit of $250,000, while the remaining $2.1 billion and $2.2 billion of time deposits met or fell below the FDIC insurance limit.
Regulatory Matters
Capital
Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At September 30, 2016, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum total risk-based capital ratio of 10.00%. Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are disallowed from regulatory capital. At September 30, 2016, such disallowed amounts were $11.3 million for the Company and $0.1 million for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future or that the Company or Bank will not have increased deferred tax assets that are disallowed.
Basel III, the comprehensive regulatory capital rules for U.S. banking organizations became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components and other provisions. The most significant provisions of Basel III which applied to the Company and the Bank were as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans, and the capital treatment of deferred tax assets and liabilities above certain thresholds.

63



The following table presents a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
 
 
 
 
 
Minimum
 
 
 
 
 
 
 
Required
 
 
 
 
 
Minimum
 
Plus Capital
 
Minimum
 
 
 
Required
 
Conservation
 
Required
 
 
 
For Capital
 
Buffer
 
For Well
 
 
 
Adequacy
 
Phase-In
 
Capitalized
 
Actual
 
Purposes
 
for 2016
 
Requirement
September 30, 2016
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
12.13%
 
4.00%
 
4.000%
 
N/A
CET1 capital (to risk weighted assets)
12.83%
 
4.50%
 
5.125%
 
N/A
Tier 1 capital (to risk weighted assets)
12.83%
 
6.00%
 
6.625%
 
N/A
Total capital (to risk weighted assets)
16.18%
 
8.00%
 
8.625%
 
N/A
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.54%
 
4.00%
 
4.000%
 
5.00%
CET1 capital (to risk weighted assets)
12.21%
 
4.50%
 
5.125%
 
6.50%
Tier 1 capital (to risk weighted assets)
12.21%
 
6.00%
 
6.625%
 
8.00%
Total capital (to risk weighted assets)
13.15%
 
8.00%
 
8.625%
 
10.00%
December 31, 2015
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.67%
 
4.00%
 
N/A
 
N/A
CET1 capital (to risk weighted assets)
12.58%
 
4.50%
 
N/A
 
N/A
Tier 1 capital (to risk weighted assets)
12.60%
 
6.00%
 
N/A
 
N/A
Total capital (to risk weighted assets)
15.65%
 
8.00%
 
N/A
 
N/A
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.40%
 
4.00%
 
N/A
 
5.00%
CET1 capital (to risk weighted assets)
12.03%
 
4.50%
 
N/A
 
6.50%
Tier 1 capital (to risk weighted assets)
12.03%
 
6.00%
 
N/A
 
8.00%
Total capital (to risk weighted assets)
12.80%
 
8.00%
 
N/A
 
10.00%
Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At September 30, 2016, the Company and Bank are in compliance with the capital conservation buffer requirement. The capital conservation buffer will increase by 0.625% each year through 2019, at which point, the common equity tier 1, tier 1 and total capital ratio minimums inclusive of the capital conservation buffer will be 7.0%, 8.5% and 10.5%, respectively.

64



Subordinated Debentures
We issued subordinated debentures to trusts that were established by us or entities we previously acquired, which, in turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $441.1 million at September 30, 2016. At September 30, 2016, none of the trust preferred securities was included in the Company's Tier I capital under the phase-out limitations of Basel III, and $428.7 million was included in Tier II capital.
Dividends on Common Stock and Interest on Subordinated Debentures
As a bank holding company, we are required to notify the Board of Governors of the Federal Reserve System (“FRB”) prior to declaring and paying a dividend to stockholders during any period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Interest payments made by us on subordinated debentures are considered dividend payments under FRB regulations.
Liquidity
Liquidity Management
The goals of our liquidity management are to ensure the ability of the Company to meet its financial commitments when contractually due and to respond to other demands for funds such as the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers who have unfunded commitments. We have an Executive Management Asset Liability Management Committee ("Executive ALM Committee"), which is comprised of members of senior management and is responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving our financial objectives. Our Executive ALM Committee meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.
We manage our liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and due from banks, interest-earning deposits in other financial institutions and unpledged investment securities available-for-sale, which we refer to as our primary liquidity. In addition, we also maintain available borrowing capacity under secured borrowing lines with the FHLB and the Federal Reserve Bank of San Francisco (“FRBSF”), which we refer to as our secondary liquidity. In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit, subject to availability, of $80.0 million with correspondent banks and $99.0 million with the FHLB, both for the purchase of overnight funds. As of September 30, 2016, there was a $90.0 million balance outstanding related to the FHLB unsecured line of credit. In March 2016, the Bank became a member of the American Financial Exchange, through which it may either borrow or lend funds on an overnight basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2016, there was a $40.0 million balance outstanding.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
 
September 30,
 
June 30,
 
December
 
2016
 
2016
 
2015
 
(Dollars in thousands)
Primary Liquidity - On-Balance Sheet:
 
 
 
 
 
Cash and due from banks
$
286,371

 
$
226,471

 
$
161,020

Interest-earning deposits in financial institutions
253,994

 
218,882

 
235,466

Securities available-for-sale
3,341,335

 
3,347,546

 
3,559,437

Less: pledged securities
(342,232
)
 
(442,884
)
 
(421,574
)
Total primary liquidity
$
3,539,468

 
$
3,350,015

 
$
3,534,349

 
 
 
 
 
 
Ratio of primary liquidity to total deposits
22.6
%
 
22.1
%
 
22.6
%

65



 
September 30,
 
June 30,
 
December
 
2016
 
2016
 
2015
 
(In thousands)
Secondary Liquidity - Off-Balance Sheet
 
 
 
 
 
Available Secured Borrowing Capacity:
 
 
 
 
 
Total secured borrowing capacity with the FHLB
$
2,044,799

 
$
2,043,979

 
$
2,500,000

Less: secured advances outstanding
(410,000
)
 
(787,000
)
 
(618,000
)
Net secured borrowing capacity with the FHLB
1,634,799

 
1,256,979

 
1,882,000

Secured borrowing capacity with the FRBSF
2,429,729

 
1,829,572

 
2,078,292

Total secondary liquidity
$
4,064,528

 
$
3,086,551

 
$
3,960,292

During the three months ended September 30, 2016, the Bank’s primary liquidity increased by $189.5 million due to a $100.7 million decrease in pledged securities available-for-sale, a $59.9 million increase in cash and due from banks, and a $35.1 million increase in interest-earning deposits in financial institutions. The Bank’s secondary liquidity increased by $978.0 million during the third quarter due to a $600.2 million increase in the borrowing capacity on the secured credit line with the FRBSF and a $377.8 million increase in the borrowing capacity on the secured credit line with the FHLB.
At September 30, 2016, certain qualifying loans totaling $3.3 billion were specifically pledged as collateral for the secured borrowing line maintained with the FRBSF. The FHLB borrowing lines are secured by a blanket lien on certain qualifying loans that are not pledged to the FRBSF.
In addition to our primary liquidity, the Bank generates liquidity from cash flows from our loan and securities portfolios and from our large base of core customer deposits, defined as noninterest-bearing demand, interest checking, money market, and savings accounts. At September 30, 2016, such core deposits totaled $12.0 billion and represented 77% of the Bank's total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long-standing relationships and stable funding sources. See "-Balance Sheet Analysis-Deposits" for additional information and detail of our core deposits.
Customer deposit balances may decrease if interest rates increase significantly or if corporate customers move funds from the Bank. In order to address the Bank’s liquidity risk as deposit balances may fluctuate, the Bank maintains adequate levels of available liquidity.
Our liquidity policy establishes various liquidity guidelines for the Bank. The policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Coverage and Crisis Coverage Ratios (measurements of liquid assets to expected short-term liquidity required for the loan and deposit portfolios under normal and stressed conditions), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus FHLB borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. As of September 30, 2016, all liquidity guidelines established in the liquidity policy were in compliance.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulatory limits, for liquidity management purposes. At September 30, 2016, brokered deposits totaled $1.5 billion, consisting of $404.5 million of brokered time deposits, $1.1 billion of non-maturity brokered sweep accounts, and $13.3 million of other brokered deposits. At December 31, 2015, brokered deposits totaled $1.2 billion, consisting of $272.5 million of brokered time deposits, $942.3 million of non-maturity brokered sweep accounts, and $15.3 million of other brokered deposits. The amount of our brokered deposits fluctuates based on market conditions and liquidity and funding needs. Brokered deposits are an effective source of funding due to the large amount of deposits that can be obtained in a short period of time.

66



Holding Company Liquidity
The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and our ability to raise capital, issue subordinated debt and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders and for other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances or cash dividends.
Dividends paid by California state-chartered banks are regulated by the California Department of Business Oversight (“DBO”) under its general supervisory authority as it relates to a bank’s capital requirements and the FDIC. A state bank may declare a dividend without the approval of the DBO and the FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. During the three and nine months ended September 30, 2016, PacWest received $65.0 million and $194.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $536.0 million at September 30, 2016, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At September 30, 2016, PacWest had $483.3 million in cash, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months, including any stock repurchases pursuant to the Company's recently announced stock repurchase program. See "-Recent Events-Stock Repurchase Program" for additional information. PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity.
Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
 
September 30, 2016
 
Due
 
Due in
 
Due in
 
Due
 
 
 
Within
 
One to
 
Three to
 
After
 
 
 
One Year
 
Three Years
 
Five Years
 
Five Years
 
Total
 
(In thousands)
Time deposits(1)
$
2,314,213

 
$
213,328

 
$
24,032

 
$
929

 
$
2,552,502

Short-term FHLB and American Financial
 
 
 
 
 
 
 
 
 
Exchange borrowings
540,000

 

 

 

 
540,000

Long-term debt obligations(1)
613

 
368

 
30

 
540,329

 
541,340

Contractual interest(2)
3,394

 
2,324

 
793

 
46

 
6,557

Operating lease obligations
29,136

 
52,179

 
39,915

 
41,074

 
162,304

Other contractual obligations
120,495

 
27,048

 
12,622

 
21,139

 
181,304

Total
$
3,007,851

 
$
295,247

 
$
77,392

 
$
603,517

 
$
3,984,007

_______________________________________ 
(1)
Excludes purchase accounting fair value adjustments.
(2)
Excludes interest on subordinated debentures as these instruments are variable rate.
Long-term debt obligations include subordinated debentures. Debt obligations are also discussed in Note 7. Borrowings and Subordinated Debentures, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).” Operating lease obligations are discussed in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. The other contractual obligations relate to our minimum liability associated with our data and item processing contract with a third-party provider, commitments to contribute capital to investments in low income housing project partnerships and private equity funds, commitments to purchase loans, and commitments under deferred compensation arrangements.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity, and continued deposit gathering activities. We believe we have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

67



Off-Balance Sheet Arrangements
Our obligations also include off-balance sheet arrangements consisting of loan and lease-related commitments, of which only a portion is expected to be funded. At September 30, 2016, our loan and lease-related commitments, including standby letters of credit, totaled $4.4 billion. The commitments, which may result in funded loans and leases, increase our profitability through net interest income when drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources have been and are expected to be sufficient to meet the cash requirements of our lending activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2015, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.
Market Risk - Foreign Currency Exchange
We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' transaction and economic exposures arising out of commercial transactions. We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar. We recognized foreign currency translation net gains of $0.7 million and $0.8 million for the nine months ended September 30, 2016 and 2015. In June 2015, we hedged our Euro-denominated subordinated debentures with a cross currency swap to reduce the related foreign currency translation volatility.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our interest rate risk position, or "IRR," on at least a quarterly basis using two methods: (i) net interest income simulation analysis; and (ii) market value of equity modeling. The Executive ALM Committee and the Board Asset Liability Management Committee review the results of these analyses quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of equity and/or net interest income outside our pre‑established limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.
We evaluated the results of our net interest income simulation ("NII simulation model") and market value of equity models ("MVE model") prepared as of September 30, 2016, the results of which are presented below. Our NII simulation and MVE models indicate that our balance sheet is asset sensitive. An asset sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated net interest income and market value of equity, while a liability sensitive profile would suggest that these amounts would decrease.
Net Interest Income Simulation
We used a NII simulation model to measure the estimated changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of September 30, 2016. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth in either our total interest‑sensitive assets or liabilities over the next 12 months, therefore the results reflect an interest rate shock to a static balance sheet.
This analysis calculates the difference between net interest income forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at September 30, 2016. In order to arrive at the base case, we extend our balance sheet at September 30, 2016 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of September 30, 2016. Based on such repricing, we calculate an estimated net interest income and net interest margin.

68



The NII simulation model is dependent upon numerous assumptions. For example, the substantial majority of our loans are variable‑rate, which are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these prepayments and reinvest these proceeds at current simulated yields. Our deposit products reprice at our discretion and are assumed to reprice more slowly in a rising or declining interest rate environment and usually reprice at a rate less than the change in market rates. The effects of certain balance sheet attributes, such as fixed‑rate loans, variable‑rate loans that have reached their floors, and the volume of noninterest‑bearing deposits as a percentage of earning assets, impact our assumptions and consequently the results of our NII simulation model. Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on our net interest income.
The following table presents as of September 30, 2016, forecasted net interest income and net interest margin for the next 12 months using the forward yield curve as the base scenario and shocking the base scenario given immediate and sustained parallel upward and downward movements in interest rates of 100, 200 and 300 basis points:
 
 
 
 
 
 
 
 
 
Forecasted
 
 
 
 
 
Forecasted
September 30, 2016
Net Interest
 
Percentage
 
Forecasted
 
Net Interest
Interest Rate Scenario:
Income
 
Change
 
Net Interest
 
Margin Change
 
(Tax Equivalent)
 
From Base
 
Margin
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
Up 300 basis points
$
1,061.8

 
16.3%
 
5.75%
 
0.80%
Up 200 basis points
$
1,013.7

 
11.0%
 
5.49%
 
0.54%
Up 100 basis points
$
963.5

 
5.6%
 
5.22%
 
0.27%
BASE CASE
$
912.8

 
 
4.95%
 
Down 100 basis points
$
887.3

 
(2.8)%
 
4.82%
 
(0.13)%
Down 200 basis points
$
879.1

 
(3.7)%
 
4.77%
 
(0.18)%
Down 300 basis points
$
873.0

 
(4.4)%
 
4.74%
 
(0.21)%
Total base case year 1 tax equivalent NII was $912.8 million at September 30, 2016 compared to $932.2 million at June 30, 2016. The decrease in year 1 NII was due to a decrease in the yield on loans due to the payoff of higher coupon legacy loans that were replaced by new loan originations at lower coupons and an increase in the cost of deposits due to the higher forward yield curve, partially offset by higher loan income on floating rate loans due to the higher forward yield curve.
In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors that are viewed as more likely to occur in a typical monetary policy tightening cycle. One such scenario provides for market rates to increase during the next six months in accordance with the forward yield curve and thereafter to increase by 25 basis points every six months. The expected first year NII under this alternative rising rate scenario would be approximately 0.5% higher than the base case.
Of the $14.8 billion of total loans in the portfolio, $10.8 billion have variable interest rate terms (excluding hybrid loans discussed below) of which $6.7 billion would immediately reprice at September 30, 2016.
The following table presents variable-rate loans at their floors and the amounts for which the fully-indexed rates would rise off of the floors and reprice as a result of the rate increases shown:
September 30, 2016
Cumulative
 
Rate
Amount of
 
Increase
Variable-Rate
 
Needed to
Loans
 
Reprice
(Dollars in millions)
 
 
$
3,648

 
  0 - 100 bps
$
3,841

 
101 - 200 bps
$
3,950

 
201 - 300 bps
$
4,061

 
> 300 bps

69



Additionally, certain variable-rate hybrid loans do not immediately reprice because the loans contain an initial fixed-rate period before they become variable. The cumulative amounts of hybrid loans that would switch from being fixed-rate to variable-rate because the initial fixed-rate term would expire were approximately $82 million, $273 million, and $405 million in the next one, two, and three years. Approximately 66% of the total variable-rate loans have a LIBOR index rate.
Market Value of Equity
We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities and off‑balance sheet items, defined as the market value of equity, using our MVE model. This simulation model assesses the changes in the market value of our interest‑sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100, 200, and 300 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows and interest rates and are by their nature forward‑looking and inherently uncertain.
The MVE model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions. The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities and off‑balance sheet items existing at September 30, 2016.
The following table shows the projected change in the market value of equity for the set of rate scenarios presented as of September 30, 2016:
 
 
 
 
 
 
 
 
 
Ratio of
 
Projected
 
Dollar
 
Percentage
 
Percentage
 
Projected
September 30, 2016
Market Value
 
Change
 
Change
 
of Total
 
Market Value
Interest Rate Scenario:
of Equity
 
From Base
 
From Base
 
Assets
 
to Book Value
 
(Dollars in millions)
 
 
 
 
 
 
Up 300 basis points
$
5,622

 
$
127

 
2.3
 %
 
26.4
%
 
123.8
%
Up 200 basis points
$
5,590

 
$
95

 
1.7
 %
 
26.2
%
 
123.1
%
Up 100 basis points
$
5,550

 
$
55

 
1.0
 %
 
26.0
%
 
122.2
%
BASE CASE
$
5,495

 
$

 
 %
 
25.8
%
 
121.0
%
Down 100 basis points
$
5,462

 
$
(33
)
 
(0.6
)%
 
25.6
%
 
120.2
%
Down 200 basis points
$
5,289

 
$
(207
)
 
(3.8
)%
 
24.8
%
 
116.4
%
Down 300 basis points
$
5,181

 
$
(314
)
 
(5.7
)%
 
24.3
%
 
114.1
%
In comparing the September 30, 2016 simulation results to June 30, 2016, our base case market value of equity has increased $225 million while our overall profile has remained relatively unchanged. The increase in base case market value of equity was due primarily to a $144 million increase in the fair value of loans and leases due to lower discount rates used for the valuation, a $50 million increase in the fair value of non-maturity deposits due to increased volume and higher market discount rates, and the $31 million net increase in stockholders' equity during the quarter.

70



ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 8. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements (Unaudited) is incorporated herein by reference.
In addition, in the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon information currently available to us, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.
ITEM 1A. RISK FACTORS
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2015. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this quarterly report on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents stock purchases made during the third quarter of 2016:
 
Total
 
 
 
Number of
 
Average
 
Shares
 
Price Paid
Purchase Dates
Purchased(1)
 
Per Share
July 1, 2016 - July 31, 2016

 
$

August 1, 2016 - August 31, 2016
4,704

 
41.50

September 1, 2016 - September 30, 2016

 

Total
4,704

 
$
41.50

__________________________
(1)
Shares repurchased pursuant to net settlement by employees and directors, in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards.

71



ITEM 6. INDEX TO EXHIBITS
Exhibit Number
Description
2.3
Agreement and Plan of Merger dated March 1, 2015 between PacWest Bancorp and Square 1 Financial, Inc. (Exhibit 2.1 to Form 8-K filed on March 5, 2015 and incorporated herein by this reference).
3.1
Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).
3.2
Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware Corporation, dated May 14, 2010 (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated herein by this reference).
3.5
Amended and Restated Bylaws of PacWest Bancorp, a Delaware corporation, dated November 5, 2014 (Exhibit 3.5 to Form 10-Q filed on November 7, 2014 and incorporated herein by this reference).
10.1
PacWest Bancorp 2003 Stock Incentive Plan, as amended and restated, dated May 16, 2016 (Exhibit 10.1 to Form 8-K filed on May 18, 2016 and incorporated herein by this reference).
10.2
Form of Stock Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended. *
10.3
Form of Stock Unit Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended. *
31.1
Section 302 Certification of Chief Executive Officer. *
31.2
Section 302 Certification of Chief Financial Officer. *
32.1
Section 906 Certification of Chief Executive Officer. *
32.2
Section 906 Certification of Chief Financial Officer. *
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, (ii) the Condensed Consolidated Statements of Earnings for the three months ended September 30, 2016, June 30, 2016, and September 30, 2015 and nine months ended September 30, 2016 and 2015, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2016, June 30, 2016, and September 30, 2015 and nine months ended September 30, 2016 and 2015, (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2016, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015, and (vi) the Notes to Condensed Consolidated Financial Statements. *
_____________________
* Filed herewith.


72



Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
PACWEST BANCORP
 
 
November 4, 2016
/s/ Patrick J. Rusnak
 
Patrick J. Rusnak
 
Executive Vice President and Chief Financial Officer

73