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PACWEST BANCORP - Quarter Report: 2017 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, 2017
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
 
 
 
 
 
o Emerging growth company
 
 
 
o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of October 27, 2017, there were 128,935,736 shares of the registrant's common stock outstanding, excluding 1,364,336 shares of unvested restricted stock.


1



PACWEST BANCORP
SEPTEMBER 30, 2017 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
Condensed Consolidated Statements of Earnings (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statement Changes in Stockholders' Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Index to Exhibits
Signatures


2


PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
AFX
American Financial Exchange
 
FHLB
Federal Home Loan Bank of San Francisco
ALM
Asset Liability Management
 
FRB
Board of Governors of the Federal Reserve System
ASC
Accounting Standards Codification
 
FRBSF
Federal Reserve Bank of San Francisco
ASU
Accounting Standards Update
 
IRR
Interest Rate Risk
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013.
 
MBS
Mortgage-Backed Securities
BHCA
Bank Holding Company Act of 1956, as amended
 
MVE
Market Value of Equity
BOLI
Bank Owned Life Insurance
 
NII
Net Interest Income
CapitalSource Inc.
A company acquired on April 7, 2014
 
NIM
Net Interest Margin
CapitalSource Division
A division of Pacific Western Bank, formed at the closing of the CapitalSource Inc. merger
 
Non-PCI
Non-Purchased Credit Impaired
C&I
Commercial and Industrial
 
OREO
Other Real Estate Owned
CDI
Core Deposit Intangible Assets
 
PWEF
Pacific Western Equipment Finance, a leasing unit sold March 31, 2016
CET1
Common Equity Tier 1
 
PCI
Purchased Credit Impaired
CMOs
Collateralized Mortgage Obligations
 
PRSUs
Performance-Based Restricted Stock Units
CRI
Customer Relationship Intangible Assets
 
S1AM
Square 1 Asset Management, Inc.
CUB
CU Bancorp (a company acquired on October 20, 2017)
 
SBA
Small Business Administration
CU Bank
California United Bank (a wholly-owned subsidiary of CUB)
 
SEC
Securities and Exchange Commission
DBO
California Department of Business Oversight
 
Square 1
Square 1 Financial, Inc. (a company acquired on October 6, 2015)
DTAs
Deferred Tax Assets
 
Square 1 Bank Division
A division of Pacific Western Bank formed at the closing of the Square 1 acquisition
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
Tax Equivalent Net Interest Income
Net interest income adjusted for tax-equivalent adjustments related to tax-exempt interest on certain loans and municipal securities
Efficiency Ratio
Noninterest expense (less intangible asset amortization, net foreclosed assets income/expense, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)
 
Tax Equivalent NIM
NIM adjusted for tax-equivalent adjustments related to tax-exempt income on municipal securities
FASB
Financial Accounting Standards Board
 
TDRs
Troubled Debt Restructurings
FCAL
First California Financial Group, Inc. (a company acquired on May 31, 2013)
 
TRSAs
Time-Based Restricted Stock Awards
FDIC
Federal Deposit Insurance Corporation
 
U.S. GAAP
U.S. Generally Accepted Accounting Principles


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
147,579

 
$
337,965

Interest-earning deposits in financial institutions
122,439

 
81,705

Total cash and cash equivalents
270,018

 
419,670

Securities available-for-sale, at fair value
3,532,230

 
3,223,830

Federal Home Loan Bank stock, at cost
17,250

 
21,870

Total investment securities
3,549,480

 
3,245,700

Gross loans and leases held for investment
15,756,285

 
15,520,537

Deferred fees, net
(65,768
)
 
(64,583
)
Allowance for loan and lease losses
(159,606
)
 
(157,238
)
Total loans and leases held for investment, net
15,530,911

 
15,298,716

Equipment leased to others under operating leases
233,866

 
229,905

Premises and equipment, net
28,910

 
38,594

Foreclosed assets, net
11,630

 
12,976

Deferred tax asset, net
65,321

 
94,112

Goodwill
2,173,949

 
2,173,949

Core deposit and customer relationship intangibles, net
27,188

 
36,366

Other assets
351,659

 
319,779

Total assets
$
22,242,932

 
$
21,869,767

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
6,911,874

 
$
6,659,016

Interest-bearing deposits
9,861,371

 
9,211,595

Total deposits
16,773,245

 
15,870,611

Borrowings
250,399

 
905,812

Subordinated debentures
448,126

 
440,744

Accrued interest payable and other liabilities
160,494

 
173,545

Total liabilities
17,632,264

 
17,390,712

 
 
 
 
Commitments and contingencies (Note 7)


 


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

 

Common stock ($0.01 par value, 200,000,000 shares authorized at September 30, 2017 and
 
 
 
December 31, 2016, 123,122,892 and 122,803,029 shares issued, respectively, including
 
 
 
1,393,874 and 1,476,132 shares of unvested restricted stock, respectively)
1,231

 
1,228

Additional paid-in capital
4,000,543

 
4,162,132

Retained earnings
639,434

 
366,073

Treasury stock, at cost (1,673,098 and 1,519,360 shares at September 30, 2017 and December 31, 2016)
(64,153
)
 
(56,360
)
Accumulated other comprehensive income, net
33,613

 
5,982

Total stockholders' equity
4,610,668

 
4,479,055

Total liabilities and stockholders' equity
$
22,242,932

 
$
21,869,767

See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
235,666

 
$
234,618

 
$
225,370

 
$
694,462

 
$
686,071

Investment securities
24,762

 
24,689

 
22,187

 
72,490

 
67,154

Deposits in financial institutions
538

 
237

 
298

 
967

 
914

Total interest income
260,966

 
259,544

 
247,855

 
767,919

 
754,139

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
13,071

 
10,205

 
7,247

 
31,653

 
24,143

Borrowings
188

 
1,066

 
695

 
2,272

 
1,628

Subordinated debentures
6,017

 
5,800

 
5,278

 
17,379

 
15,382

Total interest expense
19,276

 
17,071

 
13,220

 
51,304

 
41,153

Net interest income
241,690

 
242,473

 
234,635

 
716,615

 
712,986

Provision for credit losses
15,119

 
11,499

 
8,471

 
51,346

 
42,514

Net interest income after provision for credit losses
226,571

 
230,974

 
226,164

 
665,269

 
670,472

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,465

 
3,510

 
3,488

 
10,733

 
10,977

Other commissions and fees
9,944

 
10,583

 
12,528

 
30,917

 
35,090

Leased equipment income
8,332

 
11,635

 
8,538

 
29,442

 
25,305

Gain on sale of loans and leases
2,848

 
649

 
157

 
4,209

 
790

Gain on sale of securities
1,236

 
1,651

 
382

 
2,788

 
8,970

FDIC loss sharing expense, net

 

 

 

 
(8,917
)
Other income
5,557

 
7,254

 
1,827

 
23,689

 
11,365

Total noninterest income
31,382

 
35,282

 
26,920

 
101,778

 
83,580

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
64,413

 
65,288

 
62,661

 
194,581

 
185,900

Occupancy
12,729

 
11,811

 
12,010

 
36,148

 
36,835

Data processing
6,459

 
6,337

 
6,234

 
19,811

 
17,782

Other professional services
4,213

 
3,976

 
4,625

 
11,567

 
11,598

Insurance and assessments
4,702

 
4,856

 
4,324

 
14,349

 
14,240

Intangible asset amortization
3,049

 
3,065

 
4,224

 
9,178

 
13,341

Leased equipment depreciation
4,862

 
5,232

 
5,298

 
15,719

 
15,608

Foreclosed assets expense (income), net
2,191

 
(157
)
 
(248
)
 
2,177

 
(812
)
Acquisition, integration and reorganization costs
1,450

 
1,700

 

 
3,650

 
200

Loan expense
3,421

 
3,884

 
1,931

 
10,692

 
6,231

Other expense
11,053

 
11,715

 
9,651

 
34,921

 
30,556

Total noninterest expense
118,542

 
117,707

 
110,710

 
352,793

 
331,479

Earnings before income taxes
139,411

 
148,549

 
142,374

 
414,254

 
422,573

Income tax expense
(37,945
)
 
(54,902
)
 
(48,479
)
 
(140,473
)
 
(156,054
)
Net earnings
$
101,466

 
$
93,647

 
$
93,895

 
$
273,781

 
$
266,519

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

Diluted
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50

 
$
1.50

 
$
1.50


See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Net earnings
$
101,466

 
$
93,647

 
$
93,895

 
$
273,781

 
$
266,519

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Unrealized net holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale arising during the period
7,812

 
30,340

 
(15,954
)
 
49,336

 
83,653

Income tax (expense) benefit related to net unrealized
 
 
 
 
 
 
 
 
 
holding gains arising during the period
(3,198
)
 
(12,350
)
 
6,509

 
(20,055
)
 
(34,111
)
Unrealized net holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
4,614

 
17,990

 
(9,445
)
 
29,281

 
49,542

Reclassification adjustment for net gains
 
 
 
 
 
 
 
 
 
included in net earnings (1)
(1,236
)
 
(1,651
)
 
(382
)
 
(2,788
)
 
(8,970
)
Income tax expense related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
506

 
672

 
156

 
1,138

 
3,673

Reclassification adjustment for net gains
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(730
)
 
(979
)
 
(226
)
 
(1,650
)
 
(5,297
)
Other comprehensive income (loss), net of tax
3,884

 
17,011

 
(9,671
)
 
27,631

 
44,245

Comprehensive income
$
105,350

 
$
110,658

 
$
84,224

 
$
301,412

 
$
310,764

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

See Notes to Condensed Consolidated Financial Statements.


6



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

 
Nine Months Ended September 30, 2017
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income
 
Total
 
(Unaudited)
 
(Dollars in thousands)
Balance, December 31, 2016
121,283,669

 
$
1,228

 
$
4,162,132

 
$
366,073

 
$
(56,360
)
 
$
5,982

 
$
4,479,055

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 
711

 
(420
)
 

 

 
291

Net earnings

 

 

 
273,781

 

 

 
273,781

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

 

 

 

 

 
27,631

 
27,631

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
319,863

 
3

 
20,195

 

 

 

 
20,198

Restricted stock surrendered
(153,738
)
 

 

 

 
(7,793
)
 

 
(7,793
)
Cash dividends paid

 

 
(182,495
)
 

 

 

 
(182,495
)
Balance, September 30, 2017
121,449,794

 
$
1,231

 
$
4,000,543

 
$
639,434

 
$
(64,153
)
 
$
33,613

 
$
4,610,668

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




See Notes to Condensed Consolidated Financial Statements.



7



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
273,781

 
$
266,519

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,798

 
24,761

Amortization of net premiums on securities available-for-sale
30,238

 
28,012

Amortization of intangible assets
9,178

 
13,341

Provision for credit losses
51,346

 
42,514

Gain on sale of foreclosed assets
(282
)
 
(837
)
Provision for losses on foreclosed assets
2,138

 

Gain on sale of loans and leases
(4,209
)
 
(790
)
Gain on sale of premises and equipment
(388
)
 
(23
)
Gain on sale of securities
(2,788
)
 
(8,970
)
Gain on BOLI death benefit
(1,050
)
 
(539
)
Unrealized gain on derivatives and foreign currencies, net
(449
)
 
(374
)
Earned stock compensation
20,198

 
17,275

Loss on sale of PWEF leasing unit

 
720

Tax effect included in stockholders' equity of restricted stock vesting

 
(4,226
)
Decrease in accrued and deferred income taxes, net
10,164

 
74,946

(Increase) decrease in other assets
(32,765
)
 
1,224

Decrease in accrued interest payable and other liabilities
(20,738
)
 
(23,600
)
Net cash provided by operating activities
358,172

 
429,953

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(567,291
)
 
(514,224
)
Proceeds from sales of loans and leases
293,808

 
106,109

Proceeds from maturities and paydowns of securities available-for-sale
329,876

 
184,644

Proceeds from sales of securities available-for-sale
185,533

 
392,841

Purchases of securities available-for-sale
(804,710
)
 
(303,742
)
Net redemptions of Federal Home Loan Bank stock
4,620

 
324

Proceeds from sales of foreclosed assets
1,455

 
7,973

Purchases of premises and equipment, net
(5,892
)
 
(6,185
)
Proceeds from sales of premises and equipment
10,306

 
24

Proceeds from sale of PWEF leasing unit

 
138,955

Proceeds from BOLI death benefit
2,478

 
3,238

Net increase of equipment leased to others under operating leases
(17,956
)
 
(15,802
)
Net cash used in investing activities
(567,773
)
 
(5,845
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposits
255,874

 
352,784

Net increase (decrease) in interest-bearing deposits
649,776

 
(371,005
)
Net decrease in borrowings
(655,413
)
 
(78,873
)
Restricted stock surrendered
(7,793
)
 
(4,611
)
Tax effect included in stockholders' equity of restricted stock vesting

 
4,226

Cash dividends paid
(182,495
)
 
(182,750
)
Net cash provided by (used in) financing activities
59,949

 
(280,229
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(149,652
)
 
143,879

Cash and cash equivalents, beginning of period
419,670

 
396,486

Cash and cash equivalents, end of period
$
270,018

 
$
540,365



See Notes to Condensed Consolidated Financial Statements.


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2017
 
2016
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
48,402

 
$
41,392

Cash paid for income taxes
146,321

 
82,721

Loans transferred to foreclosed assets
580

 
129

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

 

  

See Notes to Condensed Consolidated Financial Statements.


9



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


NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. At September 30, 2017, the Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. We provide commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and middle-market businesses. We offer additional products and services through our CapitalSource and Square 1 Bank divisions. Our CapitalSource Division provides cash flow, asset-based, equipment, and real estate loans and treasury management services to established middle market businesses on a national basis. Our Square 1 Bank Division offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.
We have completed 28 acquisitions from May 1, 2000 through September 30, 2017. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 12. Subsequent Events, for information regarding the completion of the CU Bancorp acquisition on October 20, 2017.
Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission ("Form 10-K").
Accounting Standards Adopted in 2017
Effective January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Accounting." ASU 2016-09 changed aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The recognition of excess tax benefits and tax deficiencies in the income statement was adopted prospectively. Income tax benefits of $0.03 million and $1.5 million were recognized during the three and nine months ended September 30, 2017 as a result of the adoption of ASU 2016-09. We expect the requirements of ASU 2016-09 to result in fluctuations in our effective tax rate from period to period based upon the timing of share-based award vestings.
In connection with the adoption of ASU 2016-09, we elected to recognize forfeitures on stock-based compensation awards when they occur, instead of estimating forfeitures at the grant date of the awards and throughout the vesting period. The modified retrospective application of this change in accounting principle resulted in a cumulative adjustment charge to retained earnings of $420,000, net of income taxes. We elected to present the classification of excess tax benefits on the statement of cash flows using a prospective transition method and the prior period has not been adjusted.



10



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


Effective July 1, 2017, the Company early-adopted ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 210-20): Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for discounts on callable debt securities was not impacted. The adoption of this ASU had no material impact on the Company's consolidated financial position, results of operations, or cash flows.
Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. On the condensed consolidated statements of earnings, beginning with our June 30, 2017 results, we began presenting a new line for "Loan expense" as that category exceeded the disclosure materiality threshold, which previously had been included as part of "Other expense." Included in loan expense are costs related to servicing our loans including legal fees. Prior to 2017, time deposit disclosures were presented as: (1) under $100,000, and (2) $100,000 or more. We are now using the current FDIC insurance limit of $250,000 and presenting the categories as: (1) $250,000 and under, and (2) over $250,000.
NOTE 2.  GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings.
Our other intangible assets with definite lives include CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of September 30, 2017 is 4.7 years and the aggregate amortization expense is expected to be $11.5 million for 2017. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, $3.0 million for 2021, and $1.7 million for 2022.

11



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


The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
64,187

 
$
64,187

 
$
76,513

 
$
64,187

 
$
95,524

Fully amortized portion
(2,190
)
 

 
(2,811
)
 
(2,190
)
 
(20,122
)
Reduction due to sale of PWEF leasing unit

 

 

 

 
(1,700
)
Balance, end of period
61,997

 
64,187

 
73,702

 
61,997

 
73,702

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(33,950
)
 
(30,885
)
 
(32,747
)
 
(27,821
)
 
(42,304
)
Amortization
(3,049
)
 
(3,065
)
 
(4,224
)
 
(9,178
)
 
(13,341
)
Fully amortized portion
2,190

 

 
2,811

 
2,190

 
20,122

Reduction due to sale of PWEF leasing unit

 

 

 

 
1,363

Balance, end of period
(34,809
)
 
(33,950
)
 
(34,160
)
 
(34,809
)
 
(34,160
)
Net CDI and CRI, end of period
$
27,188

 
$
30,237

 
$
39,542

 
$
27,188

 
$
39,542

NOTE 3. INVESTMENT SECURITIES     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
375,357

 
$
4,569

 
$
(2,385
)
 
$
377,541

 
$
499,185

 
$
6,222

 
$
(2,964
)
 
$
502,443

Agency CMOs
175,429

 
1,655

 
(1,134
)
 
175,950

 
145,258

 
1,528

 
(497
)
 
146,289

Private label CMOs
131,149

 
4,001

 
(600
)
 
134,550

 
122,707

 
4,199

 
(1,437
)
 
125,469

Municipal securities
1,501,196

 
49,362

 
(1,408
)
 
1,549,150

 
1,447,064

 
15,406

 
(6,011
)
 
1,456,459

Agency commercial MBS
996,963

 
5,764

 
(6,813
)
 
995,914

 
555,552

 
1,798

 
(9,658
)
 
547,692

Corporate debt securities
17,000

 
2,125

 

 
19,125

 
47,100

 
680

 
(271
)
 
47,509

Collateralized loan obligations
19,119

 
66

 
(9
)
 
19,176

 
155,440

 
1,685

 
(238
)
 
156,887

SBA securities
166,949

 
1,363

 
(284
)
 
168,028

 
179,085

 
510

 
(750
)
 
178,845

Asset-backed and other securities
92,345

 
804

 
(353
)
 
92,796

 
62,264

 
358

 
(385
)
 
62,237

Total
$
3,475,507

 
$
69,709

 
$
(12,986
)
 
$
3,532,230

 
$
3,213,655

 
$
32,386

 
$
(22,211
)
 
$
3,223,830

As of September 30, 2017, securities available-for-sale with a fair value of $339.8 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, 2017, we sold $98.3 million of securities available-for-sale for a gross realized gain of $1.3 million and a gross realized loss of $0.1 million. 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.

12



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


During the nine months ended September 30, 2017, we sold $182.7 million of securities available-for-sale for a gross realized gain of $3.3 million and a gross realized loss of $0.5 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 $10.6 million and a gross realized loss of $1.6 million.
Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
September 30, 2017
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
52,840

 
$
(271
)
 
$
127,695

 
$
(2,114
)
 
$
180,535

 
$
(2,385
)
Agency CMOs
55,606

 
(891
)
 
18,436

 
(243
)
 
74,042

 
(1,134
)
Private label CMOs
45,494

 
(386
)
 
18,080

 
(214
)
 
63,574

 
(600
)
Municipal securities
78,784

 
(329
)
 
29,203

 
(1,079
)
 
107,987

 
(1,408
)
Agency commercial MBS
338,883

 
(2,920
)
 
106,766

 
(3,893
)
 
445,649

 
(6,813
)
Collateralized loan obligations
7,162

 
(9
)
 

 

 
7,162

 
(9
)
SBA securities
42,963

 
(284
)
 

 

 
42,963

 
(284
)
Asset-backed and other securities
39,723

 
(295
)
 
8,162

 
(58
)
 
47,885

 
(353
)
Total
$
661,455

 
$
(5,385
)
 
$
308,342

 
$
(7,601
)
 
$
969,797

 
$
(12,986
)

 
December 31, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
149,281

 
$
(1,691
)
 
$
122,902

 
$
(1,273
)
 
$
272,183

 
$
(2,964
)
Agency CMOs
44,111

 
(416
)
 
25,316

 
(81
)
 
69,427

 
(497
)
Private label CMOs
49,067

 
(906
)
 
30,155

 
(531
)
 
79,222

 
(1,437
)
Municipal securities
644,424

 
(6,011
)
 

 

 
644,424

 
(6,011
)
Agency commercial MBS
349,550

 
(9,658
)
 

 

 
349,550

 
(9,658
)
Corporate debt securities
29,829

 
(271
)
 

 

 
29,829

 
(271
)
Collateralized loan obligations
12,450

 
(37
)
 
39,231

 
(201
)
 
51,681

 
(238
)
SBA securities
69,293

 
(407
)
 
39,024

 
(343
)
 
108,317

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

 
(309
)
 
7,851

 
(76
)
 
26,064

 
(385
)
Total
$
1,366,218

 
$
(19,706
)
 
$
264,479

 
$
(2,505
)
 
$
1,630,697

 
$
(22,211
)

13



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


We reviewed the securities that were in an unrealized loss position at September 30, 2017, and concluded their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
September 30, 2017
 
Amortized
 
Fair
Maturity
Cost
 
Value
 
(In thousands)
Due in one year or less
$
17,879

 
$
18,352

Due after one year through five years
326,552

 
331,164

Due after five years through ten years
962,429

 
969,431

Due after ten years
2,168,647

 
2,213,283

Total securities available-for-sale
$
3,475,507

 
$
3,532,230

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,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Taxable interest
$
13,576

 
$
13,515

 
$
11,446

 
$
39,257

 
$
34,248

Non-taxable interest
10,795

 
10,750

 
10,333

 
31,926

 
31,562

Dividend income
391

 
424

 
408

 
1,307

 
1,344

Total interest income on investment securities
$
24,762

 
$
24,689

 
$
22,187

 
$
72,490

 
$
67,154


14



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


NOTE 4.  LOANS AND LEASES
Our loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that we would be able to collect all contractually required payments, are referred to collectively as Non-PCI loans. Generally, PCI loans are purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was probable that collection of all contractually required payments was unlikely.
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality." For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
Loans Held for Sale
In the second quarter of 2017, we entered into two agreements to sell loans with balances totaling $175.2 million and the associated unfunded commitments of $19.3 million, primarily from our healthcare portfolios. The $175.2 million of loans were reported as loans held for sale at June 30, 2017 and the sales were completed in July. In connection with the transfer of loans to held for sale, we recognized $7.2 million in charge-offs during the second quarter related to our healthcare portfolio loans in order to record the loans at the lower of cost or fair value. There were no loans held for sale at September 30, 2017.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
6,146,978

 
$
58,077

 
$
6,205,055

 
$
5,635,675

 
$
92,793

 
$
5,728,468

Real estate construction and land
1,266,791

 

 
1,266,791

 
975,032

 
2,409

 
977,441

Commercial
7,894,115

 
4,194

 
7,898,309

 
8,426,236

 
12,994

 
8,439,230

Consumer
385,892

 
238

 
386,130

 
375,149

 
249

 
375,398

Total gross loans and leases held for
 
 
 
 
 
 
 
 
 
 
 
investment
15,693,776

 
62,509

 
15,756,285

 
15,412,092

 
108,445

 
15,520,537

Deferred fees, net
(65,753
)
 
(15
)
 
(65,768
)
 
(64,562
)
 
(21
)
 
(64,583
)
Total loans and leases held for investment,
 
 
 
 
 
 
 
 
 
 
 
net of deferred fees
15,628,023

 
62,494

 
15,690,517

 
15,347,530

 
108,424

 
15,455,954

Allowance for loan and lease losses
(152,770
)
 
(6,836
)
 
(159,606
)
 
(143,755
)
 
(13,483
)
 
(157,238
)
Total loans and leases held for
 
 
 
 
 
 
 
 
 
 
 
investment, net
$
15,475,253

 
$
55,658

 
$
15,530,911

 
$
15,203,775

 
$
94,941

 
$
15,298,716


15



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


Non‑PCI Loans and Leases Held for Investment
The following tables present an aging analysis of our Non‑PCI loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated:
 
September 30, 2017
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
1,685

 
$
3,664

 
$
5,349

 
$
4,306,899

 
$
4,312,248

Residential
282

 
1,740

 
2,022

 
1,816,926

 
1,818,948

Total real estate mortgage
1,967

 
5,404

 
7,371

 
6,123,825

 
6,131,196

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
680,949

 
680,949

Residential

 

 

 
568,273

 
568,273

Total real estate construction and land

 

 

 
1,249,222

 
1,249,222

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
140

 
1,484

 
1,624

 
2,728,771

 
2,730,395

Asset-based

 

 

 
2,577,390

 
2,577,390

Venture capital
3,142

 
948

 
4,090

 
1,955,345

 
1,959,435

Equipment finance

 
690

 
690

 
593,782

 
594,472

Total commercial
3,282

 
3,122

 
6,404

 
7,855,288

 
7,861,692

Consumer
286

 
272

 
558

 
385,355

 
385,913

Total
$
5,535

 
$
8,798

 
$
14,333

 
$
15,613,690

 
$
15,628,023


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

 
$
3,303

 
$
11,893

 
$
4,341,740

 
$
4,353,633

Residential
5,694

 
1,999

 
7,693

 
1,256,630

 
1,264,323

Total real estate mortgage
14,284

 
5,302

 
19,586

 
5,598,370

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
578,838

 
578,838

Residential
364

 

 
364

 
383,637

 
384,001

Total real estate construction and land
364

 

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
191

 
1,821

 
2,012

 
3,105,380

 
3,107,392

Asset-based
1,500

 
2

 
1,502

 
2,607,543

 
2,609,045

Venture capital
13,589

 
5,769

 
19,358

 
1,963,798

 
1,983,156

Equipment finance
1,417

 
3,051

 
4,468

 
687,499

 
691,967

Total commercial
16,697

 
10,643

 
27,340

 
8,364,220

 
8,391,560

Consumer
224

 

 
224

 
374,951

 
375,175

Total
$
31,569

 
$
15,945

 
$
47,514

 
$
15,300,016

 
$
15,347,530



16



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


It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more unless the loan is both well secured and in the process of collection or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing Non‑PCI loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated:  
 
September 30, 2017
 
December 31, 2016
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
63,096

 
$
4,249,152

 
$
4,312,248

 
$
62,454

 
$
4,291,179

 
$
4,353,633

Residential
3,186

 
1,815,762

 
1,818,948

 
6,881

 
1,257,442

 
1,264,323

Total real estate mortgage
66,282

 
6,064,914

 
6,131,196

 
69,335

 
5,548,621

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
680,949

 
680,949

 

 
578,838

 
578,838

Residential

 
568,273

 
568,273

 
364

 
383,637

 
384,001

Total real estate construction and land

 
1,249,222

 
1,249,222

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
33,514

 
2,696,881

 
2,730,395

 
53,908

 
3,053,484

 
3,107,392

Asset-based
3,977

 
2,573,413

 
2,577,390

 
2,118

 
2,606,927

 
2,609,045

Venture capital
22,686

 
1,936,749

 
1,959,435

 
11,687

 
1,971,469

 
1,983,156

Equipment finance
30,942

 
563,530

 
594,472

 
32,848

 
659,119

 
691,967

Total commercial
91,119

 
7,770,573

 
7,861,692

 
100,561

 
8,290,999

 
8,391,560

Consumer
296

 
385,617

 
385,913

 
339

 
374,836

 
375,175

Total
$
157,697

 
$
15,470,326

 
$
15,628,023

 
$
170,599

 
$
15,176,931

 
$
15,347,530

At September 30, 2017, nonaccrual loans and leases totaled $157.7 million and included $8.8 million of loans and leases 90 or more days past due, $0.7 million of loans and leases 30 to 89 days past due, and $148.2 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $170.6 million at December 31, 2016, including $15.9 million of the loans and leases 90 or more days past due, $3.0 million of loans and leases 30 to 89 days past due, and $151.7 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of September 30, 2017, our ten largest Non-PCI loan relationships on nonaccrual status had an aggregate carrying value of $129.1 million and represented 81.9% of total Non-PCI nonaccrual loans and leases. The largest of these relationships consisted of a $45.5 million healthcare real estate loan secured by a continuing care retirement facility that migrated to nonaccrual status during the third quarter of 2016 due to weak operating performance and cash flow difficulties.

17



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


The following table presents the credit risk rating categories for Non‑PCI loans and leases held for investment, net of deferred fees, 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, 2017
 
December 31, 2016
 
Classified
 
Nonclassified
 
Total
 
Classified
 
Nonclassified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
95,272

 
$
4,216,976

 
$
4,312,248

 
$
99,641

 
$
4,253,992

 
$
4,353,633

Residential
7,652

 
1,811,296

 
1,818,948

 
17,540

 
1,246,783

 
1,264,323

Total real estate mortgage
102,924

 
6,028,272

 
6,131,196

 
117,181

 
5,500,775

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
680,949

 
680,949

 
409

 
578,429

 
578,838

Residential

 
568,273

 
568,273

 
364

 
383,637

 
384,001

Total real estate construction and land

 
1,249,222

 
1,249,222

 
773

 
962,066

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
128,207

 
2,602,188

 
2,730,395

 
177,661

 
2,929,731

 
3,107,392

Asset-based
19,645

 
2,557,745

 
2,577,390

 
28,112

 
2,580,933

 
2,609,045

Venture capital
62,602

 
1,896,833

 
1,959,435

 
52,646

 
1,930,510

 
1,983,156

Equipment finance
30,942

 
563,530

 
594,472

 
32,848

 
659,119

 
691,967

Total commercial
241,396

 
7,620,296

 
7,861,692

 
291,267

 
8,100,293

 
8,391,560

Consumer
457

 
385,456

 
385,913

 
424

 
374,751

 
375,175

Total
$
344,777

 
$
15,283,246

 
$
15,628,023

 
$
409,645

 
$
14,937,885

 
$
15,347,530

In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
Non‑PCI nonaccrual loans and leases and performing troubled debt restructured loans are considered impaired for reporting purposes. Troubled debt restructurings are a result of rate reductions, term extensions, fee concessions, and debt forgiveness, or a combination thereof.
The following table presents the composition of our impaired loans and leases held for investment, net of deferred fees, by portfolio segment as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
 
 
Performing
 
Total
 
 
 
Performing
 
Total
 
Nonaccrual
 
Troubled
 
Impaired
 
Nonaccrual
 
Troubled
 
Impaired
 
Loans
 
Debt
 
Loans
 
Loans
 
Debt
 
Loans
 
and
 
Restructured
 
and
 
and
 
Restructured
 
and
 
Leases
 
Loans
 
Leases
 
Leases
 
Loans
 
Leases
 
(In thousands)
Real estate mortgage
$
66,282

 
$
47,473

 
$
113,755

 
$
69,335

 
$
54,750

 
$
124,085

Real estate construction and land

 
5,764

 
5,764

 
364

 
6,893

 
7,257

Commercial
91,119

 
3,209

 
94,328

 
100,561

 
3,157

 
103,718

Consumer
296

 
106

 
402

 
339

 
152

 
491

Total
$
157,697

 
$
56,552

 
$
214,249

 
$
170,599

 
$
64,952

 
$
235,551



18



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


The following tables present information regarding our Non‑PCI impaired loans and leases held for investment, net of deferred fees, by portfolio segment and class as of and for the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
Impaired Loans and Leases
Investment
 
Balance
 
Allowance
 
Investment
 
Balance
 
Allowance
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
14,716

 
$
15,536

 
$
682

 
$
63,325

 
$
65,031

 
$
6,266

Residential
3,074

 
3,269

 
471

 
8,424

 
8,612

 
585

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 
213

 
213

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
31,114

 
40,068

 
8,720

 
51,272

 
52,910

 
12,474

Asset-based
2,499

 
2,514

 
422

 
4,395

 
4,861

 
2,144

Venture capital
20,039

 
22,377

 
5,870

 
5,821

 
5,880

 
3,294

Equipment finance

 

 

 
1,524

 
4,636

 

Consumer
106

 
105

 
17

 
270

 
280

 
170

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
92,295

 
$
103,306

 
 
 
$
44,557

 
$
51,402

 
 
Residential
3,670

 
3,906

 
 
 
7,779

 
8,940

 
 
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,764

 
5,762

 
 
 
6,680

 
6,680

 
 
Residential

 

 
 
 
364

 
366

 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
2,559

 
4,690

 
 
 
2,852

 
5,939

 
 
Asset-based
4,528

 
6,479

 
 
 
664

 
1,652

 
 
Venture capital
2,647

 
6,741

 
 
 
5,866

 
8,939

 
 
Equipment finance
30,942

 
49,742

 
 
 
31,324

 
53,319

 
 
Consumer
296

 
368

 
 
 
221

 
292

 
 
Total Non-PCI Loans and Leases With
 
 
 
 
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
113,755

 
$
126,017

 
$
1,153

 
$
124,085

 
$
133,985

 
$
6,851

Real estate construction and land
5,764

 
5,762

 

 
7,257

 
7,259

 

Commercial
94,328

 
132,611

 
15,012

 
103,718

 
138,136

 
17,912

Consumer
402

 
473

 
17

 
491

 
572

 
170

Total
$
214,249

 
$
264,863

 
$
16,182

 
$
235,551

 
$
279,952

 
$
24,933








19



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


 
Three Months Ended September 30,
 
2017
 
2016
 
Weighted
 
Interest
 
Weighted
 
Interest
 
Average
 
Income
 
Average
 
Income
Impaired Loans and Leases
Balance(1)
 
Recognized
 
Balance(1)
 
Recognized
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
14,716

 
$
214

 
$
18,580

 
$
262

Residential
3,074

 
14

 
2,505

 
15

Real estate construction and land:
 
 
 
 
 
 
 
Residential

 

 
736

 
4

Commercial:
 
 
 
 
 
 
 
Cash flow
31,114

 
2

 
25,933

 
9

Asset-based
2,372

 
29

 
2,730

 
5

Venture capital
18,298

 

 
6,878

 

Equipment finance

 

 
42,913

 

Consumer
106

 
2

 
346

 
3

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
92,183

 
$
635

 
$
59,090

 
$
518

Residential
3,670

 
15

 
9,573

 
70

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,764

 
74

 
7,870

 
57

Commercial:
 
 
 
 
 
 
 
Cash flow
2,338

 
11

 
2,330

 
1

Asset-based
1,501

 
29

 
2,535

 
37

Venture capital
2,647

 

 

 

Equipment finance
30,942

 

 

 

Consumer
296

 

 
76

 

Total Non-PCI Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
113,643

 
$
878

 
$
89,748

 
$
865

Real estate construction and land
5,764

 
74

 
8,606

 
61

Commercial
89,212

 
71

 
83,319

 
52

Consumer
402

 
2

 
422

 
3

Total
$
209,021

 
$
1,025

 
$
182,095

 
$
981

_________________________
(1)
For Non-PCI loans and leases reported as impaired at September 30, 2017 and 2016, 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)


 
Nine Months Ended September 30,
 
2017
 
2016
 
Weighted
 
Interest
 
Weighted
 
Interest
 
Average
 
Income
 
Average
 
Income
Impaired Loans and Leases
Balance(1)
 
Recognized
 
Balance(1)
 
Recognized
 
(In thousands)
With An Allowance Recorded:
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
14,716

 
$
634

 
$
18,220

 
$
781

Residential
3,074

 
41

 
2,325

 
42

Real estate construction and land:
 
 
 
 
 
 
 
Residential

 

 
736

 
11

Commercial:
 
 
 
 
 
 
 
Cash flow
31,114

 
5

 
20,417

 
26

Asset-based
2,079

 
83

 
2,278

 
14

Venture capital
9,621

 

 
2,542

 

Equipment finance

 

 
41,587

 

Consumer
106

 
6

 
330

 
8

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
90,631

 
$
1,924

 
$
54,747

 
$
1,209

Residential
3,650

 
44

 
6,990

 
130

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,764

 
220

 
7,106

 
169

Commercial:
 
 
 
 
 
 
 
Cash flow
1,995

 
14

 
2,232

 
1

Asset-based
1,171

 
54

 
1,828

 
77

Venture capital
1,922

 

 

 

Equipment finance
30,560

 

 

 

Consumer
296

 

 
74

 
1

Total Non-PCI Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
112,071

 
$
2,643

 
$
82,282

 
$
2,162

Real estate construction and land
5,764

 
220

 
7,842

 
180

Commercial
78,462

 
156

 
70,884

 
118

Consumer
402

 
6

 
404

 
9

Total
$
196,699

 
$
3,025

 
$
161,412

 
$
2,469

_________________________
(1)
For Non-PCI loans and leases reported as impaired at September 30, 2017 and 2016, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.








21



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


The following tables present our troubled debt restructurings of Non-PCI loans held for investment by portfolio segment and class for the periods indicated:
 
Three Months Ended September 30,
 
2017
 
2016
 
 
 
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
1

 
$
998

 
$
998

 
2

 
$
1,147

 
$
1,147

Residential
3

 
566

 
10

 
1

 
93

 
93

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
1

 
1,245

 
1,245

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
3

 
9,491

 
255

 
2

 
25

 
25

Asset-based
2

 
2,655

 
2,655

 
1

 
25

 
25

Venture capital
4

 
15,308

 
15,308

 

 

 

Equipment finance

 

 

 
1

 
39,912

 
39,912

Consumer

 

 

 
1

 
21

 
21

Total
13

 
$
29,018

 
$
19,226

 
9

 
$
42,468

 
$
42,468


 
Nine Months Ended September 30,
 
2017
 
2016
 
 
 
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
5

 
$
2,527

 
$
2,463

 
7

 
$
5,287

 
$
5,287

Residential
8

 
1,328

 
489

 
7

 
5,136

 
5,136

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
1

 
1,245

 
1,245

Residential
1

 
362

 

 

 

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
12

 
26,385

 
17,150

 
12

 
30,582

 
30,582

Asset-based
7

 
4,433

 
4,433

 
5

 
2,158

 
2,158

Venture capital
9

 
28,465

 
28,465

 

 

 

Equipment finance

 

 

 
7

 
44,196

 
42,572

Consumer
1

 
97

 
97

 
4

 
819

 
111

Total
43

 
$
63,597

 
$
53,097

 
43

 
$
89,423

 
$
87,091



22



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


The following tables present troubled debt restructurings of Non-PCI loans held for investment by portfolio segment and class that subsequently defaulted for the periods indicated:
 
Three Months Ended September 30,
 
 
2017
 
2016
 
Troubled Debt Restructurings
Number
 
Recorded
 
Number
 
Recorded
 
That Subsequently Defaulted
of Loans
 
Investment(1)
 
of Loans
 
Investment(1)
 
 
(Dollars in thousands)
 
Real estate construction and land:
 
 
 
 
 
 
 
 
Commercial

 
$

 
1

 
$
1,245

 
Commercial:
 
 
 
 
 
 
 
 
Asset-based

 

 
1

 
2

 
Total

 
$

 
2

 
$
1,247

(2)
_________________________
(1)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. For example, for the 12-month period ended September 30, 2017, the population of defaulted restructured loans includes only those loans restructured after September 30, 2016. 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.


 
Nine Months Ended September 30,
 
 
2017
 
2016
 
Troubled Debt Restructurings
Number
 
Recorded
 
Number
 
Recorded
 
That Subsequently Defaulted
of Loans
 
Investment(1)
 
of Loans
 
Investment(1)
 
 
(Dollars in thousands)
 
Real estate construction and land:
 
 
 
 
 
 
 
 
Commercial

 
$

 
1

 
$
1,245

 
Commercial:
 
 
 
 
 
 
 
 
Asset-based

 

 
1

 
2

 
Equipment finance

 

 
1

 
39,912

(3)
Total

 
$

 
3

 
$
41,159

(2)
_________________________
(1)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. For example, for the 12-month period ended September 30, 2017, the population of defaulted restructured loans includes only those loans restructured after September 30, 2016. 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)
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. The modified terms were extended an additional six months in April 2017.


23



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 held for investment by portfolio segment and PCI loans held for investment for the periods indicated:
 
Three Months Ended September 30, 2017
 
 
 
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
$
37,122

 
$
11,318

 
$
88,364

 
$
2,075

 
$
138,879

 
$
7,079

 
$
145,958

Charge-offs
(531
)
 

 
(4,984
)
 
(413
)
 
(5,928
)
 
(79
)
 
(6,007
)
Recoveries
36

 
353

 
4,447

 
29

 
4,865

 
217

 
5,082

Provision (negative provision)
(186
)
 
22

 
14,366

 
752

 
14,954

 
(381
)
 
14,573

Balance, end of period
$
36,441

 
$
11,693

 
$
102,193

 
$
2,443

 
$
152,770

 
$
6,836

 
$
159,606


 
Nine Months Ended September 30, 2017
 
 
 
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
$
37,765

 
$
10,045

 
$
93,853

 
$
2,092

 
$
143,755

 
$
13,483

 
$
157,238

Charge-offs
(2,217
)
 

 
(46,965
)
 
(625
)
 
(49,807
)
 
(5,768
)
 
(55,575
)
Recoveries
286

 
370

 
8,848

 
104

 
9,608

 
275

 
9,883

Provision (negative provision)
607

 
1,278

 
46,457

 
872

 
49,214

 
(1,154
)
 
48,060

Balance, end of period
$
36,441

 
$
11,693

 
$
102,193

 
$
2,443

 
$
152,770

 
$
6,836

 
$
159,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,153

 
$

 
$
15,012

 
$
17

 
$
16,182

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
35,288

 
$
11,693

 
$
87,181

 
$
2,426

 
$
136,588

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
6,836

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
113,304

 
$
5,764

 
$
94,078

 
$
106

 
$
213,252

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
6,017,892

 
1,243,458

 
7,767,614

 
385,807

 
15,414,771

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
62,494

 
 
Ending balance
$
6,131,196

 
$
1,249,222

 
$
7,861,692

 
$
385,913

 
$
15,628,023

 
$
62,494

 
$
15,690,517


24



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


 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
5,464,941

 
$
831,515

 
$
8,069,687

 
$
256,504

 
$
14,622,647

 
$
120,199

 
$
14,742,846






25



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


Allowance for Credit Losses
The Non-PCI allowance for credit losses is the combination of the Non-PCI allowance for loan and lease losses and the Non-PCI reserve for unfunded loan commitments. The Non-PCI reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The following tables present a summary of the activity in the Non-PCI allowance for loan and lease losses, Non-PCI reserve for unfunded loan commitments, and PCI allowance for loan losses for the periods indicated:
 
Three Months Ended September 30, 2017
 
Non-PCI
 
 
 
 
 
Allowance for
 
Reserve for
 
 
 
PCI
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Allowance for
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
Loan Losses
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
138,879

 
$
20,263

 
$
159,142

 
$
7,079

 
$
166,221

Charge-offs
(5,928
)
 

 
(5,928
)
 
(79
)
 
(6,007
)
Recoveries
4,865

 

 
4,865

 
217

 
5,082

Net charge-offs
(1,063
)
 

 
(1,063
)
 
138

 
(925
)
Provision (negative provision)
14,954

 
546

 
15,500

 
(381
)
 
15,119

Balance, end of period
$
152,770

 
$
20,809

 
$
173,579

 
$
6,836

 
$
180,415

 
Nine Months Ended September 30, 2017
 
Non-PCI
 
 
 
 
 
Allowance for
 
Reserve for
 
 
 
PCI
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Allowance for
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
Loan Losses
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
143,755

 
$
17,523

 
$
161,278

 
$
13,483

 
$
174,761

Charge-offs
(49,807
)
 

 
(49,807
)
 
(5,768
)
 
(55,575
)
Recoveries
9,608

 

 
9,608

 
275

 
9,883

Net charge-offs
(40,199
)
 

 
(40,199
)
 
(5,493
)
 
(45,692
)
Provision (negative provision)
49,214

 
3,286

 
52,500

 
(1,154
)
 
51,346

Balance, end of period
$
152,770

 
$
20,809

 
$
173,579

 
$
6,836

 
$
180,415

 
Three Months Ended September 30, 2016
 
Non-PCI
 
 
 
 
 
Allowance for
 
Reserve for
 
 
 
PCI
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Allowance for
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
Loan Losses
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
132,000

 
$
17,944

 
$
149,944

 
$
11,289

 
$
161,233

Charge-offs
(9,924
)
 

 
(9,924
)
 
(531
)
 
(10,455
)
Recoveries
6,050

 

 
6,050

 

 
6,050

Net charge-offs
(3,874
)
 

 
(3,874
)
 
(531
)
 
(4,405
)
Provision (negative provision)
8,621

 
(621
)
 
8,000

 
471

 
8,471

Balance, end of period
$
136,747

 
$
17,323

 
$
154,070

 
$
11,229

 
$
165,299



26



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


 
Nine Months Ended September 30, 2016
 
Non-PCI
 
 
 
 
 
Allowance for
 
Reserve for
 
 
 
PCI
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Allowance for
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
Loan Losses
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
105,534

 
$
16,734

 
$
122,268

 
$
9,577

 
$
131,845

Charge-offs
(17,009
)
 

 
(17,009
)
 
(862
)
 
(17,871
)
Recoveries
8,811

 

 
8,811

 

 
8,811

Net charge-offs
(8,198
)
 

 
(8,198
)
 
(862
)
 
(9,060
)
Provision
39,411

 
589

 
40,000

 
2,514

 
42,514

Balance, end of period
$
136,747

 
$
17,323

 
$
154,070

 
$
11,229

 
$
165,299

NOTE 5.  FORECLOSED ASSETS
The following table summarizes foreclosed assets as of the dates indicated:
 
September 30,
 
December 31,
Property Type
2017
 
2016
 
(In thousands)
Construction and land development
$
9,319

 
$
11,224

Multi‑family

 
652

Commercial real estate
65

 

Single family residence
1,668

 

Total other real estate owned, net
11,052

 
11,876

Other foreclosed assets
578

 
1,100

Total foreclosed assets, net
$
11,630

 
$
12,976

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, 2016
$
12,976

Transfers to foreclosed assets from loans
580

Other additions
1,385

Provision for losses
(2,138
)
Reductions related to sales
(1,173
)
Balance, September 30, 2017
$
11,630


27



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


NOTE 6. BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Average
 
 
 
Average
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
399

 
6.82
%
 
$
812

 
6.41
%
FHLB secured advances
115,000

 
1.14
%
 
735,000

 
0.59
%
FHLB unsecured overnight advance
135,000

 
1.15
%
 
130,000

 
0.55
%
AFX borrowings

 
%
 
40,000

 
0.81
%
Total borrowings
$
250,399

 
 
 
$
905,812

 
 
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, 2017, this debt had a weighted average remaining maturity of 1.9 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 FRBSF, and other financial institutions.
FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of September 30, 2017 of $3.0 billion, collateralized by a blanket lien on $4.4 billion of certain qualifying loans not pledged to the FRBSF. As of September 30, 2017, the balance outstanding was a $115.0 million overnight advance. As of December 31, 2016, the balance outstanding was $735.0 million, which consisted of a $435.0 million overnight advance and a $300.0 million one-month advance with a January 23, 2017 maturity date.
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2017, the Bank had secured borrowing capacity of $2.2 billion collateralized by liens covering $2.9 billion of certain qualifying loans. As of September 30, 2017 and December 31, 2016, there were no balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $135.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which $135.0 million was outstanding at September 30, 2017. At December 31, 2016, the balance outstanding was $130.0 million.
Federal Funds Arrangements with Commercial Banks. As of September 30, 2017, the Bank had unsecured lines of credit of $75.0 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, 2017 and December 31, 2016, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2017, there was no balance outstanding. At December 31, 2016, the balance outstanding was $40.0 million, which consisted of a $26.0 million overnight borrowing and a $14.0 million one-month borrowing with a January 20, 2017 maturity date.

28



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


Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
 
September 30, 2017
 
December 31, 2016
 
Date
 
Maturity
 
Rate Index
Series
Amount
 
Rate
 
Amount
 
Rate
 
Issued
 
Date
 
(Quarterly Reset)
 
(Dollars in thousands)
 
 
 
 
 
 
Trust V
$
10,310

 
4.42
%
 
$
10,310

 
4.09
%
 
8/15/2003
 
9/17/2033
 
3 month LIBOR + 3.10
Trust VI
10,310

 
4.37
%
 
10,310

 
4.01
%
 
9/3/2003
 
9/15/2033
 
3 month LIBOR + 3.05
Trust CII
5,155

 
4.27
%
 
5,155

 
3.95
%
 
9/17/2003
 
9/17/2033
 
3 month LIBOR + 2.95
Trust VII
61,856

 
4.06
%
 
61,856

 
3.64
%
 
2/5/2004
 
4/23/2034
 
3 month LIBOR + 2.75
Trust CIII
20,619

 
3.01
%
 
20,619

 
2.65
%
 
8/15/2005
 
9/15/2035
 
3 month LIBOR + 1.69
Trust FCCI
16,495

 
2.92
%
 
16,495

 
2.56
%
 
1/25/2007
 
3/15/2037
 
3 month LIBOR + 1.60
Trust FCBI
10,310

 
2.87
%
 
10,310

 
2.51
%
 
9/30/2005
 
12/15/2035
 
3 month LIBOR + 1.55
Trust CS 2005-1
82,475

 
3.27
%
 
82,475

 
2.91
%
 
11/21/2005
 
12/15/2035
 
3 month LIBOR + 1.95
Trust CS 2005-2
128,866

 
3.26
%
 
128,866

 
2.84
%
 
12/14/2005
 
1/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-1
51,545

 
3.26
%
 
51,545

 
2.84
%
 
2/22/2006
 
4/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-2
51,550

 
3.26
%
 
51,550

 
2.84
%
 
9/27/2006
 
10/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-3 (1)
30,422

 
1.72
%
 
27,185

 
1.74
%
 
9/29/2006
 
10/30/2036
 
3 month EURIBOR + 2.05
Trust CS 2006-4
16,470

 
3.26
%
 
16,470

 
2.84
%
 
12/5/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2006-5
6,650

 
3.26
%
 
6,650

 
2.84
%
 
12/19/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2007-2
39,177

 
3.26
%
 
39,177

 
2.84
%
 
6/13/2007
 
7/30/2037
 
3 month LIBOR + 1.95
Gross subordinated debentures
542,210

 
 
 
538,973

 
 
 
 
 
 
 
 
Unamortized discount (2)
(94,084
)
 
 
 
(98,229
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
448,126

 
 
 
$
440,744

 
 
 
 
 
 
 
 
___________________
(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 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.

29



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


NOTE 7. 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 and standby letters of credit. 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,
 
2017
 
2016
 
(In thousands)
Loan commitments to extend credit
$
5,037,084

 
$
4,166,703

Standby letters of credit
237,052

 
211,398

Total
$
5,274,136

 
$
4,378,101

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. The increase in loan commitments to extend credit is primarily a result of the continued growth of our construction and venture capital portfolios in 2017.
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, 2017 and December 31, 2016, we had commitments to contribute capital to these entities totaling $43.1 million and $26.6 million. We also had commitments to contribute up to an additional $2.5 million and $2.8 million to private equity funds at September 30, 2017 and December 31, 2016. In addition, at September 30, 2017, we had a commitment to purchase approximately $7.8 million of loans that terminates in June 2018.
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 concluded 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, a wholly-owned subsidiary of FCAL, was acquired by PacWest Bancorp and merged into Pacific Western Bank in May 2013. The investigation was concluded in September 2017 with a cash settlement of $1.75 million. The claims settled are allegations only, and there has been no determination of liability. The settled claims relate exclusively to conduct by First California prior to its acquisition by PacWest Bancorp.

30



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


NOTE 8.  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, CDI, 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, 2017
Measured on a Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
Residential MBS and CMOs:
 
 
 
 
 
 
 
Agency MBS
$
377,541

 
$

 
$
377,541

 
$

Agency CMOs
175,950

 

 
175,950

 

Private label CMOs
134,550

 

 
96,614

 
37,936

Municipal securities
1,549,150

 

 
1,549,150

 

Agency commercial MBS
995,914

 

 
995,914

 

Corporate debt securities
19,125

 

 
19,125

 

Collateralized loan obligations
19,176

 

 
19,176

 

SBA securities
168,028

 

 
168,028

 

Asset-backed and other securities
92,796

 
4,808

 
45,603

 
42,385

Total securities available-for-sale
3,532,230

 
4,808

 
3,447,101

 
80,321

Equity warrants
5,158

 

 

 
5,158

Other derivative assets
1,221

 

 
1,221

 

Total recurring assets
$
3,538,609

 
$
4,808

 
$
3,448,322

 
$
85,479

Derivative liabilities
$
564

 
$

 
$
564

 
$


31



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


 
Fair Value Measurements as of
 
December 31, 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
$
502,443

 
$

 
$
502,443

 
$

Agency CMOs
146,289

 

 
146,289

 

Private label CMOs
125,469

 

 
68,567

 
56,902

Municipal securities
1,456,459

 

 
1,456,459

 

Agency commercial MBS
547,692

 

 
547,692

 

Corporate debt securities
47,509

 

 
47,509

 

Collateralized loan obligations
156,887

 

 
156,887

 

SBA securities
178,845

 

 
178,845

 

Asset-backed and other securities
62,237

 
2,080

 
51,784

 
8,373

Total securities available-for-sale
3,223,830

 
2,080

 
3,156,475

 
65,275

Equity warrants
5,497

 

 

 
5,497

Other derivative assets
694

 

 
694

 

Total recurring assets
$
3,230,021

 
$
2,080

 
$
3,157,169

 
$
70,772

Derivative liabilities
$
3,285

 
$

 
$
3,285

 
$

During the nine months ended September 30, 2017, there were no transfers of assets between Level 1 and Level 2, and there was a $0.7 million transfer of assets from Level 3 to Level 1 of the fair value hierarchy for assets measured on a recurring basis.
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 the date indicated:
 
September 30, 2017
 
Private Label CMOs
 
Asset-Backed Securities
 
 
 
Weighted
 
 
 
Weighted
 
Range
 
Average
 
Range
 
Average
Unobservable Inputs
of Inputs
 
Input
 
of Inputs
 
Input
Voluntary annual prepayment speeds
3.2% - 25.5%
 
9.6%
 
5% - 15%
 
13.5%
Annual default rates
0.1% - 13.6%
 
2.2%
 
1% - 2%
 
1.8%
Loss severity rates
4.0% - 95.9%
 
46.9%
 
10% - 60%
 
52.4%
Discount rates
1.6% - 9.9%
 
4.6%
 
3.2% - 4.3%
 
3.6%



32



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 the date indicated:
 
September 30, 2017
 
Equity Warrants
 
Weighted
 
Average
Unobservable Inputs
Input
Volatility
17.3%
Risk-free interest rate
1.7%
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, 2016
$
56,902

 
$
8,373

 
$
5,497

Total included in earnings
2,114

 
314

 
1,701

Total included in other comprehensive income
(578
)
 
(349
)
 

Purchases

 
37,722

 

Issuances

 

 
720

Sales
(4,732
)
 

 
(2,106
)
Net settlements
(15,770
)
 
(3,675
)
 

Transfers to securities available-for-sale

 

 
(654
)
Balance, September 30, 2017
$
37,936

 
$
42,385

 
$
5,158

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, 2017
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired Non‑PCI loans
$
63,463

 
$

 
$
6,779

 
$
56,684

OREO
9,100

 

 
9,100

 

Total non-recurring
$
72,563

 
$

 
$
15,879

 
$
56,684

 
Fair Value Measurement as of
 
December 31, 2016
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired Non‑PCI loans
$
149,749

 
$

 
$
1,661

 
$
148,088

OREO
11,224

 

 
11,224

 

Investments carried at cost
242

 

 

 
242

Total non-recurring
$
161,215

 
$

 
$
12,885

 
$
148,330


33



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
Losses on Assets
September 30,
 
September 30,
Measured on a Non‑Recurring Basis
2017
 
2016
 
2017
 
2016
 
(In thousands)
Impaired Non‑PCI loans
$
4,427

 
$
12,935

 
$
17,895

 
$
27,301

OREO

2,124

 

 
2,124

 

Total losses
$
6,551

 
$
12,935

 
$
20,019

 
$
27,301

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:
 
 
September 30, 2017
 
 
 
 
Valuation
 
Unobservable
 
 
 
Weighted
Asset
 
Fair Value
 
Technique
 
Inputs
 
Range
 
Average
 
 
(In thousands)
 
 
 
 
 
 
 
 
Impaired Non-PCI loans
 
$
55,365

 
Discounted cash flows
 
Discount rates
 
2.00% - 8.93%
 
6.84%
 
 
1,319

 
Third party appraisals
 
No discounts
 
 
 
 
Total non-recurring Level 3
 
$
56,684

 
 
 
 
 
 
 
 
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 carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
 
September 30, 2017
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
147,579

 
$
147,579

 
$
147,579

 
$

 
$

Interest‑earning deposits in financial institutions
122,439

 
122,439

 
122,439

 

 

Securities available‑for‑sale
3,532,230

 
3,532,230

 
4,808

 
3,447,101

 
80,321

Investment in FHLB stock
17,250

 
17,250

 

 
17,250

 

Investments carried at cost
1,006

 
10,702

 

 

 
10,702

Loans and leases held for investment, net
15,530,911

 
15,700,815

 

 
6,779

 
15,694,036

Equity warrants
5,158

 
5,158

 

 

 
5,158

Other derivative assets
1,221

 
1,221

 

 
1,221

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
13,531,300

 
13,531,300

 

 
13,531,300

 

Non-core non-maturity deposits
1,118,694

 
1,118,694

 

 
1,118,694

 

Time deposits
2,123,251

 
2,114,655

 

 
2,114,655

 

Borrowings
250,399

 
250,399

 
250,000

 
399

 

Subordinated debentures
448,126

 
431,173

 

 
431,173

 

Derivative liabilities
564

 
564

 

 
564

 


34



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


 
December 31, 2016
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
337,965

 
$
337,965

 
$
337,965

 
$

 
$

Interest‑earning deposits in financial institutions
81,705

 
81,705

 
81,705

 

 

Securities available‑for‑sale
3,223,830

 
3,223,830

 
2,080

 
3,156,475

 
65,275

Investment in FHLB stock
21,870

 
21,870

 

 
21,870

 

Investments carried at cost
1,416

 
3,843

 

 

 
3,843

Loans and leases held for investment, net
15,298,716

 
15,494,808

 

 
1,661

 
15,493,147

Equity warrants
5,497

 
5,497

 

 

 
5,497

Other derivative assets
694

 
694

 

 
694

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
12,523,834

 
12,523,834

 

 
12,523,834

 

Non-core non-maturity deposits
1,174,487

 
1,174,487

 

 
1,174,487

 

Time deposits
2,172,290

 
2,166,187

 

 
2,166,187

 

Borrowings
905,812

 
905,838

 
591,000

 
314,838

 

Subordinated debentures
440,744

 
424,507

 

 
424,507

 

Derivative liabilities
3,285

 
3,285

 

 
3,285

 

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 2016 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, 2017, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

35



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


NOTE 9. 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,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings
$
101,466

 
$
93,647

 
$
93,895

 
$
273,781

 
$
266,519

Less: Earnings allocated to unvested restricted stock(1)
(1,149
)
 
(1,080
)
 
(1,048
)
 
(3,239
)
 
(2,983
)
Net earnings allocated to common shares
$
100,317

 
$
92,567

 
$
92,847

 
$
270,542

 
$
263,536

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares and unvested restricted
 
 
 
 
 
 
 
 
 
stock outstanding
121,447

 
121,422

 
121,818

 
121,405

 
121,739

Less: Weighted-average unvested restricted stock
 
 
 
 
 
 
 
 
 
outstanding
(1,394
)
 
(1,455
)
 
(1,401
)
 
(1,450
)
 
(1,425
)
Weighted-average basic shares outstanding
120,053

 
119,967

 
120,417

 
119,955

 
120,314

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

 
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings allocated to common shares
$
100,317

 
$
92,567

 
$
92,847

 
$
270,542

 
$
263,536

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
120,053

 
119,967

 
120,417

 
119,955

 
120,314

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

________________________
(1)
Represents cash dividends paid to holders of unvested restricted stock, net of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
NOTE 10. STOCK-BASED COMPENSATION
The Company’s 2017 Stock Incentive Plan, or the 2017 Plan, permits stock-based compensation awards to officers, directors, key employees and consultants. As of September 30, 2017, the 2017 Plan authorized grants of stock‑based compensation instruments to purchase or issue up to 4,000,000 shares of Company common stock. As of September 30, 2017, there were 3,837,850 shares available for grant under the 2017 Plan.
Restricted Stock
Restricted stock amortization totaled $6.5 million, $6.6 million, and $5.6 million for the three months ended September 30, 2017, June 30, 2017 and September 30, 2016 and, $19.6 million and $16.6 million for the nine months ended September 30, 2017 and 2016. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings. The amount of unrecognized compensation expense related to unvested TRSAs and PRSUs as of September 30, 2017 totaled $47.5 million.
Time-Based Restricted Stock Awards
At September 30, 2017, there were 1,393,874 shares of unvested TRSAs outstanding pursuant to the Company's 2003 and 2017 Stock Incentive Plans (the "Plans"). The TRSAs generally vest over a service period of three or four years from the date of the grant or immediately upon 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.

36



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


Performance-Based Restricted Stock Units
At September 30, 2017, there were 239,025 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. The PRSUs are not considered issued and outstanding under the 2003 Stock Incentive Plan until they vest. PRSUs are granted and initially expensed based on a target number. The number of shares that will ultimately vest based on actual performance will range from zero to a maximum of either 150% or 200% of target. 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. If it is determined that attainment of a financial measure higher than target is probable, the amortization will increase to up to 150% or 200% of the target amortization amount. Annual PRSU expense may vary during the three-year performance period based upon changes in management's estimate of the number of shares that may ultimately vest. 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 11.  RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued 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. We have completed the assessment phase and substantially completed our implementation plan for adopting this new standard. In the assessment phase, we determined which revenue streams were within the scope and those that were excluded from the scope of the new standard. Substantially all of the Company's revenues, such as interest income, are excluded from the scope of the new standard. For the revenue streams determined to be within the scope of the new standard, we examined customer contracts to determine the appropriate accounting for those contracts under the new standard. We evaluated the need for any changes to our accounting, operations, and internal controls related to implementing the requirements of the new standard and have made some changes as needed. However, the new standard will not significantly impact the timing or amounts recognized. The Company will use the cumulative effect transition method and does not expect the provisions of ASU 2014-09 to have a material impact on our consolidated financial statements. 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. Early adoption is permitted only for the provisions related to the recognition of changes in fair value of financial liabilities, which does not apply to the Company. The Company will adopt this standard effective January 1, 2018 and does not expect the provisions of ASU 2016-01 to have a material impact on its consolidated financial position or results of operations.
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 and mandates a modified retrospective transition method for all entities. The Company has begun to assess the impact of the new standard on its financial statements and related disclosures and is currently evaluating the existing lease portfolio and working through its implementation plan. The impact to the Company will be primarily related to leased branches and office space. The Company will adopt the standard effective January 1, 2019.

37



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


In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which significantly changes the way entities recognize credit losses and impairment of many financial assets. Currently, the credit loss and impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. Under the current expected credit loss ("CECL") model, the new standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. The Company has set up a multidisciplinary project team, developed an implementation plan, selected a software solution, and has selected a third-party vendor to assist with the assessment phase of the project. 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 consolidated financial position or results of operations.
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 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. The Company will adopt this standard on January 1, 2018.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which provides a new framework for determining whether transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for annual periods in fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2019. The Company does not expect ASU 2017-01 to have a material impact on its financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which intends to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. ASU 2017-04 instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit's fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. The Company does not expect ASU 2017-04 to have a material impact on its financial condition or results of operations.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies what constitutes a modification of a share-based payment award. ASU 2017-09 is effective for interim and annual periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company will adopt this standard on January 1, 2018 and does not expect ASU 2017-09 to have a material impact on its financial condition or results of operations.

38



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


NOTE 12. SUBSEQUENT EVENTS
CU Bancorp Acquisition
On October 20, 2017, PacWest completed the acquisition of CU Bancorp ("CUB"). As part of the acquisition, California United Bank (“CU Bank”), a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank.
Under the terms of the Agreement and Plan of Merger, each CUB common share, except dissenting shares, and each restricted stock award was converted into the right to receive 0.5308 of a share of PacWest common stock and $12.00 in cash, and each outstanding CUB stock option was settled in cash pursuant to terms of the Agreement and Plan of Merger. PacWest issued an aggregate of approximately 9.3 million shares of PacWest common stock and paid approximately $224 million in cash to CUB common shareholders and equity award holders. Based on the closing price of PacWest’s common stock on October 20, 2017 of $47.99 per share, the aggregate consideration paid to CUB common shareholders and equity awards holders was approximately $671 million. Former holders of CUB common stock as a group received shares of PacWest common stock in the acquisition constituting approximately 7% of the outstanding shares of PacWest common stock immediately after the acquisition.
CU Bank was a commercial bank headquartered in Los Angeles, California. We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio and $2.7 billion of core deposits.
Common Stock Dividends
On November 1, 2017, 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, 2017 to stockholders of record at the close of business on November 20, 2017.
We have evaluated events that have occurred subsequent to September 30, 2017 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.


39



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 recent acquisition of CUB, 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 and intangible assets, interest rate risk management, 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 or at all;
the reaction to the recent CUB acquisition of the companies' customers, employees and counterparties;
our ability to compete effectively against other financial service providers in our markets;
the effect of the current low interest rate environment or impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios;
deterioration, weaker than expected improvement, a continued sluggish recovery, or other changes in the state of the economy or the markets in which we conduct business (including the levels of initial public offerings and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans;
changes in credit quality and the effect of credit quality on our provision for credit losses and allowance for loan and lease losses;
our ability to attract deposits and other sources of funding or liquidity;
the need to retain capital for strategic or regulatory reasons;
the impact of the Dodd-Frank Act on our business, business strategies and cost of operations;
compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases and/or asset mix;
reduced demand for our services due to strategic or regulatory reasons;
our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications;
legislative or regulatory requirements or changes, including an increase to capital requirements, and increased political and regulatory uncertainty;
the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
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 non-cash charge;
the effectiveness of our risk management framework and quantitative models;
the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;

40


the impact on the value of our DTAs and on our net income or regulatory capital if corporate tax rates in the U.S. are reduced, or if other changes are made to 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
our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and other documents filed or furnished by PacWest with the SEC.
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 BHCA. Our principal business is to serve as the holding company for our Beverly Hills‑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,” 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. At September 30, 2017, the Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located throughout the state of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. We provide commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and middle-market businesses. We offer additional products and services through our CapitalSource and Square 1 Bank divisions. Our CapitalSource Division provides cash flow, asset-based, equipment, and real estate loans and treasury management services to established middle market businesses on a national basis. Our Square 1 Bank Division offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
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 2017, accounted for 87.6% of our net revenues (net interest income plus noninterest income).
At September 30, 2017, we had total assets of $22.2 billion, including $15.7 billion of loans and leases held for investment, net of deferred fees, and $3.5 billion of securities available-for-sale, compared to $21.9 billion of total assets, including $15.5 billion of loans and leases held for investment, net of deferred fees, and $3.2 billion of securities available-for-sale at December 31, 2016. The $373.2 million increase in total assets during the nine months ended September 30, 2017 was due primarily to a $234.6 million increase in loans and leases, driven by new production of $3.1 billion, and a $308.4 million increase in securities available-for-sale, due mainly to purchases of $804.7 million, offset partially by a $149.7 million decrease in cash and cash equivalents.
At September 30, 2017, we had total liabilities of $17.6 billion, including total deposits of $16.8 billion and borrowings of $250.4 million, compared to $17.4 billion of total liabilities, including $15.9 billion of total deposits and $905.8 million of borrowings at December 31, 2016. The $241.6 million increase in total liabilities since year-end was due mainly to a $1.0 billion increase in core deposits, offset partially by a $655.4 million decrease in borrowings, primarily short-term FHLB advances, a $55.8 million decrease in non-core non-maturity deposits, and a $49.0 million decrease in time deposits. At September 30, 2017, core deposits totaled $13.5 billion, or 81% of total deposits, and time deposits totaled $2.1 billion, or 13% of total deposits.

41



Recent Events
CU Bancorp Acquisition
On October 20, 2017, we completed the acquisition of CU Bancorp (“CUB”) in a transaction valued at approximately $671 million. As part of the acquisition, California United Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank. As of October 20, 2017, CUB had $2.7 billion of core deposits and $2.1 billion of loans, with nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties. For further information, see Note 12, Subsequent Events, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
Loan Sales and Loans Held for Sale
In the second quarter of 2017, we sold $46.0 million of loans consisting primarily of loans from our healthcare portfolios. Additionally, we entered into two agreements to sell loans with balances totaling $175.2 million and the associated unfunded commitments of $19.3 million, primarily from our healthcare portfolios. The $175.2 million of loans were reported as held for sale at June 30, 2017 and the sales were completed in July. As a result of the second quarter loan sales and transfers to loans held for sale, our healthcare cash flow portfolio held for investment decreased from $740.6 million at March 31, 2017 to $514.7 million at June 30, 2017, which included two non-pass rated credits of $26.1 million.
In connection with the transfer of loans to held for sale, we recognized $7.2 million in charge-offs during the second quarter of 2017 in order to record the loans at the lower of cost or fair value. Additionally, our nonaccrual loans held for investment decreased by $5.3 million and our classified loans held for investment decreased by $44.8 million as a result of the loans transferred to held for sale.
There were no loans held for sale at September 30, 2017.
Sale/Leaseback Transaction
In the first quarter of 2017, the Company sold four properties with an aggregate book value of $9.7 million to a third party and simultaneously leased back the properties under one lease with an initial term of five years and three leases with initial terms of 10 years. The aggregate purchase price was $12.1 million which resulted in a gain of $0.6 million recognized in the first quarter and a deferred gain of $1.8 million to be recognized over the respective terms of the new leases.
Key Performance Indicators
Among other factors, our operating results generally depend 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 interest on certain loans and 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.
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.

42


Loan and Lease Growth
We actively seek new lending opportunities under an array of commercial real estate loans and C&I lending products. Our targeted collateral for our real estate loan offerings includes multifamily properties, healthcare properties, office properties, hospitality properties, industrial properties, and retail properties. Our C&I loan products include equipment-secured loans and leases, asset-secured loans, loans to finance companies, 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 the various stages of their operations. Our loan origination process emphasizes credit quality. We foster lending 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 select 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 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 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 and gain (loss) on sales of assets other than loans and leases).

43


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
2017
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Noninterest expense
$
118,542

 
$
117,707

 
$
110,710

 
$
352,793

 
$
331,479

Less:
Intangible asset amortization
3,049

 
3,065

 
4,224

 
9,178

 
13,341

 
Foreclosed assets expense (income), net
2,191

 
(157
)
 
(248
)
 
2,177

 
(812
)
 
Acquisition, integration and reorganization costs
1,450

 
1,700

 

 
3,650

 
200

Noninterest expense used for efficiency ratio
$
111,852

 
$
113,099

 
$
106,734

 
$
337,788

 
$
318,750

 
 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
246,575

 
$
247,322

 
$
239,473

 
$
731,132

 
$
727,680

Noninterest income
31,382

 
35,282

 
26,920

 
101,778

 
83,580

Net revenues
277,957

 
282,604

 
266,393

 
832,910

 
811,260

Less:
Gain on sale of securities
1,236

 
1,651

 
382

 
2,788

 
8,970

Net revenues used for efficiency ratio
$
276,721

 
$
280,953

 
$
266,011

 
$
830,122

 
$
802,290

 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio
40.4
%
 
40.3
%
 
40.1
%
 
40.7
%
 
39.7
%
Critical Accounting Policies
The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We have 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 carrying values of intangible assets, the realization of deferred income tax assets, and the accounting for business combinations. For further information, refer to our Annual Report on Form 10‑K for the year ended December 31, 2016.
Non-GAAP Measurements
We use 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. We used the following non-GAAP measures in this Form 10-Q:
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 reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.


44



 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Return on Average Tangible Equity
2017
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Net earnings
$
101,466

 
$
93,647

 
$
93,895

 
$
273,781

 
$
266,519

 
 
 
 
 
 
 
 
 
 
 
Average stockholders' equity
$
4,592,489

 
$
4,545,276

 
$
4,530,701

 
$
4,547,472

 
$
4,484,468

Less:
Average intangible assets
2,202,922

 
2,205,814

 
2,217,564

 
2,205,927

 
2,222,346

Average tangible common equity
$
2,389,567

 
$
2,339,462

 
$
2,313,137

 
$
2,341,545

 
$
2,262,122

 
 
 
 
 
 
 
 
 
 
 
Return on average equity (1)
8.77
%
 
8.26
%
 
8.24
%
 
8.05
%
 
7.94
%
Return on average tangible equity (2)
16.85
%
 
16.06
%
 
16.15
%
 
15.63
%
 
15.74
%
___________________________________
(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
2017
 
2016
 
(Dollars in thousands, except per share data)
Stockholders’ equity
$
4,610,668

 
$
4,479,055

Less: Intangible assets
2,201,137

 
2,210,315

Tangible common equity
$
2,409,531

 
$
2,268,740

 
 
 
 
Total assets
$
22,242,932

 
$
21,869,767

Less: Intangible assets
2,201,137

 
2,210,315

Tangible assets
$
20,041,795

 
$
19,659,452

 
 
 
 
Equity to assets ratio
20.73
%
 
20.48
%
Tangible common equity ratio(1)
12.02
%
 
11.54
%
Book value per share
$
37.96

 
$
36.93

Tangible book value per share
$
19.84

 
$
18.71

Shares outstanding
121,449,794

 
121,283,669

_______________________________________ 
(1)
Tangible common equity divided by tangible assets.

45


Results of Operations
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,
Performance Measures
2017
 
2017
 
2016
 
2017
 
2016
Diluted earnings per share
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

Annualized return on:
 
 
 
 
 
 
 
 
 
Average assets
1.82
%
 
1.71
%
 
1.77
%
 
1.67
%
 
1.69
%
Average tangible equity (1)(2)
16.85
%
 
16.06
%
 
16.15
%
 
15.63
%
 
15.74
%
Net interest margin (tax equivalent)
5.08
%
 
5.21
%
 
5.26
%
 
5.15
%
 
5.37
%
Efficiency ratio
40.4
%
 
40.3
%
 
40.1
%
 
40.7
%
 
39.7
%
_____________________________
(1)
Calculation reduces average stockholder's equity by average intangible assets.
(2)
See "Non-GAAP Measurements."
Third Quarter of 2017 Compared to Second Quarter of 2017
Net earnings for the third quarter of 2017 were $101.5 million, or $0.84 per diluted share, compared to net earnings for the second quarter of 2017 of $93.6 million, or $0.77 per diluted share. The $7.8 million increase in net earnings was due primarily to lower income tax expense of $17.0 million, offset partially by lower noninterest income of $3.9 million and a higher provision for credit losses of $3.6 million. The decrease in income tax expense was due to a $13.6 million reversal of a valuation allowance related to tax credits in the third quarter of 2017 which, based on a change in estimate in our latest analysis, are more likely than not to be utilized before they expire. The decrease in noninterest income was due mainly to lower leased equipment income and lower other income. The increase in the provision for credit losses was due primarily to loan risk rating downgrades combined with net portfolio growth.
Third Quarter of 2017 Compared to Third Quarter of 2016
Net earnings for the third quarter of 2017 were $101.5 million, or $0.84 per diluted share, compared to net earnings for the third quarter of 2016 of $93.9 million, or $0.77 per diluted share. The $7.6 million increase in net earnings was due to lower income tax expense of $10.5 million, higher net interest income of $7.1 million, and higher noninterest income of $4.5 million, offset partially by a higher provision for credit losses of $6.6 million and higher noninterest expense of $7.8 million. The decrease in income tax expense was due to a $13.6 million reversal of a valuation allowance related to tax credits in the third quarter of 2017, offset partially by certain discrete tax items recognized in the third quarter of 2016 which reduced income tax expense for that period. The increase in net interest income was due mainly to a higher average loan and lease balance, offset by lower discount accretion on acquired loans and higher interest expense on interest-bearing liabilities. The increase in noninterest income was due mostly to higher gain on sale of loans and leases, higher other income, higher dividends and realized gains on equity investments, and a higher gain on sale of securities, offset partially by lower other commissions and fees. The increase in noninterest expense was due mostly to higher foreclosed assets expense, compensation expense, loan expense, acquisition, integration and reorganization costs, and other expense, offset by lower intangible asset amortization.

46


Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net earnings for the nine months ended September 30, 2017 were $273.8 million, or $2.26 per diluted share, compared to net earnings for the nine months ended September 30, 2016 of $266.5 million, or $2.19 per diluted share. The $7.3 million increase in net earnings was due to lower income tax expense of $15.6 million, higher net interest income of $3.6 million, and higher noninterest income of $18.2 million, offset partially by a higher provision for credit losses of $8.8 million and higher noninterest expense of $21.3 million as compared to the nine months ended September 30, 2016. The decrease in income tax expense was due to a $13.6 million reversal of a valuation allowance related to tax credits in the third quarter of 2017. The increase in net interest income was due mainly to a higher average loan and lease balance, offset by lower discount accretion on acquired loans and higher interest expense on interest-bearing liabilities. The decrease in accretion was due primarily to lower accelerated accretion from payoffs of acquired loans, including $12.1 million from the payoff of a nonaccrual PCI loan in the first quarter of 2016. The increase in noninterest income was due mostly to lower FDIC loss sharing expense and higher other income. The decrease in FDIC loss sharing expense was due to the early termination of all FDIC loss sharing agreements in the second quarter of 2016. The increase in noninterest expense was due mostly to higher compensation expense, loan expense, other expense, acquisition, integration and reorganization costs, foreclosed asset expense, and data processing expense, offset by lower intangible asset amortization.

47


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 summarizes 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, for the periods indicated:
 
Three Months Ended
 
September 30, 2017
 
June 30, 2017
 
September 30, 2016
 
 
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
$
60,126

$
3,308

21.83
%
 
$
68,759

$
4,643

27.08
%
 
$
117,781

$
5,868

19.82
%
Non-PCI loans and leases
15,514,904

232,510

5.95
%
 
15,429,162

229,975

5.98
%
 
14,417,170

219,502

6.06
%
Total loans and leases (1)
15,575,030

235,818

6.01
%
 
15,497,921

234,618

6.07
%
 
14,534,951

225,370

6.17
%
Investment securities (2)
3,510,956

29,495

3.33
%
 
3,436,785

29,538

3.45
%
 
3,338,209

27,025

3.22
%
Deposits in financial institutions
171,455

538

1.24
%
 
96,087

237

0.99
%
 
238,425

298

0.50
%
Total interest‑earning assets (2)
19,257,441

265,851

5.48
%
 
19,030,793

264,393

5.57
%
 
18,111,585

252,693

5.55
%
Other assets
2,880,433

 
 
 
2,905,809

 
 
 
2,960,468

 
 
Total assets
$
22,137,874

 
 
 
$
21,936,602

 
 
 
$
21,072,053

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
2,146,125

2,960

0.55
%
 
$
1,709,699

1,697

0.40
%
 
$
1,161,931

604

0.21
%
Money market deposits
4,914,803

6,307

0.51
%
 
4,907,865

4,993

0.41
%
 
4,514,525

3,303

0.29
%
Savings deposits
707,367

289

0.16
%
 
708,389

296

0.17
%
 
764,415

341

0.18
%
Time deposits
2,256,259

3,515

0.62
%
 
2,366,399

3,219

0.55
%
 
2,666,434

2,999

0.45
%
Total interest‑bearing deposits
10,024,554

13,071

0.52
%
 
9,692,352

10,205

0.42
%
 
9,107,305

7,247

0.32
%
Borrowings
61,071

188

1.22
%
 
457,774

1,066

0.93
%
 
583,982

695

0.47
%
Subordinated debentures
447,012

6,017

5.34
%
 
443,756

5,800

5.24
%
 
439,970

5,278

4.77
%
Total interest‑bearing liabilities
10,532,637

19,276

0.73
%
 
10,593,882

17,071

0.65
%
 
10,131,257

13,220

0.52
%
Noninterest‑bearing demand deposits
6,858,816

 
 
 
6,646,349

 
 
 
6,274,294

 
 
Other liabilities
153,932

 
 
 
151,095

 
 
 
135,801

 
 
Total liabilities
17,545,385

 
 
 
17,391,326

 
 
 
16,541,352

 
 
Stockholders’ equity
4,592,489

 
 
 
4,545,276

 
 
 
4,530,701

 
 
Total liabilities and
 
 
 
 
 
 
 
 
 
 
 
stockholders' equity
$
22,137,874

 
 
 
$
21,936,602

 
 
 
$
21,072,053

 
 
Net interest income (tax equivalent) (2)
 
$
246,575

 
 
 
$
247,322

 
 
 
$
239,473

 
Net interest rate spread
 
 
4.75
%
 
 
 
4.92
%
 
 
 
5.03
%
Net interest margin
 
 
5.08
%
 
 
 
5.21
%
 
 
 
5.26
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (3)
$
16,883,370

$
13,071

0.31
%
 
$
16,338,701

$
10,205

0.25
%
 
$
15,381,599

$
7,247

0.19
%
Funding sources (4)
$
17,391,453

$
19,276

0.44
%
 
$
17,240,231

$
17,071

0.40
%
 
$
16,405,551

$
13,220

0.32
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees. Starting with the third quarter of 2017, includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)
Includes tax-equivalent adjustments of $4.7 million, $4.8 million, and $4.8 million for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016, respectively, related to tax-exempt interest 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.


48


 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
 
Interest
Yields
 
 
Interest
Yields
 
Average
Income/
and
 
Average
Income/
and
 
Balance
Expense
Rates
 
Balance
Expense
Rates
 
(Dollars in thousands)
ASSETS:
 
 
 
 
 
 
 
PCI loans
$
72,633

$
12,200

22.46
%
 
$
144,129

$
34,425

31.90
%
Non-PCI loans and leases
15,385,050

682,414

5.93
%
 
14,347,598

651,646

6.07
%
Total loans and leases (1)
15,457,683

694,614

6.01
%
 
14,491,727

686,071

6.32
%
Investment securities (2)
3,402,658

86,855

3.41
%
 
3,362,352

81,848

3.25
%
Deposits in financial institutions
123,023

967

1.05
%
 
238,129

914

0.51
%
Total interest‑earning assets (2)
18,983,364

782,436

5.51
%
 
18,092,208

768,833

5.68
%
Other assets
2,925,110

 
 
 
2,997,922

 
 
Total assets
$
21,908,474

 
 
 
$
21,090,130

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Interest checking deposits
$
1,789,435

5,824

0.44
%
 
$
1,038,103

1,488

0.19
%
Money market deposits
4,896,639

15,710

0.43
%
 
4,229,315

8,604

0.27
%
Savings deposits
709,080

883

0.17
%
 
761,376

1,197

0.21
%
Time deposits
2,289,771

9,236

0.54
%
 
3,202,436

12,854

0.54
%
Total interest‑bearing deposits
9,684,925

31,653

0.44
%
 
9,231,230

24,143

0.35
%
Borrowings
369,953

2,272

0.82
%
 
460,165

1,628

0.47
%
Subordinated debentures
444,117

17,379

5.23
%
 
438,534

15,382

4.69
%
Total interest‑bearing liabilities
10,498,995

51,304

0.65
%
 
10,129,929

41,153

0.54
%
Noninterest‑bearing demand deposits
6,701,135

 
 
 
6,328,223

 
 
Other liabilities
160,872

 
 
 
147,510

 
 
Total liabilities
17,361,002

 
 
 
16,605,662

 
 
Stockholders’ equity
4,547,472

 
 
 
4,484,468

 
 
Total liabilities and
 
 
 
 
 
 
 
stockholders' equity
$
21,908,474

 
 
 
$
21,090,130

 
 
Net interest income (tax equivalent) (2)
 
$
731,132

 
 
 
$
727,680

 
Net interest rate spread
 
 
4.86
%
 
 
 
5.14
%
Net interest margin
 
 
5.15
%
 
 
 
5.37
%
 
 
 
 
 
 
 
 
Total deposits (3)
$
16,386,060

$
31,653

0.26
%
 
$
15,559,453

$
24,143

0.21
%
Funding sources (4)
$
17,200,130

$
51,304

0.40
%
 
$
16,458,152

$
41,153

0.33
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees. Starting with the third quarter of 2017, includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)
Includes tax-equivalent adjustments of $14.4 million and $14.7 million for the nine months ended September 30, 2017 and 2016, respectively, related to tax-exempt interest 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.


49


Third Quarter of 2017 Compared to Second Quarter of 2017
Net interest income decreased by $0.8 million to $241.7 million for the third quarter of 2017 compared to $242.5 million for the second quarter of 2017 due mainly to interest expense growth exceeding interest income growth. Interest income increased due to one additional day in the period and a higher average loan and lease balance, offset by a lower yield on average loans and leases. The loan and lease yield for the third quarter of 2017 was 6.01% compared to 6.07% for the second quarter of 2017. The decrease in the loan and lease yield was principally due to the decrease in discount accretion on acquired loans and lower loan fee income. Total discount accretion on acquired loans was $5.5 million in the third quarter of 2017 (14 basis points on the loan and lease yield) compared to $7.5 million in the second quarter of 2017 (20 basis points on the loan and lease yield).
The tax equivalent NIM for the third quarter of 2017 was 5.08% compared to 5.21% for the second quarter of 2017. The decrease in the tax equivalent NIM was mostly due to the decrease in discount accretion on acquired loans and loan fee income and a higher cost of average interest-bearing liabilities. Total discount accretion on acquired loans contributed 11 basis points to the NIM for the third quarter of 2017 and 16 basis points for the second quarter of 2017. The taxable equivalent adjustment for tax-exempt interest income on municipal securities contributed 10 points to the tax equivalent NIM for the third quarter of 2017 and second quarter of 2017.
The cost of average total deposits increased to 0.31% in the third quarter of 2017 from 0.25% in the second quarter of 2017 due to higher rates paid for non-core deposits and select large-balance deposit customers.
Third Quarter of 2017 Compared to Third Quarter of 2016
Net interest income increased by $7.1 million to $241.7 million for the third quarter of 2017 compared to $234.6 million for the third quarter of 2016 due mainly to a higher average balance of loans and leases and a higher yield and average balance of investment securities, offset partially by a lower yield on average loans and leases and higher interest expense. The loan and lease yield for the third quarter of 2017 was 6.01% compared to 6.17% for the same quarter of 2016. The decrease in the loan and lease yield was due mainly to lower discount accretion on acquired loans, offset partially by repricing of variable-rate loans attributable to the increase in market interest rates during the first half of 2017. Total discount accretion on acquired loans was $5.5 million in the third quarter of 2017 (14 basis points on the loan and lease yield) compared to $14.2 million in the third quarter of 2016 (39 basis points on the loan and lease yield).
The tax equivalent NIM for the third quarter of 2017 was 5.08% compared to 5.26% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on loans and leases as described above, and a higher cost of average interest-bearing liabilities, offset partially by the higher yield on average investment securities. Total discount accretion on acquired loans contributed 11 basis points to the NIM for the third quarter of 2017 and 31 basis points for the third quarter of 2016. Tax-exempt interest income on municipal securities contributed 10 basis points to the tax equivalent NIM for the third quarter of 2017 and 11 basis points for the third quarter of 2016.
The cost of average total deposits increased to 0.31% for the third quarter of 2017 from 0.19% for the third quarter of 2016 due mainly to higher costs and average balances of non-core non-maturity deposits and brokered time deposits.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net interest income increased by $3.6 million to $716.6 million for the nine months ended September 30, 2017 compared to $713.0 million for the nine months ended September 30, 2016 due mainly to a higher average balance of loans and leases and a higher yield on average investment securities, partially offset by a lower yield on average loans and leases, higher interest expense, and one less day in the period. The loan and lease yield for the nine months ended September 30, 2017 was 6.01% compared to 6.32% for the same period in 2016. The decrease in the loan and lease yield was due mainly to lower discount accretion on acquired loans, partially offset by repricing of variable-rate loans attributable to the increase in market interest rates during the first half of 2017. Total discount accretion on acquired loans was $19.4 million for the nine months ended September 30, 2017 (17 basis points on the loan and lease yield) compared to $58.3 million for the same period in 2016 (54 basis points on the loan and lease yield). The decrease in accretion was primarily due to lower accelerated accretion from payoffs of acquired loans, including $12.1 million from the payoff of a nonaccrual PCI loan in the first quarter of 2016.

50


The tax equivalent NIM for the nine months ended September 30, 2017 was 5.15% compared to 5.37% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on average loans and leases as described above, and a higher cost of average interest-bearing liabilities, offset partially by the higher yield on average investment securities. Total discount accretion on acquired loans contributed 13 basis points to the NIM for the nine months ended September 30, 2017 and 43 basis points for the same period last year. Tax-exempt interest income on municipal securities contributed 10 basis points to the tax equivalent NIM for the nine months ended September 30, 2017 and 11 basis points for the for the nine months ended September 30, 2016.
The cost of average total deposits increased to 0.26% for the nine months ended September 30, 2017 from 0.21% for the nine months ended September 30, 2016 due mainly to higher costs and average balances of non-core non-maturity deposits and brokered time deposits.
Provision for Credit Losses
The following table sets forth the details of the provision for credit losses on loans and leases held for investment and information regarding Non-PCI credit quality metrics for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
 
 
 
 
Addition to allowance for Non‑PCI loan and lease losses
$
14,954

 
$
10,000

 
$
8,621

 
$
49,214

 
$
39,411

Addition to reserve for unfunded loan commitments
546

 
2,500

 
(621
)
 
3,286

 
589

Total provision for Non‑PCI loan and lease credit losses
15,500

 
12,500

 
8,000

 
52,500

 
40,000

(Negative provision) provision for PCI loan losses
(381
)
 
(1,001
)
 
471

 
(1,154
)
 
2,514

Total provision for credit losses
$
15,119

 
$
11,499

 
$
8,471

 
$
51,346

 
$
42,514

 
 
 
 
 
 
 
 
 
 
Non‑PCI Credit Quality Metrics:
 
 
 
 
 
 
 
 
 
Net charge‑offs on Non-PCI loans and leases
 
 
 
 
 
 
 
 
 
held for investment
$
1,063

 
$
20,947

 
$
3,874

 
$
40,199

 
$
8,198

Annualized net charge‑offs to
 
 
 
 
 
 
 
 
 
average Non-PCI loans and leases
0.03
%
 
0.54
%
 
0.11
%
 
0.35
%
 
0.08
%
At period end:
 
 
 
 
 
 
 
 
 
Allowance for credit losses
173,579

 
159,142

 
154,070

 
 
 
 
Non‑PCI nonaccrual loans and leases (1)
157,697

 
172,576

 
171,085

 
 
 
 
Non‑PCI classified loans and leases (1)
344,777

 
339,977

 
417,541

 
 
 
 
Allowance for credit losses to Non‑PCI
 
 
 
 
 
 
 
 
 
loans and leases held for investment
1.11
%
 
1.02
%
 
1.05
%
 
 
 
 
Allowance for credit losses to Non‑PCI
 
 
 
 
 
 
 
 
 
nonaccrual loans and leases held for investment
110.1
%
 
92.2
%
 
90.1
%
 
 
 
 
______________________
(1)
Excludes loans held for sale carried at lower of cost or fair value at June 30, 2017.

51


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 held for investment and a provision for credit losses on our PCI loans held for investment. The provision for credit losses on our Non‑PCI loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate allowance for credit losses. The allowance for loan and lease losses is comprised of a general reserve component for unimpaired loans and leases and a specific reserve component for impaired loans and leases, the latter being the aggregation of individual loan impairment analyses. Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors that are applied against the population of unimpaired loans and leases. The quantitative loss factors are the average charge-offs experienced over a prescribed historical look-back period pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things, current economic trends and forecasts, current commercial real estate values and performance trends, and the loan portfolio's current composition and credit performance trends. The provision for credit losses on our PCI loans held for investment results from changes in expected cash flows on such loans compared to those previously estimated.
We recorded a total provision for credit losses of $15.1 million in the third quarter of 2017, $11.5 million in the second quarter of 2017, and $8.5 million in the third quarter of 2016. The provision for credit losses for the nine months ended September 30, 2017 was $51.3 million compared to $42.5 million for the same period last year. The increase in the provision for credit losses for the third quarter of 2017 compared to the second quarter of 2017 was due primarily to loan risk rating downgrades combined with net portfolio growth.
Charge-offs of $5.9 million for the third quarter of 2017 included $3.4 million for venture capital loans. Charge-offs of $23.0 million for the second quarter of 2017 included $11.0 million for venture capital loans and $7.2 million related to the recording of the healthcare portfolio loans at the lower of cost or fair value at the time of transfer to loans held for sale. Recoveries of $4.9 million in the third quarter of 2017 and $2.0 million in the second quarter of 2017 included $2.6 million and$1.3 million, respectively, related to venture capital loans previously charged off.
Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances are an increased amount of classified and/or impaired loans and leases, net loan and lease and unfunded commitment growth, and changes in economic conditions. Changes in economic conditions include 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 Leases Held for Investment” and “- Balance Sheet Analysis - Allowance for Loan Losses on PCI Loans Held for Investment” contained herein.
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,
Noninterest Income
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Service charges on deposit accounts
$
3,465

 
$
3,510

 
$
3,488

 
$
10,733

 
$
10,977

Other commissions and fees
9,944

 
10,583

 
12,528

 
30,917

 
35,090

Leased equipment income
8,332

 
11,635

 
8,538

 
29,442

 
25,305

Gain on sale of loans and leases
2,848

 
649

 
157

 
4,209

 
790

Gain on sale of securities
1,236

 
1,651

 
382

 
2,788

 
8,970

FDIC loss sharing expense, net

 

 

 

 
(8,917
)
Other income:
 
 
 
 
 
 
 
 
 
Dividends and realized gains on equity investments
1,845

 
1,587

 
377

 
4,777

 
2,808

Warrant income
731

 
815

 
213

 
1,701

 
301

Other
2,981

 
4,852

 
1,237

 
17,211

 
8,256

Total noninterest income
$
31,382

 
$
35,282

 
$
26,920

 
$
101,778

 
$
83,580


52


Third Quarter of 2017 Compared to Second Quarter of 2017
Noninterest income decreased by $3.9 million to $31.4 million for the third quarter of 2017 compared to $35.3 million for the second quarter of 2017 due mainly to lower leased equipment income of $3.3 million attributable to lower gains on early lease terminations, and lower other income of $1.9 million, offset partially by a higher gain on sale of loans and leases of $2.2 million. The decrease in other income was due to a BOLI death benefit and higher recoveries from third parties included in the second quarter of 2017.
Third Quarter of 2017 Compared to Third Quarter of 2016
Noninterest income increased by $4.5 million to $31.4 million for the third quarter of 2017 compared to $26.9 million for the third quarter of 2016 due mostly to a higher gain on sale of loans and leases of $2.7 million, higher other income of $1.7 million, higher dividends and realized gains on equity investments of $1.5 million, and a higher gain on sale of securities of $0.9 million, offset partially by lower other commissions and fees of $2.6 million. The increase in other income was due primarily to a $1.1 million legal settlement recorded in the third quarter of 2017 and an increase in foreign currency translation net gains. The increase in dividends and realized gains on equity investments was due mainly to higher dividends received of $1.3 million. The decrease in other commissions and fees was due primarily to lower loan prepayment penalty fees of $3.5 million, offset partially by higher foreign exchange fees of $0.7 million and higher credit card fees of $0.5 million.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Noninterest income increased by $18.2 million to $101.8 million for the nine months ended September 30, 2017 compared to $83.6 million for the nine months ended September 30, 2016 due mostly to higher other income of $9.0 million, lower FDIC loss sharing expense of $8.9 million, higher leased equipment income of $4.1 million, higher gain on sale of loans and leases of $3.4 million, higher dividends and realized gains on equity investments of $2.0 million, and higher warrant income of $1.4 million, offset partially by a lower gain on sale of securities of $6.2 million and lower other commissions and fees of $4.2 million. The increase in other income was due mainly to a $5.0 million legal settlement with a former borrower recorded in the first quarter of 2017, a separate legal settlement for $1.1 million recorded in the third quarter of 2017, higher syndication fees, higher BOLI income, and a loss on the sale of our Pacific Western Equipment Finance leasing unit in the first quarter of 2016. The decrease in FDIC loss sharing expense was due to the termination of all FDIC loss sharing agreements in the second quarter of 2016. Leased equipment income increased due to a higher average balance of leased equipment in 2017 and higher gains from early lease terminations. The increase in gain on sale of loans and leases was attributable to a net gain of $4.2 million on sales of $289.6 million of loans during the nine months ended September 30, 2017 compared to a net gain of $0.8 million on sales of $105.3 million of loans and leases during the 2016 period. The increase in dividends and realized gains on equity investments was due mainly to higher dividends received of $2.7 million, offset partially by lower gains on equity investments of $0.8 million. The decrease in gain on sale of securities was attributable to a net gain of $2.8 million on sales of $182.7 million of securities during the nine months ended September 30, 2017 compared to a net gain of $9.0 million on sales of $383.9 million of securities during the 2016 period. The decrease in other commissions and fees was due primarily to lower loan prepayment penalty fees of $7.7 million, offset partially by higher credit card fees of $1.6 million, higher syndication fees of $1.4 million, and higher foreign exchange fees of $0.9 million.

53


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,
Noninterest Expense
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Compensation
$
64,413

 
$
65,288

 
$
62,661

 
$
194,581

 
$
185,900

Occupancy
12,729

 
11,811

 
12,010

 
36,148

 
36,835

Data processing
6,459

 
6,337

 
6,234

 
19,811

 
17,782

Other professional services
4,213

 
3,976

 
4,625

 
11,567

 
11,598

Insurance and assessments
4,702

 
4,856

 
4,324

 
14,349

 
14,240

Intangible asset amortization
3,049

 
3,065

 
4,224

 
9,178

 
13,341

Leased equipment depreciation
4,862

 
5,232

 
5,298

 
15,719

 
15,608

Foreclosed assets expense (income), net
2,191

 
(157
)
 
(248
)
 
2,177

 
(812
)
Acquisition, integration and reorganization costs
1,450

 
1,700

 

 
3,650

 
200

Loan expense
3,421

 
3,884

 
1,931

 
10,692

 
6,231

Other
11,053

 
11,715

 
9,651

 
34,921

 
30,556

Total noninterest expense
$
118,542

 
$
117,707

 
$
110,710

 
$
352,793

 
$
331,479

Third Quarter of 2017 Compared to Second Quarter of 2017
Noninterest expense increased by $0.8 million to $118.5 million for the third quarter of 2017 compared to $117.7 million for the second quarter of 2017. The increase was due mostly to a $2.3 million increase in foreclosed asset expense, offset by a decrease in compensation expense of $0.9 million, and a decrease in other expense of $0.7 million. The increase in foreclosed assets expense was due to a write-down of $2.1 million on foreclosed property. The decrease in compensation expense was due primarily to a lower vacation accrual and lower payroll taxes. The decrease in other expense was due mainly to a $1.1 million charge recorded in the second quarter of 2017 related to the sale of the unfunded commitments portion of the healthcare loan sale (see "- Recent Events - Loan Sales and Loans Held for Sale").
Third Quarter of 2017 Compared to Third Quarter of 2016
Noninterest expense increased by $7.8 million to $118.5 million for the third quarter of 2017 compared to $110.7 million for the third quarter of 2016. The increase was due mostly to higher foreclosed asset expense of $2.4 million, higher compensation expense of $1.8 million, higher loan expense of $1.5 million, higher acquisition, integration and reorganization costs of $1.5 million, and higher other expense of $1.4 million, offset by lower intangible asset amortization of $1.2 million. The increase in foreclosed asset expense was due to a write-down of $2.1 million on foreclosed property as described above. Compensation expensed increased due mainly to higher salary expense of $1.5 million. Loan expense increased due to higher legal-related and other loan expenses, offset partially by higher fee income from servicing. Acquisition, integration and reorganization costs increased due to costs associated with the CUB acquisition. Other expense increased due primarily to higher business development expenses of $0.6 million, higher employee-related expenses of $0.4 million, and $0.3 million for a legal settlement. Intangible asset amortization decreased due mainly to a decline in the amortization recorded on the Square 1 CDI and CRI. In addition, the CDI related to a previous acquisition was fully amortized in the second quarter of 2016.




54


Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Noninterest expense increased by $21.3 million to $352.8 million for the nine months ended September 30, 2017 compared to $331.5 million for the nine months ended of 2016. The increase was due mostly to higher compensation expense of $8.7 million, higher loan expense of $4.5 million, higher other expense of $4.4 million, higher acquisition, integration and reorganization costs of $3.5 million, higher foreclosed asset expense of $3.0 million, and higher data processing expense of $2.0 million, offset by lower intangible asset amortization of $4.2 million. Compensation expense increased due to higher salary expense of $4.6 million, higher stock-based compensation expense of $2.9 million, higher bonus expense of $1.3 million, and higher commissions expense of $1.0 million, offset partially by higher deferred loan costs of $1.1 million. Loan expense increased due primarily to higher legal-related and other loan expenses, lower fee income from servicing, and lower recoveries of legal costs. Other expense increased due primarily to a $1.75 million legal settlement, a $1.1 million charge in the second quarter of 2017 related to the sale of the unfunded commitments portion of the healthcare loan sale, and higher business development expenses of $1.2 million. Acquisition, integration and reorganization costs increased due to costs associated with the CUB acquisition. The increase in foreclosed asset expense was due mainly to a write-down of $2.1 million on foreclosed property as described above, lower gains on sales of $0.6 million, and higher operating expenses of $0.3 million. Intangible asset amortization decreased due mainly to a decline in the amortization recorded on the Square 1 CDI and CRI. In addition, the CDI related to a previous acquisition was fully amortized in the second quarter of 2016.
Income Taxes
The effective tax rate for the third quarter of 2017 was 27.2% compared to 37.0% for the second quarter of 2017 and 34.1% for the third quarter of 2016. The effective tax rate was 33.9% and 36.9% for the nine months ended September 30, 2017 and 2016. The decrease in the effective tax rate for the third quarter of 2017 and nine months ended September 30, 2017 was primarily due to the reversal of a $13.6 million valuation allowance related to tax credits in the third quarter of 2017 which, based on a change in estimate in our latest analysis, are more likely than not to be utilized before they expire. The decrease in the effective tax rate for the nine months ended September 30, 2017 was also attributable, to a lesser extent, to tax benefits recorded in 2017 due to the adoption of ASU 2016-09 on January 1, 2017. The estimated effective tax rate for the full year 2017 is approximately 35%. The Company's blended statutory tax rate for federal and state is 41%.


55



Balance Sheet Analysis
Securities Available-for-Sale
The following table presents the composition and durations of our securities available-for-sale as of the dates indicated:
 
September 30, 2017
 
June 30, 2017
 
December 31, 2016
 
Fair
 
% of
 
Duration
 
Fair
 
% of
 
Duration
 
Fair
 
% of
 
Duration
Security Type
Value
 
Total
 
(in years)
 
Value
 
Total
 
(in years)
 
Value
 
Total
 
(in years)
 
(Dollars in thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
377,541

 
11
%
 
2.8

 
$
404,320

 
12
%
 
2.9

 
$
502,443

 
16
%
 
3.4

Agency CMOs
175,950

 
5
%
 
3.4

 
133,792

 
4
%
 
2.4

 
146,289

 
4
%
 
3.0

Private label CMOs
134,550

 
4
%
 
4.9

 
159,701

 
5
%
 
4.9

 
125,469

 
4
%
 
3.5

Municipal securities
1,549,150

 
44
%
 
7.9

 
1,534,554

 
44
%
 
7.6

 
1,456,459

 
45
%
 
6.3

Agency commercial MBS
995,914

 
28
%
 
5.5

 
918,210

 
26
%
 
5.5

 
547,692

 
17
%
 
4.9

Corporate debt securities
19,125

 
%
 
11.9

 
19,185

 
%
 
12.0

 
47,509

 
1
%
 
4.9

Collateralized loan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
obligations
19,176

 
%
 
0.2

 
66,301

 
2
%
 
0.2

 
156,887

 
5
%
 
0.1

SBA securities
168,028

 
5
%
 
1.9

 
178,056

 
5
%
 
2.0

 
178,845

 
6
%
 
3.8

Asset-backed and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
other securities
92,796

 
3
%
 
3.5

 
60,441

 
2
%
 
3.6

 
62,237

 
2
%
 
3.5

Total securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
available-for-sale
$
3,532,230

 
100
%
 
5.9

 
$
3,474,560

 
100
%
 
5.7

 
$
3,223,830

 
100
%
 
4.8

The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
 
September 30, 2017
 
Fair
 
% of
Municipal Securities by State
Value
 
Total
 
(Dollars in thousands)
 California
$
251,496

 
16
%
 New York
171,680

 
11
%
 Washington
166,535

 
11
%
 Texas
105,972

 
7
%
 Ohio
92,197

 
6
%
 District of Columbia
77,364

 
5
%
 Oregon
69,315

 
4
%
 Massachusetts
59,547

 
4
%
Utah
55,064

 
4
%
Alabama
45,862

 
3
%
Total of 10 largest states
1,095,032

 
71
%
All other states
454,118

 
29
%
Total municipal securities
$
1,549,150

 
100
%

56



Loans and Leases Held for Investment
The following table presents the composition of our total loans and leases held for investment as of the dates indicated:
 
September 30, 2017
 
June 30, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Healthcare real estate
$
840,638

 
5
%
 
$
901,688

 
6
%
 
$
955,477

 
6
%
Hospitality
695,605

 
4
%
 
712,365

 
5
%
 
689,158

 
4
%
SBA program
484,897

 
3
%
 
483,484

 
3
%
 
454,196

 
3
%
Other commercial real estate
2,317,793

 
16
%
 
2,320,926

 
14
%
 
2,297,865

 
15
%
Total commercial real estate
4,338,933

 
28
%
 
4,418,463

 
28
%
 
4,396,696

 
28
%
Income producing residential
1,730,383

 
11
%
 
1,596,398

 
10
%
 
1,169,267

 
8
%
Owner-occupied residential
119,941

 
1
%
 
122,871

 
1
%
 
144,769

 
1
%
Total residential real estate
1,850,324

 
12
%
 
1,719,269

 
11
%
 
1,314,036

 
9
%
Total real estate mortgage
6,189,257

 
40
%
 
6,137,732

 
39
%
 
5,710,732

 
37
%
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
680,950

 
5
%
 
691,828

 
5
%
 
581,246

 
4
%
Residential
568,273

 
4
%
 
473,282

 
3
%
 
384,001

 
2
%
Total real estate construction and land
1,249,223

 
9
%
 
1,165,110

 
8
%
 
965,247

 
6
%
Total real estate
7,438,480

 
49
%
 
7,302,842

 
47
%
 
6,675,979

 
43
%
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Technology cash flow
915,863

 
6
%
 
995,235

 
6
%
 
1,047,683

 
7
%
Security cash flow
562,754

 
4
%
 
545,904

 
4
%
 
440,340

 
3
%
Healthcare cash flow
484,888

 
3
%
 
514,681

 
3
%
 
799,030

 
5
%
Other cash flow
770,949

 
4
%
 
779,146

 
5
%
 
825,837

 
5
%
Total cash flow
2,734,454

 
17
%
 
2,834,966

 
18
%
 
3,112,890

 
20
%
Lender finance & timeshare
1,594,196

 
10
%
 
1,435,301

 
9
%
 
1,666,855

 
11
%
Healthcare asset-based
118,222

 
1
%
 
155,847

 
1
%
 
180,580

 
1
%
Other asset-based
865,052

 
5
%
 
801,055

 
5
%
 
764,361

 
5
%
Total asset-based
2,577,470

 
16
%
 
2,392,203

 
15
%
 
2,611,796

 
17
%
Expansion stage
890,756

 
6
%
 
951,502

 
6
%
 
920,006

 
6
%
Early stage
464,506

 
3
%
 
450,282

 
3
%
 
448,458

 
3
%
Equity funds group
341,401

 
2
%
 
309,820

 
2
%
 
325,047

 
2
%
Later stage
262,826

 
1
%
 
289,823

 
2
%
 
294,389

 
2
%
Total venture capital
1,959,489

 
12
%
 
2,001,427

 
13
%
 
1,987,900

 
13
%
Equipment finance
594,473

 
4
%
 
613,550

 
4
%
 
691,967

 
4
%
Total commercial
7,865,886

 
49
%
 
7,842,146

 
50
%
 
8,404,553

 
54
%
Consumer
386,151

 
2
%
 
398,469

 
3
%
 
375,422

 
3
%
Total loans and leases held for investment,
 
 
 
 
 
 
 
 
 
 
 
net of deferred fees (1)
$
15,690,517

 
100
%
 
$
15,543,457

 
100
%
 
$
15,455,954

 
100
%
 
_____________________________________
(1)
Excludes loans held for sale carried at lower of cost or fair value at June 30, 2017.
Our real estate portfolio exposes us to risk elements associated with mortgage loans on commercial property. For commercial real estate loans, the respective primary and secondary sources of loan repayments are the net operating incomes of the properties and the proceeds from the sales or refinancings of the properties. As such, our commercial real estate borrowers generally are required to refinance the loans with us or another lender or sell the properties to repay our loans.

57



The following table presents the geographic composition of our real estate loans held for investment 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, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
Real Estate Loans by State
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
California
$
3,523,200

 
48
%
 
$
3,248,735

 
49
%
New York
670,982

 
9
%
 
524,833

 
8
%
Florida
479,990

 
7
%
 
478,984

 
7
%
Texas
345,166

 
5
%
 
364,689

 
5
%
Virginia
235,588

 
3
%
 
231,162

 
3
%
Arizona
219,930

 
3
%
 
166,499

 
3
%
Illinois
179,613

 
2
%
 
178,726

 
3
%
Washington
174,168

 
2
%
 
49,301

 
1
%
Pennsylvania
171,081

 
2
%
 
160,303

 
2
%
Georgia
157,421

 
2
%
 
118,629

 
2
%
Total of 10 largest states
6,157,139

 
83
%
 
5,521,861

 
83
%
All other states
1,281,341

 
17
%
 
1,154,118

 
17
%
Total real estate loans held for investment
$
7,438,480

 
100
%
 
$
6,675,979

 
100
%
The following table presents a roll forward of the loan and lease portfolio held for investment for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
Loans and Leases Held for Investment Roll Forward (1)
September 30, 2017
 
September 30, 2017
 
(Dollars in thousands)
Balance, beginning of period
$
15,543,457

 
$
15,455,954

New production
1,002,887

 
3,129,506

Existing loans and leases:
 
 
 
Payoffs
(903,395
)
 
(3,072,964
)
Paydowns
(637,674
)
 
(1,956,583
)
Disbursements
722,777

 
2,479,882

Sales (2)
(31,528
)
 
(113,965
)
Transfers to foreclosed assets

 
(580
)
Charge-offs
(6,007
)
 
(55,575
)
Transfers to loans held for sale (3)

 
(175,158
)
Balance, end of period
$
15,690,517

 
$
15,690,517

 
 
 
 
Weighted average rate on new production
5.04
%
 
4.96
%
_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
Sales for the three and nine months ended September 30, 2017 exclude sales of loans that were transferred to loans held for sale at June 30, 2017.
(3)
These loans were sold in July 2017 from the held for sale portfolio.


58



Allowance for Credit Losses on Non-PCI Loans and Leases Held for Investment
The allowance for credit losses on Non-PCI loans and leases held for investment 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 related allowance for credit losses. Refer to "- Balance Sheet Analysis - Allowance for Loan Losses on PCI Loans Held for Investment" 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 credit 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 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 make payments to us in accordance with contractual terms. 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 has 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.
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 and leases 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 or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a specific reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent. 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.
Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to our population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors are the average charge-offs experienced over a prescribed historical look-back period on loans and leases pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things, current economic trends and forecasts, current commercial real estate values and performance trends, and the loan portfolio's current composition and credit performance trends.
The qualitative criteria we consider 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;
loan and lease portfolio composition and any loan concentrations;
current lending policies and the effects of any new policies or policy amendments;
loan and lease production volume and mix;
loan and lease portfolio credit performance trends;
results of our independent credit review; and
changes in management related to credit administration functions.

59



We estimate the reserve for unfunded commitments 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 allowance for credit losses is directly correlated to the credit risk ratings of our loans. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans on a regular basis. 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 4. Loans and Leases, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
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 borrower loan defaults, borrowers’ noncompliance with our loan agreements, 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 future losses.
The following table presents information regarding the allowance for credit losses on Non-PCI loans and leases held for investment as of the dates indicated:
 
September 30,
 
June 30,
 
March 31,
 
September 30,
Non-PCI Allowance for Credit Losses Data
2017
 
2017
 
2017
 
2016
 
(Dollars in thousands)
Allowance for loan and lease losses
$
152,770

 
$
138,879

 
$
149,826

 
$
136,747

Reserve for unfunded loan commitments
20,809

 
20,263

 
17,763

 
17,323

Total allowance for credit losses
$
173,579

 
$
159,142

 
$
167,589

 
$
154,070

 
 
 
 
 
 
 
 
Allowance for credit losses to loans and leases held for investment
1.11
%
 
1.02
%
 
1.08
%
 
1.05
%
Allowance for credit losses to nonaccrual loans and leases held for investment
110.1
%
 
92.2
%
 
96.9
%
 
90.1
%



60



The following table presents the changes in our allowance for credit losses on Non-PCI loans and leases held for investment for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Non-PCI Allowance for Credit Losses
2017
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Balance, beginning of period
$
159,142

 
$
167,589

 
$
149,944

 
$
161,278

 
$
122,268

Provision for credit losses:
 
 
 
 
 
 
 
 
 
Addition to allowance for loan and lease losses
14,954

 
10,000

 
8,621

 
49,214

 
39,411

Addition to reserve for unfunded loan commitments
546

 
2,500

 
(621
)
 
3,286

 
589

Provision for credit losses
15,500

 
12,500

 
8,000

 
52,500

 
40,000

Loans and leases charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
(531
)
 
(142
)
 
(302
)
 
(2,217
)
 
(1,905
)
Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
(846
)
 
(11,599
)
 
(167
)
 
(25,554
)
 
(1,792
)
Asset-based
(714
)
 
(99
)
 

 
(1,212
)
 
(659
)
Venture capital
(3,424
)
 
(10,980
)
 

 
(20,181
)
 
(146
)
Equipment finance

 
(18
)
 
(9,439
)
 
(18
)
 
(11,709
)
Total commercial
(4,984
)
 
(22,696
)
 
(9,606
)
 
(46,965
)
 
(14,306
)
Consumer
(413
)
 
(113
)
 
(16
)
 
(625
)
 
(798
)
Total loans and leases charged off
(5,928
)
 
(22,951
)
 
(9,924
)
 
(49,807
)
 
(17,009
)
Recoveries on loans charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
36

 
20

 
2,414

 
286

 
4,352

Real estate construction and land
353

 
9

 
27

 
370

 
185

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
312

 
267

 
3,362

 
711

 
3,593

Asset-based
146

 
420

 
148

 
705

 
472

Venture capital
2,597

 
1,252

 
35

 
4,054

 
91

Equipment finance
1,392

 
14

 
8

 
3,378

 
23

Total commercial
4,447

 
1,953

 
3,553

 
8,848

 
4,179

Consumer
29

 
22

 
56

 
104

 
95

Total recoveries on loans charged off
4,865

 
2,004

 
6,050

 
9,608

 
8,811

Net charge-offs
(1,063
)
 
(20,947
)
 
(3,874
)
 
(40,199
)
 
(8,198
)
Balance, end of period
$
173,579

 
$
159,142

 
$
154,070

 
$
173,579

 
$
154,070

 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average loans and leases
0.03
%
 
0.54
%
 
0.11
%
 
0.35
%
 
0.08
%
Allowance for Loan Losses on PCI Loans Held for Investment
We measure the allowance for loan losses for PCI loans held for investment at the end of each financial reporting period based on expected cash flows of our PCI loans. 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 negative provision, respectively, for loan losses on such loans. For example, generally a decrease in the expected cash flows of PCI loans would result in an additional reserve requirement and a provision for PCI loan losses would be recorded.

61



The following table presents the changes in our allowance for loan losses on PCI loans held for investment for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
PCI Allowance for Loan Losses
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Balance, beginning of period
$
7,079

 
$
11,481

 
$
11,289

 
$
13,483

 
$
9,577

(Negative provision) provision for loan losses
(381
)
 
(1,001
)
 
471

 
(1,154
)
 
2,514

Net recoveries (charge-offs)
138

 
(3,401
)
 
(531
)
 
(5,493
)
 
(862
)
Balance, end of period
$
6,836

 
$
7,079

 
$
11,229

 
$
6,836

 
$
11,229

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,
 
2017
 
2017
 
2016
 
2016
 
(Dollars in thousands)
Nonaccrual Non-PCI loans and leases held for investment (1)
$
157,697

 
$
172,576

 
$
170,599

 
$
171,085

Nonaccrual PCI loans held for investment
1,761

 
1,980

 
2,928

 
3,478

Total nonaccrual loans and leases held for investment
159,458

 
174,556

 
173,527

 
174,563

Foreclosed assets, net
11,630

 
13,278

 
12,976

 
15,113

Total nonperforming assets
$
171,088

 
$
187,834

 
$
186,503

 
$
189,676

 
 
 
 
 
 
 
 
Performing troubled debt restructured loans held for investment (2)
$
56,552

 
$
55,910

 
$
64,592

 
$
70,348

Classified Non-PCI loans and leases held for investment (1)
$
344,777

 
$
339,977

 
$
409,645

 
$
417,541

Nonaccrual loans and leases held for investment to
 
 
 
 
 
 
 
loans and leases held for investment
1.01
%
 
1.12
%
 
1.12
%
 
1.18
%
Nonperforming assets to loans and leases held for investment
 
 
 
 
 
 
 
and foreclosed assets, net
1.09
%
 
1.20
%
 
1.20
%
 
1.28
%
Classified Non-PCI loans and leases held for investment
 
 
 
 
 
 
 
to Non-PCI loans and leases held for investment
2.20
%
 
2.19
%
 
2.66
%
 
2.84
%
_______________________________________ 
(1)
Excludes loans held for sale carried at lower of cost or fair value at June 30, 2017.
(2)
Excludes PCI loans.

Nonperforming assets include Non-PCI and PCI nonaccrual loans and leases held for investment and foreclosed assets and totaled $171.1 million at September 30, 2017 compared to $187.8 million at June 30, 2017. The ratio of nonperforming assets to loans and leases held for investment and foreclosed assets decreased to 1.09% at September 30, 2017 from 1.20% at June 30, 2017. During the third quarter of 2017, Non-PCI classified loans and leases held for investment increased by $4.8 million to $344.8 million as new downgrades exceeded resolutions.
Nonaccrual Loans and Leases Held for Investment
During the third quarter of 2017, nonaccrual loan and leases held for investment decreased by $15.1 million to $159.5 million at September 30, 2017 due mainly to $5.7 million in charge-offs and $23.0 million in principal payments and other reductions, offset by nonaccrual additions of $13.6 million.
As of September 30, 2017, the Company's ten largest Non-PCI loan relationships on nonaccrual status had an aggregate carrying value of $129.1 million and represented 81.9% of total Non-PCI nonaccrual loans and leases. The largest of these relationships consisted of a $45.5 million healthcare real estate loan secured by a continuing care retirement facility that migrated to nonaccrual status during the third quarter of 2016 due to weak operating performance and cash flow difficulties.


62



The following table presents our Non-PCI nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by portfolio segment and class as of the dates indicated:
 
Non-PCI Nonaccrual Loans and Leases
 
Non-PCI Accruing and
 
September 30, 2017
 
June 30, 2017
 
30 - 89 Days Past Due
 
 
 
% of
 
 
 
% of
 
September 30,
 
June 30,
 
 
 
Loan
 
 
 
Loan
 
2017
 
2017
 
Amount
 
Category
 
Amount
 
Category
 
Amount
 
Amount
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
63,096

 
1.5
%
 
$
65,599

 
1.5
%
 
$
1,446

 
$
3,734

Residential
3,186

 
0.2
%
 
5,229

 
0.3
%
 
282

 
46

Total real estate mortgage
66,282

 
1.1
%
 
70,828

 
1.2
%
 
1,728

 
3,780

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
33,514

 
1.2
%
 
43,169

 
1.5
%
 
72

 
201

Asset-based
3,977

 
0.2
%
 
1,718

 
0.1
%
 

 

Venture capital
22,686

 
1.2
%
 
25,278

 
1.3
%
 
2,720

 
23,171

Equipment finance
30,942

 
5.2
%
 
31,111

 
5.1
%
 

 

Total commercial
91,119

 
1.2
%
 
101,276

 
1.3
%
 
2,792

 
23,372

Consumer
296

 
0.1
%
 
472

 
0.1
%
 
286

 

Total held for investment (1)
$
157,697

 
1.0
%
 
$
172,576

 
1.1
%
 
$
4,806

 
$
27,152

_______________________________________ 
(1)
Excludes loans held for sale carried at lower of cost or fair value at June 30, 2017.
Foreclosed Assets
The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
Property Type
2017
 
2017
 
2016
 
2016
 
(In thousands)
Construction and land development
$
9,319

 
$
11,443

 
$
11,224

 
$
13,800

Multi-family

 

 
652

 

Commercial real estate
65

 
65

 

 

Single family residence
1,668

 
1,018

 

 

Total OREO, net
11,052

 
12,526

 
11,876

 
13,800

Other foreclosed assets
578

 
752

 
1,100

 
1,313

Total foreclosed assets
$
11,630

 
$
13,278

 
$
12,976

 
$
15,113

During the third quarter of 2017, foreclosed assets decreased by $1.6 million to $11.6 million at September 30, 2017 due primarily to a write-down of $2.1 million on foreclosed property and reductions related to sales of $0.2 million, offset by additions of $0.7 million.
Performing Troubled Debt Restructured Loans Held for Investment
During the third quarter of 2017, Non-PCI performing troubled debt restructured loans held for investment increased by $0.6 million to $56.6 million due mainly to $0.5 million in new additions and $0.3 million in transfers from nonaccrual status to accrual status, offset by $0.2 million in payoffs and other reductions. At September 30, 2017, we had $47.5 million in real estate mortgage loans, $5.8 million in real estate construction and land loans, $3.2 million in commercial loans, and $0.1 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 restructurings and have remained on accrual status after the restructurings due to the borrowers making payments before and after the restructurings.

63



Deposits
The following table presents the balance of each major category of deposits as of the dates indicated:
 
September 30, 2017
 
June 30, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
 
 
 
% of
Deposit Category
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
6,911,874

 
41
%
 
$
6,701,039

 
40
%
 
$
6,659,016

 
42
%
Interest checking deposits
1,957,485

 
12
%
 
1,762,016

 
10
%
 
1,448,394

 
9
%
Money market deposits
3,967,224

 
24
%
 
4,033,471

 
24
%
 
3,705,385

 
23
%
Savings deposits
694,717

 
4
%
 
721,048

 
4
%
 
711,039

 
5
%
Total core deposits
13,531,300

 
81
%
 
13,217,574

 
78
%
 
12,523,834

 
79
%
Non-core non-maturity deposits
1,118,694

 
6
%
 
1,329,324

 
8
%
 
1,174,487

 
7
%
Total non-maturity deposits
14,649,994

 
87
%
 
14,546,898

 
86
%
 
13,698,321

 
86
%
Time deposits $250,000 and under
1,770,439

 
11
%
 
1,940,872

 
12
%
 
1,758,434

 
11
%
Time deposits over $250,000
352,812

 
2
%
 
387,207

 
2
%
 
413,856

 
3
%
Total time deposits
2,123,251

 
13
%
 
2,328,079

 
14
%
 
2,172,290

 
14
%
Total deposits
$
16,773,245

 
100
%
 
$
16,874,977

 
100
%
 
$
15,870,611

 
100
%
Total deposits decreased by $101.7 million during the third quarter to $16.8 billion, due mainly to a decrease in non-core non-maturity deposits of $210.6 million and a decrease in time deposits of $204.8 million, offset partially by an increase in core deposits of $313.7 million. The decrease in non-core non-maturity deposits was planned based upon year-to-date core deposit growth and in anticipation of the core deposits being acquired from CUB. At September 30, 2017, core deposits totaled $13.5 billion, or 81% of total deposits, including $6.9 billion of noninterest-bearing demand deposits, or 41% of total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
 
Time Deposits
 
$250,000
 
Over
 
 
Maturity
and Under
 
$250,000
 
Total
 
(In thousands)
Due in three months or less
$
607,436

 
$
112,808

 
$
720,244

Due in over three months through six months
532,766

 
172,846

 
705,612

Due in over six months through twelve months
505,340

 
50,205

 
555,545

Due in over 12 months through 24 months
82,233

 
8,738

 
90,971

Due in over 24 months
42,664

 
8,215

 
50,879

Total at September 30, 2017
$
1,770,439

 
$
352,812

 
$
2,123,251

 
 
 
 
 
 
Total at June 30, 2017
$
1,940,872

 
$
387,207

 
$
2,328,079

Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through S1AM, our registered investment adviser subsidiary, and third-party money market sweep products. S1AM provides customized investment advisory and asset management solutions. At September 30, 2017, total off-balance sheet client investment funds were $1.9 billion, of which $1.6 billion was managed by S1AM.

64



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, 2017, 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, 2017, such disallowed amounts were $4.0 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 applicable to the Company and the Bank were 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.
Beginning January 1, 2016, Basel III required all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements 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, 2017, the Company and Bank were 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.
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
 
 
 
 
 
Plus Capital
 
 
 
Plus Capital
 
 
 
For Capital
 
Conservation
 
For Well
 
Conservation
 
 
 
Adequacy
 
Buffer
 
Capitalized
 
Buffer Fully
 
Actual
 
Purposes
 
Phase-In (1)
 
Requirement
 
Phased-In
September 30, 2017
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
12.02%
 
4.00%
 
4.00%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
12.52%
 
4.50%
 
5.75%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
12.52%
 
6.00%
 
7.25%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
15.74%
 
8.00%
 
9.25%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.46%
 
4.00%
 
4.00%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
11.95%
 
4.50%
 
5.75%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
11.95%
 
6.00%
 
7.25%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
12.89%
 
8.00%
 
9.25%
 
10.00%
 
10.50%

65



 
 
 
Minimum Required
 
 
 
 
 
Plus Capital
 
 
 
Plus Capital
 
 
 
For Capital
 
Conservation
 
For Well
 
Conservation
 
 
 
Adequacy
 
Buffer
 
Capitalized
 
Buffer Fully
 
Actual
 
Purposes
 
Phase-In (1)
 
Requirement
 
Phased-In
December 31, 2016
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.91%
 
4.00%
 
4.00%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
12.31%
 
4.50%
 
5.125%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
12.31%
 
6.00%
 
6.625%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
15.56%
 
8.00%
 
8.625%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.40%
 
4.00%
 
4.00%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
11.78%
 
4.50%
 
5.125%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
11.78%
 
6.00%
 
6.625%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
12.72%
 
8.00%
 
8.625%
 
10.00%
 
10.50%
_______________________________________ 
(1)
Ratios for September 30, 2017 reflect the minimum required plus capital conservation buffer phase-in for 2017; ratios for December 31, 2016 reflect the minimum required plus capital conservation buffer phase-in for 2016. The capital conservation buffer increases by 0.625% each year through 2019.
Subordinated Debentures
We issued or assumed through mergers 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 $448.1 million at September 30, 2017. At September 30, 2017, none of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $435.0 million were included in Tier II capital.
Dividends on Common Stock and Interest on Subordinated Debentures
As a bank holding company, PacWest is required to notify the 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.

66



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 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 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 for the purpose of overnight funds, subject to availability, of $135.0 million with the FHLB and $75.0 million with correspondent banks. As of September 30, 2017, there was a $135.0 million balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2017, the Bank had no borrowings outstanding through the AFX.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
 
September 30,
 
June 30,
 
December 31,
Primary Liquidity - On-Balance Sheet
2017
 
2017
 
2016
 
(Dollars in thousands)
Cash and due from banks
$
147,579

 
$
180,330

 
$
337,965

Interest-earning deposits in financial institutions
122,439

 
107,150

 
81,705

Securities available-for-sale
3,532,230

 
3,474,560

 
3,223,830

Less: pledged securities
(339,815
)
 
(430,182
)
 
(425,511
)
Total primary liquidity
$
3,462,433

 
$
3,331,858

 
$
3,217,989

 
 
 
 
 
 
Ratio of primary liquidity to total deposits
20.6
%
 
19.7
%
 
20.3
%
Secondary Liquidity - Off-Balance Sheet
September 30,
 
June 30,
 
December 31,
Available Secured Borrowing Capacity
2017
 
2017
 
2016
 
(In thousands)
Secured borrowing capacity with the FHLB
$
3,033,258

 
$
2,916,358

 
$
2,010,739

Less: secured advances outstanding
(115,000
)
 
(85,000
)
 
(735,000
)
Net secured borrowing capacity with the FHLB
2,918,258

 
2,831,358

 
1,275,739

Secured borrowing capacity with the FRBSF
2,170,255

 
2,201,579

 
2,210,692

Total secondary liquidity
$
5,088,513

 
$
5,032,937

 
$
3,486,431

During the three months ended September 30, 2017, the Company's primary liquidity increased by $130.6 million due to a $90.4 million decrease in pledged securities, a $57.7 million increase in securities available-for-sale, and a $15.3 million increase in interest-earning deposits in financial institutions, offset partially by a $32.8 million decrease in cash due from banks. The Company's secondary liquidity increased by $55.6 million during the third quarter due mainly to a $116.9 million increase in the borrowing capacity on the secured borrowing line with the FHLB, offset partially by a $31.3 million decrease in the borrowing capacity on the secured credit line with the FRBSF and a $30.0 million increase in the amount borrowed from the secured borrowing line with the FHLB.

67



As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB as of September 30, 2017 of $3.0 billion, collateralized by a blanket lien on $4.4 billion of certain qualifying loans not pledged to the FRBSF. The Bank also had secured borrowing capacity with the FRBSF of $2.2 billion as of September 30, 2017 collateralized by liens on $2.9 billion of qualifying loans.
In addition to our primary liquidity, we generate 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, savings, and non-brokered money market accounts. At September 30, 2017, core deposits totaled $13.5 billion and represented 81% of the Company's total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.
Our deposit balances may decrease if interest rates increase significantly or if corporate customers withdraw 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 off-balance sheet liquidity.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At September 30, 2017, brokered deposits totaled $1.8 billion, consisting of $759.6 million of brokered time deposits, $1.1 billion of non-maturity brokered accounts, and $9.4 million of other brokered deposits. At December 31, 2016, brokered deposits totaled $1.6 billion, consisting of $405.5 million of brokered time deposits, $1.2 billion of non-maturity brokered accounts, and $12.2 million of other brokered deposits. We have increased the amount of our brokered deposits in recent quarters because of the large amount of deposits that can be obtained in a short period of time to manage liquidity and funding needs.
Our liquidity 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 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, 2017, we were in compliance with all of our established liquidity guidelines.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and 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 FDIC and the DBO under their general supervisory authority as it relates to a bank’s capital requirements. 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, 2017, PacWest received $65.0 million and $195.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $466.9 million at September 30, 2017, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At September 30, 2017, PacWest had $507.9 million in cash and due from banks, 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 Stock Repurchase Program and cash consideration required in connection with the CUB acquisition.

68



Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
 
September 30, 2017
 
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)
$
1,981,251

 
$
116,086

 
$
25,645

 
$
119

 
$
2,123,101

Short-term borrowings
250,000

 

 

 

 
250,000

Long-term debt obligations(1)
233

 
166

 

 
542,210

 
542,609

Contractual interest(2)
4,943

 
1,024

 
745

 
7

 
6,719

Operating lease obligations
30,358

 
53,764

 
39,122

 
36,241

 
159,485

Other contractual obligations
33,066

 
29,851

 
9,839

 
16,360

 
89,116

Total
$
2,299,851

 
$
200,891

 
$
75,351

 
$
594,937

 
$
3,171,030

_______________________________________ 
(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 6. 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, 2016. 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 liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan and lease payoffs, securities repayments and maturities, and continued deposit gathering activities. We also have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a portion is expected to be funded. At September 30, 2017, our loan commitments, including standby letters of credit, totaled $5.3 billion. The commitments, a portion of which result in funded loans, 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, as described in "- Liquidity - Liquidity Management," have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments, see Note 7. Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

69



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, 2016, 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' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps to hedge exposures to loans and debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings 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, and the cross currency swaps that hedge those exposures. As of September 30, 2017, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $8.0 million and $30.4 million, and the U.S. Dollar notional amounts of cross currency swaps outstanding to hedge these foreign currency exposures were $6.8 million and $29.2 million. We recognized foreign currency translation net gains of $0.4 million and $0.7 million for the nine months ended September 30, 2017 and 2016.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our IRR position on at least a quarterly basis using two methods: (i) NII simulation analysis; and (ii) MVE 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 NII simulation model and MVE model prepared as of September 30, 2017, the results of which are presented below. Our NII simulation indicates that our balance sheet is asset-sensitive, while our MVE model indicates that our balance sheet had a slightly liability-sensitive profile. 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, 2017. 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, 2017. In order to arrive at the base case, we extend our balance sheet at September 30, 2017 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, 2017. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.

70



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 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 as of the date indicated:
 
 
 
 
 
 
 
 
 
Forecasted
 
 
 
Forecasted
 
Forecasted
 
Net Interest
 
Percentage
 
Net Interest
 
Net Interest
September 30, 2017
Income
 
Change
 
Margin
 
Margin Change
Interest Rate Scenario
(Tax Equivalent)
 
From Base
 
(Tax Equivalent)
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
Up 300 basis points
$
1,146.6

 
15.9%
 
5.88%
 
0.81%
Up 200 basis points
$
1,096.0

 
10.8%
 
5.62%
 
0.55%
Up 100 basis points
$
1,044.2

 
5.6%
 
5.36%
 
0.29%
BASE CASE
$
988.9

 
 
5.07%
 
Down 100 basis points
$
934.9

 
(5.5)%
 
4.80%
 
(0.27)%
Down 200 basis points
$
915.6

 
(7.4)%
 
4.70%
 
(0.37)%
Down 300 basis points
$
906.6

 
(8.3)%
 
4.65%
 
(0.42)%
Total base case year 1 tax equivalent NII was $988.9 million at September 30, 2017 compared to $998.2 million at June 30, 2017. The $9.3 million decrease in year 1 NII was attributable to a decrease in the assumed pricing spreads on new loan originations, increased funding costs on deposits, and a lower loan portfolio average balance due to the sale of the loans designated as held for sale at June 30, 2017, offset partially by an increase in the average balance of securities and a lower average balance of borrowings.
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. The most favorable alternate rate vector that we model is the “Bear Flattener” scenario, when short term rates increase faster than long term rates, and the least favorable alternate rate vector that we model is the “Bull Steepener,” when short term rates fall faster than long term rates. In the “Bear Flattener” scenario that we model, Year 1 NII increases by 1.4%, and in the “Bull Steepener” scenario that we model, Year 1 NII decreases by 2.9%.
Of the $15.8 billion of total loans in the portfolio, $10.9 billion have variable interest rate terms (excluding hybrid loans discussed below). At September 30, 2017, $10.4 billion of these variable-rate loans have a loan rate higher than their floor rate, which allows them to reprice at their next reprice date upon a change in their index. Approximately 67% of the total variable-rate loans have a LIBOR index rate.

71



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, 2017
Cumulative
 
Rate
Amount of
 
Increase
Variable-Rate
 
Needed to
Loans
 
Reprice
(Dollars in millions)
 
 
$
379.4

 
  0 - 100 bps
$
526.0

 
101 - 200 bps
$
547.2

 
201 - 300 bps
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 $245 million, $408 million, and $722 million in the next one, two, and three years.
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, 2017.
The following table shows the projected change in the market value of equity for the set of rate scenarios presented as of the date indicated:
 
 
 
 
 
 
 
 
 
Ratio of
 
Projected
 
Dollar
 
Percentage
 
Percentage
 
Projected
September 30, 2017
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
$
5,740.0

 
$
(96.2
)
 
(1.6
)%
 
25.8
%
 
124.5
%
Up 200 basis points
$
5,775.2

 
$
(61.0
)
 
(1.0
)%
 
26.0
%
 
125.3
%
Up 100 basis points
$
5,809.6

 
$
(26.6
)
 
(0.5
)%
 
26.1
%
 
126.0
%
BASE CASE
$
5,836.2

 
$

 
 %
 
26.2
%
 
126.6
%
Down 100 basis points
$
5,851.3

 
$
15.1

 
0.3
 %
 
26.3
%
 
126.9
%
Down 200 basis points
$
5,870.3

 
$
34.1

 
0.6
 %
 
26.4
%
 
127.3
%
Down 300 basis points
$
5,721.1

 
$
(115.1
)
 
(2.0
)%
 
25.7
%
 
124.1
%




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Total base case projected market value of equity was $5.8 billion at September 30, 2017, an increase of $46 million compared to June 30, 2017. The increase in base case market value of equity was due primarily to a $51 million increase in the book value of stockholders' equity and a $27 million decrease in the mark-to-market adjustment for total deposits, offset partially by a $32 million decrease in the fair value of loans.
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.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 7. 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, 2016. 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 2017:
 
 
 
 
 
Total Number of
 
Maximum Dollar
 
 
 
 
 
Shares Purchased
 
Value of Shares
 
 
 
 
 
as Part of
 
That May Yet
 
 
 
Average
 
Publicly
 
Be Purchased
 
Total Number of
 
Price Paid
 
Announced
 
Under the
Purchase Dates
Shares Purchased (1)
 
Per Share
 
Program (2)
 
Program (2)
 
 
 
 
 
 
 
(In thousands)

July 1, 2017 - July 31, 2017

 
$

 

 
$
372,069

August 1, 2017 - August 31, 2017
4,892

 
$
48.01

 

 
$
372,069

September 1, 2017 - September 30, 2017

 
$

 

 
$
372,069

Total
4,892

 
$

 

 
 
__________________________
(1)
Includes shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards, and shares repurchased pursuant to the Company's publicly announced Stock Repurchase Program.
(2)
On October 17, 2016, PacWest’s Board of Directors authorized a Stock Repurchase Program, pursuant to which the Company may, from time to time until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. All shares repurchased under the Stock Repurchase Program were retired upon settlement.

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ITEM 6. INDEX TO EXHIBITS
Exhibit Number
Description
2.3
2.4
3.1
3.2
3.5
10.1
10.2
10.3
10.4
10.5
10.6
31.1
31.2
32.1
32.2
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) the Condensed Consolidated Statements of Earnings for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016 and nine months ended September 30, 2017 and 2016, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016 and nine months ended September 30, 2017 and 2016, (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2017, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (vi) the Notes to Condensed Consolidated Financial Statements (Filed herewith).



75



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
 
 
 
Date:
November 7, 2017
/s/ Bart R. Olson
 
 
Bart R. Olson
 
 
Executive Vice President and Chief Accounting Officer

76