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PACWEST BANCORP - Quarter Report: 2019 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, 2019
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)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
 
PACW
 
The Nasdaq Stock Market, LLC
(Title of Each Class)
 
(Trading Symbol)
 
(Name of Exchange on Which Registered)
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
o Accelerated filer
o Non-accelerated filer
 
 
 
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 30, 2019, there were 118,833,032 shares of the registrant's common stock outstanding, excluding 1,235,264 shares of unvested restricted stock.


1



PACWEST BANCORP
MARCH 31, 2019 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
Condensed Consolidated Statements of Earnings (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Index to Exhibits
Signatures


2


PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
AFX
American Financial Exchange
 
FRBSF
Federal Reserve Bank of San Francisco
ALLL
Allowance for Loan and Lease Losses
 
IPO
Initial Public Offering
ALM
Asset Liability Management
 
IRR
Interest Rate Risk
ASC
Accounting Standards Codification
 
LIHTC
Low Income Housing Tax Credit
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
C&I
Commercial and Industrial
 
Non-PCI
Non-Purchased Credit Impaired
CDI
Core Deposit Intangible Assets
 
NSF
Non-Sufficient Funds
CECL
Current Expected Credit Loss
 
OREO
Other Real Estate Owned
CET1
Common Equity Tier 1
 
PD/LGD
Probability of Default/Loss Given Default
CMOs
Collateralized Mortgage Obligations
 
PCI
Purchased Credit Impaired
CPI
Consumer Price Index
 
PRSUs
Performance-Based Restricted Stock Units
CRA
Community Reinvestment Act
 
PWAM
Pacific Western Asset Management Inc.
CRI
Customer Relationship Intangible Assets
 
ROU
Right-of-use
CUB
CU Bancorp (a company acquired on October 20, 2017)
 
SBA
Small Business Administration
CU Bank
California United Bank (a wholly-owned subsidiary of CUB)
 
SEC
Securities and Exchange Commission
DBO
California Department of Business Oversight
 
Square 1
Square 1 Financial, Inc. (a company acquired on October 6, 2015)
DTAs
Deferred Tax Assets
 
Tax Equivalent Net Interest Income
Net interest income adjusted for tax equivalent adjustments related to tax-exempt interest on certain loans and investment securities
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
Tax Equivalent NIM
NIM adjusted for tax equivalent adjustments related to tax-exempt interest on certain loans and investment securities
Efficiency Ratio
Noninterest expense (less intangible asset amortization, net foreclosed assets income/expense, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)
 
TCJA
Tax Cuts and Jobs Act
FASB
Financial Accounting Standards Board
 
TDRs
Troubled Debt Restructurings
FDIC
Federal Deposit Insurance Corporation
 
TRSAs
Time-Based Restricted Stock Awards
FHLB
Federal Home Loan Bank of San Francisco
 
U.S. GAAP
U.S. Generally Accepted Accounting Principles
FRB
Board of Governors of the Federal Reserve System
 
VIE
Variable Interest Entity


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
 
December 31,
 
2019
 
2018
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
224,758

 
$
175,830

Interest-earning deposits in financial institutions
332,124

 
209,937

Total cash, cash equivalents, and restricted cash
556,882

 
385,767

Securities available-for-sale, at fair value
3,994,708

 
4,009,431

Federal Home Loan Bank stock, at cost
29,430

 
32,103

Total investment securities
4,024,138

 
4,041,534

Loans held for sale
25,124

 

Gross loans and leases held for investment
18,371,295

 
18,026,365

Deferred fees, net
(63,598
)
 
(68,652
)
Allowance for loan and lease losses
(136,281
)
 
(132,472
)
Total loans and leases held for investment, net
18,171,416

 
17,825,241

Equipment leased to others under operating leases
293,853

 
292,677

Premises and equipment, net
37,783

 
34,661

Foreclosed assets, net
3,291

 
5,299

Deferred tax asset, net

 
17,489

Goodwill
2,548,670

 
2,548,670

Core deposit and customer relationship intangibles, net
52,250

 
57,120

Other assets
610,731

 
522,896

Total assets
$
26,324,138

 
$
25,731,354

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
7,712,409

 
$
7,888,915

Interest-bearing deposits
11,573,518

 
10,981,586

Total deposits
19,285,927

 
18,870,501

Borrowings
1,481,087

 
1,371,114

Subordinated debentures
454,458

 
453,846

Accrued interest payable and other liabilities
311,684

 
210,305

Total liabilities
21,533,156

 
20,905,766

 
 
 
 
Commitments and contingencies


 


 
 
 
 
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, 2019 and
 
 
 
December 31, 2018; 122,204,565 and 125,079,705 shares issued, respectively, includes
 
 
 
1,241,543 and 1,344,656 shares of unvested restricted stock, respectively)
1,222

 
1,251

Additional paid-in capital
3,535,793

 
3,722,723

Retained earnings
1,296,216

 
1,182,674

Treasury stock, at cost (2,003,416 and 1,889,872 shares at March 31, 2019 and December 31, 2018)
(79,507
)
 
(74,985
)
Accumulated other comprehensive income (loss), net
37,258

 
(6,075
)
Total stockholders' equity
4,790,982

 
4,825,588

Total liabilities and stockholders' equity
$
26,324,138

 
$
25,731,354

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,
 
2019
 
2018
 
2018
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
Loans and leases
$
274,229

 
$
272,522

 
$
251,085

Investment securities
29,680

 
29,690

 
26,138

Deposits in financial institutions
650

 
527

 
552

Total interest income
304,559

 
302,739

 
277,775

Interest expense:
 
 
 
 
 
Deposits
34,235

 
28,834

 
13,818

Borrowings
7,710

 
4,602

 
920

Subordinated debentures
7,738

 
7,538

 
6,537

Total interest expense
49,683

 
40,974

 
21,275

Net interest income
254,876

 
261,765

 
256,500

Provision for credit losses
4,000

 
12,000

 
4,000

Net interest income after provision for credit losses
250,876

 
249,765

 
252,500

Noninterest income:
 
 
 
 
 
Other commissions and fees
11,008

 
11,114

 
10,265

Leased equipment income
9,282

 
9,384

 
9,587

Service charges on deposit accounts
3,730

 
4,091

 
4,174

Gain on sale of loans and leases

 

 
4,569

Gain on sale of securities
2,161

 
786

 
6,311

Other income
4,883

 
8,151

 
3,653

Total noninterest income
31,064

 
33,526

 
38,559

Noninterest expense:
 
 
 
 
 
Compensation
70,845

 
69,299

 
71,023

Occupancy
14,320

 
13,356

 
13,223

Data processing
6,925

 
6,930

 
6,659

Leased equipment depreciation
5,651

 
5,758

 
5,375

Intangible asset amortization
4,870

 
4,986

 
6,346

Other professional services
4,513

 
6,198

 
4,439

Insurance and assessments
4,038

 
4,202

 
5,727

Loan expense
2,885

 
2,991

 
2,271

Acquisition, integration and reorganization costs
618

 
970

 

Foreclosed assets expense (income), net
29

 
(311
)
 
(122
)
Other expense
11,593

 
14,856

 
12,454

Total noninterest expense
126,287

 
129,235

 
127,395

Earnings before income taxes
155,653

 
154,056

 
163,664

Income tax expense
43,049

 
39,015

 
45,388

Net earnings
$
112,604

 
$
115,041

 
$
118,276

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
0.92

 
$
0.93

 
$
0.93

Diluted
$
0.92

 
$
0.93

 
$
0.93

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,
 
2019
 
2018
 
2018
 
(Unaudited)
 
(In thousands)
Net earnings
$
112,604

 
$
115,041

 
$
118,276

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Unrealized net holding gains (losses) on securities
 
 
 
 
 
available-for-sale arising during the period
62,639

 
53,702

 
(62,669
)
Income tax (expense) benefit related to net unrealized
 
 
 
 
 
holding gains (losses) arising during the period
(17,758
)
 
(15,362
)
 
17,931

Unrealized net holding gains (losses) on securities
 
 
 
 
 
available-for-sale, net of tax
44,881

 
38,340

 
(44,738
)
Reclassification adjustment for net gains
 
 
 
 
 
included in net earnings (1)
(2,161
)
 
(786
)
 
(6,311
)
Income tax expense related to reclassification
 
 
 
 
 
adjustment
613

 
225

 
1,806

Reclassification adjustment for net gains
 
 
 
 
 
included in net earnings, net of tax
(1,548
)
 
(561
)
 
(4,505
)
Other comprehensive income (loss), net of tax
43,333

 
37,779

 
(49,243
)
Comprehensive income
$
155,937

 
$
152,820

 
$
69,033

___________________________________ 
(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 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
Three Months Ended March 31, 2019
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income (Loss)
 
Total
 
(Unaudited)
 
(Dollars in thousands)
Balance, December 31, 2018
123,189,833

 
$
1,251

 
$
3,722,723

 
$
1,182,674

 
$
(74,985
)
 
$
(6,075
)
 
$
4,825,588

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 

 
938

 

 

 
938

Net earnings

 

 

 
112,604

 

 

 
112,604

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

 

 

 

 

 
43,333

 
43,333

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
195,536

 
2

 
5,806

 

 

 

 
5,808

Restricted stock surrendered
(113,544
)
 

 

 

 
(4,522
)
 

 
(4,522
)
Common stock repurchased under
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Program
(3,070,676
)
 
(31
)
 
(119,556
)
 

 

 

 
(119,587
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.60/share

 

 
(73,180
)
 

 

 

 
(73,180
)
Balance, March 31, 2019
120,201,149

 
$
1,222

 
$
3,535,793

 
$
1,296,216

 
$
(79,507
)
 
$
37,258

 
$
4,790,982

________________________
(1)
Impact due to adoption on January 1, 2019 of ASU 2016-02, "Leases (Topic 842)," and the related amendments.

 
Three Months Ended March 31, 2018
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income (Loss)
 
Total
 
(Unaudited)
 
(Dollars in thousands)
Balance, December 31, 2017
128,782,878

 
$
1,305

 
$
4,287,487

 
$
723,471

 
$
(65,836
)
 
$
31,171

 
$
4,977,598

Cumulative effect of changes in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principles (2)

 

 

 
(6,136
)
 

 
6,136

 

Net earnings

 

 

 
118,276

 

 

 
118,276

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

 

 

 

 

 
(49,243
)
 
(49,243
)
Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
96,034

 
1

 
7,198

 

 

 

 
7,199

Restricted stock surrendered
(55,186
)
 

 

 

 
(2,858
)
 

 
(2,858
)
Common stock repurchased under
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Program
(2,285,855
)
 
(23
)
 
(119,770
)
 

 

 

 
(119,793
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.50/share

 

 
(63,689
)
 

 

 

 
(63,689
)
Balance, March 31, 2018
126,537,871

 
$
1,283

 
$
4,111,226

 
$
835,611

 
$
(68,694
)
 
$
(11,936
)
 
$
4,867,490

________________________
(2)
Impact due to adoption on January 1, 2018 of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," and ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."
See Notes to Condensed Consolidated Financial Statements.


7



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
112,604

 
$
118,276

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,287

 
8,751

Amortization of net premiums on securities available-for-sale
4,142

 
8,432

Amortization of intangible assets
4,870

 
6,346

Amortization of ROU assets
7,608

 

Provision for credit losses
4,000

 
4,000

Gain on sale of foreclosed assets
(191
)
 

Provision for losses on foreclosed assets

 
65

Gain on sale of loans and leases

 
(4,569
)
Loss on sale of premises and equipment
3

 
7

Gain on sale of securities
(2,161
)
 
(6,311
)
Unrealized loss (gain) on derivatives and foreign currencies, net
16

 
(605
)
Earned stock compensation
5,808

 
7,199

Decrease in deferred income taxes, net
14,714

 
7,153

Decrease in other assets
37,434

 
38,208

Decrease in accrued interest payable and other liabilities
(46,241
)
 
(50,969
)
Net cash provided by operating activities
151,893

 
135,983

 
 
 
 
Cash flows from investing activities:
 
 
 
Net (increase) decrease in loans and leases
(391,621
)
 
382,590

Proceeds from sales of loans and leases
16,937

 
615,376

Proceeds from maturities and paydowns of securities available-for-sale
67,325

 
75,125

Proceeds from sales of securities available-for-sale
407,926

 
306,253

Purchases of securities available-for-sale
(402,030
)
 
(487,105
)
Net redemptions of Federal Home Loan Bank stock
2,673

 
3,540

Proceeds from sales of foreclosed assets
2,236

 
28

Purchases of premises and equipment, net
(5,625
)
 
(3,997
)
Net decrease in equipment leased to others under operating leases
(6,709
)
 
(1,241
)
Net cash (used in) provided by investing activities
(308,888
)
 
890,569

 
 
 
 
Cash flows from financing activities:
 
 
 
Net decrease in noninterest-bearing deposits
(176,506
)
 
(275,579
)
Net increase (decrease) in interest-bearing deposits
591,932

 
(510,844
)
Net increase in borrowings
109,973

 
107,942

Net decrease in subordinated debentures

 
(12,372
)
Common stock repurchased and restricted stock surrendered
(124,109
)
 
(122,651
)
Cash dividends paid
(73,180
)
 
(63,689
)
Net cash provided by (used in) financing activities
328,110

 
(877,193
)
 
 
 
 
Net increase in cash, cash equivalents, and restricted cash
171,115

 
149,359

Cash, cash equivalents, and restricted cash, beginning of period
385,767

 
398,437

Cash, cash equivalents, and restricted cash, end of period
$
556,882

 
$
547,796

See Notes to Condensed Consolidated Financial Statements.


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
46,197

 
$
17,515

Cash paid for income taxes
2,778

 
3,790

Loans transferred to foreclosed assets
37

 

Transfers from loans held for investment to loans held for sale
25,124

 

See Notes to Condensed Consolidated Financial Statements.


9



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


NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and numerous loan production offices across the country through its Community Banking, National Lending and Venture Banking groups. Community Banking provides real estate loans, commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices. National Lending provides asset-based, equipment, real estate, and security cash flow loans and treasury management services to established middle-market businesses on a national basis. Venture Banking 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 Pacific Western 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 interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.
We have completed 29 acquisitions from May 1, 2000 through March 31, 2019. 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.
Significant Accounting Policies
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, 2018 as filed with the Securities and Exchange Commission ("Form 10-K").
Accounting Standards Adopted in 2019
Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and the related amendments to this new standard issued in 2018. ASU 2016-02 supersedes Topic 840, “Leases,” and is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the new standard using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” and recognized a cumulative effect adjustment to increase retained earnings by $938,000, net of taxes, without restating prior periods and applying the requirements of the new standard prospectively. The Company has elected the following practical expedients: (1) to not separate lease and non-lease components for facilities leases; (2) to not reassess whether any expired or existing contracts are or contain leases and to maintain existing lease classifications; (3) to not record short-term leases (initial term less than 12 months) on the balance sheet; and (4) to elect to present sales tax on a net basis for those transactions in which the Company's the lessor.


10



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


The standard had a significant impact on our condensed consolidated balance sheet, but did not have a significant impact on our condensed consolidated statement of earnings. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for leases as a lessor remained substantially unchanged. The ROU asset is included within "Other assets," while the ROU liability is included within "Accrued interest payable and other liabilities". See Note 8. Leases and Note 7. Other Assets for further details.
Effective January 1, 2019, the Company early-adopted any removed or modified disclosures as permitted by ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements,” but will defer adoption of the additional disclosures until the effective date of January 1, 2020 as permitted in the transition guidance in ASU 2018-13.
Effective January 1, 2019, the Company early-adopted ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force)," which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The Company opted to apply ASU 2018-15 prospectively. The primary effect of the provisions is to capitalize eligible implementation costs during the application development phase and to amortize those costs over the life of the agreement. There was no significant impact to our condensed consolidated financial statements from the adoption of this new standard.
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 combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments), 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
None.

11



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


NOTE 2. RESTRICTED CASH BALANCES
The Company is required to maintain reserve balances with the FRBSF. Such reserve requirements are based on a percentage of deposit liabilities and may be satisfied by cash on hand. The average reserves required to be held at the FRBSF for the three months ended March 31, 2019 and year ended December 31, 2018 were $92.2 million and $77.0 million. As of March 31, 2019 and December 31, 2018, we pledged cash collateral for our derivative contracts of $2.3 million and $2.6 million.
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, 2019
 
December 31, 2018
 
 
 
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
$
340,184

 
$
3,990

 
$
(998
)
 
$
343,176

 
$
281,486

 
$
1,902

 
$
(2,300
)
 
$
281,088

Agency CMOs
712,090

 
8,625

 
(2,939
)
 
717,776

 
634,774

 
3,448

 
(5,372
)
 
632,850

Private label CMOs
121,981

 
2,205

 
(939
)
 
123,247

 
101,313

 
1,985

 
(2,093
)
 
101,205

Municipal securities
1,145,963

 
40,748

 
(1,710
)
 
1,185,001

 
1,298,514

 
21,000

 
(7,320
)
 
1,312,194

Agency commercial MBS
1,079,816

 
4,460

 
(5,365
)
 
1,078,911

 
1,133,846

 
383

 
(21,525
)
 
1,112,704

U.S. Treasury securities
287,721

 
2,996

 

 
290,717

 
401,056

 
2,437

 
(88
)
 
403,405

Asset-backed securities
185,592

 
80

 
(516
)
 
185,156

 
81,762

 
104

 
(481
)
 
81,385

SBA securities
52,361

 
2

 
(339
)
 
52,024

 
68,158

 

 
(1,111
)
 
67,047

Corporate debt securities
17,000

 
1,700

 

 
18,700

 
17,000

 
553

 

 
17,553

Total
$
3,942,708

 
$
64,806

 
$
(12,806
)
 
$
3,994,708

 
$
4,017,909

 
$
31,812

 
$
(40,290
)
 
$
4,009,431

See Note 11. Fair Value Measurements for information on fair value measurements and methodology.
As of March 31, 2019, securities available-for-sale with a fair value of $495.4 million were pledged as collateral for borrowings, public deposits, and other purposes as required by various statutes and agreements.
Realized Gains and Losses on Securities Available-for-Sale
During the three months ended March 31, 2019, we sold $405.8 million of securities available-for-sale for a gross realized gain of $4.1 million and a gross realized loss of $1.9 million. During the three months ended March 31, 2018, we sold $299.9 million of securities available-for-sale for a gross realized gain of $6.8 million and a gross realized loss of $515,000.


12



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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
March 31, 2019
 
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
$

 
$

 
$
80,472

 
$
(998
)
 
$
80,472

 
$
(998
)
Agency CMOs

 

 
148,729

 
(2,939
)
 
148,729

 
(2,939
)
Private label CMOs
10,003

 
(6
)
 
74,242

 
(933
)
 
84,245

 
(939
)
Municipal securities

 

 
119,130

 
(1,710
)
 
119,130

 
(1,710
)
Agency commercial MBS

 

 
611,315

 
(5,365
)
 
611,315

 
(5,365
)
Asset-backed securities
80,287

 
(321
)
 
19,136

 
(195
)
 
99,423

 
(516
)
SBA securities

 

 
50,239

 
(339
)
 
50,239

 
(339
)
Total
$
90,290

 
$
(327
)
 
$
1,103,263

 
$
(12,479
)
 
$
1,193,553

 
$
(12,806
)
 
December 31, 2018
 
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
$
60,164

 
$
(169
)
 
$
85,245

 
$
(2,131
)
 
$
145,409

 
$
(2,300
)
Agency CMOs
69,859

 
(326
)
 
164,097

 
(5,046
)
 
233,956

 
(5,372
)
Private label CMOs
32,170

 
(831
)
 
49,237

 
(1,262
)
 
81,407

 
(2,093
)
Municipal securities
52,386

 
(238
)
 
284,915

 
(7,082
)
 
337,301

 
(7,320
)
Agency commercial MBS
40,641

 
(341
)
 
1,020,684

 
(21,184
)
 
1,061,325

 
(21,525
)
U.S. Treasury securities
49,729

 
(88
)
 

 

 
49,729

 
(88
)
Asset-backed securities
11,548

 
(38
)
 
35,859

 
(443
)
 
47,407

 
(481
)
SBA securities
249

 
(1
)
 
66,798

 
(1,110
)
 
67,047

 
(1,111
)
Total
$
316,746

 
$
(2,032
)
 
$
1,706,835

 
$
(38,258
)
 
$
2,023,581

 
$
(40,290
)



13



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


We reviewed the securities that were in an unrealized loss position at March 31, 2019, and concluded their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
March 31, 2019
 
Amortized
 
Fair
Maturities
Cost
 
Value
 
(In thousands)
Due in one year or less
$
28,716

 
$
28,703

Due after one year through five years
539,423

 
543,189

Due after five years through ten years
1,010,453

 
1,013,236

Due after ten years
2,364,116

 
2,409,580

Total securities available-for-sale
$
3,942,708

 
$
3,994,708

Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(In thousands)
Taxable interest
$
19,742

 
$
19,181

 
$
14,599

Non-taxable interest
9,593

 
9,866

 
11,107

Dividend income
345

 
643

 
432

Total interest income on investment securities
$
29,680

 
$
29,690

 
$
26,138


14



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


NOTE 4.  LOANS AND LEASES
Our 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.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
 
March 31,
 
December 31,
 
2019
 
2018
 
(In thousands)
Real estate mortgage
$
8,172,992

 
$
7,933,859

Real estate construction and land
2,379,560

 
2,262,710

Commercial
7,446,612

 
7,428,500

Consumer
372,131

 
401,296

Total gross loans and leases held for investment
18,371,295

 
18,026,365

Deferred fees, net
(63,598
)
 
(68,652
)
Total loans and leases held for investment,
 
 
 
net of deferred fees
18,307,697

 
17,957,713

Allowance for loan and lease losses
(136,281
)
 
(132,472
)
Total loans and leases held for investment, net
$
18,171,416

 
$
17,825,241

The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
 
March 31, 2019
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
7,266

 
$
6,464

 
$
13,730

 
$
4,626,780

 
$
4,640,510

Income producing and other residential
1,853

 
309

 
2,162

 
3,516,786

 
3,518,948

Total real estate mortgage
9,119

 
6,773

 
15,892

 
8,143,566

 
8,159,458

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 
430

 
430

 
943,166

 
943,596

Residential
8,949

 

 
8,949

 
1,399,179

 
1,408,128

Total real estate construction and land
8,949

 
430

 
9,379

 
2,342,345

 
2,351,724

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based
3,750

 

 
3,750

 
3,418,452

 
3,422,202

Venture capital
4,500

 
1,194

 
5,694

 
2,021,756

 
2,027,450

Other commercial
3,655

 
3,339

 
6,994

 
1,967,708

 
1,974,702

Total commercial
11,905

 
4,533

 
16,438

 
7,407,916

 
7,424,354

Consumer
614

 
208

 
822

 
371,339

 
372,161

Total
$
30,587

 
$
11,944

 
$
42,531

 
$
18,265,166

 
$
18,307,697



15



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


 
December 31, 2018
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
3,487

 
$
7,541

 
$
11,028

 
$
4,813,270

 
$
4,824,298

Income producing and other residential
1,557

 
476

 
2,033

 
3,091,810

 
3,093,843

Total real estate mortgage
5,044

 
8,017

 
13,061

 
7,905,080

 
7,918,141

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 
442

 
442

 
912,141

 
912,583

Residential
1,527

 

 
1,527

 
1,319,546

 
1,321,073

Total real estate construction and land
1,527

 
442

 
1,969

 
2,231,687

 
2,233,656

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based
47

 
646

 
693

 
3,304,728

 
3,305,421

Venture capital
4,705

 

 
4,705

 
2,034,043

 
2,038,748

Other commercial
5,181

 
1,285

 
6,466

 
2,053,960

 
2,060,426

Total commercial
9,933

 
1,931

 
11,864

 
7,392,731

 
7,404,595

Consumer
581

 
333

 
914

 
400,407

 
401,321

Total
$
17,085

 
$
10,723

 
$
27,808

 
$
17,929,905

 
$
17,957,713

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 loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:  
 
March 31, 2019
 
December 31, 2018
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
12,750

 
$
4,627,760

 
$
4,640,510

 
$
15,321

 
$
4,808,977

 
$
4,824,298

Income producing and other residential
2,444

 
3,516,504

 
3,518,948

 
2,524

 
3,091,319

 
3,093,843

Total real estate mortgage
15,194

 
8,144,264

 
8,159,458

 
17,845

 
7,900,296

 
7,918,141

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
430

 
943,166

 
943,596

 
442

 
912,141

 
912,583

Residential

 
1,408,128

 
1,408,128

 

 
1,321,073

 
1,321,073

Total real estate construction and land
430

 
2,351,294

 
2,351,724

 
442

 
2,233,214

 
2,233,656

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
43,406

 
3,378,796

 
3,422,202

 
32,324

 
3,273,097

 
3,305,421

Venture capital
20,437

 
2,007,013

 
2,027,450

 
20,299

 
2,018,449

 
2,038,748

Other commercial
8,633

 
1,966,069

 
1,974,702

 
7,380

 
2,053,046

 
2,060,426

Total commercial
72,476

 
7,351,878

 
7,424,354

 
60,003

 
7,344,592

 
7,404,595

Consumer
427

 
371,734

 
372,161

 
1,043

 
400,278

 
401,321

Total
$
88,527

 
$
18,219,170

 
$
18,307,697

 
$
79,333

 
$
17,878,380

 
$
17,957,713


16



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


At March 31, 2019, nonaccrual loans and leases totaled $88.5 million and included $11.9 million of loans and leases 90 or more days past due, $2.4 million of loans and leases 30 to 89 days past due, and $74.2 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $79.3 million at December 31, 2018, including $10.7 million of loans and leases 90 or more days past due, $6.6 million of loans and leases 30 to 89 days past due, and $62.0 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of March 31, 2019, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $52.4 million and represented 59% of total nonaccrual loans and leases.
The following tables present the credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.
 
March 31, 2019
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
24,542

 
$
67,115

 
$
4,548,853

 
$
4,640,510

Income producing and other residential
9,131

 
452

 
3,509,365

 
3,518,948

Total real estate mortgage
33,673

 
67,567

 
8,058,218

 
8,159,458

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
430

 

 
943,166

 
943,596

Residential

 
2,485

 
1,405,643

 
1,408,128

Total real estate construction and land
430

 
2,485

 
2,348,809

 
2,351,724

Commercial:
 
 
 
 
 
 
 
Asset-based
52,586

 
85,060

 
3,284,556

 
3,422,202

Venture capital
43,128

 
62,514

 
1,921,808

 
2,027,450

Other commercial
59,690

 
74,517

 
1,840,495

 
1,974,702

Total commercial
155,404

 
222,091

 
7,046,859

 
7,424,354

Consumer
798

 
637

 
370,726

 
372,161

Total
$
190,305

 
$
292,780

 
$
17,824,612

 
$
18,307,697





17



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


 
December 31, 2018
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
57,734

 
$
74,785

 
$
4,691,779

 
$
4,824,298

Income producing and other residential
10,521

 
968

 
3,082,354

 
3,093,843

Total real estate mortgage
68,255

 
75,753

 
7,774,133

 
7,918,141

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
442

 
7,041

 
905,100

 
912,583

Residential

 
1,527

 
1,319,546

 
1,321,073

Total real estate construction and land
442

 
8,568

 
2,224,646

 
2,233,656

Commercial:
 
 
 
 
 
 
 
Asset-based
45,957

 
48,338

 
3,211,126

 
3,305,421

Venture capital
28,731

 
77,588

 
1,932,429

 
2,038,748

Other commercial
92,526

 
50,136

 
1,917,764

 
2,060,426

Total commercial
167,214

 
176,062

 
7,061,319

 
7,404,595

Consumer
1,199

 
1,015

 
399,107

 
401,321

Total
$
237,110

 
$
261,398

 
$
17,459,205

 
$
17,957,713


Nonaccrual loans and leases and performing TDRs are considered impaired for reporting purposes. TDRs are a result of rate reductions, term extensions, fee concessions, and debt forgiveness, or a combination thereof.
The following table presents the composition of our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Total
 
 
 
 
 
Total
 
Nonaccrual
 
 
 
Impaired
 
Nonaccrual
 
 
 
Impaired
 
Loans
 
 
 
Loans
 
Loans
 
 
 
Loans
 
and
 
Performing
 
and
 
and
 
Performing
 
and
 
Leases
 
TDRs
 
Leases
 
Leases
 
TDRs
 
Leases
 
(In thousands)
Real estate mortgage
$
15,194

 
$
11,355

 
$
26,549

 
$
17,845

 
$
11,484

 
$
29,329

Real estate construction and land
430

 
5,002

 
5,432

 
442

 
5,420

 
5,862

Commercial
72,476

 
573

 
73,049

 
60,003

 
692

 
60,695

Consumer
427

 
97

 
524

 
1,043

 
105

 
1,148

Total
$
88,527

 
$
17,027

 
$
105,554

 
$
79,333

 
$
17,701

 
$
97,034




18



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


The following tables present information regarding our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of and for the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
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
$
1,139

 
$
1,139

 
$
68

 
$
1,736

 
$
1,648

 
$
170

Income producing and other residential
2,090

 
2,084

 
202

 
2,569

 
2,563

 
247

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset based
10,335

 
10,335

 
2,735

 

 

 

Venture capital
19,243

 
21,029

 
3,196

 
11,621

 
13,255

 
3,141

Other commercial

 

 

 
473

 
482

 
473

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
15,727

 
$
29,962

 
 
 
$
17,783

 
$
32,035

 
 
Income producing and other residential
7,593

 
9,775

 
 
 
7,241

 
9,425

 
 
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,432

 
5,449

 
 
 
5,862

 
5,870

 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
33,071

 
38,401

 
 
 
32,324

 
38,100

 
 
Venture capital
1,194

 
31,632

 
 
 
8,678

 
41,335

 
 
Other commercial
9,206

 
27,642

 
 
 
7,599

 
25,740

 
 
Consumer
524

 
693

 
 
 
1,148

 
1,470

 
 
Total Loans and Leases With and
 
 
 
 
 
 
 
 
 
 
 
Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
26,549

 
$
42,960

 
$
270

 
$
29,329

 
$
45,671

 
$
417

Real estate construction and land
5,432

 
5,449

 

 
5,862

 
5,870

 

Commercial
73,049

 
129,039

 
5,931

 
60,695

 
118,912

 
3,614

Consumer
524

 
693

 

 
1,148

 
1,470

 

Total
$
105,554

 
$
178,141

 
$
6,201

 
$
97,034

 
$
171,923

 
$
4,031












19



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


 
Three Months Ended March 31,
 
2019
 
2018
 
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
$
1,139

 
$
17

 
$
13,884

 
$
201

Income producing and other residential
2,090

 
16

 
4,295

 
23

Commercial:
 
 
 
 
 
 
 
Asset-based
3,560

 

 

 

Venture capital
12,906

 

 
14,598

 

Other commercial

 

 
16,851

 
15

Consumer

 

 
295

 
2

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
15,538

 
$
53

 
$
46,782

 
$
765

Income producing and other residential
7,516

 
53

 
8,464

 
45

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,432

 
101

 
5,670

 
89

Commercial:
 
 
 
 
 
 
 
Asset-based
31,979

 

 
32,838

 

Venture capital
1,194

 

 
4,474

 

Other commercial
7,767

 
17

 
7,859

 
1,147

Consumer
524

 
2

 
79

 

Total Loans and Leases With and
 
 
 
 
 
 
 
Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
26,283

 
$
139

 
$
73,425

 
$
1,034

Real estate construction and land
5,432

 
101

 
5,670

 
89

Commercial
57,406

 
17

 
76,620

 
1,162

Consumer
524

 
2

 
374

 
2

Total
$
89,645

 
$
259

 
$
156,089

 
$
2,287

_________________________
(1)
For loans and leases reported as impaired at March 31, 2019 and 2018, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.








20



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


The following table presents our troubled debt restructurings of loans held for investment by loan portfolio segment and class for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
Number
 
Outstanding
 
Outstanding
 
Number
 
Outstanding
 
Outstanding
 
of
 
Recorded
 
Recorded
 
of
 
Recorded
 
Recorded
Troubled Debt Restructurings
Loans
 
Investment
 
Investment
 
Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
$
37

 
$

 

 
$

 
$

Income producing and other residential
3

 
789

 
789

 

 

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Venture capital
6

 
2,105

 
1,242

 

 

 

Other commercial
8

 
585

 
585

 
2

 
11,783

 
11,783

Total
18

 
$
3,516

 
$
2,616

 
2

 
$
11,783

 
$
11,783


During the three months ended March 31, 2019, two other commercial loans totaling $64,000 were restructured in the preceding 12-month period and subsequently defaulted after being restructured. During the three months ended March 31, 2018, one other commercial loan of $2.3 million was restructured in the preceding 12-month period and subsequently defaulted after being restructured.
Leases Receivable
We provide equipment financing to our customers primarily with direct financing leases. Lease receivables are recorded on the balance sheet but the leased equipment is not, although we generally retain legal title to the leased equipment until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Direct financing leases are subject to our allowance for loans and leases.
The following table provides the components of leases receivable income for the period indicated:
 
Three Months Ended
 
March 31, 2019
 
(In thousands)
Component of leases receivable income:
 
Interest income on net investments in leases
$
3,140

The following table presents the components of leases receivable as of the date indicated:
 
March 31, 2019
 
(Dollars in thousands)
Net investment in sales type and direct financing leases:
 
Lease payments receivable
$
195,018

Unguaranteed residual assets
25,895

Deferred fees and other
962

Aggregate net investment in leases
$
221,875


21



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


The following table presents maturities of leases receivable as of the date indicated:
 
March 31, 2019
 
(In thousands)
Twelve Months Ending March 31,
 
2020
$
77,413

2021
63,321

2022
42,112

2023
15,386

2024
8,998

Thereafter
7,348

Total undiscounted cash flows
214,578

Less: Unearned income
(19,560
)
Present value of lease payments
$
195,018

Allowance for Loan and Lease Losses
The following tables present a summary of the activity in the allowance for loan and lease losses on loans and leases held for investment by loan portfolio segment for the periods indicated:
 
Three Months Ended March 31, 2019
 
 
 
Real Estate
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Total
 
(In thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
46,021

 
$
28,209

 
$
56,360

 
$
1,882

 
$
132,472

Charge-offs
(196
)
 

 
(3,003
)
 
(266
)
 
(3,465
)
Recoveries
143

 

 
3,106

 
25

 
3,274

Net (charge-offs) recoveries
(53
)
 

 
103

 
(241
)
 
(191
)
Provision (negative provision)
(214
)
 
(1,001
)
 
5,033

 
182

 
4,000

Balance, end of period
$
45,754

 
$
27,208

 
$
61,496

 
$
1,823

 
$
136,281

 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
270

 
$

 
$
5,931

 
$

 
$
6,201

Collectively evaluated for impairment
$
45,484

 
$
27,208

 
$
55,565

 
$
1,823

 
$
130,080

 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
23,908

 
$
5,432

 
$
71,660

 
$

 
$
101,000

Collectively evaluated for impairment
8,135,550

 
2,346,292

 
7,352,694

 
372,161

 
18,206,697

Ending balance
$
8,159,458

 
$
2,351,724

 
$
7,424,354

 
$
372,161

 
$
18,307,697






22



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


 
Three Months Ended March 31, 2018
 
 
 
Real Estate
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Total
 
(In thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
Balance, beginning of period (1)
$
40,051

 
$
13,055

 
$
84,022

 
$
2,328

 
$
139,456

Charge-offs
(2,598
)
 

 
(9,524
)
 
(31
)
 
(12,153
)
Recoveries
1,657

 
9

 
5,487

 
45

 
7,198

Net (charge-offs) recoveries
(941
)
 
9

 
(4,037
)
 
14

 
(4,955
)
Provision (negative provision)
1,048

 
5,126

 
(6,205
)
 
(195
)
 
(226
)
Balance, end of period
$
40,158

 
$
18,190

 
$
73,780

 
$
2,147

 
$
134,275

 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,088

 
$

 
$
13,141

 
$
16

 
$
14,245

Collectively evaluated for impairment
$
39,070

 
$
18,190

 
$
60,639

 
$
2,131

 
$
120,030

 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
74,390

 
$
5,670

 
$
82,434

 
$
324

 
$
162,818

Collectively evaluated for impairment
7,479,853

 
1,671,332

 
6,743,689

 
397,593

 
16,292,467

Ending balance
$
7,554,243

 
$
1,677,002

 
$
6,826,123

 
$
397,917

 
$
16,455,285

_______________________________________ 
(1)
The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance of the allowance for loan and lease losses for the three months ended March 31, 2018.
Allowance for Credit Losses
The allowance for credit losses is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The following tables present a summary of the activity in the allowance for loan and lease losses and reserve for unfunded loan commitments for the periods indicated:
 
Three Months Ended March 31, 2019
 
Allowance for
 
Reserve for
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
132,472

 
$
36,861

 
$
169,333

Charge-offs
(3,465
)
 

 
(3,465
)
Recoveries
3,274

 

 
3,274

Net charge-offs
(191
)
 

 
(191
)
Provision
4,000

 

 
4,000

Balance, end of period
$
136,281

 
$
36,861

 
$
173,142



23



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


 
Three Months Ended March 31, 2018
 
Allowance for
 
Reserve for
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
(In thousands)
Balance, beginning of period (1)
$
139,456

 
$
28,635

 
$
168,091

Charge-offs
(12,153
)
 

 
(12,153
)
Recoveries
7,198

 

 
7,198

Net charge-offs
(4,955
)
 

 
(4,955
)
Provision (negative provision)
(226
)
 
4,226

 
4,000

Balance, end of period
$
134,275

 
$
32,861

 
$
167,136

_______________________________________ 
(1)
The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance of the allowance for loan and lease losses for the three months ended March 31, 2018.
NOTE 5.  FORECLOSED ASSETS
The following table summarizes foreclosed assets as of the dates indicated:
 
March 31,
 
December 31,
Property Type
2019
 
2018
 
(In thousands)
Commercial real estate
$
2,041

 
$
2,004

Single-family residence
953

 
953

Construction and land development
219

 
219

Multi‑family

 
1,059

Total other real estate owned, net
3,213

 
4,235

Other foreclosed assets
78

 
1,064

Total foreclosed assets, net
$
3,291

 
$
5,299

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, 2018
$
5,299

Transfers to foreclosed assets from loans
37

Provision for losses

Reductions related to sales
(2,045
)
Balance, March 31, 2019
$
3,291

NOTE 6.  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.

24



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


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 aggregate amortization expense is expected to be $18.7 million for 2019. The estimated aggregate amortization expense related to our current intangible assets for each of the next five years is $14.6 million for 2020, $10.8 million for 2021, $7.5 million for 2022, $3.8 million for 2023, and $1.7 million for 2024.
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,
 
2019
 
2018
 
2018
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
Balance, beginning of period
$
119,497

 
$
119,497

 
$
119,497

Balance, end of period
119,497

 
119,497

 
119,497

Accumulated Amortization:
 
 
 
 
 
Balance, beginning of period
(62,377
)
 
(57,391
)
 
(39,871
)
Amortization
(4,870
)
 
(4,986
)
 
(6,346
)
Balance, end of period
(67,247
)
 
(62,377
)
 
(46,217
)
Net CDI and CRI, end of period
$
52,250

 
$
57,120

 
$
73,280

NOTE 7.  OTHER ASSETS
The following table presents the detail of our other assets as of the dates indicated:
 
March 31,
 
December 31,
Other Assets
2019
 
2018
 
(In thousands)
Cash surrender value of BOLI
$
196,161

 
$
194,897

Operating lease ROU assets, net
125,402

 

Interest receivable
89,727

 
88,754

LIHTC investments
59,948

 
59,507

CRA investments (1)
59,824

 
59,062

Taxes receivable
17,289

 
39,096

Prepaid expenses
16,319

 
18,006

Equity investments without readily determinable fair values
14,777

 
14,758

Equity warrants
4,438

 
4,793

Equity investments with readily determinable fair values
3,848

 
4,891

Other receivables/assets
22,998

 
39,132

Total other assets
$
610,731

 
$
522,896

________________________
(1)
Includes equity investments without readily determinable fair values of $13.1 million and $12.5 million at March 31, 2019 and December 31, 2018.
The increase in the operating lease ROU assets in the first quarter of 2019 was due to the adoption of ASU 2016-02 effective January 1, 2019. See Note 8. Leases for further details.
Regarding our equity investments without readily determinable fair values, there were no impairments and no upward adjustments during the three months ended March 31, 2019. On a cumulative basis since January 1, 2018 and through March 31, 2019, we recorded impairments of $278,000 and upward adjustments of $286,000 to our equity investments without readily determinable fair values.

25



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


NOTE 8. LEASES
The Company adopted ASU 2016-02, "Leases (Topic 842)," effective January 1, 2019 and applied the guidance to all leases within the scope of Topic 842 as of that date. We have adopted the guidance using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” and recognized a cumulative effect adjustment to retained earnings without prior periods restated, effectively applying the requirements of the new standard prospectively.
We determine if an arrangement is a lease at inception by assessing whether there is an identified asset, and whether the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. Topic 842 also requires a lessee to classify a lease as either finance or operating. The Company only has operating leases related to our facilities as of March 31, 2019, which consists of 75 full-service branch offices and 76 other offices.
ROU assets represent a lessee's right to use an underlying asset for the lease term and lease liabilities represent a lessee's obligation to make lease payments arising from the lease. On January 1, 2019, ROU assets and operating lease liabilities were initially recognized based on the present value of future minimum lease payments over the remaining lease terms. We used our incremental borrowing rates on January 1, 2019 to determine the present value of future payments. The ROU assets also include any prepaid lease payments and initial direct costs incurred less any lease incentives received. We amortize the operating lease ROU assets and record interest expense on the operating lease liabilities over the lease terms.
Our leases have remaining terms ranging from 1 to 28 years. Short-term leases (initial term of less than 12 months) are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component. Most leases include one or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of lease renewal options is at our sole discretion. Some of our leases also include termination options. We have determined that we do not meet the reasonably certain threshold to exercise any renewal or termination options, therefore our lease terms do not reflect any optional periods. We rent or sublease certain office space to third parties. Our subleases consist of operating leases for offices that we have fully or partially vacated.
Certain of our lease agreements also include rental payments that adjust periodically based on changes in the CPI. We initially measured our lease payments using the index at the lease commencement date. Subsequent increases in the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. The ROU assets and lease liabilities are not re-measured as a result of changes in the CPI. Our lease agreements do not contain any purchase options, residual value guarantees, or restrictive covenants.
Operating Leases as a Lessee
Our lease expense is a component of "Occupancy expense" on our condensed consolidated statements of earnings. The following table presents the components of lease expense for the period indicated:
 
Three Months Ended
 
March 31, 2019
 
(In thousands)
Operating lease expense:
 
Fixed costs
$
8,302

Variable costs
24

Short-term lease costs
520

Sublease income
(1,126
)
Net lease expense
$
7,720



26



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


The following table presents supplemental cash flow information related to leases for the period indicated:
 
Three Months Ended
 
March 31, 2019
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
8,242

ROU assets obtained in exchange for lease obligations:
 
Operating leases
$
147,972

The following table presents supplemental balance sheet and other information related to operating leases as of the date indicated:
 
March 31, 2019
 
(Dollars in thousands)
Operating leases:
 
Operating lease right-of-use assets, net
$
125,402

Operating lease liabilities
$
140,392

 
 
Weighted average remaining lease term (in years)
6

Weighted average discount rate
2.92
%
The following table presents maturities of operating lease liabilities as of the date indicated:
 
March 31, 2019
 
(In thousands)
Twelve Months Ending March 31,
 
2020
$
32,749

2021
30,238

2022
25,928

2023
20,533

2024
17,600

Thereafter
26,875

Total operating lease liabilities
153,923

Less: Imputed interest
(13,531
)
Present value of operating lease liabilities
$
140,392

Operating Leases as a Lessor
We provide equipment financing through operating leases where we facilitate the purchase of equipment leased to our customers. The equipment is on our balance sheet as "Equipment leased to others under operating leases" and is depreciated to its estimated residual value at the end of the lease term, shown as "Leased equipment depreciation" in the condensed consolidated statements of earnings, according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest Income" in the condensed consolidated statements of earnings.

27



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


The following table presents the rental payments to be received on operating leases as of the date indicated:
 
March 31, 2019
 
(In thousands)
Twelve Months Ending March 31,
 
2020
$
34,368

2021
31,432

2022
23,162

2023
17,838

2024
16,104

Thereafter
41,444

Total undiscounted cash flows
$
164,348

NOTE 9.  BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Average
 
 
 
Average
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
87

 
7.50
%
 
$
114

 
7.50
%
FHLB secured advances
1,090,000

 
2.60
%
 
1,040,000

 
2.56
%
FHLB unsecured overnight advance
141,000

 
2.57
%
 
141,000

 
2.53
%
AFX borrowings
250,000

 
2.52
%
 
190,000

 
2.56
%
Total borrowings
$
1,481,087

 
2.58
%
 
$
1,371,114

 
2.56
%
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, 2019, this debt had a weighted average remaining maturity of 0.8 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, 2019 of $4.0 billion, collateralized by a blanket lien on $5.7 billion of qualifying loans. As of March 31, 2019, the balance outstanding was a $1.1 billion overnight advance. As of December 31, 2018, the balance outstanding was a $1.0 billion overnight advance.
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of March 31, 2019, the Bank had secured borrowing capacity of $2.2 billion collateralized by liens covering $3.0 billion of qualifying loans. As of March 31, 2019 and December 31, 2018, there were no balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $141.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which $141.0 million was outstanding at March 31, 2019. At December 31, 2018, the balance outstanding was $141.0 million.

28



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


Federal Funds Arrangements with Commercial Banks. As of March 31, 2019, the Bank had unsecured lines of credit of $180.0 million in the aggregate with several 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, 2019 and December 31, 2018, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of March 31, 2019, the balance outstanding was $250.0 million, which consisted of $240.0 million in overnight borrowings and a $10.0 million one-month borrowing with a maturity date of April 17, 2019. As of December 31, 2018, there was a $190.0 million overnight borrowing outstanding.
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
Date
 
Maturity
 
Rate Index
Series
Amount
 
Rate
 
Amount
 
Rate
 
Issued
 
Date
 
(Quarterly Reset)
 
(Dollars in thousands)
 
 
 
 
 
 
Trust V
$
10,310

 
5.71
%
 
$
10,310

 
5.89
%
 
8/15/2003
 
9/17/2033
 
3-month LIBOR + 3.10
Trust VI
10,310

 
5.66
%
 
10,310

 
5.84
%
 
9/3/2003
 
9/15/2033
 
3-month LIBOR + 3.05
Trust CII
5,155

 
5.56
%
 
5,155

 
5.74
%
 
9/17/2003
 
9/17/2033
 
3-month LIBOR + 2.95
Trust VII
61,856

 
5.50
%
 
61,856

 
5.27
%
 
2/5/2004
 
4/23/2034
 
3-month LIBOR + 2.75
Trust CIII
20,619

 
4.30
%
 
20,619

 
4.48
%
 
8/15/2005
 
9/15/2035
 
3-month LIBOR + 1.69
Trust FCCI
16,495

 
4.21
%
 
16,495

 
4.39
%
 
1/25/2007
 
3/15/2037
 
3-month LIBOR + 1.60
Trust FCBI
10,310

 
4.16
%
 
10,310

 
4.34
%
 
9/30/2005
 
12/15/2035
 
3-month LIBOR + 1.55
Trust CS 2005-1
82,475

 
4.56
%
 
82,475

 
4.74
%
 
11/21/2005
 
12/15/2035
 
3-month LIBOR + 1.95
Trust CS 2005-2
128,866

 
4.70
%
 
128,866

 
4.47
%
 
12/14/2005
 
1/30/2036
 
3-month LIBOR + 1.95
Trust CS 2006-1
51,545

 
4.70
%
 
51,545

 
4.47
%
 
2/22/2006
 
4/30/2036
 
3-month LIBOR + 1.95
Trust CS 2006-2
51,550

 
4.70
%
 
51,550

 
4.47
%
 
9/27/2006
 
10/30/2036
 
3-month LIBOR + 1.95
Trust CS 2006-3 (1)
28,914

 
1.74
%
 
29,556

 
1.73
%
 
9/29/2006
 
10/30/2036
 
3-month EURIBOR + 2.05
Trust CS 2006-4
16,470

 
4.70
%
 
16,470

 
4.47
%
 
12/5/2006
 
1/30/2037
 
3-month LIBOR + 1.95
Trust CS 2006-5
6,650

 
4.70
%
 
6,650

 
4.47
%
 
12/19/2006
 
1/30/2037
 
3-month LIBOR + 1.95
Trust CS 2007-2
39,177

 
4.70
%
 
39,177

 
4.47
%
 
6/13/2007
 
7/30/2037
 
3-month LIBOR + 1.95
Gross subordinated debentures
540,702

 
4.62
%
 
541,344

 
4.51
%
 
 
 
 
 
 
Unamortized discount (2)
(86,244
)
 
 
 
(87,498
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
454,458

 
 
 
$
453,846

 
 
 
 
 
 
 
 
___________________
(1)
Denomination is in Euros with a value of €25.8 million.
(2)
Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.


29



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


NOTE 10.  COMMITMENTS AND CONTINGENCIES
The following table presents a summary of commitments described below as of the dates indicated:
 
March 31,
 
December 31,
 
2019
 
2018
 
(In thousands)
Loan commitments to extend credit
$
7,465,392

 
$
7,528,248

Standby letters of credit
335,534

 
364,210

Commitments to contribute capital to low income housing project partnerships
 
 
 
and small business investment companies
101,280

 
101,991

Commitments to contribute capital to private equity funds
50

 
50

Total
$
7,902,256

 
$
7,994,499

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 that the Company has in particular classes of financial instruments.
Commitments to extend credit are contractual agreements to lend to our customers when customers are in compliance with their contractual credit agreements and when customers have contractual availability to borrow under such agreements. 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, the Company invests 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, 2019 and December 31, 2018, we had commitments to contribute capital to these entities totaling $101.3 million and $102.0 million. We also had commitments to contribute up to an additional $50,000 to private equity funds at March 31, 2019 and December 31, 2018.
Legal Matters
In the ordinary course of our business, the Company is party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon currently available information, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.

30



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


NOTE 11.  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, corporate debt securities, SBA securities, 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.
The Company uses 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, 2019
Measured on a Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
Residential MBS and CMOs:
 
 
 
 
 
 
 
Agency MBS
$
343,176

 
$

 
$
343,176

 
$

Agency CMOs
717,776

 

 
717,776

 

Private label CMOs
123,247

 

 
116,211

 
7,036

Municipal securities
1,185,001

 

 
1,185,001

 

Agency commercial MBS
1,078,911

 

 
1,078,911

 

U.S. Treasury securities
290,717

 
290,717

 

 

Asset-backed securities
185,156

 

 
149,703

 
35,453

SBA securities
52,024

 

 
52,024

 

Corporate debt securities
18,700

 

 
18,700

 

Total securities available-for-sale
3,994,708

 
290,717

 
3,661,502

 
42,489

Equity warrants
4,438

 

 

 
4,438

Other derivative assets
2,493

 

 
2,493

 

Equity investments with readily determinable fair values
3,848

 
3,848

 

 

Total recurring assets
$
4,005,487

 
$
294,565

 
$
3,663,995

 
$
46,927

Derivative liabilities
$
633

 
$

 
$
633

 
$


31



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


 
Fair Value Measurements as of
 
December 31, 2018
Measured on a Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
Residential MBS and CMOs:
 
 
 
 
 
 
 
Agency MBS
$
281,088

 
$

 
$
281,088

 
$

Agency CMOs
632,850

 

 
632,850

 

Private label CMOs
101,205

 

 
93,917

 
7,288

Municipal securities
1,312,194

 

 
1,312,194

 

Agency commercial MBS
1,112,704

 

 
1,112,704

 

U.S. Treasury securities
403,405

 
403,405

 

 

Asset-backed securities
81,385

 

 
41,440

 
39,945

SBA securities
67,047

 

 
67,047

 

Corporate debt securities
17,553

 

 
17,553

 

Total securities available-for-sale
4,009,431

 
403,405

 
3,558,793

 
47,233

Equity warrants
4,793

 

 

 
4,793

Other derivative assets
3,292

 

 
3,292

 

Equity investments with readily determinable fair values
4,891

 
4,891

 

 

Total recurring assets
$
4,022,407

 
$
408,296

 
$
3,562,085

 
$
52,026

Derivative liabilities
$
142

 
$

 
$
142

 
$

During the three months ended March 31, 2019, there was a $63,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values 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, 2019
 
Private Label CMOs
 
Asset-Backed Securities
 
 
 
Weighted
 
Input or
 
Weighted
 
Range
 
Average
 
Range
 
Average
Unobservable Inputs
of Inputs
 
Input
 
of Inputs
 
Input
Voluntary annual prepayment speeds
3.9% - 22.4%
 
10.8%
 
12.0% - 15.0%
 
13.8%
Annual default rates (1)
0.3% - 82.0%
 
1.8%
 
2.0%
 
2.0%
Loss severity rates (1)
5.6% - 159.5%
 
51.8%
 
60.0%
 
60.0%
Discount rates
2.5% - 9.6%
 
6.4%
 
3.2% - 5.2%
 
4.2%
____________________
(1)
The annual default rates and loss severity rates were the same for all of the asset-backed securities.



32



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


The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of the date indicated:
 
March 31, 2019
 
Equity Warrants
 
Weighted
 
Average
Unobservable Inputs
Input
Volatility
17.0%
Risk-free interest rate
2.2%
Remaining life assumption (in years)
3.45
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, 2018
$
7,288

 
$
39,945

 
$
4,793

Total included in earnings
137

 
(38
)
 
2,279

Total included in other comprehensive income
(84
)
 
62

 

Issuances

 

 
88

Sales and dispositions (1)

 

 
(2,659
)
Net settlements
(305
)
 
(4,516
)
 

Transfers to Level 1

 

 
(63
)
Balance, March 31, 2019
$
7,036

 
$
35,453

 
$
4,438

______________________
(1)
Includes the exercise of warrants that upon exercise become equity securities in public companies. These are often subject to lock-up restrictions that must be met before the equity security can be sold, during which time they are reported as equity investments with readily determinable fair values.
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, 2019
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired loans
$
27,901

 
$

 
$
7,886

 
$
20,015

Loans held for sale
25,124

 

 
25,124

 

Total non-recurring
$
53,025

 
$

 
$
33,010

 
$
20,015

 
Fair Value Measurement as of
 
December 31, 2018
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired loans
$
24,432

 
$

 
$
1,800

 
$
22,632

OREO
1,136

 

 
1,136

 

Total non-recurring
$
25,568

 
$

 
$
2,936

 
$
22,632


33



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


The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:
 
Three Months Ended
Losses on Assets
March 31,
Measured on a Non‑Recurring Basis
2019
 
2018
 
(In thousands)
Impaired loans
$
3,756

 
$
7,816

Loans held for sale
1,707

 

OREO

 
65

Total losses
$
5,463

 
$
7,881

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, 2019
 
 
 
 
Valuation
 
Unobservable
 
 
 
Weighted
Asset
 
Fair Value
 
Technique
 
Inputs
 
Range
 
Average
 
 
(In thousands)
 
 
 
 
 
 
 
 
Impaired loans
 
$
19,006

 
Discounted cash flows
 
Discount rates
 
3.75% - 8.00%
 
6.43%
Impaired loans
 
1,009

 
Third party appraisals
 
No discounts
 
 
 
 
Total non-recurring Level 3
 
$
20,015

 
 
 
 
 
 
 
 
The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
 
March 31, 2019
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
224,758

 
$
224,758

 
$
224,758

 
$

 
$

Interest‑earning deposits in financial institutions
332,124

 
332,124

 
332,124

 

 

Securities available‑for‑sale
3,994,708

 
3,994,708

 
290,717

 
3,661,502

 
42,489

Investment in FHLB stock
29,430

 
29,430

 

 
29,430

 

Loans held for sale
25,124

 
25,124

 

 
25,124

 

Loans and leases held for investment, net
18,171,416

 
17,719,820

 

 
7,886

 
17,711,934

Equity warrants
4,438

 
4,438

 

 

 
4,438

Other derivative assets
2,493

 
2,493

 

 
2,493

 

Equity investments with readily determinable fair values
3,848

 
3,848

 
3,848

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
16,127,638

 
16,127,638

 

 
16,127,638

 

Non-core non-maturity deposits
454,277

 
454,277

 

 
454,277

 

Time deposits
2,704,012

 
2,697,119

 

 
2,697,119

 

Borrowings
1,481,087

 
1,481,085

 
1,471,000

 
10,085

 

Subordinated debentures
454,458

 
438,207

 

 
438,207

 

Derivative liabilities
633

 
633

 

 
633

 


34



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



 
December 31, 2018
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
175,830

 
$
175,830

 
$
175,830

 
$

 
$

Interest‑earning deposits in financial institutions
209,937

 
209,937

 
209,937

 

 

Securities available‑for‑sale
4,009,431

 
4,009,431

 
403,405

 
3,558,793

 
47,233

Investment in FHLB stock
32,103

 
32,103

 

 
32,103

 

Loans and leases held for investment, net
17,825,241

 
17,013,860

 

 
1,800

 
17,012,060

Equity warrants
4,793

 
4,793

 

 

 
4,793

Other derivative assets
3,292

 
3,292

 

 
3,292

 

Equity investments with readily determinable fair values
4,891

 
4,891

 
4,891

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
16,346,671

 
16,346,671

 

 
16,346,671

 

Non-core non-maturity deposits
518,192

 
518,192

 

 
518,192

 

Time deposits
2,005,638

 
2,017,137

 

 
2,017,137

 

Borrowings
1,371,114

 
1,371,114

 
1,371,000

 
114

 

Subordinated debentures
453,846

 
435,251

 

 
435,251

 

Derivative liabilities
142

 
142

 

 
142

 

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, as amended by ASU 2016-01 and ASU 2018-03), 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 2018 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, 2019, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

35



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


NOTE 12.  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,
 
2019
 
2018
 
2018
 
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
 
 
 
 
 
Net earnings
$
112,604

 
$
115,041

 
$
118,276

Less: Earnings allocated to unvested restricted stock(1)
(1,163
)
 
(1,219
)
 
(1,115
)
Net earnings allocated to common shares
$
111,441

 
$
113,822

 
$
117,161

 
 
 
 
 
 
Weighted-average basic shares and unvested restricted
 
 
 
 
 
stock outstanding
122,227

 
123,238

 
127,487

Less: Weighted-average unvested restricted stock
 
 
 
 
 
outstanding
(1,352
)
 
(1,426
)
 
(1,413
)
Weighted-average basic shares outstanding
120,875

 
121,812

 
126,074

 
 
 
 
 
 
Basic earnings per share
$
0.92

 
$
0.93

 
$
0.93

 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
Net earnings allocated to common shares
$
111,441

 
$
113,822

 
$
117,161

 
 
 
 
 
 
Weighted-average basic shares outstanding
120,875

 
121,812

 
126,074

 
 
 
 
 
 
Diluted earnings per share
$
0.92

 
$
0.93

 
$
0.93

________________________
(1)
Represents cash dividends paid to holders of unvested restricted stock, net of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.

36



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


NOTE 13. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table presents interest income and noninterest income, the components of total revenue, as disclosed in the condensed consolidated statements of earnings and the related amounts which are from contracts with customers within the scope of Topic 606. As illustrated here, substantially all of our revenue is specifically excluded from the scope of Topic 606.
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
Total
 
Revenue from
 
Total
 
Revenue from
 
Recorded
 
Contracts with
 
Recorded
 
Contracts with
 
Revenue
 
Customers
 
Revenue
 
Customers
 
(In thousands)
Total interest income
$
304,559

 
$

 
$
277,775

 
$

Noninterest income:
 
 
 
 
 
 
 
   Service charges on deposit accounts
3,730

 
3,730

 
4,174

 
4,174

   Other commissions and fees
11,008

 
4,538

 
10,265

 
4,651

   Leased equipment income
9,282

 

 
9,587

 

   Gain on sale of loans

 

 
4,569

 

   Gain on sale of securities
2,161

 

 
6,311

 

   Other income
4,883

 
371

 
3,653

 
461

      Total noninterest income
31,064

 
8,639

 
38,559

 
9,286

Total revenue
$
335,623

 
$
8,639

 
$
316,334

 
$
9,286

The following table presents revenue from contracts with customers based on the timing of revenue recognition for the period indicated:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Products and services transferred at a point in time
$
4,546

 
$
4,661

Products and services transferred over time
4,093

 
4,625

Total revenue from contracts with customers
$
8,639

 
$
9,286

Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Receivables, which are included in "Other assets"
$
1,198

 
$
1,334

Contract assets, which are included in "Other assets"
$

 
$

Contract liabilities, which are included in "Accrued interest payable and other liabilities"
$
588

 
$
621

Contract liabilities relate to advance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the three months ended March 31, 2019 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $33,000.

37



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


NOTE 14.  STOCK-BASED COMPENSATION
The Company’s 2017 Stock Incentive Plan, or the 2017 Plan, permits stock-based compensation awards to officers, directors, employees, and consultants. The 2017 Plan authorized grants of stock‑based compensation instruments to purchase or issue up to 4,000,000 shares of Company common stock. As of March 31, 2019, there were 3,069,009 shares available for grant under the 2017 Plan. Though frozen for new issuances, certain awards issued under the 2003 Stock Incentive Plan, or the 2003 Plan, remain outstanding.
Restricted Stock
Restricted stock amortization totaled $5.8 million, $6.9 million, and $7.2 million for the three months ended March 31, 2019, December 31, 2018, and March 31, 2018. 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, 2019 totaled $49.7 million.
Time-Based Restricted Stock Awards
At March 31, 2019, there were 1,241,543 shares of unvested TRSAs outstanding pursuant to the Company's 2003 and 2017 Stock Incentive Plans. The TRSAs generally vest ratably 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.
Performance-Based Restricted Stock Units
At March 31, 2019, there were 276,386 unvested PRSUs granted. 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 either the 2017 Plan or the 2003 Plan until they vest. PRSUs are granted and initially expensed based on a target number. The number of shares that will ultimately vest based on actual performance will range from zero to a maximum of either 150% or 200% of target. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award date and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion of the previously recognized amortization is reversed and also suspended. If it is determined that attainment of a financial measure higher than target is probable, the amortization will increase to up to 150% or 200% of the target amortization amount. Annual PRSU expense may vary during the three-year performance period based upon changes in management's estimate of the number of shares that may ultimately vest. In the case where the performance target for the PRSU 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 and the employee continues to meet the service requirement of the award.

38



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


NOTE 15.  RECENTLY ISSUED ACCOUNTING STANDARDS
 
 
 
 
Effective
 
Effect on the Financial Statements
Standard
 
Description
 
Date
 
or Other Significant Matters
ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,"
and
ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses”

 
1. This Update changes the accounting and recognition of credit losses and impairment of financial assets recorded at amortized cost. Under the CECL model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. The forward-looking concept of CECL requires loss estimates for the remaining estimated life of the financial assets using historical experience, current conditions and reasonable and supportable forecasts. 2. The Update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Receivables arising from operating leases are not within the scope of the new credit losses standard. 3. The Update must be applied using the modified retrospective method with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. A prospective transition approach is required for available-for-sale debt securities for which an other-than-temporary impairment had been recognized before the adoption date. Early adoption is permitted.
 
January 1, 2020
 
1. The Company has established a multidisciplinary project team and implementation plan, selected a software solution, reached preliminary accounting decisions on various matters, developed a conceptual framework, and developed regression models for the reasonable and supportable forecast period. 2. The Company continues to test and refine the CECL models and has begun parallel calculations, testing, and sensitivity analysis on its initial modeling assumptions and results. The ultimate impact is influenced by our portfolio characteristics, of which the vast majority is comprised of short-duration commercial loans; the macroeconomic conditions and forecasts at adoption; and other management judgments. 3. We plan to adopt this new standard on January 1, 2020. The new standard will be significant to the policies, processes, and methodology used to determine credit losses; however, the Company has not yet determined the quantitative effect on its consolidated financial position and results of operations.
 
 
 
 
Effective
 
Effect on the Financial Statements
Standard
 
Description
 
Date
 
or Other Significant Matters
ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" 
 
1. This Update simplifies 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. 2. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized 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. 3. The Update must be applied prospectively and early adoption is permitted.
 
January 1, 2020
 
1. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations and we plan to adopt this standard on January 1, 2020.

39



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


 
 
 
 
Effective
 
Effect on the Financial Statements
Standard
 
Description
 
Date
 
or Other Significant Matters
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements”
 
1. This Update modified the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. 2. Certain disclosure requirements in Topic 820 are also removed or modified. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis and early adoption is permitted.
 
January 1, 2020
 
1. The adoption of this guidance will modify disclosures but will not have an impact on the Company’s consolidated financial position or results of operations. The Company has early adopted any removed or modified disclosures effective January 1, 2019 but will defer adoption of the additional disclosures until January 1, 2020 as permitted in the transition guidance in ASU 2018-13.

40



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


 
 
 
 
Effective
 
Effect on the Financial Statements
Standard
 
Description
 
Date
 
or Other Significant Matters
ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments"


 
1. This Update made clarifications and amendments to five topics: (i) Topic A: Codification Improvements Resulting from the June and November 2018 Credit Losses Transition Resource Group ("TRG") Meetings, (ii) Topic B: Codification Improvements to ASU 2016-13, (iii) Topic C: Codification Improvements to ASU 2017-12, "Derivatives and Hedging (Topic 815)" and Other Hedging Items, (iv) Topic D: Codification Improvements to ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10)," and (v) Topic E: Codification Improvements Resulting from the November 2018 Credit Losses TRG Meeting. 2. In addition to conforming amendments that correct for errors and oversights, the Update in Topics A, B, and E, which impacts CECL implementation, amends or clarifies guidance for accrued interest; transfers between classifications or categories of loans and debt securities; recoveries; effect of prepayments in determining the effective interest rate; estimated costs to sell when foreclosure is probable; vintage disclosure presentation related to line-of-credit arrangements converted to term loans; contractual extensions or renewals; and others. 3. Transition requirements for the amendments are the same as ASU 2016-13 for the Update in Topics A, B, and E. The Update in Topic C may be applied retrospectively as of the date of initial adoption of ASU 2017-012 or prospectively. The Update in Topic D must be applied on a modified retrospective method with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption and early adoption is permitted.

 
January 1, 2020; except for Topic C - January 1, 2019
 
1. Impacts from the adoption of Topics A, B, and E within this Update will be considered in the Company's overall CECL implementation and we plan to adopt this Update concurrent with the adoption of ASU 2016-13. 2. The adoption of Topic D within this Update is not expected to have a material impact on the Company's consolidated financial position or results of operations and we plan to adopt this standard on January 1, 2020. 3. Topic C within this Update is not applicable to us and therefore there is no impact on the Company's consolidated financial position or results of operations.
NOTE 16.  SUBSEQUENT EVENTS
Common Stock Dividends
On May 1, 2019, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.60 per common share. The cash dividend is payable on May 31, 2019 to stockholders of record at the close of business on May 20, 2019.
The Company has evaluated events that have occurred subsequent to March 31, 2019 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.


41



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 operating expenses, profitability, allowance for loan and lease losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:
our ability to complete future acquisitions, and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
our ability to compete effectively against other financial service providers in our markets;
the 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, 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;
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, changes in our asset or liability mix, and/or changes to the cost of deposits and borrowings;
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 of capital requirements, and increased political and regulatory uncertainty;
the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
higher than anticipated increases in operating expenses;
lower than expected dividends paid from the Bank to the holding company;
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
the effectiveness of our risk management framework and quantitative models;
the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
the impact of changes made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and

42


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, 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.
The Bank is 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 numerous loan production offices across the country through its Community Banking, National Lending and Venture Banking groups. Community Banking provides real estate loans, commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices. National Lending provides asset-based, equipment, real estate, and security cash flow loans and treasury management services to established middle-market businesses on a national basis. Venture Banking 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 Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
Over the last couple of years, one area of focus has been our credit de-risking strategy whereby we made the decision to reduce our exposure in certain lending portfolios while emphasizing growth in loan portfolios with favorable credit performance. These efforts included the decision to exit the healthcare, technology, and general cash flow lending origination businesses by selling $1.5 billion of cash flow loans in 2017 and reducing the portfolio from approximately $2.4 billion at the end of 2016 to approximately $112 million as of March 31, 2019. We also reduced our exposure to healthcare real estate by shrinking this portfolio from approximately $955 million at the end of 2016 to approximately $415 million as of March 31, 2019, while also shifting our Venture Banking strategy to emphasize growth in equity fund loans which, as a percentage of our $2.0 billion Venture Banking loan portfolio, has gone from 16% as of the end of 2016 to 43% as of March 31, 2019. These efforts can contribute to lower loan yields as reductions in certain loan portfolios are replaced with loans with lower credit risk, such as multi-family and equity fund loans, thus placing pressure on our net interest margin. However, these efforts have resulted in an improved credit risk profile as evidenced by the reduction in our classified loans from 2.67% of loans at December 31, 2016 to 1.04% as of March 31, 2019, a reduction in nonaccrual loans from 1.11% of loans at December 31, 2016 to 0.48% as of March 31, 2019, and a reduction in our provision for credit losses as a percentage of average loans and leases from 0.42% in 2016 to 0.27% in 2018.
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 2019, accounted for 89.1% of net revenue (net interest income plus noninterest income).

43



At March 31, 2019, we had total assets of $26.3 billion, including $18.3 billion of total loans and leases, net of deferred fees, and $3.99 billion of securities available-for-sale, compared to $25.7 billion of total assets, including $18.0 billion of total loans and leases, net of deferred fees, and $4.01 billion of securities available-for-sale at December 31, 2018. The $592.8 million increase in total assets since year-end was due primarily to a $375.1 million increase in loans and leases, a $171.1 million increase in cash and cash equivalents, and an $87.8 million increase in other assets, offset partially by a $14.7 million decrease in securities available-for-sale. The increase in loans and leases was driven mostly by net loans held for investment growth of $350.0 million. The increase in other assets was due mainly to an operating lease ROU asset recorded in connection with the adoption of ASU 2016-02, "Leases (Topic 842)," on January 1, 2019.
At March 31, 2019, we had total liabilities of $21.5 billion, including total deposits of $19.3 billion and borrowings of $1.5 billion, compared to $20.9 billion of total liabilities, including $18.9 billion of total deposits and $1.4 billion of borrowings at December 31, 2018. The $627.4 million increase in total liabilities since year-end was due mainly to a $698.4 million increase in time deposits and a $110.0 million increase in borrowings, primarily short-term FHLB advances, offset partially by a $219.0 million decrease in core deposits and a $63.9 million decrease in non-core non-maturity deposits. At March 31, 2019, core deposits totaled $16.1 billion, or 84% of total deposits, including $7.7 billion of noninterest-bearing demand deposits, or 40% of total deposits.
At March 31, 2019, we had total stockholders' equity of $4.79 billion compared to $4.83 billion at December 31, 2018. The $34.6 million decrease in stockholders' equity since year-end was due mainly to $119.6 million of common stock repurchased under the Stock Repurchase Program and $73.2 million of cash dividends paid, offset partially by $112.6 million in net earnings and a $43.3 million increase in accumulated other comprehensive income . Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 9.48% and 12.15% at March 31, 2019.
Recent Events
Stock Repurchase Program
On February 24, 2019, effective upon the maturity of the previous Stock Repurchase Program on February 28, 2019, PacWest's Board of Directors authorized a new Stock Repurchase Program for an aggregate purchase price not to exceed $225 million until February 29, 2020.
The amount and exact timing of any repurchases will depend upon market conditions and other factors. The Stock Repurchase Program may be suspended or discontinued at any time. During the first quarter of 2019, we repurchased 3,070,676 shares of common stock for a total amount of $119.6 million at an average price of $38.94. All shares repurchased under the Stock Repurchase Program were retired upon settlement. At March 31, 2019, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program was $159.6 million.
Colorado Market Expansion
In the second quarter of 2019, we received approval to open a full-service branch office in Denver, Colorado, which we expect to open in the fourth quarter of 2019.

44


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 if related to a quarterly period) expressed as a percentage of average interest‑earning assets. Tax equivalent net interest income is net interest income increased by an adjustment for tax-exempt interest on certain loans and municipal securities based on a 21% federal statutory tax rate. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets.
Net interest income is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities. 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.
Loan and Lease Growth
We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans are diverse and generally include various asset-secured loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial companies during the various phases of their early life cycles, secured business loans originated through our Community Banking group, and loans to security alarm monitoring companies. Our loan origination process emphasizes credit quality. To augment our internal loan production, we have historically purchased multi-family loans from other banks. We have also purchased single-family mortgage and construction loans and private student loans from third-party lenders. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. 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 loans and leases, nonaccrual loans and leases, 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 exposures. 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 classified loans and leases, the likelihood of loans defaulting based on the historical degree that similar loans defaulted and the resulting loss severity for these defaulted loans, 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.

45


We regularly review our loans and leases to determine whether there has been any deterioration in credit quality resulting 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 unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, 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 our loans are concentrated in commercial real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation and occupancy expense. 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).
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
2019
 
2018
 
2018
 
 
(Dollars in thousands)
Noninterest expense
$
126,287

 
$
129,235

 
$
127,395

Less:
Intangible asset amortization
4,870

 
4,986

 
6,346

 
Foreclosed assets (income) expense, net
29

 
(311
)
 
(122
)
 
Acquisition, integration and reorganization costs
618

 
970

 

      Noninterest expense used for efficiency ratio
$
120,770

 
$
123,590

 
$
121,171

 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
256,052

 
$
263,369

 
$
258,472

Noninterest income
31,064

 
33,526

 
38,559

Net revenues
287,116

 
296,895

 
297,031

Less:
Gain on sale of securities
2,161

 
786

 
6,311

Net revenues used for efficiency ratio
$
284,955

 
$
296,109

 
$
290,720

 
 
 
 
 
 
 
Efficiency ratio
42.4
%
 
41.7
%
 
41.7
%
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that 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 and estimates relate to the allowance for credit losses on loans and leases held for investment, accounting for business combinations, and the realization of deferred income tax assets and liabilities. For further information, refer to our Annual Report on Form 10‑K for the year ended December 31, 2018.

46



Non-GAAP Measurements
We use certain non‑GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:
Return on average tangible equity, tangible common equity ratio, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to the related GAAP measures of return on average equity, equity to assets ratio, and book value per share, respectively. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.
 
 
 
Three Months Ended
 
 
 
March 31,
 
December 31,
 
March 31,
Return on Average Tangible Equity
2019
 
2018
 
2018
 
 
 
(Dollars in thousands)
Net earnings
 
$
112,604

 
$
115,041

 
$
118,276

 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
4,815,965

 
$
4,758,401

 
$
4,901,207

Less:
Average intangible assets
 
2,603,842

 
2,608,497

 
2,625,593

Average tangible common equity
 
$
2,212,123

 
$
2,149,904

 
$
2,275,614

 
 
 
 
 
 
 
 
Return on average equity (1)
 
9.48
%
 
9.59
%
 
9.79
%
Return on average tangible equity (2)
 
20.64
%
 
21.23
%
 
21.08
%
___________________________________
(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
2019
 
2018
 
(Dollars in thousands, except per share data)
Stockholders’ equity
$
4,790,982

 
$
4,825,588

Less: Intangible assets
2,600,920

 
2,605,790

Tangible common equity
$
2,190,062

 
$
2,219,798

 
 
 
 
Total assets
$
26,324,138

 
$
25,731,354

Less: Intangible assets
2,600,920

 
2,605,790

Tangible assets
$
23,723,218

 
$
23,125,564

 
 
 
 
Equity to assets ratio
18.20
%
 
18.75
%
Tangible common equity ratio (1)
9.23
%
 
9.60
%
Book value per share
$
39.86

 
$
39.17

Tangible book value per share (2)
$
18.22

 
$
18.02

Shares outstanding
120,201,149

 
123,189,833

_______________________________________ 
(1)
Tangible common equity divided by tangible assets.
(2)
Tangible common equity divided by shares outstanding.


47


Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(Dollars in thousands, except per share data)
Earnings Summary:
 
 
 
 
 
Net interest income
$
254,876

 
$
261,765

 
$
256,500

Provision for credit losses
(4,000
)
 
(12,000
)
 
(4,000
)
Noninterest income
31,064

 
33,526

 
38,559

Noninterest expense
(126,287
)
 
(129,235
)
 
(127,395
)
Earnings before income taxes
155,653

 
154,056

 
163,664

Income tax expense
(43,049
)
 
(39,015
)
 
(45,388
)
Net earnings
$
112,604

 
$
115,041

 
$
118,276

 
 
 
 
 
 
Performance Measures:
 
 
 
 
 
Diluted earnings per share
$
0.92

 
$
0.93

 
$
0.93

Annualized return on:
 
 
 
 
 
Average assets
1.77
%
 
1.84
%
 
1.99
%
Average tangible equity (1)(2)
20.64
%
 
21.23
%
 
21.08
%
Net interest margin (tax equivalent)
4.69
%
 
4.91
%
 
5.11
%
Yield on average loans and leases (tax equivalent)
6.16
%
 
6.27
%
 
6.11
%
Cost of average total deposits
0.73
%
 
0.62
%
 
0.31
%
Efficiency ratio
42.4
%
 
41.7
%
 
41.7
%
_____________________________
(1)
Calculation reduces average stockholder's equity by average intangible assets.
(2)
See "- Non-GAAP Measurements."
First Quarter of 2019 Compared to Fourth Quarter of 2018
Net earnings for the first quarter of 2019 were $112.6 million, or $0.92 per diluted share, compared to net earnings for the fourth quarter of 2018 of $115.0 million, or $0.93 per diluted share. The $2.4 million decrease in net earnings from the prior quarter was due primarily to lower net interest income of $6.9 million, higher income tax expense of $4.0 million, and lower noninterest income of $2.5 million, offset partially by a lower provision for credit losses of $8.0 million and lower noninterest expense of $2.9 million. Net interest income decreased due to interest expense growth of $8.7 million exceeding interest income growth of $1.8 million and two less days in the first quarter compared to the fourth quarter. Income tax expense increased due to a lower effective tax rate in the fourth quarter attributable primarily to a change in the state apportionment method applied by the state of Maryland. Noninterest income declined due mainly to a $5.0 million decrease in other income, offset partially by an increase of $1.6 million in dividends and gains on equity investments and a $1.4 million increase in gain on sale of securities. Noninterest expense decreased due mostly to a $3.3 million decline in other expense and a $1.7 million decrease in other professional services expense, offset partially by a $1.5 million increase in compensation expense.

48


First Quarter of 2019 Compared to First Quarter of 2018
Net earnings for the first quarter of 2019 were $112.6 million, or $0.92 per diluted share, compared to net earnings for the first quarter of 2018 of $118.3 million, or $0.93 per diluted share. The $5.7 million decrease in net earnings was due mainly to lower noninterest income of $7.5 million and lower net interest income of $1.6 million, offset partially by lower noninterest expense of $1.1 million. Noninterest income declined due primarily to lower gain on sale of loans and leases of $4.6 million and lower gain on sale of securities of $4.2 million, offset partially by higher warrant income of $2.0 million. Net interest income decreased due to interest expense growth of $28.4 million exceeding interest income growth of $26.8 million. Noninterest expense declined due mainly to lower insurance and assessments expense of $1.7 million and lower intangible asset amortization of $1.5 million, offset partially by higher occupancy expense of $1.1 million.

49


Net Interest Income
The following tables summarize 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, 2019
 
December 31, 2018
 
March 31, 2018
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases (1)(2)(3)
$
18,064,230

$
274,513

6.16
%
 
$
17,275,343

$
272,824

6.27
%
 
$
16,682,124

$
251,260

6.11
%
Investment securities (2)(4)
3,968,531

30,572

3.12
%
 
3,899,520

30,992

3.15
%
 
3,682,138

27,935

3.08
%
Deposits in financial institutions
111,950

650

2.35
%
 
94,500

527

2.21
%
 
150,674

552

1.49
%
Total interest‑earning assets (2)
22,144,711

305,735

5.60
%
 
21,269,363

304,343

5.68
%
 
20,514,936

279,747

5.53
%
Other assets
3,631,238

 
 
 
3,515,099

 
 
 
3,556,212

 
 
Total assets
$
25,775,949

 
 
 
$
24,784,462

 
 
 
$
24,071,148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest checking
$
3,041,822

9,321

1.24
%
 
$
2,785,702

7,932

1.13
%
 
$
2,311,988

3,050

0.54
%
Money market
5,274,987

14,908

1.15
%
 
5,107,468

13,621

1.06
%
 
5,038,119

6,812

0.55
%
Savings
553,032

242

0.18
%
 
597,259

273

0.18
%
 
685,173

258

0.15
%
Time
2,286,932

9,764

1.73
%
 
1,932,332

7,008

1.44
%
 
1,923,963

3,698

0.78
%
Total interest‑bearing deposits
11,156,773

34,235

1.24
%
 
10,422,761

28,834

1.10
%
 
9,959,243

13,818

0.56
%
Borrowings
1,218,319

7,710

2.57
%
 
764,039

4,602

2.39
%
 
239,293

920

1.56
%
Subordinated debentures
454,203

7,738

6.91
%
 
452,998

7,538

6.60
%
 
461,648

6,537

5.74
%
Total interest‑bearing liabilities
12,829,295

49,683

1.57
%
 
11,639,798

40,974

1.40
%
 
10,660,184

21,275

0.81
%
Noninterest‑bearing demand deposits
7,783,652

 
 
 
8,163,699

 
 
 
8,311,104

 
 
Other liabilities
347,037

 
 
 
222,564

 
 
 
198,653

 
 
Total liabilities
20,959,984

 
 
 
20,026,061

 
 
 
19,169,941

 
 
Stockholders’ equity
4,815,965

 
 
 
4,758,401

 
 
 
4,901,207

 
 
Total liabilities and
 
 
 
 
 
 
 
 
 
 
 
stockholders' equity
$
25,775,949

 
 
 
$
24,784,462

 
 
 
$
24,071,148

 
 
Net interest income (2)
 
$
256,052

 
 
 
$
263,369

 
 
 
$
258,472

 
Net interest rate spread (2)
 
 
4.03
%
 
 
 
4.28
%
 
 
 
4.72
%
Net interest margin (2)
 
 
4.69
%
 
 
 
4.91
%
 
 
 
5.11
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (5)
$
18,940,425

$
34,235

0.73
%
 
$
18,586,460

$
28,834

0.62
%
 
$
18,270,347

$
13,818

0.31
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)
Tax equivalent.
(3)
Includes discount accretion on acquired loans of $3.0 million, $6.9 million, and $7.6 million for the three months ended March 31, 2019, December 31, 2018, and March 31, 2018, respectively.
(4)
Includes tax-equivalent adjustments of $0.9 million, $1.3 million, and $1.8 million for the three months ended March 31, 2019, December 31, 2018, and March 31, 2018, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.
(5)
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 total deposits divided by average total deposits.



50


First Quarter of 2019 Compared to Fourth Quarter of 2018
Net interest income decreased by $6.9 million to $254.9 million for the first quarter of 2019 compared to $261.8 million for the fourth quarter of 2018 due to interest expense growth exceeding interest income growth and two less days in the first quarter compared to the fourth quarter. Interest expense increased by $8.7 million due mainly to a higher cost of average total deposits, a higher balance of average interest-bearing deposits, and a higher balance of average borrowings, offset partially by two less days in the first quarter of 2019. Interest income increased by $1.8 million due primarily to a higher balance of average loans and leases, offset partially by a lower yield on average loans and leases and two less days in the first quarter of 2019. The tax equivalent yield on average loans and leases was 6.16% for the first quarter of 2019 compared to 6.27% for the fourth quarter of 2018. The decrease in the yield on average loans and leases was due principally to lower discount accretion on acquired loans (seven basis points in the first quarter of 2019 compared to 16 basis points in the fourth quarter of 2018). The decrease in loan yield is also influenced by the credit de-risking initiatives taken over the last couple of years which has seen the replacement of higher yielding loans, such as cash flow, with lower yielding multi-family and equity fund loans.
The tax equivalent NIM was 4.69% for the first quarter of 2019 compared to 4.91% for the fourth quarter of 2018. The decrease in the tax equivalent NIM was due mainly to higher deposit and borrowing costs and a lower yield on average loans and leases resulting from lower discount accretion on acquired loans as described above. Total discount accretion on acquired loans contributed six basis points to the NIM for the first quarter of 2019 compared to 13 basis points for the fourth quarter of 2018.
The cost of average total deposits increased to 0.73% for the first quarter of 2019 from 0.62% for the fourth quarter of 2018. The increase was driven primarily by a shift in our deposit mix resulting from increases in higher rate average time, interest checking, and money market deposits and decreases in lower rate average savings deposits and noninterest-bearing demand deposits. Additionally, interest rates paid on our deposits were higher due to the Federal Reserve's December 2018 increase to the federal funds rate.
First Quarter of 2019 Compared to First Quarter of 2018
Net interest income decreased by $1.6 million to $254.9 million for the first quarter of 2019 compared to $256.5 million for the first quarter of 2018 due to interest expense growth exceeding interest income growth. Interest expense increased by $28.4 million due mainly to a higher cost of average total deposits, a higher balance of average interest-bearing deposits, and a higher balance of average borrowings. Interest income increased by $26.8 million due primarily to a higher balance of average loans and leases and a higher yield on average loans and leases. The tax equivalent yield on average loans and leases was 6.16% for the first quarter of 2019 compared to 6.11% for the same quarter of 2018. The increase in the yield on average loans and leases was due mainly to the repricing of variable-rate loans attributable to higher short-term market interest rates, offset partially by lower discount accretion on acquired loans (seven basis points in the first quarter of 2019 compared to 19 basis points in the first quarter of 2018).
The tax equivalent NIM was 4.69% for the first quarter of 2019 compared to 5.11% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to higher deposit and borrowing costs, offset partially by the increase in the yield on average loans and leases as described above. Total discount accretion on acquired loans contributed six basis points to the NIM for the first quarter of 2019 compared to 15 basis points for the first quarter of 2018.
The cost of average total deposits increased to 0.73% for the first quarter of 2019 from 0.31% for the first quarter of 2018 due mainly to higher rates paid on deposits in conjunction with increased market rates, along with a shift in our deposit mix resulting from increases in higher rate average time, interest checking, and money market deposits and decreases in lower rate average savings deposits and noninterest-bearing demand deposits.

51


Provision for Credit Losses
The following table sets forth the details of the provision for credit losses on loans and leases held for investment and information regarding credit quality metrics for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
Addition to (reduction in) allowance for loan and lease losses
$
4,000

 
$
10,500

 
$
(226
)
Addition to reserve for unfunded loan commitments

 
1,500

 
4,226

Total provision for credit losses
$
4,000

 
$
12,000

 
$
4,000

 
 
 
 
 
 
Credit Quality Metrics:
 
 
 
 
 
Net charge‑offs on loans and leases held for
 
 
 
 
 
investment (1)
$
191

 
$
19,948

 
$
4,955

Annualized net charge‑offs to average loans and leases
%
 
0.46
%
 
0.12
%
At period end:
 
 
 
 
 
Allowance for credit losses
$
173,142

 
$
169,333

 
$
167,136

Allowance for credit losses to loans and leases
 
 
 
 
 
held for investment
0.95
%
 
0.94
%
 
1.02
%
Allowance for credit losses to nonaccrual
 
 
 
 
 
loans and leases held for investment
195.6
%
 
213.5
%
 
161.1
%
 
 
 
 
 
 
Nonaccrual loans and leases held for investment
$
88,527

 
$
79,333

 
$
103,725

Performing TDRs held for investment
17,027

 
17,701

 
60,173

Total impaired loans and leases
$
105,554

 
$
97,034

 
$
163,898

 
 
 
 
 
 
Classified loans and leases held for investment 
$
190,305

 
$
237,110

 
$
208,042

______________________
(1)
See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" for detail of charge-offs and recoveries by loan portfolio segment, class, and subclass for the periods presented.
Provisions for credit losses are charged to earnings for both on and off‑balance sheet credit exposures. The provision for credit losses on our loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate allowance for credit losses.
The allowance for loan and lease losses has a general reserve component for loans and leases with no credit impairment and a specific reserve component for impaired loans and leases. Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors that are applied against the population of unimpaired loans and leases. The quantitative loss factors consider the likelihood of loans defaulting based on the historical degree that similar loans defaulted and the degree of credit losses based on the historical average degree of loss experienced for these similar loans and leases pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things, current economic trends and forecasts, current collateral values and performance trends, credit performance trends, and the loan portfolio's current composition.

52


We recorded a provision for credit losses of $4.0 million in the first quarter of 2019, $12.0 million in the fourth quarter of 2018, and $4.0 million in the first quarter of 2018.
The decrease in the provision for credit losses for the first quarter of 2019 compared to the fourth quarter of 2018 was due mainly to a lower amount of net loan growth in the first quarter of 2019 compared to the fourth quarter of 2018 and no provision amount related to the reserve for unfunded loan commitments because of the decline in construction-related unfunded commitments.
The provision for credit losses for the first quarter of 2019 compared to the first quarter of 2018 was the same at $4.0 million; however, there were various components of these provision amounts that were different. Examples of these different components were greater recoveries in the first quarter of 2018 and a higher provision amount related to the reserve for unfunded loan commitments because unfunded commitments primarily relating to construction loans increased.
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 unemployment rate, the rate of inflation, 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 Loans and Leases Held for Investment” contained herein.
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
2019
 
2018
 
2018
 
(In thousands)
Other commissions and fees
$
11,008

 
$
11,114

 
$
10,265

Leased equipment income
9,282

 
9,384

 
9,587

Service charges on deposit accounts
3,730

 
4,091

 
4,174

Gain on sale of loans and leases

 

 
4,569

Gain on sale of securities
2,161

 
786

 
6,311

Other income:
 
 
 
 
 
Dividends and gains (losses) on equity investments
296

 
(1,331
)
 
251

Warrant income
2,279

 
2,187

 
248

Other
2,308

 
7,295

 
3,154

Total noninterest income
$
31,064

 
$
33,526

 
$
38,559

First Quarter of 2019 Compared to Fourth Quarter of 2018
Noninterest income decreased by $2.5 million to $31.1 million for the first quarter of 2019 compared to $33.5 million for the fourth quarter of 2018 due mainly to a decrease of $5.0 million in other income, offset partially by increases of $1.6 million in dividends and gains on equity investments and $1.4 million in gain on sale of securities. Other income decreased due primarily to lower miscellaneous income from borrower settlements and lower BOLI income attributable to a death benefit received in the fourth quarter of 2018. Dividends and gains on equity investments increased due mostly to negative mark-to-market valuation adjustments in the fourth quarter on equity investments arising from exercised warrants. The increase in gain on sale of securities was attributable to a net gain of $2.2 million on sales of $405.8 million of securities in the first quarter of 2019 as part of a partial portfolio repositioning compared to a net gain of $0.8 million on sales of $70.9 million of securities in the fourth quarter of 2018.

53


First Quarter of 2019 Compared to First Quarter of 2018
Noninterest income decreased by $7.5 million to $31.1 million for the first quarter of 2019 compared to $38.6 million for the first quarter of 2018 due mainly to decreases of $4.6 million in gain on sale of loans and leases and $4.2 million in gain on sale of securities, offset partially by an increase of $2.0 million in warrant income. The decrease in gain on sale of loan and leases was attributable to no gain on sales of $16.9 million of loans in the first quarter of 2019 compared to a net gain of $4.6 million on sales of $610.8 million of loans in the first quarter of 2018. The first quarter of 2018 included a $2.4 million gain resulting from the sale of our largest nonaccrual loan above its carrying value and $1.3 million related to the settlement of loans held for sale of $481.1 million. The decrease in gain on sale of securities was attributable to a net gain of $2.2 million on sales of $405.8 million of securities in the first quarter of 2019 as part of a partial portfolio repositioning compared to a net gain of $6.3 million on sales of $299.9 million of securities in the first quarter of 2018. The first quarter of 2018 securities were sold primarily for reinvestment in higher quality liquid assets, yield, and credit risk purposes. Warrant income increased due primarily to higher realized gains on exercised warrants.
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
2019
 
2018
 
2018
 
(In thousands)
Compensation
$
70,845

 
$
69,299

 
$
71,023

Occupancy
14,320

 
13,356

 
13,223

Data processing
6,925

 
6,930

 
6,659

Leased equipment depreciation
5,651

 
5,758

 
5,375

Intangible asset amortization
4,870

 
4,986

 
6,346

Other professional services
4,513

 
6,198

 
4,439

Insurance and assessments
4,038

 
4,202

 
5,727

Loan expense
2,885

 
2,991

 
2,271

Acquisition, integration and reorganization costs
618

 
970

 

Foreclosed assets expense (income), net
29

 
(311
)
 
(122
)
Other
11,593

 
14,856

 
12,454

Total noninterest expense
$
126,287

 
$
129,235

 
$
127,395

First Quarter of 2019 Compared to Fourth Quarter of 2018
Noninterest expense decreased by $2.9 million to $126.3 million for the first quarter of 2019 compared to $129.2 million for the fourth quarter of 2018 attributable primarily to decreases of $3.3 million in other expense and $1.7 million in other professional services expense, offset partially by an increase of $1.5 million in compensation expense. Other expense decreased due mainly to the $2.1 million write-off of the Square 1 trademark asset in the fourth quarter of 2018 as a result of our plan to retire the Square 1 name and increased employee expense in the fourth quarter of 2018 due to executive relocation costs. Other professional services expense decreased due to lower legal and consulting expenses. Compensation expense increased due to normal seasonal increases in payroll tax and other employee benefit expenses and higher bonus expense, offset partially by lower stock compensation expense, due to an increase in forfeitures, and lower commissions expense.

54


First Quarter of 2019 Compared to First Quarter of 2018
Noninterest expense decreased by $1.1 million to $126.3 million for the first quarter of 2019 compared to $127.4 million for the first quarter of 2018 due mainly to decreases of $1.7 million in insurance and assessments expense and $1.5 million in intangible asset amortization, offset partially by an increase of $1.1 million in occupancy expense. Insurance and assessments expense decreased due primarily to the ending in the fourth quarter of 2018 of a 4.5 basis point surcharge on the FDIC insurance assessments of depository institutions with more than $10 billion in total consolidated assets. The Bank became subject to the FDIC surcharge on July 1, 2016 and the surcharge continued through September 30, 2018, when the Deposit Insurance Fund reserve ratio reached 1.36% of insured deposits, exceeding the statutorily required minimum reserve level of 1.35%. Intangible asset amortization declined due mostly to lower amortization on the CUB and Square 1 intangible assets. Occupancy expense increased due mainly to a greater number of properties leased in the first quarter of 2019 compared to the same period last year.
Income Taxes
The effective tax rate for the first quarter of 2019 was 27.7% compared to 25.3% for the fourth quarter of 2018 and 27.7% for the first quarter of 2018. The fourth quarter of 2018 effective tax rate was lower due primarily to a change in the state apportionment method applied by the state of Maryland. The Company’s blended statutory tax rate for federal and state is 28.31% and the effective tax rate for the full year 2019 is estimated to be in the range of 27-28%.





55



Balance Sheet Analysis
Securities Available-for-Sale
The following table presents the composition and durations of our securities available-for-sale as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
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
$
343,176

 
9
%
 
3.4

 
$
281,088

 
7
%
 
3.7

Agency CMOs
717,776

 
18
%
 
4.1

 
632,850

 
16
%
 
4.3

Private label CMOs
123,247

 
3
%
 
3.5

 
101,205

 
2
%
 
4.2

Municipal securities
1,185,001

 
30
%
 
7.1

 
1,312,194

 
33
%
 
7.3

Agency commercial MBS
1,078,911

 
27
%
 
5.1

 
1,112,704

 
28
%
 
4.9

U.S. Treasury securities
290,717

 
7
%
 
2.5

 
403,405

 
10
%
 
3.0

Asset-backed securities
185,156

 
5
%
 
0.9

 
81,385

 
2
%
 
2.4

SBA securities
52,024

 
1
%
 
4.1

 
67,047

 
2
%
 
3.5

Corporate debt securities
18,700

 
%
 
11.0

 
17,553

 
%
 
11.0

Total securities available-
 
 
 
 
 
 
 
 
 
 
 
for-sale
$
3,994,708

 
100
%
 
5.0

 
$
4,009,431

 
100
%
 
5.2

The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
 
March 31, 2019
 
Fair
 
% of
Municipal Securities by State
Value
 
Total
 
(Dollars in thousands)
 California
$
283,360

 
24
%
 Washington
144,064

 
12
%
 New York
128,823

 
11
%
 Utah
67,682

 
6
%
 Texas
56,623

 
5
%
 Florida
48,579

 
4
%
 Oregon
46,824

 
4
%
 Massachusetts
45,609

 
4
%
 District of Columbia
41,841

 
3
%
 Idaho
38,899

 
3
%
Total of ten largest states
902,304

 
76
%
 All other states
282,697

 
24
%
Total municipal securities
$
1,185,001

 
100
%

56



Loans and Leases Held for Investment
The following table presents the composition of our loans and leases held for investment, net of deferred fees, by loan portfolio segment, class, and subclass as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
% of
 
 
 
% of
Loan and Lease Portfolio 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Healthcare real estate
$
415,314

 
2
%
 
$
451,776

 
3
%
Hospitality
587,675

 
3
%
 
575,516

 
3
%
SBA program
553,563

 
3
%
 
559,113

 
3
%
Other commercial real estate
3,083,958

 
17
%
 
3,237,893

 
18
%
Total commercial real estate mortgage
4,640,510

 
25
%
 
4,824,298

 
27
%
Income producing and other residential
3,406,373

 
18
%
 
2,971,213

 
16
%
Other residential real estate
112,575

 
1
%
 
122,630

 
1
%
Total income producing and other
 
 
 
 
 
 
 
residential real estate mortgage
3,518,948

 
19
%
 
3,093,843

 
17
%
Total real estate mortgage
8,159,458

 
44
%
 
7,918,141

 
44
%
Real estate construction and land:
 
 
 
 
 
 
 
Commercial
943,596

 
5
%
 
912,583

 
5
%
Residential
1,408,128

 
8
%
 
1,321,073

 
8
%
Total real estate construction and land
2,351,724

 
13
%
 
2,233,656

 
13
%
Total real estate
10,511,182

 
57
%
 
10,151,797

 
57
%
Commercial:
 
 
 
 
 
 
 
Lender finance & timeshare
1,860,670

 
10
%
 
1,780,731

 
10
%
Equipment finance
749,124

 
4
%
 
734,331

 
4
%
Other asset-based
422,623

 
2
%
 
434,005

 
2
%
Premium finance
389,785

 
3
%
 
356,354

 
2
%
Total asset-based
3,422,202

 
19
%
 
3,305,421

 
18
%
Expansion stage
858,711

 
5
%
 
908,047

 
5
%
Equity fund loans
871,399

 
5
%
 
797,500

 
4
%
Early stage
207,431

 
1
%
 
225,566

 
1
%
Late stage
89,909

 
%
 
107,635

 
1
%
Total venture capital
2,027,450

 
11
%
 
2,038,748

 
11
%
Secured business loans
744,179

 
4
%
 
788,012

 
4
%
Security monitoring
632,899

 
3
%
 
643,369

 
4
%
Other lending
485,936

 
3
%
 
514,947

 
3
%
Cash flow
111,688

 
1
%
 
114,098

 
1
%
Total other commercial
1,974,702

 
11
%
 
2,060,426

 
12
%
Total commercial
7,424,354

 
41
%
 
7,404,595

 
41
%
Consumer
372,161

 
2
%
 
401,321

 
2
%
Total loans and leases held for investment,
 
 
 
 
 
 
 
net of deferred fees
$
18,307,697

 
100
%
 
$
17,957,713

 
100
%
 



  

57



The following table presents the geographic composition of our real estate loans held for investment, net of deferred fees, 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, 2019
 
December 31, 2018
 
 
 
% of
 
 
 
% of
Real Estate Loans by State
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
California
$
6,085,055

 
58
%
 
$
5,798,045

 
57
%
New York
822,136

 
8
%
 
855,644

 
8
%
Florida
515,778

 
5
%
 
547,054

 
5
%
Texas
342,928

 
3
%
 
378,834

 
4
%
Washington
320,660

 
3
%
 
253,545

 
3
%
Oregon
268,598

 
3
%
 
227,067

 
2
%
Virginia
231,287

 
2
%
 
206,920

 
2
%
Arizona
218,006

 
2
%
 
235,425

 
2
%
Illinois
209,382

 
2
%
 
154,808

 
2
%
New Jersey
184,774

 
2
%
 
179,045

 
2
%
Total of 10 largest states
9,198,604

 
88
%
 
8,836,387

 
87
%
All other states
1,312,578

 
12
%
 
1,315,410

 
13
%
Total real estate loans held for investment, net of deferred fees
$
10,511,182

 
100
%
 
$
10,151,797

 
100
%
The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the periods indicated:
 
Three Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)
March 31, 2019
 
(Dollars in thousands)
Balance, beginning of period
$
17,957,713

Additions:
 
Production
1,174,838

Disbursements
1,192,972

Total production and disbursements
2,367,810

Reductions:
 
Payoffs
(933,300
)
Paydowns
(1,038,964
)
Total payoffs and paydowns
(1,972,264
)
Sales
(16,936
)
Transfers to foreclosed assets
(37
)
Charge-offs
(3,465
)
Transfers to loans held for sale
(25,124
)
Total reductions
(2,017,826
)
Balance, end of period
$
18,307,697

 
 
Weighted average rate on production (2)
5.11
%
_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
The weighted average rate on production presents contractual rates on a tax equivalent basis and does not include amortized fees. Amortized fees added approximately 24 basis points to loan yields for the three months ended March 31, 2019.



58



Allowance for Credit Losses on Loans and Leases Held for Investment
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. For loans and leases acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or other inherent risks related to these acquired assets that may occur after the acquisition date.
The allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon our review of the credit quality of the loan and lease portfolio, which includes loan and lease payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial performance, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to make payments to us in accordance with contractual terms. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses has a general reserve component for unimpaired loans and leases and a specific reserve component for impaired loans and leases.
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. Impaired loans and leases with outstanding balances less than or equal to $250,000 may not be individually assessed for impairment but are assessed with reserves based on the average loss severity on historical impaired loans with similar risk characteristics.
Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to our population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors consider the likelihood of loans defaulting based on the historical degree that similar loans defaulted and the degree of credit losses based on the historical average degree of loss experienced for these similar loans and leases pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things, current economic trends and forecasts, current collateral values and performance trends, credit performance trends, and the loan portfolio's current composition.
The qualitative criteria we consider when establishing the loss factors include the following:
current economic trends and forecasts;
current collateral values, performance trends, and overall outlook in the markets where we lend;
legal and regulatory matters that could impact our borrowers’ ability to repay our loans and leases;
loan and lease portfolio composition and any loan concentrations;
current lending policies and the effects of any new policies or policy amendments;
loan and lease production volume and mix;
loan and lease portfolio credit performance trends;
results of our independent credit review; and
changes in management related to credit administration functions.

59



We estimate the reserve for unfunded loan commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for unfunded loan commitments is computed using expected future usage of the unfunded commitments based on historical usage of unfunded commitments for the various loan types.
The allowance for credit losses is directly correlated to the credit risk ratings of our loans. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans on a regular basis. The credit risk ratings assigned to every loan and lease are either “pass,” “special mention,” “substandard,” or “doubtful” and defined as follows:
Pass: Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: Loans and leases rated 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 rated 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 rated as "doubtful" have all the weaknesses of those rated 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)."
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.
Management believes the allowance for credit losses is appropriate for the known and inherent risks in our 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 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 loans and leases held for investment as of the dates indicated:
 
March 31,
 
December 31,
 
March 31,
Allowance for Credit Losses Data 
2019
 
2018
 
2018
 
(Dollars in thousands)
Allowance for loan and lease losses
$
136,281

 
$
132,472

 
$
134,275

Reserve for unfunded loan commitments
36,861

 
36,861

 
32,861

Total allowance for credit losses
$
173,142

 
$
169,333

 
$
167,136

 
 
 
 
 
 
Allowance for credit losses to loans and leases held for investment
0.95
%
 
0.94
%
 
1.02
%
Allowance for credit losses to nonaccrual loans and leases held for investment
195.6
%
 
213.5
%
 
161.1
%





60



The following table presents the changes in our allowance for credit losses on loans and leases held for investment for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Allowance for Credit Losses Roll Forward 
2019
 
2018
 
2018
 
(Dollars in thousands)
Balance, beginning of period (1)
$
169,333

 
$
177,281

 
$
168,091

Provision for credit losses:
 
 
 
 
 
Addition to (reduction in) allowance for loan and lease losses
4,000

 
10,500

 
(226
)
Addition to reserve for unfunded loan commitments

 
1,500

 
4,226

Total provision for credit losses
4,000

 
12,000

 
4,000

Loans and leases charged off:
 
 
 
 
 
Real estate mortgage
(196
)
 
(119
)
 
(2,597
)
Real estate construction and land

 

 

Commercial
(3,003
)
 
(25,160
)
 
(9,525
)
Consumer
(266
)
 
(67
)
 
(31
)
Total loans and leases charged off
(3,465
)
 
(25,346
)
 
(12,153
)
Recoveries on loans charged off:
 
 
 
 
 
Real estate mortgage
143

 
350

 
1,657

Real estate construction and land

 
147

 
9

Commercial
3,106

 
4,864

 
5,487

Consumer
25

 
37

 
45

Total recoveries on loans charged off
3,274

 
5,398

 
7,198

Net charge-offs
(191
)
 
(19,948
)
 
(4,955
)
Balance, end of period
$
173,142

 
$
169,333

 
$
167,136

 
 
 
 
 
 
Annualized net charge-offs to average loans and leases
%
 
0.46
%
 
0.12
%
_________________________________________
(1)
The allowance for credit losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance for the three months ended March 31, 2018.




61



The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Allowance for Credit Losses Charge-offs 
2019
 
2018
 
2018
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
Healthcare real estate
$

 
$

 
$

Hospitality

 

 

SBA program
96

 
85

 
2,015

Other commercial real estate
9

 
34

 
521

Total commercial real estate mortgage
105

 
119

 
2,536

Income producing and other residential

 

 

Other residential real estate
91

 

 
61

Total income producing and other residential
 
 
 
 
 
real estate mortgage
91

 

 
61

Total real estate mortgage
196

 
119

 
2,597

Real estate construction and land:
 
 
 
 
 
Commercial

 

 

Residential

 

 

Total real estate construction and land

 

 

Commercial:
 
 
 
 
 
Lender finance & timeshare

 

 
8

Equipment finance

 

 

Other asset-based

 

 
360

Premium finance

 

 

Total asset-based

 

 
368

Expansion stage
204

 
12,096

 
2,474

Early stage
96

 
11,349

 
(167
)
Equity fund loans

 

 

Late stage

 

 

Total venture capital
300

 
23,445

 
2,307

Security monitoring
1,707

 

 

Secured business loans
9

 
1,360

 
465

Other lending
514

 
355

 
686

Cash flow
473

 

 
5,699

Total other commercial
2,703

 
1,715

 
6,850

Total commercial
3,003

 
25,160

 
9,525

Consumer
266

 
67

 
31

Total charge-offs
$
3,465

 
$
25,346

 
$
12,153




62



The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
Allowance for Credit Losses Recoveries
2019
 
2018
 
2018
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
Healthcare real estate
$

 
$

 
$

Hospitality

 

 

SBA program
33

 
158

 
256

Other commercial real estate
72

 
117

 
162

Total commercial real estate mortgage
105

 
275

 
418

Income producing and other residential

 

 
1,208

Other residential real estate
38

 
75

 
31

Total income producing and other residential
 
 
 
 
 
real estate mortgage
38

 
75

 
1,239

Total real estate mortgage
143

 
350

 
1,657

Real estate construction and land:
 
 
 
 
 
Commercial

 
19

 
9

Residential

 
128

 

Total real estate construction and land

 
147

 
9

Commercial:
 
 
 
 
 
Lender finance & timeshare
1

 
21

 

Equipment finance
11

 

 
90

Other asset-based
79

 
67

 
50

Premium finance

 

 

Total asset-based
91

 
88

 
140

Expansion stage
97

 
1,016

 
4,420

Early stage
2,155

 
2,102

 
216

Equity fund loans

 

 

Late stage

 

 

Total venture capital
2,252

 
3,118

 
4,636

Security monitoring

 

 

Secured business loans
627

 
342

 
152

Other lending
125

 
437

 
559

Cash flow
11

 
879

 

Total other commercial
763

 
1,658

 
711

Total commercial
3,106

 
4,864

 
5,487

Consumer
25

 
37

 
45

Total recoveries
$
3,274

 
$
5,398

 
$
7,198



63



Deposits
The following table presents the balance of each major category of deposits as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
% of
 
 
 
% of
Deposit Composition
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Noninterest-bearing demand
$
7,712,409

 
40
%
 
$
7,888,915

 
42
%
Interest checking
3,163,228

 
16
%
 
2,842,463

 
15
%
Money market
4,714,078

 
25
%
 
5,043,871

 
27
%
Savings
537,923

 
3
%
 
571,422

 
3
%
Total core deposits
16,127,638

 
84
%
 
16,346,671

 
87
%
Non-core non-maturity deposits
454,277

 
2
%
 
518,192

 
3
%
Total non-maturity deposits
16,581,915

 
86
%
 
16,864,863

 
90
%
Time deposits $250,000 and under
2,258,989

 
12
%
 
1,593,453

 
8
%
Time deposits over $250,000
445,023

 
2
%
 
412,185

 
2
%
Total time deposits
2,704,012

 
14
%
 
2,005,638

 
10
%
Total deposits
$
19,285,927

 
100
%
 
$
18,870,501

 
100
%
Total deposits increased by $415.4 million during the first quarter to $19.3 billion, due mainly to an increase in time deposits of $698.4 million, offset partially by a decrease in core deposits of $219.0 million and a decrease in non-core non-maturity deposits of $63.9 million. At March 31, 2019, core deposits totaled $16.1 billion, or 84% of total deposits, including $7.7 billion of noninterest-bearing demand deposits, or 40% of total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
 
Time Deposits
 
$250,000
 
Over
 
 
March 31, 2019
and Under
 
$250,000
 
Total
 
(In thousands)
Maturities:
 
 
 
 
 
Due in three months or less
$
918,028

 
$
102,594

 
$
1,020,622

Due in over three months through six months
849,684

 
177,470

 
1,027,154

Due in over six months through twelve months
387,350

 
150,838

 
538,188

Total due within twelve months
2,155,062

 
430,902

 
2,585,964

Due in over 12 months through 24 months
79,187

 
11,816

 
91,003

Due in over 24 months
24,740

 
2,305

 
27,045

Total
$
2,258,989

 
$
445,023

 
$
2,704,012

Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At March 31, 2019, total off-balance sheet client investment funds were $2.2 billion, of which $1.6 billion was managed by PWAM. At December 31, 2018, total off-balance sheet client investment funds were $1.9 billion, of which $1.5 billion was managed by PWAM.

64



Credit Quality
Nonperforming Assets, Performing TDRs, and Classified Loans and Leases
The following table presents information on our nonperforming assets, performing TDRs, and classified loans and leases as of the dates indicated:
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(Dollars in thousands)
Nonaccrual loans and leases held for investment
$
88,527

 
$
79,333

 
$
103,725

Accruing loans contractually past due 90 days or more

 

 
500

Foreclosed assets, net
3,291

 
5,299

 
1,236

Total nonperforming assets
$
91,818

 
$
84,632

 
$
105,461

 
 
 
 
 
 
Performing TDRs held for investment
$
17,027

 
$
17,701

 
$
60,173

Classified loans and leases held for investment
$
190,305

 
$
237,110

 
$
208,042

Nonaccrual loans and leases held for investment to
 
 
 
 
 
loans and leases held for investment
0.48
%
 
0.44
%
 
0.63
%
Nonperforming assets to loans and leases held for investment
 
 
 
 
 
and foreclosed assets, net
0.50
%
 
0.47
%
 
0.64
%
Classified loans and leases held for investment
 
 
 
 
 
to loans and leases held for investment
1.04
%
 
1.32
%
 
1.26
%
Nonaccrual Loans and Leases Held for Investment
During the first quarter of 2019, nonaccrual loan and leases held for investment increased by $9.2 million to $88.5 million at March 31, 2019 due mainly to $25.2 million in nonaccrual additions, offset partially by $1.1 million in charge-offs and $15.0 million in principal payments and other reductions. The increase in nonaccrual loans and leases by loan portfolio class was attributable primarily to an $11.1 million increase in nonaccrual asset-based loans and a $1.3 million increase in nonaccrual other commercial loans, offset partially by a $2.6 million decrease in nonaccrual commercial real estate mortgage loans. As of March 31, 2019, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $52.4 million and represented 59% of total nonaccrual loans and leases.

65



The following table presents our nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:
 
Nonaccrual Loans and Leases
 
Accruing and
 
March 31, 2019
 
December 31, 2018
 
30 - 89 Days Past Due
 
 
 
% of
 
 
 
% of
 
March 31,
 
December 31,
 
 
 
Loan
 
 
 
Loan
 
2018
 
2018
 
Amount
 
Category
 
Amount
 
Category
 
Amount
 
Amount
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
12,750

 
0.3
%
 
$
15,321

 
0.3
%
 
$
6,863

 
$
3,276

Income producing and other residential
2,444

 
0.1
%
 
2,524

 
0.1
%
 
1,853

 
1,557

Total real estate mortgage
15,194

 
0.2
%
 
17,845

 
0.2
%
 
8,716

 
4,833

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
430

 
%
 
442

 
%
 

 

Residential

 
%
 

 
%
 
8,949

 
1,527

Total real estate construction and land
430

 
%
 
442

 
%
 
8,949

 
1,527

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
43,406

 
1.3
%
 
32,324

 
1.0
%
 
3,750

 
47

Venture capital
20,437

 
1.0
%
 
20,299

 
1.0
%
 
4,500

 
1,028

Other commercial
8,633

 
0.4
%
 
7,380

 
0.4
%
 
1,694

 
2,467

Total commercial
72,476

 
1.0
%
 
60,003

 
0.8
%
 
9,944

 
3,542

Consumer
427

 
0.1
%
 
1,043

 
0.3
%
 
614

 
581

Total held for investment
$
88,527

 
0.5
%
 
$
79,333

 
0.4
%
 
$
28,223

 
$
10,483

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
2019
 
2018
 
2018
 
(In thousands)
Commercial real estate
$
2,041

 
$
2,004

 
$
64

Single-family residence
953

 
953

 
953

Construction and land development
219

 
219

 
219

Multi-family

 
1,059

 

Total OREO, net
3,213

 
4,235

 
1,236

Other foreclosed assets
78

 
1,064

 

Total foreclosed assets
$
3,291

 
$
5,299

 
$
1,236

During the first quarter of 2019, foreclosed assets decreased by $2.0 million to $3.3 million at March 31, 2019 due to sales of $2.0 million.

66



Performing TDRs Held for Investment
The following table presents our performing TDRs held for investment by loan portfolio segment as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
Number
 
 
 
Number
 
 
 
of
 
 
 
of
Performing TDRs 
Amount
 
Loans
 
Amount
 
Loans
 
(Dollars in thousands)
Real estate mortgage
$
11,355

 
27

 
$
11,484

 
27

Real estate construction and land
5,002

 
2

 
5,420

 
2

Commercial
573

 
8

 
692

 
6

Consumer
97

 
3

 
105

 
3

Total performing TDRs held for investment
$
17,027

 
40

 
$
17,701

 
38

During the first quarter of 2019, performing TDRs held for investment decreased by $0.7 million to $17.0 million at March 31, 2019 attributable primarily to $0.8 million in payoffs and other reductions. The majority of the number of performing TDRs were on accrual status prior to the restructurings and have remained on accrual status after the restructurings due to the borrowers making payments before and after the restructurings.
Classified and Special Mention Loans and Leases Held for Investment
The following table presents the credit risk ratings of our loans and leases held for investment, net of deferred fees, as of the dates indicated:
 
March 31,
 
December 31,
 
March 31,
Loan and Lease Credit Risk Ratings 
2019
 
2018
 
2018
 
(Dollars in thousands)
Pass
$
17,824,612

 
$
17,459,205

 
$
15,832,127

Special mention
292,780

 
261,398

 
415,116

Classified
190,305

 
237,110

 
208,042

Total loans and leases held for investment,
 
 
 
 
 
net of deferred fees
$
18,307,697

 
$
17,957,713

 
$
16,455,285

Classified and special mention loans and leases fluctuate from period to period as a result of loan repayments and our ongoing active portfolio monitoring.
During the first quarter of 2019, classified loans and leases decreased by $46.8 million to $190.3 million at March 31, 2019 due mainly to the payoff of a $30.0 million commercial real estate mortgage loan and the transfer to loans held for sale of a $27.4 million security monitoring loan which was settled in April 2019. The decrease in classified loans and leases by loan portfolio class was attributable primarily to a $33.2 million decrease in classified commercial real estate mortgage loans and a $32.8 million decrease in classified other commercial loans, offset partially by a $14.4 million increase in classified venture capital loans and a $6.6 million increase in classified asset-based loans.
During the first quarter of 2019, special mention loans and leases increased by $31.4 million to $292.8 million at March 31, 2019. The increase in special mention loans and leases by loan portfolio class was attributable mainly to a $36.7 million increase in special mention asset-based loans and a $24.4 million increase in special mention other commercial loans, offset partially by a $15.1 million decrease in special mention venture capital loans, a $7.7 million decrease in special mention commercial real estate mortgage loans, and a $7.0 million decrease in special mention commercial real estate construction and land loans.

67



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, 2019, 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, 2019, such disallowed amounts were $290,000 for the Company and $31,000 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 currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At March 31, 2019, the Company and Bank were in compliance with the capital conservation buffer requirement. Effective January 1, 2019, the capital conservation buffer increased by 0.625% to its fully phased-in 2.50%, such that the common equity tier 1, tier 1 and total capital ratio minimums inclusive of the capital conservation buffer were 7.0%, 8.5%, and 10.5%.
The following tables present a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
 
 
 
Minimum Required
 
 
 
 
 
Plus Capital
 
 
 
 
 
For Capital
 
Conservation
 
For Well
 
 
 
Adequacy
 
Buffer Fully
 
Capitalized
 
Actual
 
Purposes
 
Phased-In
 
Requirement
March 31, 2019
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
9.38%
 
4.00%
 
4.000%
 
N/A
CET1 capital (to risk weighted assets)
9.48%
 
4.50%
 
7.000%
 
N/A
Tier 1 capital (to risk weighted assets)
9.48%
 
6.00%
 
8.500%
 
N/A
Total capital (to risk weighted assets)
12.15%
 
8.00%
 
10.500%
 
N/A
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.57%
 
4.00%
 
4.000%
 
5.00%
CET1 capital (to risk weighted assets)
10.69%
 
4.50%
 
7.000%
 
6.50%
Tier 1 capital (to risk weighted assets)
10.69%
 
6.00%
 
8.500%
 
8.00%
Total capital (to risk weighted assets)
11.45%
 
8.00%
 
10.500%
 
10.00%

68



 
 
 
Minimum Required
 
 
 
 
 
Plus Capital
 
 
 
Plus Capital
 
 
 
For Capital
 
Conservation
 
For Well
 
Conservation
 
 
 
Adequacy
 
Buffer
 
Capitalized
 
Buffer Fully
 
Actual
 
Purposes
 
Phase-In (1)
 
Requirement
 
Phased-In
December 31, 2018
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.13%
 
4.00%
 
4.000%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
10.01%
 
4.50%
 
6.375%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
10.01%
 
6.00%
 
7.875%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
12.72%
 
8.00%
 
9.875%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.80%
 
4.00%
 
4.000%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
10.68%
 
4.50%
 
6.375%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
10.68%
 
6.00%
 
7.875%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
11.44%
 
8.00%
 
9.875%
 
10.00%
 
10.50%
_______________________________________ 
(1)
Ratios for March 31, 2019 reflect the minimum required plus the fully phased-in capital conservation buffer of 2.50%; ratios for December 31, 2018 reflect the minimum required plus capital conservation buffer phase-in for 2018. The capital conservation buffer increased by 0.625% each year through 2019.
Subordinated Debentures
We issued or assumed through mergers subordinated debentures to trusts that were established by us or entities we previously acquired, which, in turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $454.5 million at March 31, 2019. At March 31, 2019, none of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $440.8 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.

69



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") that 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 securities available-for-sale, which we refer to as our primary liquidity. We also maintain available borrowing capacity under secured borrowing lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.
As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $4.0 billion at March 31, 2019, of which $2.9 billion was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $5.7 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $2.2 billion at March 31, 2019, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $3.0 billion of qualifying loans.
In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $141.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of March 31, 2019, there was a $141.0 million balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of March 31, 2019, the Bank had $250.0 million of borrowings outstanding through the AFX.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
 
March 31,
 
December 31,
Primary Liquidity - On-Balance Sheet
2019
 
2018
 
(Dollars in thousands)
Cash and due from banks
$
224,758

 
$
175,830

Interest-earning deposits in financial institutions
332,124

 
209,937

Securities available-for-sale
3,994,708

 
4,009,431

Less: pledged securities
(495,375
)
 
(458,143
)
Total primary liquidity
$
4,056,215

 
$
3,937,055

 
 
 
 
Ratio of primary liquidity to total deposits
21.0
%
 
20.9
%
Secondary Liquidity - Off-Balance Sheet
March 31,
 
December 31,
Available Secured Borrowing Capacity
2019
 
2018
 
(In thousands)
Secured borrowing capacity with the FHLB
$
3,966,178

 
$
3,746,970

Less: secured advances outstanding
(1,090,000
)
 
(1,040,000
)
Available secured borrowing capacity with the FHLB
2,876,178

 
2,706,970

Available secured borrowing capacity with the FRBSF
2,223,695

 
2,003,269

Total secondary liquidity
$
5,099,873

 
$
4,710,239


70



During the three months ended March 31, 2019, the Company's primary liquidity increased by $119.2 million due primarily to a $122.2 million increase in interest-earning deposits in financial institutions and a $48.9 million increase in cash and due from banks, offset partially by a $37.2 million increase in pledged securities and a $14.7 million decrease in securities available-for-sale. The Company's secondary liquidity increased by $389.6 million during the first quarter of 2019 due to a $220.4 million increase in the borrowing capacity on the secured credit line with the FRBSF and a $219.2 million increase in the borrowing capacity on the secured borrowing line with the FHLB, offset partially by a $50.0 million increase in the amount borrowed from the secured borrowing line with the FHLB. The increase in the borrowing capacity with the FHLB and FRBSF in the first quarter was due primarily to increases in loan collateral pledged for the facilities.
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, 2019, core deposits totaled $16.1 billion and represented 84% 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 customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk as deposit balances may fluctuate, the Bank maintains adequate levels of available off-balance sheet liquidity.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At March 31, 2019, brokered deposits totaled $1.8 billion, consisting of $1.3 billion of brokered time deposits, $454.3 million of non-maturity brokered accounts, and $3.7 million of other brokered deposits. At December 31, 2018, brokered deposits totaled $1.3 billion, consisting of $729.4 million of brokered time deposits, $518.2 million of non-maturity brokered accounts, and $3.7 million of other brokered deposits.
Our liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Liquidity Buffer Coverage Ratio (the ratio of cash and unpledged securities to the estimated 30 day cash outflow in a defined stress scenario), Liquidity Stress Test Survival Horizon (the number of days that the Bank’s liquidity buffer plus available secured borrowing capacity is sufficient to offset cumulative cash outflow in a defined stress scenario), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. As of March 31, 2019, we were in compliance with all of our established liquidity guidelines.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends.
Dividends paid by California state-chartered banks are regulated by the FDIC and the DBO under their general supervisory authority as it relates to a bank’s capital requirements. The Bank may declare a dividend without the approval of the DBO and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for the three previous fiscal years less any dividends paid during such period. Dividends paid by the Bank during the three previous fiscal years exceeded the Bank's net earnings during that same period by $28.5 million. During the three months ended March 31, 2019, PacWest received $80.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $603.7 million at March 31, 2019, for the foreseeable future any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At March 31, 2019, PacWest had $120.5 million in cash and due from banks, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated future 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, which terminates on February 29, 2020. See "- Recent Events - Stock Repurchase Program" for additional information.

71



Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
 
March 31, 2019
 
 
 
Due After
 
Due After
 
 
 
 
 
Due
 
One Year
 
Three Years
 
Due
 
 
 
Within
 
Through
 
Through
 
After
 
 
 
One Year
 
Three Years
 
Five Years
 
Five Years
 
Total
 
(In thousands)
Time deposits
$
2,585,964

 
$
110,235

 
$
7,813

 
$

 
$
2,704,012

Short-term borrowings
1,481,000

 

 

 

 
1,481,000

Long-term debt obligations (1)
87

 

 

 
540,702

 
540,789

Contractual interest (2)
18,753

 
2,788

 
218

 

 
21,759

Operating lease obligations
33,614

 
58,000

 
40,169

 
32,887

 
164,670

Other contractual obligations
53,899

 
59,413

 
11,746

 
25,155

 
150,213

Total
$
4,173,317

 
$
230,436

 
$
59,946

 
$
598,744

 
$
5,062,443

_______________________________________ 
(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 9. 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, 2018. 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, and commitments under deferred compensation arrangements.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan and lease payoffs, securities repayments and maturities, and continued deposit gathering activities. We also have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a portion is expected to be funded, and standby letters of credit. At March 31, 2019, our loan commitments and standby letters of credit were $7.5 billion and $335.5 million. The loan 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 10. Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

72



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, 2018, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.
Market Risk - Foreign Currency Exchange
We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps and forward contracts to hedge exposures to loans and debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar, and the derivatives that hedge those exposures. As of March 31, 2019, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $48.6 million and $28.9 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $52.1 million and $29.2 million. We recognized a foreign currency translation net gain of $36,000 for the three months ended March 31, 2019, a foreign currency translation net gain of $352,000 for the three months ended December 31, 2018, and a foreign currency translation net gain of $666,000 for the three months ended March 31, 2018.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our IRR position on a monthly 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, 2019, 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 NII and MVE, 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 NII that would result over the next 12 months from immediate and sustained changes in interest rates as of March 31, 2019. 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 NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at March 31, 2019. In order to arrive at the base case, we extend our balance sheet at March 31, 2019 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, 2019. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.

73



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 interest-bearing deposits reprice at our discretion and are assumed to reprice at a rate less than the change in market rates. The 12-month NII simulation model as of March 31, 2019 assumes interest-bearing deposits reprice at 31% of the change in market rates (this is commonly referred to as the "deposit beta"). 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, loan and deposit pricing, changes in the mix of 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 static balance sheet and forward yield curve as the base scenario, with immediate and sustained parallel upward and downward movements in interest rates of 100, 200 and 300 basis points as of the date indicated:
 
 
 
 
 
 
 
 
 
Forecasted
 
 
 
Forecasted
 
Forecasted
 
Net Interest
 
Percentage
 
Net Interest
 
Net Interest
 
Income
 
Change
 
Margin
 
Margin Change
March 31, 2019
(Tax Equivalent)
 
From Base
 
(Tax Equivalent)
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
Interest Rate Scenario:
 
 
 
 
 
 
 
Up 300 basis points
$
1,137.6

 
10.3%
 
4.98%
 
0.47%
Up 200 basis points
$
1,103.4

 
6.9%
 
4.83%
 
0.32%
Up 100 basis points
$
1,067.1

 
3.4%
 
4.67%
 
0.16%
BASE CASE
$
1,031.7

 
 
4.51%
 
Down 100 basis points
$
996.5

 
(3.4)%
 
4.36%
 
(0.15)%
Down 200 basis points
$
968.6

 
(6.1)%
 
4.24%
 
(0.27)%
Down 300 basis points
$
959.5

 
(7.0)%
 
4.20%
 
(0.31)%
Total base case year 1 tax equivalent NII was $1.032 billion at March 31, 2019 compared to $1.049 billion at December 31, 2018. The $17.0 million decrease in year 1 tax equivalent NII was attributable to the flattening of the forward curve and lower forecasted new loan yields.
In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors that are viewed as more likely to occur in a typical monetary policy tightening cycle. The most favorable alternate rate vector that we model is the “Bear Flattener” scenario, when short-term rates increase faster than long-term rates, and the least favorable alternate rate vector that we model is the “Bull Steepener,” when short-term rates fall faster than long-term rates. In the “Bear Flattener” scenario, Year 1 tax equivalent NII increases by 1.20%, and in the “Bull Steepener” scenario, Year 1 tax equivalent NII decreases by 1.60%.
Of the $18.4 billion of total loans at March 31, 2019, $11.0 billion have variable interest rate terms (excluding hybrid loans discussed below), of which $10.6 billion have a loan rate higher than their floor rate, which allows them to reprice at their next reprice date upon a change in their index. Approximately 60% of the variable-rate loans (excluding hybrid loans) have a LIBOR index rate. Of the $418 million of loans with rates below their floor rates at March 31, 2019, $397 million (95.1%) will rise above their floor rates with a 100 basis point increase in market rates. LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR.  The business processes impacted relate primarily to our variable-rate loans and our subordinated debentures, both of which are indexed to LIBOR.
Additionally, approximately $3.6 billion of 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 $251 million, $593 million, and $1.2 billion in the next one, two, and three years.

74



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, 2019.
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
 
Market Value
 
Change
 
Change
 
of Total
 
Market Value
March 31, 2019
of Equity
 
From Base
 
From Base
 
Assets
 
to Book Value
 
(Dollars in millions)
 
 
 
 
 
 
Interest Rate Scenario:
 
 
 
 
 
 
 
 
 
Up 300 basis points
$
5,704.3

 
$
(40.4
)
 
(0.7
)%
 
21.7
%
 
119.1
%
Up 200 basis points
$
5,726.0

 
$
(18.7
)
 
(0.3
)%
 
21.8
%
 
119.5
%
Up 100 basis points
$
5,739.2

 
$
(5.5
)
 
(0.1
)%
 
21.8
%
 
119.8
%
BASE CASE
$
5,744.7

 
$

 
 %
 
21.8
%
 
119.9
%
Down 100 basis points
$
5,758.1

 
$
13.4

 
0.2
 %
 
21.9
%
 
120.2
%
Down 200 basis points
$
5,769.6

 
$
24.9

 
0.4
 %
 
21.9
%
 
120.4
%
Down 300 basis points
$
5,489.8

 
$
(254.9
)
 
(4.4
)%
 
20.9
%
 
114.6
%
Total base case projected market value of equity was $5.7 billion at March 31, 2019 compared to $5.5 billion at December 31, 2018. The projected market value of equity increased by $239 million, while our overall MVE sensitivity profile has remained relatively unchanged. The increase in base case market value of equity was due primarily to: (1) a $383 million increase in the mark-to-market adjustment for loans and leases resulting from lower credit spreads used in the loan value calculation, offset partially by (2) a $107 million increase in the mark-to-market adjustment for total deposits due to the modest shift in the mix of total deposits as noninterest-bearing deposits decreased to 40% of total deposits at March 31, 2019 from 42% at December 31, 2018, and (3) a $35 million decrease in the book value of stockholders' equity due mainly to $120 million of stock repurchases under the Stock Repurchase Program and $73 million of cash dividends paid, offset partially by $113 million of net earnings and a $43 million increase in accumulated other comprehensive income.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10. 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, 2018. 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 2019:
 
 
 
 
 
Total Number of
 
Maximum Dollar
 
 
 
 
 
Shares Purchased
 
Value of Shares
 
Total
 
 
 
as Part of
 
That May Yet
 
Number of
 
Average
 
Publicly
 
Be Purchased
 
Shares
 
Price Paid
 
Announced
 
Under the
Purchase Dates
Purchased (1)
 
Per Share
 
Program (2)
 
Program (2)
 
 
 
 
 
 
 
(In thousands)

January 1 – January 31, 2019
323,886

 
$
38.67

 
323,886

 
$
97,603

February 1 – February 28, 2019
1,153,176

 
$
40.08

 
1,039,671

 
$
55,902

March 1 – March 31, 2019
1,707,158

 
$
38.29

 
1,707,119

 
$
159,637

Total
3,184,220

 
$
38.98

 
3,070,676

 
 
__________________________
(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, described in (2) below.
(2)
On February 24, 2019, effective upon the maturity of the current Stock Repurchase Program on February 28, 2019, PacWest's Board of Directors authorized a new Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $225 million until February 29, 2020. All shares repurchased under the Stock Repurchase Program were retired upon settlement.

76



ITEM 6. INDEX TO EXHIBITS
Exhibit Number
Description
2.4
3.1
3.2
3.5
10.1
10.2
10.3
10.4
10.5
10.6
31.1
31.2
32.1
32.2
101



77



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 8, 2019
/s/ Bart R. Olson
 
 
Bart R. Olson
 
 
Executive Vice President and Chief Accounting Officer

78