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PACWEST BANCORP - Quarter Report: 2017 March (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 March 31, 2017
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
 
 
 
 
 
o Emerging growth company
 
 
 
o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of April 26, 2017, there were 119,870,416 shares of the registrant's common stock outstanding, excluding 1,537,717 shares of unvested restricted stock.


1



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


2


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


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
$
337,965

Interest-earning deposits in financial institutions
111,892

 
81,705

Total cash and cash equivalents
296,500

 
419,670

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

 
3,223,830

Federal Home Loan Bank stock, at cost
17,901

 
21,870

Total investment securities
3,354,893

 
3,245,700

Gross loans and leases
15,622,871

 
15,520,537

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

 
15,298,716

Equipment leased to others under operating leases
224,580

 
229,905

Premises and equipment, net
28,908

 
38,594

Foreclosed assets, net
12,842

 
12,976

Deferred tax asset, net
88,765

 
94,112

Goodwill
2,173,949

 
2,173,949

Core deposit and customer relationship intangibles, net
33,302

 
36,366

Other assets
318,133

 
319,779

Total assets
$
21,927,254

 
$
21,869,767

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

 
$
6,659,016

Interest-bearing deposits
9,541,200

 
9,211,595

Total deposits
16,331,008

 
15,870,611

Borrowings
460,609

 
905,812

Subordinated debentures
442,516

 
440,744

Accrued interest payable and other liabilities
185,015

 
173,545

Total liabilities
17,419,148

 
17,390,712

 
 
 
 
Commitments and contingencies (Note 7)


 


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

 

Common stock ($0.01 par value, 200,000,000 shares authorized at March 31, 2017 and
 
 
 
December 31, 2016, 122,968,677 and 122,803,029 shares issued, respectively, including
 
 
 
1,537,717 and 1,476,132 shares of unvested restricted stock, respectively)
1,230

 
1,228

Additional paid-in capital
4,108,478

 
4,162,132

Retained earnings
444,321

 
366,073

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

 
5,982

Total stockholders' equity
4,508,106

 
4,479,055

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

 
$
21,869,767


See Notes to Condensed Consolidated Financial Statements.

4



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

 
$
238,223

 
$
236,375

Investment securities
23,039

 
23,403

 
22,547

Deposits in financial institutions
192

 
147

 
308

Total interest income
247,409

 
261,773

 
259,230

Interest expense:
 
 
 
 
 
Deposits
8,377

 
7,369

 
9,073

Borrowings
1,018

 
631

 
581

Subordinated debentures
5,562

 
5,468

 
4,982

Total interest expense
14,957

 
13,468

 
14,636

Net interest income
232,452

 
248,305

 
244,594

Provision for credit losses
24,728

 
23,215

 
20,140

Net interest income after provision for credit losses
207,724

 
225,090

 
224,454

Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
3,758

 
3,557

 
3,856

Other commissions and fees
10,390

 
12,036

 
11,489

Leased equipment income
9,475

 
8,614

 
8,244

Gain on sale of loans and leases
712

 
119

 
245

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

 
8,110

FDIC loss sharing expense, net

 

 
(2,415
)
Other income
10,878

 
4,054

 
5,010

Total noninterest income
35,114

 
28,895

 
34,539

Noninterest expense:
 
 
 
 
 
Compensation
64,880

 
66,013

 
61,065

Occupancy
11,608

 
12,076

 
12,632

Data processing
7,015

 
6,574

 
5,904

Other professional services
3,378

 
4,880

 
3,572

Insurance and assessments
4,791

 
4,124

 
4,965

Intangible asset amortization
3,064

 
3,176

 
4,746

Leased equipment depreciation
5,625

 
5,291

 
5,024

Foreclosed assets expense (income), net
143

 
2,693

 
(561
)
Acquisition, integration and reorganization costs
500

 

 
200

Other expense
15,540

 
13,795

 
13,141

Total noninterest expense
116,544

 
118,622

 
110,688

Earnings before income taxes
126,294

 
135,363

 
148,305

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

 
$
85,647

 
$
90,456

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
0.65

 
$
0.71

 
$
0.74

Diluted
$
0.65

 
$
0.71

 
$
0.74

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50


See Notes to Condensed Consolidated Financial Statements.


5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 
$
85,647

 
$
90,456

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

 
(111,045
)
 
43,093

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

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

 
(65,786
)
 
25,438

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

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

 
3,323

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

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

 
(66,091
)
 
20,651

Comprehensive income
$
85,404

 
$
19,556

 
$
111,107

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

See Notes to Condensed Consolidated Financial Statements.


6



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

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

 
$
1,228

 
$
4,162,132

 
$
366,073

 
$
(56,360
)
 
$
5,982

 
$
4,479,055

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 
711

 
(420
)
 

 

 
291

Net earnings

 

 

 
78,668

 

 

 
78,668

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

 

 

 

 

 
6,736

 
6,736

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

 
2

 
6,468

 

 

 

 
6,470

Restricted stock surrendered
(41,184
)
 

 

 

 
(2,281
)
 

 
(2,281
)
Cash dividends paid

 

 
(60,833
)
 

 

 

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

 
$
1,230

 
$
4,108,478

 
$
444,321

 
$
(58,641
)
 
$
12,718

 
$
4,508,106

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




See Notes to Condensed Consolidated Financial Statements.



7



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

 
$
90,456

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

 
8,219

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

 
9,523

Amortization of intangible assets
3,064

 
4,746

Provision for credit losses
24,728

 
20,140

Gain on sale of foreclosed assets

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

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

 
(250
)
Earned stock compensation
6,470

 
5,046

Loss on sale of PWEF leasing unit

 
720

Tax effect included in stockholders' equity of restricted stock vesting

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

 
24,726

Decrease in other assets
661

 
5,756

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

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

 
132,158

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

 
26,903

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

 
61,626

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

 
343,031

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

 
2,460

Proceeds from sales of foreclosed assets
212

 
4,443

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

 
6

Proceeds from sale of leasing unit

 
138,809

Proceeds from BOLI death benefit
1,192

 
1,853

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

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

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

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

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

 
3,795

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

Cash and cash equivalents, beginning of period
419,670

 
396,486

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

 
$
519,518

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

 
$
15,080

Cash paid for income taxes
2,834

 
15,773

Loans transferred to foreclosed assets
78

 
129

  
See Notes to Condensed Consolidated Financial Statements.

8



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



NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. We provide commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and middle-market businesses. We offer additional products and services through our CapitalSource and Square 1 Bank divisions. Our CapitalSource Division provides cash flow, asset-based, equipment, and real estate loans and treasury management services to established middle market businesses on a national basis. Our Square 1 Bank Division offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.
We have completed 28 acquisitions from May 1, 2000 through March 31, 2017. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 12. Subsequent Events, for information regarding the announcement of the CU Bancorp merger.
Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission ("Form 10-K").
Accounting Standard Adopted in 2017
Effective January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Accounting." ASU 2016-09 changed aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The recognition of excess tax benefits and tax deficiencies in the income statement was adopted prospectively. An income tax benefit of $1.1 million was recognized during the three months ended March 31, 2017 as a result of the adoption of ASU 2016-09. We expect the requirements of ASU 2016-09 to result in fluctuations in our effective tax rate from period to period based upon the timing of share-based award vestings.
In connection with the adoption of ASU 2016-09, we elected to recognize forfeitures on stock-based compensation awards when they occur, instead of estimating forfeitures at the grant date of the awards and throughout the vesting period. The modified retrospective application of this change in accounting principle resulted in a cumulative adjustment charge to retained earnings of $420,000, net of income taxes. We elected to present the classification of excess tax benefits on the statement of cash flows using a prospective transition method and the prior period has not been adjusted.




9



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


Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. Regarding time deposits disclosures, we previously presented the categories as: (1) under $100,000, and (2) $100,000 or more, but now are using the current FDIC insurance limit of $250,000 and presenting the categories as: (1) $250,000 and under, and (2) over $250,000.

10



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


NOTE 2.  GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings.
Our other intangible assets with definite lives include CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of March 31, 2017 is 5.2 years. The aggregate CDI and CRI amortization expense is expected to be $11.5 million for 2017. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, $3.0 million for 2021, and $1.7 million for 2022.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
Balance, beginning of period
$
64,187

 
$
73,702

 
$
95,524

Fully amortized portion

 
(9,515
)
 

Reduction due to sale of PWEF leasing unit

 

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

 
64,187

 
93,824

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

 
9,515

 

Reduction due to sale of PWEF leasing unit

 

 
1,363

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

 
$
36,366

 
$
48,137


11



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


NOTE 3. INVESTMENT SECURITIES     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
471,851

 
$
6,088

 
$
(3,383
)
 
$
474,556

 
$
499,185

 
$
6,222

 
$
(2,964
)
 
$
502,443

Agency CMOs
137,720

 
1,661

 
(449
)
 
138,932

 
145,258

 
1,528

 
(497
)
 
146,289

Private label CMOs
147,818

 
3,461

 
(1,879
)
 
149,400

 
122,707

 
4,199

 
(1,437
)
 
125,469

Municipal securities
1,464,306

 
22,686

 
(3,711
)
 
1,483,281

 
1,447,064

 
15,406

 
(6,011
)
 
1,456,459

Agency commercial MBS
718,483

 
2,488

 
(8,900
)
 
712,071

 
555,552

 
1,798

 
(9,658
)
 
547,692

Corporate debt securities
17,000

 
1,211

 

 
18,211

 
47,100

 
680

 
(271
)
 
47,509

Collateralized loan obligations
126,306

 
1,809

 
(142
)
 
127,973

 
155,440

 
1,685

 
(238
)
 
156,887

SBA securities
168,084

 
589

 
(339
)
 
168,334

 
179,085

 
510

 
(750
)
 
178,845

Asset-backed and other securities
63,966

 
460

 
(192
)
 
64,234

 
62,264

 
358

 
(385
)
 
62,237

Total
$
3,315,534

 
$
40,453

 
$
(18,995
)
 
$
3,336,992

 
$
3,213,655

 
$
32,386

 
$
(22,211
)
 
$
3,223,830

As of March 31, 2017, securities available-for-sale with a fair value of $424.7 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended March 31, 2017, we sold $43.1 million of securities available-for-sale for a gross realized gain of $204,000 and a gross realized loss of $303,000. During the three months ended March 31, 2016, we sold $334.9 million of securities available-for-sale for a gross realized gain of $8.9 million and a gross realized loss of $0.8 million.
Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
March 31, 2017
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
139,928

 
$
(1,802
)
 
$
113,812

 
$
(1,581
)
 
$
253,740

 
$
(3,383
)
Agency CMOs
34,796

 
(312
)
 
18,797

 
(137
)
 
53,593

 
(449
)
Private label CMOs
88,381

 
(1,548
)
 
24,843

 
(331
)
 
113,224

 
(1,879
)
Municipal securities
334,546

 
(3,711
)
 

 

 
334,546

 
(3,711
)
Agency commercial MBS
380,604

 
(8,900
)
 

 

 
380,604

 
(8,900
)
Collateralized loan obligations
17,964

 
(24
)
 
17,067

 
(118
)
 
35,031

 
(142
)
SBA securities
44,618

 
(103
)
 
29,674

 
(236
)
 
74,292

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

 
(156
)
 
6,957

 
(36
)
 
22,929

 
(192
)
Total
$
1,056,809

 
$
(16,556
)
 
$
211,150

 
$
(2,439
)
 
$
1,267,959

 
$
(18,995
)

12



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


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

 
$
(1,691
)
 
$
122,902

 
$
(1,273
)
 
$
272,183

 
$
(2,964
)
Agency CMOs
44,111

 
(416
)
 
25,316

 
(81
)
 
69,427

 
(497
)
Private label CMOs
49,067

 
(906
)
 
30,155

 
(531
)
 
79,222

 
(1,437
)
Municipal securities
644,424

 
(6,011
)
 

 

 
644,424

 
(6,011
)
Agency commercial MBS
349,550

 
(9,658
)
 

 

 
349,550

 
(9,658
)
Corporate debt securities
29,829

 
(271
)
 

 

 
29,829

 
(271
)
Collateralized loan obligations
12,450

 
(37
)
 
39,231

 
(201
)
 
51,681

 
(238
)
SBA securities
69,293

 
(407
)
 
39,024

 
(343
)
 
108,317

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

 
(309
)
 
7,851

 
(76
)
 
26,064

 
(385
)
Total
$
1,366,218

 
$
(19,706
)
 
$
264,479

 
$
(2,505
)
 
$
1,630,697

 
$
(22,211
)
We reviewed the securities that were in a loss position at March 31, 2017, and concluded their losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
March 31, 2017
 
Amortized
 
Fair
Maturity
Cost
 
Value
 
(In thousands)
Due in one year or less
$
18,084

 
$
18,221

Due after one year through five years
235,439

 
238,871

Due after five years through ten years
879,297

 
885,026

Due after ten years
2,182,714

 
2,194,874

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

 
$
3,336,992

Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

13



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


Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(In thousands)
Taxable interest
$
12,166

 
$
11,849

 
$
11,396

Non-taxable interest
10,381

 
10,323

 
10,726

Dividend income
492

 
1,231

 
425

Total interest income on investment securities
$
23,039

 
$
23,403

 
$
22,547

NOTE 4.  LOANS AND LEASES
Our loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that we would be able to collect all contractually required payments, are referred to collectively as Non-PCI loans. Generally, PCI loans are purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was probable that collection of all contractually required payments was unlikely.
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality." For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,904,995

 
$
88,918

 
$
5,993,913

 
$
5,635,675

 
$
92,793

 
$
5,728,468

Real estate construction and land
1,123,123

 
2,326

 
1,125,449

 
975,032

 
2,409

 
977,441

Commercial
8,115,953

 
4,863

 
8,120,816

 
8,426,236

 
12,994

 
8,439,230

Consumer
382,447

 
246

 
382,693

 
375,149

 
249

 
375,398

Total gross loans and leases
15,526,518

 
96,353

 
15,622,871

 
15,412,092

 
108,445

 
15,520,537

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

 
96,335

 
15,556,689

 
15,347,530

 
108,424

 
15,455,954

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

 
$
84,854

 
$
15,395,382

 
$
15,203,775

 
$
94,941

 
$
15,298,716




14



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


Non‑PCI Loans and Leases
The following tables present an aging analysis of our Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:
 
March 31, 2017
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
9,218

 
$
3,975

 
$
13,193

 
$
4,365,745

 
$
4,378,938

Residential
844

 
1,879

 
2,723

 
1,505,308

 
1,508,031

Total real estate mortgage
10,062

 
5,854

 
15,916

 
5,871,053

 
5,886,969

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
666,185

 
666,185

Residential

 
362

 
362

 
441,689

 
442,051

Total real estate construction and land

 
362

 
362

 
1,107,874

 
1,108,236

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
598

 
2,915

 
3,513

 
3,129,896

 
3,133,409

Asset-based
500

 
204

 
704

 
2,390,379

 
2,391,083

Venture capital
14,381

 
257

 
14,638

 
1,920,311

 
1,934,949

Equipment finance
251

 

 
251

 
622,986

 
623,237

Total commercial
15,730

 
3,376

 
19,106

 
8,063,572

 
8,082,678

Consumer
77

 

 
77

 
382,394

 
382,471

Total Non-PCI loans and leases
$
25,869

 
$
9,592

 
$
35,461

 
$
15,424,893

 
$
15,460,354


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

 
$
3,303

 
$
11,893

 
$
4,341,740

 
$
4,353,633

Residential
5,694

 
1,999

 
7,693

 
1,256,630

 
1,264,323

Total real estate mortgage
14,284

 
5,302

 
19,586

 
5,598,370

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
578,838

 
578,838

Residential
364

 

 
364

 
383,637

 
384,001

Total real estate construction and land
364

 

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
191

 
1,821

 
2,012

 
3,105,380

 
3,107,392

Asset-based
1,500

 
2

 
1,502

 
2,607,543

 
2,609,045

Venture capital
13,589

 
5,769

 
19,358

 
1,963,798

 
1,983,156

Equipment finance
1,417

 
3,051

 
4,468

 
687,499

 
691,967

Total commercial
16,697

 
10,643

 
27,340

 
8,364,220

 
8,391,560

Consumer
224

 

 
224

 
374,951

 
375,175

Total Non-PCI loans and leases
$
31,569

 
$
15,945

 
$
47,514

 
$
15,300,016

 
$
15,347,530


15



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


It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more unless the loan is both well secured and in the process of collection or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:  
 
March 31, 2017
 
December 31, 2016
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
66,216

 
$
4,312,722

 
$
4,378,938

 
$
62,454

 
$
4,291,179

 
$
4,353,633

Residential
5,826

 
1,502,205

 
1,508,031

 
6,881

 
1,257,442

 
1,264,323

Total real estate mortgage
72,042

 
5,814,927

 
5,886,969

 
69,335

 
5,548,621

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
666,185

 
666,185

 

 
578,838

 
578,838

Residential
362

 
441,689

 
442,051

 
364

 
383,637

 
384,001

Total real estate construction and land
362

 
1,107,874

 
1,108,236

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
53,611

 
3,079,798

 
3,133,409

 
53,908

 
3,053,484

 
3,107,392

Asset-based
1,165

 
2,389,918

 
2,391,083

 
2,118

 
2,606,927

 
2,609,045

Venture capital
15,289

 
1,919,660

 
1,934,949

 
11,687

 
1,971,469

 
1,983,156

Equipment finance
30,388

 
592,849

 
623,237

 
32,848

 
659,119

 
691,967

Total commercial
100,453

 
7,982,225

 
8,082,678

 
100,561

 
8,290,999

 
8,391,560

Consumer
173

 
382,298

 
382,471

 
339

 
374,836

 
375,175

Total Non-PCI loans and leases
$
173,030

 
$
15,287,324

 
$
15,460,354

 
$
170,599

 
$
15,176,931

 
$
15,347,530

At March 31, 2017, nonaccrual loans and leases totaled $173.0 million and included $9.6 million of loans and leases 90 or more days past due, $4.0 million of loans and leases 30 to 89 days past due, and $159.4 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $170.6 million at December 31, 2016, including $15.9 million of the loans and leases 90 or more days past due, $3.0 million of loans and leases 30 to 89 days past due, and $151.7 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.

16



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


The following table presents the credit risk rating categories for Non‑PCI loans and leases by portfolio segment and class as of the dates indicated. Nonclassified loans and leases are those with a credit risk rating of either pass or special mention, while classified loans and leases are those with a credit risk rating of either substandard or doubtful.
 
March 31, 2017
 
December 31, 2016
 
Classified
 
Nonclassified
 
Total
 
Classified
 
Nonclassified
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
100,202

 
$
4,278,736

 
$
4,378,938

 
$
99,641

 
$
4,253,992

 
$
4,353,633

Residential
9,680

 
1,498,351

 
1,508,031

 
17,540

 
1,246,783

 
1,264,323

Total real estate mortgage
109,882

 
5,777,087

 
5,886,969

 
117,181

 
5,500,775

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
403

 
665,782

 
666,185

 
409

 
578,429

 
578,838

Residential
362

 
441,689

 
442,051

 
364

 
383,637

 
384,001

Total real estate construction and land
765

 
1,107,471

 
1,108,236

 
773

 
962,066

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
175,511

 
2,957,898

 
3,133,409

 
177,661

 
2,929,731

 
3,107,392

Asset-based
32,285

 
2,358,798

 
2,391,083

 
28,112

 
2,580,933

 
2,609,045

Venture capital
75,222

 
1,859,727

 
1,934,949

 
52,646

 
1,930,510

 
1,983,156

Equipment finance
30,388

 
592,849

 
623,237

 
32,848

 
659,119

 
691,967

Total commercial
313,406

 
7,769,272

 
8,082,678

 
291,267

 
8,100,293

 
8,391,560

Consumer
346

 
382,125

 
382,471

 
424

 
374,751

 
375,175

Total Non-PCI loans and leases
$
424,399

 
$
15,035,955

 
$
15,460,354

 
$
409,645

 
$
14,937,885

 
$
15,347,530

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

 
$
47,119

 
$
119,161

 
$
69,335

 
$
54,750

 
$
124,085

Real estate construction and land
362

 
6,321

 
6,683

 
364

 
6,893

 
7,257

Commercial
100,453

 
2,920

 
103,373

 
100,561

 
3,157

 
103,718

Consumer
173

 
141

 
314

 
339

 
152

 
491

Total
$
173,030

 
$
56,501

 
$
229,531

 
$
170,599

 
$
64,952

 
$
235,551




17



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


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

 
 

 
 

 
 

 
 

 
 

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
14,350

 
$
15,257

 
$
633

 
$
63,325

 
$
65,031

 
$
6,266

Residential
3,502

 
3,570

 
437

 
8,424

 
8,612

 
585

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 
213

 
213

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
50,690

 
65,605

 
8,901

 
51,272

 
52,910

 
12,474

Asset-based
1,430

 
1,423

 
144

 
4,395

 
4,861

 
2,144

Venture capital
12,206

 
12,254

 
3,222

 
5,821

 
5,880

 
3,294

Equipment finance

 

 

 
1,524

 
4,636

 

Consumer
187

 
191

 
90

 
270

 
280

 
170

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
96,032

 
$
105,317

 
 
 
$
44,557

 
$
51,402

 
 
Residential
5,277

 
6,408

 
 
 
7,779

 
8,940

 
 
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
6,111

 
6,111

 
 
 
6,680

 
6,680

 
 
Residential
572

 
576

 
 
 
364

 
366

 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
2,925

 
5,718

 
 
 
2,852

 
5,939

 
 
Asset-based
2,651

 
3,782

 
 
 
664

 
1,652

 
 
Venture capital
3,083

 
9,907

 
 
 
5,866

 
8,939

 
 
Equipment finance
30,388

 
51,682

 
 
 
31,324

 
53,319

 
 
Consumer
127

 
198

 
 
 
221

 
292

 
 
Total Non-PCI Loans and Leases With
 
 
 
 
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
119,161

 
$
130,552

 
$
1,070

 
$
124,085

 
$
133,985

 
$
6,851

Real estate construction and land
6,683

 
6,687

 

 
7,257

 
7,259

 

Commercial
103,373

 
150,371

 
12,267

 
103,718

 
138,136

 
17,912

Consumer
314

 
389

 
90

 
491

 
572

 
170

Total
$
229,531

 
$
287,999

 
$
13,427

 
$
235,551

 
$
279,952

 
$
24,933












18



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


 
Three Months Ended March 31,
 
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
$
14,350

 
$
206

 
$
19,471

 
$
243

Residential
3,501

 
12

 
4,198

 
24

Real estate construction and land:
 
 
 
 
 
 
 
Residential

 

 
743

 
4

Commercial:
 
 
 
 
 
 
 
Cash flow
43,172

 

 
20,823

 
12

Asset-based
1,162

 
15

 
3,696

 
27

Venture capital
4,693

 

 

 

Equipment finance

 

 
49,322

 

Consumer
187

 

 
341

 
3

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
92,753

 
$
560

 
$
54,132

 
$
217

Residential
5,216

 
15

 
5,405

 
14

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
6,111

 
67

 
7,202

 
62

Residential
572

 
2

 

 

Commercial:
 
 
 
 
 
 
 
Cash flow
2,821

 
5

 
2,683

 
1

Asset-based
2,279

 
25

 
1,181

 
15

Venture capital
2,429

 

 

 

Equipment finance
30,388

 

 

 

Consumer
127

 
2

 
797

 

Total Non-PCI Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
115,820

 
$
793

 
$
83,206

 
$
498

Real estate construction and land
6,683

 
69

 
7,945

 
66

Commercial
86,944

 
45

 
77,705

 
55

Consumer
314

 
2

 
1,138

 
3

Total
$
209,761

 
$
909

 
$
169,994

 
$
622

_________________________
(1)
For Non-PCI loans and leases reported as impaired at March 31, 2017 and 2016, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.







19



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


The following table presents new troubled debt restructurings of Non-PCI loans for the periods indicated:
 
Three Months Ended March 31,
 
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

 
$
64

 
$

 
4

 
$
3,140

 
$
3,140

Residential
2

 
42

 
42

 
1

 
165

 
165

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
2

 
106

 
106

 
4

 
257

 
257

Asset-based
2

 
613

 
613

 
2

 
629

 
629

Venture capital
3

 
13,065

 
13,065

 

 

 

Equipment finance

 

 

 
2

 
2,660

 
2,660

Consumer
1

 
97

 
97

 
1

 
60

 
60

Total
11

 
$
13,987

 
$
13,923

 
14

 
$
6,911

 
$
6,911

The following table presents troubled debt restructurings that subsequently defaulted for the periods indicated:
 
Three Months Ended March 31,
 
 
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 mortgage:
 
 
 
 
 
 
 
 
Commercial

 
$

 
1

 
$
230

 
Consumer
1

 
28

 

 

 
Total
1

 
$
28

(2)
1

 
$
230

(3)
_________________________
(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 March 31, 2017, the population of defaulted restructured loans includes only those loans restructured after March 31, 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 March 31, 2017, and there were no charge-offs.
(3)
Represents the balance at March 31, 2016, and there were no charge-offs.


20



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


Allowance for Loan and Lease Losses
The following tables present a summary of the activity in the allowance for loan and lease losses on Non‑PCI loans and leases by portfolio segment and PCI loans for the periods indicated:
 
Three Months Ended March 31, 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
(1,544
)
 

 
(19,285
)
 
(99
)
 
(20,928
)
 
(2,230
)
 
(23,158
)
Recoveries
230

 
8

 
2,448

 
53

 
2,739

 

 
2,739

Provision (negative provision)
(1,083
)
 
423

 
25,118

 
(198
)
 
24,260

 
228

 
24,488

Balance, end of period
$
35,368

 
$
10,476

 
$
102,134

 
$
1,848

 
$
149,826

 
$
11,481

 
$
161,307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,070

 
$

 
$
12,267

 
$
90

 
$
13,427

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
34,298

 
$
10,476

 
$
89,867

 
$
1,758

 
$
136,399

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
11,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
118,275

 
$
6,683

 
$
103,221

 
$
281

 
$
228,460

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
5,768,694

 
1,101,553

 
7,979,457

 
382,190

 
15,231,894

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
96,335

 
 
Ending balance
$
5,886,969

 
$
1,108,236

 
$
8,082,678

 
$
382,471

 
$
15,460,354

 
$
96,335

 
$
15,556,689




21



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


 
Three Months Ended March 31, 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
(737
)
 

 
(4,045
)
 
(591
)
 
(5,373
)
 
(163
)
 
(5,536
)
Recoveries
999

 
152

 
314

 
16

 
1,481

 

 
1,481

Provision (negative provision)
(7,817
)
 
(413
)
 
26,606

 
789

 
19,165

 
140

 
19,305

Balance, end of period
$
29,099

 
$
6,876

 
$
83,957

 
$
875

 
$
120,807

 
$
9,554

 
$
130,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,954

 
$
21

 
$
27,902

 
$
163

 
$
30,040

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
27,145

 
$
6,855

 
$
56,055

 
$
712

 
$
90,767

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
9,554

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
90,830

 
$
7,945

 
$
96,614

 
$
1,102

 
$
196,491

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
5,539,467

 
567,528

 
7,893,955

 
109,520

 
14,110,470

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
176,556

 
 
Ending balance
$
5,630,297

 
$
575,473

 
$
7,990,569

 
$
110,622

 
$
14,306,961

 
$
176,556

 
$
14,483,517


22



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


NOTE 5.  FORECLOSED ASSETS
The following table summarizes foreclosed assets as of the dates indicated:
 
March 31,
 
December 31,
Property Type
2017
 
2016
 
(In thousands)
Construction and land development
$
11,224

 
$
11,224

Multi‑family
601

 
652

Commercial real estate
78

 

Total other real estate owned, net
11,903

 
11,876

Other foreclosed assets
939

 
1,100

Total foreclosed assets, net
$
12,842

 
$
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

Foreclosures
78

Reductions related to sales
(212
)
Balance, March 31, 2017
$
12,842

NOTE 6. BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Average
 
 
 
Average
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
609

 
6.58
%
 
$
812

 
6.41
%
FHLB secured advances
290,000

 
0.80
%
 
735,000

 
0.59
%
FHLB unsecured overnight advance
130,000

 
0.81
%
 
130,000

 
0.55
%
American Financial Exchange borrowings
40,000

 
1.05
%
 
40,000

 
0.81
%
Total borrowings
$
460,609

 
 
 
$
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 March 31, 2017, this debt had a weighted average remaining maturity of 2.0 years.
The Bank has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, the FRBSF, and other financial institutions.
FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of March 31, 2017 of $2.7 billion, collateralized by a blanket lien on $3.9 billion of certain qualifying loans not pledged to the FRBSF. As of March 31, 2017, the balance outstanding was a $290.0 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.

23



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


FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of March 31, 2017, the Bank had secured borrowing capacity of $2.2 billion collateralized by liens covering $3.0 billion of certain qualifying loans. As of March 31, 2017 and December 31, 2016, there were no balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $130.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which $130.0 million was outstanding at March 31, 2017. At December 31, 2016, the balance outstanding was $130.0 million.
Federal Funds Arrangements with Commercial Banks. As of March 31, 2017, the Bank had unsecured lines of credit of $80.0 million with correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of March 31, 2017 and December 31, 2016, there were no balances outstanding. The Bank is a member of the American Financial Exchange, 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 March 31, 2017, the balance outstanding was $40.0 million, which consisted of a $36.0 million overnight borrowing and a total of $4.0 million in two separate one-month borrowings, comprised of $2.0 million with an April 17, 2017 maturity date and another $2.0 million with an April 28, 2017 maturity date. 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 an January 20, 2017 maturity date.
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
Date
 
Maturity
 
Rate Index
Series
Amount
 
Rate
 
Amount
 
Rate
 
Issued
 
Date
 
(Quarterly Reset)
 
(Dollars in thousands)
 
 
 
 
 
 
Trust V
$
10,310

 
4.25
%
 
$
10,310

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

 
4.18
%
 
10,310

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

 
4.10
%
 
5,155

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

 
3.79
%
 
61,856

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

 
2.82
%
 
20,619

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

 
2.73
%
 
16,495

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

 
2.68
%
 
10,310

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

 
3.08
%
 
82,475

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

 
2.99
%
 
128,866

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

 
2.99
%
 
51,545

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

 
2.99
%
 
51,550

 
2.84
%
 
9/27/2006
 
10/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-3 (1)
27,572

 
1.72
%
 
27,185

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

 
2.99
%
 
16,470

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

 
2.99
%
 
6,650

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

 
2.99
%
 
39,177

 
2.84
%
 
6/13/2007
 
7/30/2037
 
3 month LIBOR + 1.95
Gross subordinated debentures
539,360

 
 
 
538,973

 
 
 
 
 
 
 
 
Unamortized discount (2)
(96,844
)
 
 
 
(98,229
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
442,516

 
 
 
$
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.


24



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:
 
March 31,
 
December 31,
 
2017
 
2016
 
(In thousands)
Loan commitments to extend credit
$
4,497,373

 
$
4,166,703

Standby letters of credit
221,718

 
211,398

 
$
4,719,091

 
$
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.
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 March 31, 2017 and December 31, 2016, we had commitments to contribute capital to these entities totaling $31.7 million and $26.6 million. We also had commitments to contribute up to an additional $2.4 million and $2.8 million to private equity funds at March 31, 2017 and December 31, 2016. In addition, at March 31, 2017, we had a commitment to purchase approximately $6.8 million of loans that terminates in June 2017. The amount purchased will be based, in part, on the amount of portfolio paydowns which occur during the commitment period.
Legal Matters
In the ordinary course of our business, the Company is party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon currently available information, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.
Kinde Durkee Investigation
The United States Attorney's Office for the Eastern District of California is conducting an investigation relating to the handling by First California Bank ("FCB") of its banking relationship with Kinde Durkee. Ms. Durkee, who had maintained certain of her accounts with FCB, was convicted in 2012 of embezzling funds from certain California politicians, among others. FCB, a wholly-owned subsidiary of FCAL, was acquired by PacWest Bancorp and merged into Pacific Western Bank in May 2013. We understand that the investigation is focused on whether any civil or criminal laws were violated by FCB or its employees. Pacific Western is cooperating with the investigation.

25



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
 
March 31, 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
$
474,556

 
$

 
$
474,556

 
$

Agency CMOs
138,932

 

 
138,932

 

Private label CMOs
149,400

 

 
104,119

 
45,281

Municipal securities
1,483,281

 

 
1,483,281

 

Agency commercial MBS
712,071

 

 
712,071

 

Corporate debt securities
18,211

 

 
18,211

 

Collateralized loan obligations
127,973

 

 
127,973

 

SBA securities
168,334

 

 
168,334

 

Asset-backed and other securities
64,234

 
1,960

 
54,398

 
7,876

Total securities available-for-sale
3,336,992

 
1,960

 
3,281,875

 
53,157

Derivative assets
427

 

 
427

 

Equity warrants
5,368

 

 

 
5,368

Total recurring assets
$
3,342,787

 
$
1,960

 
$
3,282,302

 
$
58,525

Derivative liabilities
$
3,295

 
$

 
$
3,295

 
$


26



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

Derivative assets
694

 

 
694

 

Equity warrants
5,497

 

 

 
5,497

Total recurring assets
$
3,230,021

 
$
2,080

 
$
3,157,169

 
$
70,772

Derivative liabilities
$
3,285

 
$

 
$
3,285

 
$

During the three months ended March 31, 2017, there were no transfers of assets between Level 1 and Level 2, and no transfers in or out of Level 3 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:
 
March 31, 2017
 
Private Label CMOs
 
Asset-Backed Securities (1)
 
 
 
Weighted
 
 
 
Weighted
 
Range
 
Average
 
Range
 
Average
Unobservable Inputs
of Inputs
 
Input
 
of Inputs
 
Input
Voluntary annual prepayment speeds
2.4% - 32.6%
 
8.8%
 
5% - 5%
 
5.0%
Annual default rates
0% - 14.5%
 
2.3%
 
1% - 1%
 
1.0%
Loss severity rates
0% - 92.9%
 
41.0%
 
15% - 15%
 
15.0%
Discount rates
0% - 10.3%
 
4.4%
 
3.5% - 3.5%
 
3.5%
_________________________________
(1)
There was only one asset-backed security at March 31, 2017.

27



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:
 
March 31, 2017
 
Equity Warrants
 
Weighted
 
Average
Unobservable Inputs
Input
Volatility
17.8%
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
1,063

 
25

 
155

Total included in other comprehensive income
(534
)
 
(42
)
 

Sales
(4,732
)
 

 
(518
)
Issuances

 

 
234

Net settlements
(7,418
)
 
(480
)
 

Balance, March 31, 2017
$
45,281

 
$
7,876

 
$
5,368

The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:
 
Fair Value Measurement as of
 
March 31, 2017
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired Non‑PCI loans
$
73,047

 
$

 
$

 
$
73,047

 
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


28



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
Losses on Assets
March 31,
Measured on a Non‑Recurring Basis
2017
 
2016
 
(In thousands)
Impaired Non‑PCI loans
$
13,617

 
$
12,909

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:
 
 
March 31, 2017
 
 
 
 
Valuation
 
Unobservable
 
 
 
Weighted
Asset
 
Fair Value
 
Technique
 
Inputs
 
Range
 
Average
 
 
(In thousands)
 
 
 
 
 
 
 
 
Impaired Non-PCI loans
 
$
65,114

 
Discounted cash flows
 
Discount rates
 
0% - 8.75%
 
6.60%
 
 
7,933

 
Third party appraisals
 
No discounts
 
 
 
 
Total non-recurring Level 3
 
$
73,047

 
 
 
 
 
 
 
 
ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:
 
March 31, 2017
 
Carrying or
 
 
 
Contract
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
184,608

 
$
184,608

 
$
184,608

 
$

 
$

Interest‑earning deposits in financial institutions
111,892

 
111,892

 
111,892

 

 

Securities available‑for‑sale
3,336,992

 
3,336,992

 
1,960

 
3,281,875

 
53,157

Investment in FHLB stock
17,901

 
17,901

 

 
17,901

 

Investments carried at cost
1,175

 
12,412

 

 

 
12,412

Loans and leases, net
15,395,382

 
15,526,920

 

 

 
15,526,920

Derivative assets
427

 
427

 

 
427

 

Equity warrants
5,368

 
5,368

 

 

 
5,368

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand, money market, interest checking,
 
 
 
 
 
 
 
 
 
and savings deposits
13,923,143

 
13,923,143

 

 
13,923,143

 

Time deposits
2,407,865

 
2,399,793

 

 
2,399,793

 

Borrowings
460,609

 
460,627

 
456,000

 
4,627

 

Subordinated debentures
442,516

 
425,914

 

 
425,914

 

Derivative liabilities
3,295

 
3,295

 

 
3,295

 


29



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


 
December 31, 2016
 
Carrying or
 
 
 
Contract
 
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, net
15,298,716

 
15,494,808

 

 
1,661

 
15,493,147

Derivative assets
694

 
694

 

 
694

 

Equity warrants
5,497

 
5,497

 

 

 
5,497

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand, money market, interest checking,
 
 
 
 
 
 
 
 
 
and savings deposits
13,698,321

 
13,698,321

 

 
13,698,321

 

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 March 31, 2017, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

30



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
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
 
 
 
 
 
Net earnings
$
78,668

 
$
85,647

 
$
90,456

Less: Earnings allocated to unvested restricted stock(1)
(999
)
 
(1,004
)
 
(1,067
)
Net earnings allocated to common shares
$
77,669

 
$
84,643

 
$
89,389

 
 
 
 
 
 
Weighted-average basic shares and unvested restricted
 
 
 
 
 
stock outstanding
121,346

 
121,464

 
121,598

Less: Weighted-average unvested restricted stock
 
 
 
 
 
outstanding
(1,503
)
 
(1,450
)
 
(1,392
)
Weighted-average basic shares outstanding
119,843

 
120,014

 
120,206

 
 
 
 
 
 
Basic earnings per share
$
0.65

 
$
0.71

 
$
0.74

 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
Net earnings allocated to common shares
$
77,669

 
$
84,643

 
$
89,389

 
 
 
 
 
 
Weighted-average basic shares outstanding
119,843

 
120,014

 
120,206

 
 
 
 
 
 
Diluted earnings per share
$
0.65

 
$
0.71

 
$
0.74

________________________
(1)
Represents cash dividends paid to holders of unvested restricted stock, net of estimated forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
NOTE 10. STOCK-BASED COMPENSATION
The Company’s 2003 Stock Incentive Plan as amended and restated, or the 2003 Plan, permits stock-based compensation awards to officers, directors, key employees and consultants. As of March 31, 2017, the 2003 Plan authorized grants of stock‑based compensation instruments to purchase or issue up to 19,686,565 shares of Company common stock, subject to adjustments provided by the 2003 Plan. As of March 31, 2017, there were 12,148,677 shares available for grant under the 2003 Plan.
Restricted Stock
Restricted stock amortization totaled $6.5 million, $6.1 million, and $5.0 million for the three months ended March 31, 2017, December 31, 2016 and March 31, 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 March 31, 2017 totaled $52.8 million.
Time-Based Restricted Stock Awards
At March 31, 2017, there were 1,537,717 shares of unvested TRSAs outstanding. The TRSAs generally vest over a service period of three or four years from the date of the grant or immediately upon 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.

31



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


Performance-Based Restricted Stock Units
At March 31, 2017, there were 239,025 units of unvested PRSUs outstanding. The PRSUs will vest only if performance goals with respect to certain financial metrics are met over a three-year performance period. The PRSUs are not considered issued and outstanding under the 2003 Plan until they vest. PRSUs are granted and initially expensed based on a target number. The number of awards 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. 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. 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.
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, while earlier application is permitted only for annual and interim periods beginning after December 31, 2016. The Company has completed the assessment phase of implementing this new standard. In the assessment phase, the Company determined which revenue streams are within the scope and those that are excluded from the scope of the new standard. Substantially all of the Company's revenues are excluded from the scope of the new standard. For the revenue streams determined to be within the scope of the new standard, the Company examined a sample of customer contracts to determine the appropriate accounting for those contracts under the new standard. The Company is currently evaluating the need for any accounting or operational changes related to implementing the requirements of the new standard. The Company will use the modified retrospective transition method and does not expect the provisions of ASU 2014-09 to have a material impact on its consolidated financial position or results of operations. The Company will adopt this standard effective January 1, 2018.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which will significantly change the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities when the fair value option is elected. For equity investments with readily determinable fair values, entities must measure these investments at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost, adjusted for changes in observable prices, minus impairment. Changes in measurement under either alternative must be recognized in net income. ASU 2016-01 will be effective for annual and interim periods beginning after December 15, 2017. 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 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 is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures.

32



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 impairment of many financial assets. Currently, the 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 is reviewing software options to assist in meeting the requirements of ASU-2016-13. The Company is developing an implementation plan and is planning to engage a third-party vendor and commence early-stage model development in 2017. 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.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. ASU 2016-16 is effective for interim and annual periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company is evaluating the effect that ASU 2016-16 will have on its financial statements and related disclosures.
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.

33



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


NOTE 12. SUBSEQUENT EVENTS
CU Bancorp Merger Announcement
On April 6, 2017, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest will acquire CU Bancorp in a transaction valued at approximately $705 million.
CU Bancorp, headquartered in Los Angeles, California, is the parent of California United Bank, a California state-chartered non-member bank, with approximately $3.0 billion in assets and nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties at December 31, 2016. In connection with the transaction, California United Bank will be merged into Pacific Western Bank, the principal operating subsidiary of PacWest Bancorp.
The transaction, which was approved by the PacWest and CU Bancorp boards of directors, is expected to close in the fourth quarter of 2017 and is subject to customary closing conditions, including obtaining approval by CU Bancorp’s shareholders and bank regulatory authorities.
As of December 31, 2016, on a pro forma consolidated basis, the combined company would have approximately $25.0 billion in assets and 87 branches, prior to contemplated consolidations.
Under terms of the Agreement, CU Bancorp shareholders will receive 0.5308 shares of PacWest common stock and $12.00 in cash for each share of CU Bancorp. Based on PacWest’s April 5, 2017 closing price of $51.72, the total value of the merger consideration is $39.45 per CU Bancorp share.
Common Stock Dividends
On May 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 May 31, 2017 to stockholders of record at the close of business on May 22, 2017.
We have evaluated events that have occurred subsequent to March 31, 2017 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.


34



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 pending acquisition of CU Bancorp, 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, including the pending CU Bancorp acquisition, and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
our ability to obtain regulatory approvals and meet other closing conditions to the pending CU Bancorp acquisition on the expected terms and schedule;
changes in our stock price before completion of the pending CU Bancorp acquisition, including as a result of the financial performance of the Company or CU Bancorp prior to closing;
the reaction to the pending CU Bancorp 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;

35


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;
changes in tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
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. 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 86.9% of our net revenues (net interest income plus noninterest income).
At March 31, 2017, we had total assets of $21.9 billion, including $15.6 billion of loans and leases, net of deferred fees, compared to $21.9 billion of total assets, including $15.5 billion of loans and leases, net of deferred fees, at December 31, 2016. Total assets increased $57.5 million during the three months ended March 31, 2017 due to a $100.7 million increase in loans and leases, net of deferred fees, driven by new production, and a $113.2 million increase in securities available-for-sale due to purchases, offset partially by a decrease of $123.2 million in cash and cash equivalents.
At March 31, 2017, we had total liabilities of $17.4 billion, including total deposits of $16.3 billion and borrowings of $460.6 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 $28.4 million increase in total liabilities since year-end was due to a $245.2 million increase in lower-cost core deposits and a $235.6 million increase in higher-cost time deposits, offset partially by a $445.2 million decrease in borrowings, primarily overnight FHLB advances, and a $20.4 million decrease in brokered non-maturity deposits. At March 31, 2017, core deposits totaled $12.8 billion, or 78% of total deposits, and time deposits totaled $2.4 billion, or 15% of total deposits.

36



Recent Events
CU Bancorp Merger Announcement
On April 6, 2017, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest will acquire CU Bancorp in a transaction valued at approximately $705 million.
CU Bancorp, headquartered in Los Angeles, California, is the parent of California United Bank, a California state-chartered non-member bank, with approximately $3.0 billion in assets and nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties at December 31, 2016. In connection with the transaction, California United Bank will be merged into Pacific Western Bank, the principal operating subsidiary of PacWest Bancorp.
The transaction, which was approved by the PacWest and CU Bancorp boards of directors, is expected to close in the fourth quarter of 2017 and is subject to customary closing conditions, including obtaining approval by CU Bancorp’s shareholders and bank regulatory authorities.
As of December 31, 2016, on a pro forma consolidated basis, the combined company would have approximately $25.0 billion in assets and 87 branches, prior to contemplated consolidations.
Under terms of the Agreement, CU Bancorp shareholders will receive 0.5308 shares of PacWest common stock and $12.00 in cash for each share of CU Bancorp. Based on PacWest’s April 5, 2017 closing price of $51.72, the total value of the merger consideration is $39.45 per CU Bancorp share.
Sale/Leaseback Transaction
In the first quarter of 2017, the Company sold four properties with an aggregate book value of $9.7 million to an unaffiliated 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 income on certain municipal securities based on a 35% federal statutory tax rate. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets.
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.

37


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).

38


The following table presents the calculation of our efficiency ratio for the periods indicated:
 
 
Three Months Ended
 
 
March 31,
 
December 31,
 
March 31,
Efficiency Ratio
2017
 
2016
 
2016
 
 
(Dollars in thousands)
Noninterest expense
$
116,544

 
$
118,622

 
$
110,688

Less:
Intangible asset amortization
3,064

 
3,176

 
4,746

 
Foreclosed assets (income) expense, net
143

 
2,693

 
(561
)
 
Acquisition, integration, and reorganization costs
500

 

 
200

Noninterest expense used for efficiency ratio
$
112,837

 
$
112,753

 
$
106,303

 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
237,235

 
$
253,131

 
$
249,540

Noninterest income
35,114

 
28,895

 
34,539

Net revenues
272,349

 
282,026

 
284,079

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

 
8,110

Net revenues used for efficiency ratio
$
272,448

 
$
281,511

 
$
275,969

 
 
 
 
 
 
 
Efficiency ratio
41.4
%
 
40.1
%
 
38.5
%
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:
Net interest margin excluding acquired loan discount accretion and loan and lease yield excluding acquired loan discount accretion: The tax equivalent NIM and loan and lease yield are impacted by volatility in accretion of acquisition discounts on acquired loans and leases. We disclose the NIM excluding acquired loan discount accretion and loan and lease yield excluding acquired loan discount accretion to provide an indication of what these measures would be without the effects of acquired loan discount accretion as we believe this indicates a "normalized" measure and a more accurate indicator of future performance. See “- Results of Operations - Net Interest Income” for a reconciliation of these non-GAAP measurements to the GAAP measurements for the periods presented.
Return on average tangible equity, tangible common equity ratio, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to the related GAAP measures of return on average equity, equity to assets ratio, and book value per share, respectively. The reconciliation of these non-GAAP measurements to the GAAP measurements is presented in the following tables for and as of the periods presented:

39



 
 
Three Months Ended
 
 
March 31,
 
December 31,
 
March 31,
Return on Average Tangible Equity
2017
 
2016
 
2016
 
 
(Dollars in thousands)
Net earnings
$
78,668

 
$
85,647

 
$
90,456

 
 
 
 
 
 
 
Average stockholders' equity
$
4,503,675

 
$
4,501,948

 
$
4,438,602

Less:
Average intangible assets
2,209,112

 
2,212,042

 
2,227,520

Average tangible common equity
$
2,294,563

 
$
2,289,906

 
$
2,211,082

 
 
 
 
 
 
 
Return on average equity (1)
7.08
%
 
7.57
%
 
8.20
%
Return on average tangible equity (2)
13.90
%
 
14.88
%
 
16.45
%
___________________________________
(1)
Annualized net earnings divided by average stockholders' equity.
(2)
Annualized net earnings divided by average tangible common equity.

Tangible Common Equity Ratio/
March 31,
 
December 31,
Tangible Book Value Per Share
2017
 
2016
 
(Dollars in thousands, except per share data)
PacWest Bancorp Consolidated:
 
 
 
Stockholders’ equity
$
4,508,106

 
$
4,479,055

Less: Intangible assets
2,207,251

 
2,210,315

Tangible common equity
$
2,300,855

 
$
2,268,740

Total assets
$
21,927,254

 
$
21,869,767

Less: Intangible assets
2,207,251

 
2,210,315

Tangible assets
$
19,720,003

 
$
19,659,452

Equity to assets ratio
20.56
%
 
20.48
%
Tangible common equity ratio(1)
11.67
%
 
11.54
%
Book value per share
$
37.13

 
$
36.93

Tangible book value per share
$
18.95

 
$
18.71

Shares outstanding
121,408,133

 
121,283,669

 
 
 
 
Pacific Western Bank:
 
 
 
Stockholder's equity
$
4,405,770

 
$
4,374,478

Less: Intangible assets
2,207,251

 
2,210,315

Tangible common equity
$
2,198,519

 
$
2,164,163

Total assets
$
21,910,720

 
$
21,848,644

Less: Intangible assets
2,207,251

 
2,210,315

Tangible assets
$
19,703,469

 
$
19,638,329

Equity to assets ratio
20.11
%
 
20.02
%
Tangible common equity ratio(1)
11.16
%
 
11.02
%
_______________________________________ 
(1)
Tangible common equity divided by tangible assets.

40


Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Performance Measures
2017
 
2016
 
2016
Diluted earnings per share
$
0.65

 
$
0.71

 
$
0.74

Annualized return on:
 
 
 
 
 
Average assets
1.47
%
 
1.59
%
 
1.72
%
Average tangible equity (1)(2)
13.90
%
 
14.88
%
 
16.45
%
Net interest margin (tax equivalent)
5.16
%
 
5.47
%
 
5.53
%
Net interest margin (tax equivalent) excluding
 
 
 
 
 
acquired loan discount accretion (2)
5.02
%
 
5.01
%
 
4.91
%
Efficiency ratio
41.4
%
 
40.1
%
 
38.5
%
_____________________________
(1)
Calculation reduces average stockholder's equity by average intangible assets.
(2)
See "Non-GAAP Measurements."
First Quarter of 2017 Compared to Fourth Quarter of 2016
Net earnings were $78.7 million, or $0.65 per diluted share, for the first quarter of 2017, compared to $85.6 million, or $0.71 per diluted share, for the fourth quarter of 2016. The quarter‑over‑quarter decrease of $7.0 million in net earnings was due to lower net interest income of $15.9 million and a higher provision for credit losses of $1.5 million, offset by higher noninterest income of $6.2 million and lower noninterest expense of $2.1 million. The decrease in net interest income was due to lower discount accretion on acquired loans, offset by a higher average loan and lease balance. The decrease in accretion was due primarily to lower accelerated accretion from payoffs of acquired loans, including $13.5 million from the payoff of a nonaccrual PCI loan in the fourth quarter of 2016. The level of provision for credit losses for the first quarter of 2017 was mainly attributable to specific provisions for impaired loans and general provisions from increased general reserve loss factors which are influenced by net charge-off experience. The increase in noninterest income was due mainly to a $5.0 million legal settlement with a former borrower and a $1.2 million increase in loan syndication fees, offset by lower loan prepayment fees. The decrease in noninterest expense was due mostly to lower foreclosed assets expense.
First Quarter of 2017 Compared to First Quarter of 2016
Net earnings for the first quarter of 2017 were $78.7 million, or $0.65 per diluted share, compared to net earnings for the first quarter of 2016 of $90.5 million, or $0.74 per diluted share. The $11.8 million decrease in net earnings was due to lower net interest income of $12.1 million, a higher provision for credit losses of $4.6 million, and higher noninterest expense of $5.9 million. The decrease in net interest income was due to lower discount accretion on acquired loans, offset by a higher average loan and lease balance. 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 level of provision for credit losses for the first quarter of 2017 was mainly attributable to specific provisions for impaired loans and general provisions from increased general reserve loss factors which are influenced by net charge-off experience. The increase in noninterest expense was due mostly to higher compensation expense, data processing expense and other expense.

41


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
 
March 31, 2017
 
December 31, 2016
 
March 31, 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
$
89,335

$
4,250

19.29
%
 
$
104,234

$
17,481

66.72
%
 
$
167,626

$
20,072

48.16
%
Non-PCI loans and leases
15,207,709

219,928

5.86
%
 
14,904,034

220,742

5.89
%
 
14,303,539

216,303

6.08
%
Total loans and leases (1)
15,297,044

224,178

5.94
%
 
15,008,268

238,223

6.31
%
 
14,471,165

236,375

6.57
%
Investment securities (2)
3,257,448

27,822

3.46
%
 
3,293,003

28,229

3.41
%
 
3,460,293

27,493

3.20
%
Deposits in financial institutions
100,751

192

0.77
%
 
111,918

147

0.52
%
 
230,293

308

0.54
%
Total interest‑earning assets (2)
18,655,243

252,192

5.48
%
 
18,413,189

266,599

5.76
%
 
18,161,751

264,176

5.85
%
Other assets
2,990,291

 
 
 
3,014,761

 
 
 
3,036,843

 
 
Total assets
$
21,645,534

 
 
 
$
21,427,950

 
 
 
$
21,198,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
1,505,439

1,167

0.31
%
 
$
1,449,346

951

0.26
%
 
$
926,256

383

0.17
%
Money market deposits
4,866,720

4,410

0.37
%
 
4,740,944

3,672

0.31
%
 
3,848,753

2,415

0.25
%
Savings deposits
711,529

298

0.17
%
 
751,817

331

0.18
%
 
753,371

444

0.24
%
Time deposits
2,246,547

2,502

0.45
%
 
2,384,973

2,415

0.40
%
 
3,860,272

5,831

0.61
%
Total interest‑bearing deposits
9,330,235

8,377

0.36
%
 
9,327,080

7,369

0.31
%
 
9,388,652

9,073

0.39
%
Borrowings
596,903

1,018

0.69
%
 
505,567

631

0.50
%
 
494,725

581

0.47
%
Subordinated debentures
441,521

5,562

5.11
%
 
440,907

5,468

4.93
%
 
436,535

4,982

4.59
%
Total interest‑bearing liabilities
10,368,659

14,957

0.59
%
 
10,273,554

13,468

0.52
%
 
10,319,912

14,636

0.57
%
Noninterest‑bearing demand deposits
6,595,346

 
 
 
6,496,221

 
 
 
6,273,249

 
 
Other liabilities
177,854

 
 
 
156,227

 
 
 
166,831

 
 
Total liabilities
17,141,859

 
 
 
16,926,002

 
 
 
16,759,992

 
 
Stockholders’ equity
4,503,675

 
 
 
4,501,948

 
 
 
4,438,602

 
 
Total liabilities and
 
 
 
 
 
 
 
 
 
 
 
stockholders' equity
$
21,645,534

 
 
 
$
21,427,950

 
 
 
$
21,198,594

 
 
Net interest income (tax equivalent) (2)
 
$
237,235

 
 
 
$
253,131

 
 
 
$
249,540

 
Net interest rate spread
 
 
4.89
%
 
 
 
5.24
%
 
 
 
5.28
%
Net interest margin
 
 
5.16
%
 
 
 
5.47
%
 
 
 
5.53
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (3)
$
15,925,581

$
8,377

0.21
%
 
$
15,823,301

$
7,369

0.19
%
 
$
15,661,901

$
9,073

0.23
%
Funding sources (4)
$
16,964,005

$
14,957

0.36
%
 
$
16,769,775

$
13,468

0.32
%
 
$
16,593,161

$
14,636

0.35
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees.
(2)
Includes tax-equivalent adjustments of $4.8 million, $4.8 million, and $4.9 million for the three months ended March 31, 2017, December 31, 2016, and March 31, 2016, respectively, related to tax-exempt income on municipal securities. The federal statutory tax rate utilized was 35% for the periods.
(3)
Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(4)
Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.

42


First Quarter of 2017 Compared to Fourth Quarter of 2016
Net interest income decreased by $15.9 million to $232.5 million for the first quarter of 2017 compared to $248.3 million for the fourth quarter of 2016 due to lower discount accretion on acquired loans, offset by a higher average loan and lease balance. The loan and lease yield for the first quarter of 2017 was 5.94% compared to 6.31% for the fourth quarter of 2016. The decrease in the loan and lease yield was principally due to the lower discount accretion on acquired loans. Total discount accretion on acquired loans was $6.4 million in the first quarter of 2017 (17 basis points on the loan and lease yield) compared to $21.2 million in the fourth quarter of 2016 (56 basis points on the loan and lease yield). The decrease in accretion was due primarily to lower accelerated accretion from payoffs of acquired loans, including $13.5 million from the payoff of a nonaccrual PCI loan in the fourth quarter of 2016.
The tax equivalent NIM for the first quarter of 2017 was 5.16% compared to 5.47% for the fourth quarter of 2016. The decrease in the tax equivalent NIM was due mostly to lower discount accretion on acquired loans. Total discount accretion on acquired loans contributed 14 basis points to the NIM in the first quarter of 2017 and 46 basis points in the fourth quarter of 2016. The taxable equivalent adjustment for tax-exempt interest income contributed 10 points to the tax equivalent NIM for the first quarter of 2017 and fourth quarter of 2016.
The cost of total deposits increased to 0.21% in the first quarter of 2017 from 0.19% in the fourth quarter of 2016 due to higher average costs and balances of non-core interest-bearing deposits.
The tax equivalent net interest income and NIM as well as the loan and lease interest income and loan and lease yield are impacted by volatility in accretion of acquisition discounts on acquired loans and leases. The effects of this are shown in the following tables for the periods indicated:
 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
December 31, 2016
 
 
 
Impact on
 
 
 
Impact on
 
Amount
 
NIM
 
Amount
 
NIM
 
(Dollars in thousands)
Net interest income/NIM (tax equivalent)
$
237,235

 
5.16
 %
 
$
253,131

 
5.47
 %
Less:
 
 
 
 
 
 
 
Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
from early payoffs of acquired loans
(2,944
)
 
(0.06
)%
 
(17,454
)
 
(0.38
)%
Remaining accretion of Non-PCI loan acquisition discounts
(3,505
)
 
(0.08
)%
 
(3,726
)
 
(0.08
)%
Total acquired loan discount accretion
(6,449
)
 
(0.14
)%
 
(21,180
)
 
(0.46
)%
Net interest income/NIM excluding total acquired
 
 
 
 
 
 
 
loan discount accretion (1)
$
230,786

 
5.02
 %
 
$
231,951

 
5.01
 %
__________________________________
(1)
See "Non-GAAP Measurements."



43


 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
December 31, 2016
 
 
 
Impact on
 
 
 
Impact on
 
 
 
Loan and
 
 
 
Loan and
 
Amount
 
Lease Yield
 
Amount
 
Lease Yield
 
(Dollars in thousands)
Loan and lease interest income/Yield
$
224,178

 
5.94
 %
 
$
238,223

 
6.31
 %
Less:
 
 
 
 
 
 
 
Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
from early payoffs of acquired loans
(2,944
)
 
(0.08
)%
 
(17,454
)
 
(0.46
)%
Remaining accretion of Non-PCI loan acquisition discounts
(3,505
)
 
(0.09
)%
 
(3,726
)
 
(0.10
)%
Total acquired loan discount accretion
(6,449
)
 
(0.17
)%
 
(21,180
)
 
(0.56
)%
Loan and lease interest income/Yield excluding total
 
 
 
 
 
 
 
acquired loan discount accretion (1)
$
217,729

 
5.77
 %
 
$
217,043

 
5.75
 %
__________________________________
(1)
See "Non-GAAP Measurements."
First Quarter of 2017 Compared to First Quarter of 2016
Net interest income decreased by $12.1 million to $232.5 million for the first quarter of 2017 compared to $244.6 million for the first quarter of 2016 due to lower discount accretion on acquired loans, offset by a higher average loan and lease balance. The loan and lease yield for the first quarter of 2017 was 5.94% compared to 6.57% for the same quarter of 2016. The decrease in the loan and lease yield was due mainly to the lower discount accretion on acquired loans and yields on newly originated loans being lower than the average portfolio yield. Total discount accretion on acquired loans was $6.4 million in the first quarter of 2017 (17 basis points on the loan and lease yield) compared to $27.9 million in the first quarter of 2016 (77 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.
The tax equivalent NIM for the first quarter of 2017 was 5.16% compared to 5.53% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the loan and lease yield as described above, offset by the higher yield on average investment securities and loans and leases comprising a higher percentage of average interest-earning assets. Total discount accretion on acquired loans contributed 14 basis points to the NIM for the first quarter of 2017 compared to 62 basis points for the first quarter of 2016. Tax-exempt interest income contributed 10 basis points to the tax equivalent NIM for the first quarter of 2017 and 11 basis points for the first quarter of 2016.
The cost of total deposits decreased to 0.21% for the first quarter of 2017 from 0.23% for the first quarter of 2016 due mainly to a lower average cost and balance of time deposits.

44


The tax equivalent net interest income and NIM as well as the loan and lease interest income and loan and lease yield are impacted by volatility in accretion of acquisition discounts on acquired loans and leases. The effects of this are shown in the following tables for the periods indicated:
 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
 
 
Impact on
 
 
 
Impact on
 
Amount
 
NIM
 
Amount
 
NIM
 
(Dollars in thousands)
Net interest income/NIM (tax equivalent)
$
237,235

 
5.16
 %
 
$
249,540

 
5.53
 %
Less:
 
 
 
 
 
 
 
Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
from early payoffs of acquired loans
(2,944
)
 
(0.06
)%
 
(19,465
)
 
(0.43
)%
Remaining accretion of Non-PCI loan acquisition discounts
(3,505
)
 
(0.08
)%
 
(8,403
)
 
(0.19
)%
Total acquired loan discount accretion
(6,449
)
 
(0.14
)%
 
(27,868
)
 
(0.62
)%
Net interest income/NIM excluding total acquired
 
 
 
 
 
 
 
loan discount accretion (1)
$
230,786

 
5.02
 %
 
$
221,672

 
4.91
 %
__________________________________
(1)
See "Non-GAAP Measurements."

 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
 
 
Impact on
 
 
 
Impact on
 
 
 
Loan and
 
 
 
Loan and
 
Amount
 
Lease Yield
 
Amount
 
Lease Yield
 
(Dollars in thousands)
Loan and lease interest income/Yield
$
224,178

 
5.94
 %
 
$
236,375

 
6.57
 %
Less:
 
 
 
 
 
 
 
Accelerated accretion of acquisition discounts
 
 
 
 
 
 
 
from early payoffs of acquired loans
(2,944
)
 
(0.08
)%
 
(19,465
)
 
(0.54
)%
Remaining accretion of Non-PCI loan acquisition discounts
(3,505
)
 
(0.09
)%
 
(8,403
)
 
(0.23
)%
Total acquired loan discount accretion
(6,449
)
 
(0.17
)%
 
(27,868
)
 
(0.77
)%
Loan and lease interest income/Yield excluding total
 
 
 
 
 
 
 
acquired loan discount accretion (1)
$
217,729

 
5.77
 %
 
$
208,507

 
5.80
 %
__________________________________
(1)
See "Non-GAAP Measurements."

45


Provision for Credit Losses
The following table sets forth the details of the provision for credit losses and allowance for credit losses data for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
Addition to allowance for Non‑PCI loan and lease losses
$
24,260

 
$
20,800

 
$
19,165

Addition to reserve for unfunded loan commitments
240

 
200

 
835

Total provision for Non‑PCI loan and lease credit losses
24,500

 
21,000

 
20,000

Provision for PCI loan losses
228

 
2,215

 
140

Total provision for credit losses
$
24,728

 
$
23,215

 
$
20,140

 
 
 
 
 
 
Non‑PCI Credit Quality Metrics:
 
 
 
 
 
Net charge‑offs on Non-PCI
 
 
 
 
 
loans and leases
$
18,189

 
$
13,792

 
$
3,892

Annualized net charge‑offs to
 
 
 
 
 
average Non-PCI loans and leases
0.49
%
 
0.37
%
 
0.11
%
At period end:
 
 
 
 
 
Allowance for credit losses
167,589

 
161,278

 
120,807

Non‑PCI nonaccrual loans and leases
173,030

 
170,599

 
130,418

Non‑PCI classified loans and leases
424,399

 
409,645

 
384,698

Allowance for credit losses to Non‑PCI
 
 
 
 
 
loans and leases
1.08
%
 
1.05
%
 
0.96
%
Allowance for credit losses to Non‑PCI
 
 
 
 
 
nonaccrual loans and leases
96.9
%
 
94.5
%
 
106.1
%
Provisions for credit losses are charged to earnings for both on and off‑balance sheet credit exposures. We have a provision for credit losses on our Non‑PCI loans and leases and a provision for credit losses on our PCI loans. The provision for credit losses on our Non‑PCI loans and leases is based on our allowance methodology and is an expense, or contra‑expense, that, in our judgment, is required to maintain an adequate allowance for credit losses. Our allowance methodology uses our actual historical loan and lease charge-off experience on pools of similar loans and leases, considers the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings, and considers qualitative criteria such as current economic trends and forecasts, current commercial real estate values and performance trends, and the loan portfolio credit performance trends. The provision for credit losses on our PCI loans results from decreases or increases in expected cash flows on such loans compared to those previously estimated.
We recorded a total provision for credit losses of $24.7 million in the first quarter of 2017, $23.2 million in the fourth quarter of 2016, and $20.1 million in the first quarter of 2016 in accordance with our allowance methodology. The increase in the provision for credit losses for the first quarter of 2017 compared to the fourth quarter of 2016 was attributable mainly to specific provisions for impaired loans that were classified or impaired at December 31, 2016 and general provisions from increased general reserve loss factors which are influenced by net charge-off experience.
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 “- Balance Sheet Analysis - Allowance for Loan Losses on PCI Loans” contained herein.

46


Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Noninterest Income
2017
 
2016
 
2016
 
(In thousands)
Service charges on deposit accounts
$
3,758

 
$
3,557

 
$
3,856

Other commissions and fees
10,390

 
12,036

 
11,489

Leased equipment income
9,475

 
8,614

 
8,244

Gain on sale of loans and leases
712

 
119

 
245

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

 
8,110

FDIC loss sharing expense, net

 

 
(2,415
)
Other income:
 
 
 
 
 
Dividends and realized gains on equity investments
1,345

 
1,453

 
246

Warrant income
155

 
1,101

 
274

Other
9,378

 
1,500

 
4,490

Total noninterest income
$
35,114

 
$
28,895

 
$
34,539

First Quarter of 2017 Compared to Fourth Quarter of 2016
Noninterest income increased by $6.2 million to $35.1 million for the first quarter of 2017 compared to $28.9 million for the fourth quarter of 2016 due mostly to a $7.9 million increase in other income attributable mainly to a $5.0 million legal settlement with a former borrower and a $1.2 million increase in loan syndication fees. This was offset by a decrease in other commissions and fees of $1.6 million driven by a decrease in loan prepayment and unused commitment fees of $2.0 million. Warrant income decreased $0.9 million due mainly to lower realized gains on exercised warrants.
First Quarter of 2017 Compared to First Quarter of 2016
Noninterest income increased by $0.6 million to $35.1 million for the first quarter of 2017 compared to $34.5 million for the first quarter of 2016 due mostly to higher other income of $4.9 million, lower FDIC loss sharing expense of $2.4 million, higher leased equipment income of $1.2 million, and higher dividends and realized gains on equity investments of $1.1 million, offset by lower gain on sale of securities of $8.2 million and lower other commissions and fees of $1.1 million. Regarding the increase in other income, the first quarter of 2017 included a $5.0 million legal settlement with a former borrower and $1.2 million in loan syndication fees, while the first quarter of 2016 included a $0.9 million loan syndication fee, a $0.6 million death benefit received on a BOLI policy, and a $0.7 million loss on the sale of the PWEF leasing unit. The decrease in FDIC loss sharing expense was due to the termination of all FDIC loss sharing agreements in the second quarter of 2016. Regarding the increase in dividends and realized gains on equity investments, the first quarter of 2017 included dividends received of $0.7 million and net gains of $0.6 million on the sale of equity investments, while the first quarter of 2016 included dividends received of $0.2 million and net gains of $0.1 million on the sale of equity investments. The $1.6 million decrease in other commissions and fees was comprised of reductions in loan prepayment penalty fees and unused commitment fees of $2.2 million and $0.4 million, respectively, offset by increases of $0.4 million from credit card fees, $0.4 million from foreign exchange fees, $0.4 million from letter of credit fees, and $0.3 million from customer success fees.

47


Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Noninterest Expense
2017
 
2016
 
2016
 
(In thousands)
Compensation
$
64,880

 
$
66,013

 
$
61,065

Occupancy
11,608

 
12,076

 
12,632

Data processing
7,015

 
6,574

 
5,904

Other professional services
3,378

 
4,880

 
3,572

Insurance and assessments
4,791

 
4,124

 
4,965

Intangible asset amortization
3,064

 
3,176

 
4,746

Leased equipment depreciation
5,625

 
5,291

 
5,024

Foreclosed assets (income) expense, net
143

 
2,693

 
(561
)
Acquisition, integration and reorganization costs
500

 

 
200

Other expense:
 
 
 
 
 
Loan expense
3,387

 
3,140

 
2,155

Other
12,153

 
10,655

 
10,986

Total noninterest expense
$
116,544

 
$
118,622

 
$
110,688

First Quarter of 2017 Compared to Fourth Quarter of 2016
Noninterest expense decreased by $2.1 million to $116.5 million for the first quarter of 2017 compared to $118.6 million for the fourth quarter of 2016. The decrease was due mostly to a decrease in foreclosed assets expense of $2.6 million, a decrease in other professional services expense of $1.5 million, and a decrease in compensation expense of $1.1 million, offset by an increase in other expense of $1.5 million. Foreclosed assets expense decreased due primarily to a $2.6 million write-down recorded in the fourth quarter of 2016. Other professional services expense decreased due to lower legal expense and consulting expense. The $1.1 million reduction in compensation expense was attributable to lower bonus and severance expense, offset by a seasonal increase in payroll taxes. The increase in other expense was attributable mainly to a $1.5 million accrual in the first quarter of 2017 to increase our reserve for probable loss contingencies.
First Quarter of 2017 Compared to First Quarter of 2016
Noninterest expense increased by $5.9 million to $116.5 million for the first quarter of 2017 compared to $110.7 million for the first quarter of 2016. The increase was due mostly to higher compensation expense of $3.8 million, higher loan expense of $1.2 million, higher other expense of $1.2 million, and higher data processing expense of $1.1 million, offset by lower intangible asset amortization of $1.7 million and lower occupancy expense of $1.0 million. Compensation expensed increased due mainly to higher salary expense of $1.3 million, higher stock-based compensation expense of $1.4 million, and higher bonus expense of $1.1 million. Loan expense increased due to higher legal-related and other loan expenses and lower recoveries of legal costs, offset partially by higher fee income from servicing. Other expense increased due primarily to a $1.5 million accrual in the first quarter of 2017 to increase our reserve for probable loss contingencies. Intangible asset amortization decreased due mainly to the accelerated amortization taken in the prior year on our intangible assets, in particular the Square 1 CDI and CRI, in addition to the CDI related to a prior year acquisition that was nearly fully amortized in the first quarter of 2016.
Income Taxes
The effective tax rate for the first quarter of 2017 was 37.7% compared to 36.7% for the fourth quarter of 2016 and 39.0% for the first quarter of 2016. The estimated effective tax rate for the full year 2017 is approximately 38.1%. The Company's blended statutory tax rate for federal and state is 41%.


48



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:
 
March 31, 2017
 
December 31, 2016
 
Fair
 
% of
 
Duration
 
Fair
 
% of
 
Duration
Security Type
Value
 
Total
 
(in years)
 
Value
 
Total
 
(in years)
 
(Dollars in thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
474,556

 
14
%
 
3.0

 
$
502,443

 
16
%
 
3.4

Agency CMOs
138,932

 
4
%
 
2.6

 
146,289

 
4
%
 
3.0

Private label CMOs
149,400

 
5
%
 
5.2

 
125,469

 
4
%
 
3.5

Municipal securities
1,483,281

 
44
%
 
7.3

 
1,456,459

 
45
%
 
6.3

Agency commercial MBS
712,071

 
21
%
 
5.5

 
547,692

 
17
%
 
4.9

Corporate debt securities
18,211

 
1
%
 
11.7

 
47,509

 
1
%
 
4.9

Collateralized loan obligations
127,973

 
4
%
 
0.1

 
156,887

 
5
%
 
0.1

SBA securities
168,334

 
5
%
 
1.9

 
178,845

 
6
%
 
3.8

Asset-backed and other securities
64,234

 
2
%
 
3.7

 
62,237

 
2
%
 
3.5

Total securities available-for-sale
$
3,336,992

 
100
%
 
5.4

 
$
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:
 
March 31, 2017
 
Fair
 
% of
Municipal Securities by State
Value
 
Total
 
(Dollars in thousands)
 California
$
209,589

 
14
%
 New York
176,888

 
12
%
 Washington
161,703

 
11
%
 Texas
113,815

 
8
%
 Ohio
93,406

 
6
%
 District of Columbia
64,596

 
4
%
 Massachusetts
64,177

 
4
%
 Florida
51,487

 
4
%
 Oregon
49,516

 
3
%
Utah
44,689

 
3
%
Total of 10 largest states
1,029,866

 
69
%
All other states
453,415

 
31
%
Total municipal securities
$
1,483,281

 
100
%

49



Loans and Leases
The following table presents the composition of our total loans and leases as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Healthcare real estate
$
953,740

 
6
%
 
$
955,477

 
6
%
Hospitality
688,908

 
5
%
 
689,158

 
4
%
SBA program
470,088

 
3
%
 
454,196

 
3
%
Other commercial real estate
2,308,187

 
15
%
 
2,297,865

 
15
%
Total commercial real estate
4,420,923

 
29
%
 
4,396,696

 
28
%
Income producing residential
1,427,409

 
9
%
 
1,169,267

 
8
%
Owner-occupied residential
127,537

 
1
%
 
144,769

 
1
%
Total residential real estate
1,554,946

 
10
%
 
1,314,036

 
9
%
Total real estate mortgage
5,975,869

 
39
%
 
5,710,732

 
37
%
Real estate construction and land:
 
 
 
 
 
 
 
Commercial
668,510

 
4
%
 
581,246

 
4
%
Residential
442,051

 
3
%
 
384,001

 
2
%
Total real estate construction and land
1,110,561

 
7
%
 
965,247

 
6
%
Total real estate loans
7,086,430

 
46
%
 
6,675,979

 
43
%
Commercial:
 
 
 
 
 
 
 
Technology cash flow
1,069,838

 
7
%
 
1,047,683

 
7
%
Security cash flow
516,149

 
3
%
 
440,340

 
3
%
Healthcare cash flow
740,638

 
5
%
 
799,030

 
5
%
Other cash flow
811,571

 
6
%
 
825,837

 
5
%
Total cash flow
3,138,196

 
21
%
 
3,112,890

 
20
%
Lender finance & timeshare
1,476,896

 
9
%
 
1,666,855

 
11
%
Healthcare asset-based
171,684

 
1
%
 
180,580

 
1
%
Other asset-based
742,581

 
5
%
 
764,361

 
5
%
Total asset-based
2,391,161

 
15
%
 
2,611,796

 
17
%
Equity funds group
261,695

 
2
%
 
325,047

 
2
%
Early stage
445,520

 
3
%
 
448,458

 
3
%
Expansion stage
940,877

 
6
%
 
920,006

 
6
%
Later stage
286,857

 
1
%
 
294,389

 
2
%
Total venture capital
1,934,949

 
12
%
 
1,987,900

 
13
%
Equipment finance
623,237

 
4
%
 
691,967

 
4
%
Total commercial
8,087,543

 
52
%
 
8,404,553

 
54
%
Consumer
382,716

 
2
%
 
375,422

 
3
%
Total loans and leases, net of deferred fees
$
15,556,689

 
100
%
 
$
15,455,954

 
100
%
 
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.


50



The following table presents the geographic composition of our real estate loans by the top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
Real Estate Loans by State
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
California
$
3,377,854

 
48
%
 
$
3,248,735

 
49
%
New York
566,475

 
8
%
 
524,833

 
8
%
Florida
506,688

 
7
%
 
478,984

 
7
%
Texas
316,055

 
4
%
 
364,689

 
5
%
Virginia
235,867

 
3
%
 
231,162

 
3
%
Arizona
189,826

 
3
%
 
166,499

 
3
%
Illinois
179,742

 
3
%
 
178,726

 
3
%
Pennsylvania
167,579

 
2
%
 
160,303

 
2
%
Washington
142,504

 
2
%
 
49,301

 
1
%
New Jersey
120,250

 
2
%
 
95,265

 
1
%
Total of 10 largest states
5,802,840

 
82
%
 
5,498,497

 
82
%
All other states
1,283,590

 
18
%
 
1,177,482

 
18
%
Total real estate loans
$
7,086,430

 
100
%
 
$
6,675,979

 
100
%
The following table presents a roll forward of the loan and lease portfolio for the period indicated:
 
Three Months Ended
Loan and Lease Roll Forward (1)
March 31, 2017
 
(Dollars in thousands)
Beginning balance
$
15,455,954

New production
1,048,841

Existing loans and leases:
 
    Principal repayments, net (2)
(888,409
)
    Loan and lease sales
(36,461
)
    Transfers to foreclosed assets
(78
)
    Charge-offs
(23,158
)
Ending balance
$
15,556,689

 
 
Weighted average rate on new production
4.91
%
_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), loan participation sales, and other changes within the loan portfolio.

51



Allowance for Credit Losses on Non-PCI Loans and Leases
The allowance for credit losses on Non-PCI loans and leases is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The following discussion is for Non-PCI loans and leases and the related allowance for credit losses. Refer to "- Balance Sheet Analysis - Allowance for Loan Losses on PCI Loans" for the policy on PCI loans. For loans and leases acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or other inherent risks related to these acquired assets that may occur after the acquisition date.
The allowance for 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 contains a general reserve component for loans and leases with no credit impairment and a specific reserve component for loans and leases determined to be impaired.
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.
The methodology we use to estimate the general reserve component of our allowance for credit losses considers both quantitative and qualitative criteria. The quantitative criteria uses our actual historical loan and lease charge-off experience on pools of similar loans and leases to establish loss factors that are applied to our current loan and lease balances to estimate inherent credit losses. When estimating the general reserve component for the various pools of similar loan types, the loss factors applied to the loan pools consider the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings. We recognize that the determination of the allowance for credit losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans on a regular basis.
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.

52



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 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 as of the dates indicated:
 
March 31,
 
December 31,
 
March 31,
Non-PCI Allowance for Credit Losses Data
2017
 
2016
 
2016
 
(Dollars in thousands)
Allowance for loan and lease losses
$
149,826

 
$
143,755

 
$
120,807

Reserve for unfunded loan commitments
17,763

 
17,523

 
17,569

Total allowance for credit losses
$
167,589

 
$
161,278

 
$
138,376

 
 
 
 
 
 
Allowance for credit losses to loans and leases
1.08
%
 
1.05
%
 
0.96
%
Allowance for credit losses to nonaccrual loans and leases
96.9
%
 
94.5
%
 
106.1
%



53



The following table presents the changes in our allowance for credit losses on Non-PCI loans and leases for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Non-PCI Allowance for Credit Losses
2017
 
2016
 
2016
 
(Dollars in thousands)
Allowance for credit losses, beginning of period
$
161,278

 
$
154,070

 
$
122,268

Provision for credit losses:
 
 
 
 
 
Addition to allowance for loan and lease losses
24,260

 
20,800

 
19,165

Addition to reserve for unfunded loan commitments
240

 
200

 
835

Provision for credit losses
24,500

 
21,000

 
20,000

Loans and leases charged off:
 
 
 
 
 
Real estate mortgage
(1,544
)
 
(154
)
 
(737
)
Commercial
(19,285
)
 
(17,905
)
 
(4,045
)
Consumer
(99
)
 
(24
)
 
(591
)
Total loans and leases charged off
(20,928
)
 
(18,083
)
 
(5,373
)
Recoveries on loans charged off:
 
 
 
 
 
Real estate mortgage
230

 
167

 
999

Real estate construction and land
8

 
488

 
152

Commercial
2,448

 
3,614

 
314

Consumer
53

 
22

 
16

Total recoveries on loans charged off
2,739

 
4,291

 
1,481

Net charge-offs
(18,189
)
 
(13,792
)
 
(3,892
)
Allowance for credit losses, end of period
$
167,589

 
$
161,278

 
$
138,376

 
 
 
 
 
 
Annualized net charge-offs to
 
 
 
 
 
average loans and leases
0.49
%
 
0.37
%
 
0.11
%
Allowance for Loan Losses on PCI Loans
We measure the allowance for loan losses for PCI loans 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.
The following table presents the changes in our allowance for loan losses on PCI loans for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
PCI Allowance for Loan Losses
2017
 
2016
 
2016
 
(In thousands)
Allowance for loan losses, beginning of period
$
13,483

 
$
11,229

 
$
9,577

Provision for loan losses
228

 
2,215

 
140

Net (charge-offs) recoveries
(2,230
)
 
39

 
(163
)
Allowance for loan losses, end of period
$
11,481

 
$
13,483

 
$
9,554


54



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:
 
March 31,
 
December 31,
 
March 31,
 
2017
 
2016
 
2016
 
(Dollars in thousands)
Nonaccrual Non-PCI loans and leases
$
173,030

 
$
170,599

 
$
130,418

Nonaccrual PCI loans
2,404

 
2,928

 
3,241

Total nonaccrual loans and leases
175,434

 
173,527

 
133,659

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

 

 
2,538

Foreclosed assets, net
12,842

 
12,976

 
18,310

Total nonperforming assets
$
188,276

 
$
186,503

 
$
154,507

 
 
 
 
 
 
Performing troubled debt restructured loans(1)
$
56,501

 
$
64,952

 
$
66,829

Classified Non-PCI loans and leases
$
424,399

 
$
409,645

 
$
384,698

Nonaccrual loans and leases to loans and leases
1.12
%
 
1.12
%
 
0.92
%
Nonperforming assets to loans and leases and foreclosed assets, net
1.20
%
 
1.20
%
 
1.06
%
Classified Non-PCI loans and leases to Non-PCI loans and leases
2.73
%
 
2.66
%
 
2.68
%
_______________________________________ 
(1)
Excludes PCI loans.

Nonperforming assets include Non-PCI and PCI nonaccrual loans and leases and foreclosed assets and totaled $188.3 million at March 31, 2017 compared to $186.5 million at December 31, 2016. The $1.8 million increase in nonperforming assets during the first quarter of 2016 was due to a $1.9 million increase in nonaccrual loans and leases, offset by a $0.1 million decrease in foreclosed assets. The ratio of nonperforming assets to loans and leases and foreclosed assets was 1.20% at March 31, 2017, unchanged from 1.20% at December 31, 2016. During the first quarter of 2017, Non-PCI classified loans and leases increased by $14.8 million to $424.4 million as new downgrades exceeded resolutions.
Nonaccrual Loans and Leases
During the first quarter of 2017, nonaccrual loan and leases increased by $1.9 million to $175.4 million at March 31, 2017 due mainly to new nonaccrual additions of $33.7 million, offset by $19.1 million in net charge-offs and $12.7 million in principal payments and other reductions.
As of March 31, 2017, the Company's ten largest Non-PCI loan relationships on nonaccrual status had an aggregate carrying value of $145.6 million and represented 84.1% of total Non-PCI nonaccrual loans and leases. The largest of these relationships had an aggregate carrying value of $47.6 million and is a 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 during 2016.



55



The following table presents our Non-PCI nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by portfolio segment and class as of the dates indicated:
 
Non-PCI Nonaccrual Loans and Leases
 
Non-PCI Accruing and
 
March 31, 2017
 
December 31, 2016
 
30 - 89 Days Past Due
 
 
 
% of
 
 
 
% of
 
March 31,
 
December 31,
 
 
 
Loan
 
 
 
Loan
 
2017
 
2016
 
Amount
 
Category
 
Amount
 
Category
 
Amount
 
Amount
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
66,216

 
1.5
%
 
$
62,454

 
1.4
%
 
$
7,383

 
$
7,691

Residential
5,826

 
0.4
%
 
6,881

 
0.5
%
 
640

 
5,524

Total real estate mortgage
72,042

 
1.2
%
 
69,335

 
1.2
%
 
8,023

 
13,215

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
%
 

 
%
 

 

Residential
362

 
0.1
%
 
364

 
0.1
%
 

 

Total real estate construction and land
362

 
%
 
364

 
%
 

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Cash flow
53,611

 
1.7
%
 
53,908

 
1.7
%
 
394

 
153

Asset-based
1,165

 
%
 
2,118

 
0.1
%
 

 
1,500

Venture capital
15,289

 
0.8
%
 
11,687

 
0.6
%
 
13,265

 
13,295

Equipment finance
30,388

 
4.9
%
 
32,848

 
4.7
%
 
115

 
218

Total commercial
100,453

 
1.2
%
 
100,561

 
1.2
%
 
13,774

 
15,166

Consumer
173

 
%
 
339

 
0.1
%
 
49

 
224

Total Non-PCI loans and leases
$
173,030

 
1.1
%
 
$
170,599

 
1.1
%
 
$
21,846

 
$
28,605

Foreclosed Assets
The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:
 
March 31,
 
December 31,
 
March 31,
Property Type
2017
 
2016
 
2016
 
(In thousands)
Construction and land development
$
11,224

 
$
11,224

 
$
13,800

Multi-family
601

 
652

 

Commercial real estate
78

 

 

Single family residence

 

 
897

Total OREO, net
11,903

 
11,876

 
14,697

Other foreclosed assets
939

 
1,100

 
3,613

Total foreclosed assets
$
12,842

 
$
12,976

 
$
18,310

During the first quarter of 2016, foreclosed assets decreased by $0.1 million to $12.8 million at March 31, 2017 due to reductions related to sales of $0.2 million, offset by foreclosures of $0.1 million.

56



Performing Troubled Debt Restructured Loans
During the first quarter of 2017, Non-PCI performing troubled debt restructured loans decreased by $8.5 million to $56.5 million due to $7.7 million in payoffs and other reductions and $1.2 million in transfers of performing troubled debt restructured loans to nonaccrual status, offset by $0.4 million in additions. At March 31, 2017, we had $47.1 million in real estate mortgage loans, $6.3 million in real estate construction and land loans, $2.9 million in commercial loans, and $0.2 million in consumer loans that were accruing interest under the terms of troubled debt restructurings.
The majority of the number of performing troubled debt restructured loans were on accrual status prior to the loan restructurings and have remained on accrual status after the loan restructurings due to the borrowers making payments before and after the restructurings.
Deposits
The following table presents the balance of each major category of deposits at the dates indicated:
 
March 31, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
Deposit Category
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
6,789,808

 
42
%
 
$
6,659,016

 
42
%
Interest checking deposits
1,509,902

 
9
%
 
1,448,394

 
9
%
Money market deposits
3,758,962

 
23
%
 
3,705,385

 
23
%
Savings deposits
710,401

 
4
%
 
711,039

 
5
%
Total core deposits
12,769,073

 
78
%
 
12,523,834

 
79
%
Brokered non-maturity deposits
1,154,070

 
7
%
 
1,174,487

 
7
%
Total non-maturity deposits
13,923,143

 
85
%
 
13,698,321

 
86
%
Time deposits $250,000 and under
1,998,597

 
12
%
 
1,758,434

 
11
%
Time deposits over $250,000
409,268

 
3
%
 
413,856

 
3
%
Total time deposits
2,407,865

 
15
%
 
2,172,290

 
14
%
Total deposits
$
16,331,008

 
100
%
 
$
15,870,611

 
100
%
Total deposits increased by $460.4 million during the first quarter to $16.3 billion, due mainly to an increase in core deposits of $245.2 million and an increase in time deposits of $235.6 million. At March 31, 2017, core deposits totaled $12.8 billion, or 78% of total deposits, including $6.8 billion of noninterest-bearing demand deposits, or 42% of total deposits.
Brokered time deposits totaled $744.0 million and $405.5 million at March 31, 2017 and December 31, 2016.



57



The following table summarizes the maturities of time deposits, together with their weighted average contractual rate, as of the dates indicated:
 
March 31, 2017
 
Time
 
Time
 
 
 
 
 
Deposits
 
Deposits
 
Total
 
 
 
$250,000
 
Over
 
Time
 
Contractual
Maturity
and Under
 
$250,000
 
Deposits
 
Rate
 
(Dollars in thousands)
Due in three months or less
$
576,910

 
$
130,793

 
$
707,703

 
0.36%
Due in over three months through six months
516,646

 
200,321

 
716,967

 
0.45%
Due in over six months through twelve months
753,860

 
60,444

 
814,304

 
0.65%
Due in over 12 months through 24 months
103,329

 
10,268

 
113,597

 
0.69%
Due in over 24 months
47,852

 
7,442

 
55,294

 
0.59%
Total
$
1,998,597

 
$
409,268

 
$
2,407,865

 
0.51%
 
 
 
 
 
 
 
 
At December 31, 2016
$
1,758,434

 
$
413,856

 
$
2,172,290

 
0.41%
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 March 31, 2017, total off-balance sheet client investment funds were $1.5 billion, of which $1.3 billion was managed by S1AM.
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 March 31, 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 March 31, 2017, such disallowed amounts were $1.3 million for the Company and $0.1 million for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future or that the Company or Bank will not have increased deferred tax assets that are disallowed.
Basel III, the comprehensive regulatory capital rules for U.S. banking organizations, became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components and other provisions. The most significant provisions of Basel III which applied to the Company and the Bank were as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans, and the capital treatment of deferred tax assets and liabilities above certain thresholds.

58



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
 
 
 
Minimum
 
 
 
Minimum
 
Required
 
Minimum
 
Required
 
 
 
Required
 
Plus Capital
 
Required
 
Plus Capital
 
 
 
For Capital
 
Conservation
 
For Well
 
Conservation
 
 
 
Adequacy
 
Buffer
 
Capitalized
 
Buffer Fully
 
Actual
 
Purposes
 
Phase-In (1)
 
Requirement
 
Phased-In
March 31, 2017
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.87%
 
4.00%
 
4.000%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
12.31%
 
4.50%
 
5.750%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
12.31%
 
6.00%
 
7.250%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
15.56%
 
8.00%
 
9.250%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.36%
 
4.00%
 
4.000%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
11.79%
 
4.50%
 
5.750%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
11.79%
 
6.00%
 
7.250%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
12.74%
 
8.00%
 
9.250%
 
10.00%
 
10.50%
December 31, 2016
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.91%
 
4.00%
 
4.000%
 
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%
 
4.000%
 
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 March 31, 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.
Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At March 31, 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.

59



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 $442.5 million at March 31, 2017. At March 31, 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 $429.8 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.
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, subject to availability, of $130.0 million with the FHLB and $80.0 million with correspondent banks, both for the purchase of overnight funds. As of March 31, 2017, there was a $130.0 million balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the American Financial Exchange, 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 March 31, 2017, there was a $40.0 million balance outstanding.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
 
March 31,
 
December
Primary Liquidity - On-Balance Sheet
2017
 
2016
 
(Dollars in thousands)
Cash and due from banks
$
184,608

 
$
337,965

Interest-earning deposits in financial institutions
111,892

 
81,705

Securities available-for-sale
3,336,992

 
3,223,830

Less: pledged securities
(424,692
)
 
(425,511
)
Total primary liquidity
$
3,208,800

 
$
3,217,989

 
 
 
 
Ratio of primary liquidity to total deposits
19.6
%
 
20.3
%

60



Secondary Liquidity - Off-Balance Sheet
March 31,
 
December
Available Secured Borrowing Capacity
2017
 
2016
 
(In thousands)
Total secured borrowing capacity with the FHLB
$
2,728,762

 
$
2,010,739

Less: secured advances outstanding
(290,000
)
 
(735,000
)
Net secured borrowing capacity with the FHLB
2,438,762

 
1,275,739

Secured borrowing capacity with the FRBSF
2,193,347

 
2,210,692

Total secondary liquidity
$
4,632,109

 
$
3,486,431

During the three months ended March 31, 2017, the Company's primary liquidity decreased by $9.2 million due to a $153.4 million decrease in cash and due from banks, offset partially by a $113.2 million increase in securities available-for-sale and a $30.2 million increase in interest-earning deposits in financial institutions. The Company's secondary liquidity increased by $1.1 billion during the first quarter due to a $718.0 million increase in the borrowing capacity on the secured credit line with the FHLB and a $445.0 million decrease in related advances outstanding, offset partially by a $17.3 million decrease in the borrowing capacity on the secured credit line with the FRBSF.
As a member of the FHLB, the Bank had secured financing capacity with the FHLB as of March 31, 2017 of $2.7 billion, collateralized by a blanket lien on $3.9 billion of certain qualifying loans not pledged to the FRBSF. The Bank also had secured financing capacity with the FRBSF of $2.2 billion as of March 31, 2017 collateralized by liens on $3.0 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 March 31, 2017, core deposits totaled $12.8 billion and represented 78% 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.
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 FHLB borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. As of March 31, 2017, we were in compliance with all of our established liquidity guidelines.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At March 31, 2017, brokered deposits totaled $1.9 billion, consisting of $744.0 million of brokered time deposits, $1.2 billion of non-maturity brokered sweep accounts, and $12.1 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 sweep 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.

61



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 months ended March 31, 2017, PacWest received $65.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $502.1 million at March 31, 2017, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At March 31, 2017, PacWest had $494.4 million in cash, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months, including any stock repurchases pursuant to the Company's Stock Repurchase Program and cash consideration required in connection with the CU Bancorp acquisition.
Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
 
March 31, 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)
$
2,238,276

 
$
143,369

 
$
25,502

 
$
20

 
$
2,407,167

Short-term FHLB and American Financial
 
 
 
 
 
 
 
 
 
Exchange borrowings
460,000

 

 

 

 
460,000

Long-term debt obligations(1)
325

 
284

 

 
539,360

 
539,969

Contractual interest(2)
5,718

 
1,501

 
770

 

 
7,989

Operating lease obligations
30,078

 
54,025

 
40,004

 
37,296

 
161,403

Other contractual obligations
32,244

 
23,330

 
12,559

 
18,086

 
86,219

Total
$
2,766,641

 
$
222,509

 
$
78,835

 
$
594,762

 
$
3,662,747

_______________________________________ 
(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.

62



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 March 31, 2017, our loan commitments, including standby letters of credit, totaled $4.7 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)."
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' transaction and economic exposures arising out of commercial transactions. 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. We recognized a foreign currency translation net loss of $0.2 million for the three months ended March 31, 2017 and a $0.6 million foreign currency translation net gain for the three months ended March 31, 2016. Our Euro-denominated subordinated debentures are hedged with a cross currency swap to reduce the related foreign currency translation volatility.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our 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 March 31, 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 March 31, 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 March 31, 2017. In order to arrive at the base case, we extend our balance sheet at March 31, 2017 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of March 31, 2017. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.

63



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
 
Net Interest
 
Percentage
 
Forecasted
 
Net Interest
March 31, 2017
Income
 
Change
 
Net Interest
 
Margin Change
Interest Rate Scenario
(Tax Equivalent)
 
From Base
 
Margin
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
Up 300 basis points
$
1,141.4

 
16.0%
 
5.97%
 
0.83%
Up 200 basis points
$
1,090.6

 
10.9%
 
5.70%
 
0.56%
Up 100 basis points
$
1,038.6

 
5.6%
 
5.43%
 
0.29%
BASE CASE
$
983.8

 
 
5.14%
 
Down 100 basis points
$
938.6

 
(4.6)%
 
4.91%
 
(0.23)%
Down 200 basis points
$
922.3

 
(6.2)%
 
4.82%
 
(0.32)%
Down 300 basis points
$
914.4

 
(7.1)%
 
4.78%
 
(0.36)%
Total base case year 1 tax equivalent NII was $983.8 million at March 31, 2017 compared to $971.3 million at December 31, 2016. The $12.5 million increase in year 1 NII was due primarily to a $97 million increase in the loan and lease portfolio balance and a two basis point increase in base case net interest margin.
In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors that are viewed as more likely to occur in a typical monetary policy tightening cycle. One such scenario provides for market rates to increase during the next six months in accordance with the forward yield curve and thereafter to increase by 25 basis points every six months. The expected first year NII under this alternative rising rate scenario would be approximately 0.2% higher than the base case.
Of the $15.6 billion of total loans in the portfolio, $11.0 billion have variable interest rate terms (excluding hybrid loans discussed below). At March 31, 2017, $9.4 billion of these variable-rate loans have a loan rate higher than their floor rate, which allows them to reprice upwards at their next reprice date upon an increase in their index. Approximately 67% of the total variable-rate loans have a LIBOR index rate.
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:
March 31, 2017
Cumulative
 
Rate
Amount of
 
Increase
Variable-Rate
 
Needed to
Loans
 
Reprice
(Dollars in millions)
 
 
$
1,283

 
  0 - 100 bps
$
1,425

 
101 - 200 bps
$
1,525

 
201 - 300 bps

64



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 $193 million, $372 million, and $633 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 March 31, 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
March 31, 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
$
5,560.4

 
$
(51.5
)
 
(0.9
)%
 
25.4
%
 
123.3
%
Up 200 basis points
$
5,581.6

 
$
(30.3
)
 
(0.5
)%
 
25.5
%
 
123.8
%
Up 100 basis points
$
5,600.5

 
$
(11.4
)
 
(0.2
)%
 
25.5
%
 
124.2
%
BASE CASE
$
5,611.9

 
$

 
 %
 
25.6
%
 
124.5
%
Down 100 basis points
$
5,615.7

 
$
3.9

 
0.1
 %
 
25.6
%
 
124.6
%
Down 200 basis points
$
5,632.1

 
$
20.2

 
0.4
 %
 
25.7
%
 
124.9
%
Down 300 basis points
$
5,489.1

 
$
(122.7
)
 
(2.2
)%
 
25.0
%
 
121.8
%
Total base case projected market value of equity was $5.6 billion at March 31, 2017 compared to $5.7 billion at December 31, 2016. The projected market value of equity decreased by $48 million while our overall MVE sensitivity profile has shifted to be slightly liability-sensitive. The decrease in base case market value of equity was due primarily to a $79 million decrease in the mark-to-market adjustment for loans and leases due to an increase in the discount rate used to determine loan values, offset by a $29 million increase in the book value of stockholders' equity. The results of the rate shock analysis of MVE shifted to slightly liability sensitive at March 31, 2017, compared to slightly asset sensitive at December 31, 2016 due to a change in the modeling of certain municipal bonds, which resulted in a longer duration estimate in the up rate shock scenarios reflected in the table above.
     

65



ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 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 first 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)

January 1, 2017 - January 31, 2017

 
$

 

 
$
372,069

February 1, 2017 - February 28, 2017
41,184

 
55.39

 

 
$
372,069

March 1, 2017 - March 31, 2017

 

 

 
$
372,069

Total
41,184

 
$
55.39

 

 
 
__________________________
(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.

66



ITEM 6. INDEX TO EXHIBITS
Exhibit Number
Description
2.3
Agreement and Plan of Merger dated March 1, 2015 between PacWest Bancorp and Square 1 Financial, Inc. (Exhibit 2.1 to Form 8-K filed on March 5, 2015 and incorporated herein by this reference).
3.1
Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).
3.2
Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware Corporation, dated May 14, 2010 (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated herein by this reference).
3.5
Amended and Restated Bylaws of PacWest Bancorp, a Delaware corporation, dated November 5, 2014 (Exhibit 3.5 to Form 10-Q filed on November 7, 2014 and incorporated herein by this reference).
10.1
PacWest Bancorp 2003 Stock Incentive Plan, as amended and restated, dated May 16, 2016 (Exhibit 10.1 to Form 8-K filed on May 18, 2016 and incorporated herein by this reference).
10.2
Form of Stock Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended.
10.3
Form of Stock Unit Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended.
31.1
Section 302 Certification of Chief Executive Officer. *
31.2
Section 302 Certification of Chief Financial Officer. *
32.1
Section 906 Certification of Chief Executive Officer. *
32.2
Section 906 Certification of Chief Financial Officer. *
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (ii) the Condensed Consolidated Statements of Earnings for the three months ended March 31, 2017, December 31, 2016, and March 31, 2016, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017, December 31, 2016, and March 31, 2016, (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 2017, (v) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, and (vi) the Notes to Condensed Consolidated Financial Statements. *
_____________________
* Filed herewith.


67



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:
May 9, 2017
/s/ Bart R. Olson
 
 
Bart R. Olson
 
 
Executive Vice President and Chief Accounting Officer

68