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EX-31.1 - EXHIBIT 31.1 - PACWEST BANCORPa06301610-qexhibit311.htm
EX-32.2 - EXHIBIT 32.2 - PACWEST BANCORPa06301610-qexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - PACWEST BANCORPa06301610-qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - PACWEST BANCORPa06301610-qexhibit312.htm



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of July 27, 2016, there were 120,412,363 shares of the registrant's common stock outstanding, excluding 1,407,486 shares of unvested restricted stock.


1



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




2



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
June 30,
 
December 31,
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands)
ASSETS:
 
 
 
Cash and due from banks
$
226,471

 
$
161,020

Interest-earning deposits in financial institutions
218,882

 
235,466

Total cash and cash equivalents
445,353

 
396,486

Securities available-for-sale, at fair value
3,347,546

 
3,559,437

Federal Home Loan Bank stock, at cost
24,214

 
19,710

Total investment securities
3,371,760

 
3,579,147

Gross loans and leases
14,703,326

 
14,528,165

Deferred fees, net
(61,866
)
 
(49,911
)
Allowance for loan and lease losses
(143,289
)
 
(115,111
)
Total loans and leases, net
14,498,171

 
14,363,143

Equipment leased to others under operating leases
204,062

 
197,452

Premises and equipment, net
38,718

 
39,197

Foreclosed assets, net
16,181

 
22,120

Goodwill
2,175,791

 
2,176,291

Core deposit and customer relationship intangibles, net
43,766

 
53,220

Deferred tax asset, net
24,413

 
126,389

Other assets
328,924

 
335,045

Total assets
$
21,147,139

 
$
21,288,490

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
6,222,696

 
$
6,171,455

Interest-bearing deposits
8,925,313

 
9,494,727

Total deposits
15,148,009

 
15,666,182

Borrowings
918,208

 
621,914

Subordinated debentures
439,322

 
436,000

Accrued interest payable and other liabilities
128,296

 
166,703

Total liabilities
16,633,835

 
16,890,799

 
 
 
 
Commitments and contingencies (Note 8)


 


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

 

Common stock ($0.01 par value, 200,000,000 shares authorized at June 30, 2016 and December 31, 2015;
 
 
 
123,317,742 and 122,791,729 shares issued, respectively, including 1,407,486 and 1,211,951 shares of
 
 
 
unvested restricted stock, respectively)
1,233

 
1,228

Additional paid-in capital
4,299,259

 
4,405,775

Retained earnings
186,531

 
13,907

Treasury stock, at cost (1,497,893 and 1,378,002 shares at June 30, 2016 and December 31, 2015)
(55,463
)
 
(51,047
)
Accumulated other comprehensive income, net
81,744

 
27,828

Total stockholders' equity
4,513,304

 
4,397,691

Total liabilities and stockholders' equity
$
21,147,139

 
$
21,288,490


See Notes to Condensed Consolidated Financial Statements.

3



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands, except per share data)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
224,326

 
$
236,375

 
$
203,781

 
$
460,701

 
$
405,878

Investment securities
22,420

 
22,547

 
14,570

 
44,967

 
26,765

Deposits in financial institutions
308

 
308

 
104

 
616

 
126

Total interest income
247,054

 
259,230

 
218,455

 
506,284

 
432,769

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
7,823

 
9,073

 
11,233

 
16,896

 
21,712

Borrowings
352

 
581

 
88

 
933

 
323

Subordinated debentures
5,122

 
4,982

 
4,582

 
10,104

 
9,107

Total interest expense
13,297

 
14,636

 
15,903

 
27,933

 
31,142

Net interest income
233,757

 
244,594

 
202,552

 
478,351

 
401,627

Provision for credit losses
13,903

 
20,140

 
6,529

 
34,043

 
22,963

Net interest income after provision for credit losses
219,854

 
224,454

 
196,023

 
444,308

 
378,664

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,633

 
3,856

 
2,612

 
7,489

 
5,186

Other commissions and fees
11,073

 
11,489

 
7,123

 
22,562

 
12,519

Leased equipment income
8,523

 
8,244

 
5,375

 
16,767

 
10,757

Gain on sale of loans and leases
388

 
245

 
163

 
633

 
163

Gain (loss) on sale of securities
478

 
8,110

 
(186
)
 
8,588

 
3,089

FDIC loss sharing expense, net
(6,502
)
 
(2,415
)
 
(5,107
)
 
(8,917
)
 
(9,506
)
Other income
4,528

 
5,010

 
9,643

 
9,538

 
18,286

Total noninterest income
22,121

 
34,539

 
19,623

 
56,660

 
40,494

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
62,174

 
61,065

 
49,033

 
123,239

 
96,770

Occupancy
12,193

 
12,632

 
10,588

 
24,825

 
21,188

Data processing
5,644

 
5,904

 
4,402

 
11,548

 
8,710

Other professional services
3,223

 
3,572

 
3,332

 
6,795

 
6,553

Insurance and assessments
4,951

 
4,965

 
4,716

 
9,916

 
7,741

Intangible asset amortization
4,371

 
4,746

 
1,502

 
9,117

 
3,003

Leased equipment depreciation
5,286

 
5,024

 
3,103

 
10,310

 
6,206

Foreclosed assets income, net
(3
)
 
(561
)
 
(2,340
)
 
(564
)
 
(2,004
)
Acquisition, integration and reorganization costs

 
200

 
900

 
200

 
2,900

Other expense
12,242

 
13,141

 
10,040

 
25,383

 
18,569

Total noninterest expense
110,081

 
110,688

 
85,276

 
220,769

 
169,636

Earnings before income taxes
131,894

 
148,305

 
130,370

 
280,199

 
249,522

Income tax expense
(49,726
)
 
(57,849
)
 
(45,287
)
 
(107,575
)
 
(91,360
)
Net earnings
$
82,168

 
$
90,456

 
$
85,083

 
$
172,624

 
$
158,162

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.68

 
$
0.74

 
$
0.83

 
$
1.42

 
$
1.54

Diluted
$
0.68

 
$
0.74

 
$
0.83

 
$
1.42

 
$
1.54

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50

 
$
1.00

 
$
1.00


See Notes to Condensed Consolidated Financial Statements.


4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(In thousands)
Net earnings
$
82,168

 
$
90,456

 
$
85,083

 
$
172,624

 
$
158,162

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

 
43,093

 
(21,213
)
 
99,607

 
(13,850
)
Income tax (expense) benefit related to net unrealized
 
 
 
 
 
 
 
 
 
holding gains (losses) arising during the period
(22,965
)
 
(17,655
)
 
8,614

 
(40,620
)
 
5,509

Unrealized net holding gains (losses) on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
33,549

 
25,438

 
(12,599
)
 
58,987

 
(8,341
)
Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings (1)
(478
)
 
(8,110
)
 
186

 
(8,588
)
 
(3,089
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
194

 
3,323

 
(76
)
 
3,517

 
1,305

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(284
)
 
(4,787
)
 
110

 
(5,071
)
 
(1,784
)
Other comprehensive income (loss), net of tax
33,265

 
20,651

 
(12,489
)
 
53,916

 
(10,125
)
Comprehensive income
$
115,433

 
$
111,107

 
$
72,594

 
$
226,540

 
$
148,037

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

See Notes to Condensed Consolidated Financial Statements.


5



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

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

 
$
1,228

 
$
4,405,775

 
$
13,907

 
$
(51,047
)
 
$
27,828

 
$
4,397,691

Net earnings

 

 

 
172,624

 

 

 
172,624

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

 

 

 

 

 
53,916

 
53,916

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
526,013

 
5

 
11,595

 

 

 

 
11,600

Restricted stock surrendered
(119,891
)
 

 

 

 
(4,416
)
 

 
(4,416
)
Tax effect from vesting of
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted stock

 

 
3,683

 

 

 

 
3,683

Cash dividends paid

 

 
(121,794
)
 

 

 

 
(121,794
)
Balance, June 30, 2016
121,819,849

 
$
1,233

 
$
4,299,259

 
$
186,531

 
$
(55,463
)
 
$
81,744

 
$
4,513,304




See Notes to Condensed Consolidated Financial Statements.



6



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
June 30,
 
2016
 
2015
 
(Unaudited)
 
(Dollars in thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
172,624

 
$
158,162

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43,813

 
22,087

Provision for credit losses
34,043

 
22,963

(Gain) loss on sale of foreclosed assets
(534
)
 
126

Provision for losses on foreclosed assets

 
406

Gain on sale of loans and leases
(633
)
 
(163
)
Gain on sale of premises and equipment
(23
)
 
(11
)
Gain on sale of securities
(8,588
)
 
(3,089
)
Unrealized gain on derivatives and foreign currencies, net
(569
)
 
(1,226
)
Earned stock compensation
11,600

 
8,074

Loss on sale of leasing unit
720

 

Tax effect included in stockholders' equity of restricted stock vesting
(3,683
)
 
(401
)
Decrease in accrued and deferred income taxes, net
68,466

 
72,169

(Increase) decrease in other assets
(2,388
)
 
26,443

Decrease in accrued interest payable and other liabilities
(40,683
)
 
(26,541
)
   Net cash provided by operating activities
274,165

 
278,999

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(380,289
)
 
(169,071
)
Proceeds from sales of loans and leases
78,888

 
3,784

Securities available-for-sale:
 
 
 
Proceeds from maturities and paydowns
117,684

 
63,741

Proceeds from sales
353,374

 
159,548

Purchases
(177,644
)
 
(375,156
)
Net (purchases) redemptions of Federal Home Loan Bank stock
(4,504
)
 
23,359

Proceeds from sales of foreclosed assets
6,602

 
14,610

Purchases of premises and equipment, net
(3,951
)
 
(3,407
)
Proceeds from sales of premises and equipment
24

 
63

Proceeds from sale of leasing unit
138,955

 

Proceeds from BOLI death benefit
1,853

 

Net increase of equipment leased to others under operating leases
(16,060
)
 

   Net cash provided by (used in) investing activities
114,932

 
(282,529
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits:
 
 
 
   Noninterest-bearing
53,387

 
461,107

   Interest-bearing
(569,414
)
 
361,330

Net increase (decrease) in borrowings
298,324

 
(380,651
)
Restricted stock surrendered
(4,416
)
 
(8,336
)
Tax effect included in stockholders' equity of restricted stock vesting
3,683

 
401

Cash dividends paid
(121,794
)
 
(102,916
)
   Net cash (used in) provided by financing activities
(340,230
)
 
330,935

Net increase in cash and cash equivalents
48,867

 
327,405

Cash and cash equivalents at beginning of period
396,486

 
313,226

Cash and cash equivalents at end of period
$
445,353

 
$
640,631

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
28,558

 
$
29,006

Cash paid for income taxes
44,908

 
6,076

Loans transferred to foreclosed assets
129

 
3,089

  
See Notes to Condensed Consolidated Financial Statements.


7


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


Note 1.  Organization    
PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our wholly-owned banking subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” "us," “our,” or the “Company,” refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to “PacWest” or to the holding company, we are referring to PacWest Bancorp, the parent company, on a stand‑alone basis. As of June 30, 2016, the Company had total assets of $21.1 billion, gross loans and leases of $14.7 billion, total deposits of $15.1 billion and total stockholders' equity of $4.5 billion.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 79 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. The Bank provides commercial banking services, including real estate, construction, and commercial loans and leases, and comprehensive deposit and treasury management services to small and middle-market businesses. Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle-market businesses on a national basis. Square 1 Bank offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of Pacific Western.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.
We have completed 28 acquisitions from May 1, 2000 through June 30, 2016, including the acquisition of Square 1 Financial, Inc. on October 6, 2015. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 2. Acquisitions, for more information about the Square 1 acquisition.
On March 31, 2016, we sold our Pacific Western Equipment Finance ("PWEF") leasing unit in Midvale, Utah, including approximately $139 million of outstanding lease balances.
Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission ("Form 10-K").
Basis of Presentation    
Our interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
 

8


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


Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value and useful lives of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
As described in Note 2, Acquisitions, the acquired assets and liabilities of Square 1 were measured at their estimated fair values. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period's presentation format. The operating segments previously reported have been aggregated to one segment to conform to the current period's presentation format.
Note 2.  Acquisitions    
Square 1 Financial, Inc. Acquisition
We acquired Square 1 Financial, Inc. ("Square 1") on October 6, 2015. As part of the acquisition, Square 1 Bank, a wholly-owned subsidiary of Square 1, merged with and into Pacific Western. At closing, we formed the Square 1 Bank Division of the Bank to focus on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide. When we refer to Square 1, we are referring to the company acquired on October 6, 2015, and when we refer to the Square 1 Bank Division, we are referring to a division of Pacific Western.
We completed this acquisition to increase our core deposits, expand our nationwide lending platform, and increase our presence in the technology and life-sciences credit markets. The Square 1 acquisition has been accounted for under the acquisition method of accounting. We acquired $4.6 billion of assets and assumed $3.8 billion of liabilities upon closing of the acquisition. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The fair value of the acquired net tax assets, once the final tax returns have been filed, may change. The application of the acquisition method of accounting resulted in goodwill of $447.9 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.


9


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


Note 3.  Goodwill and Other Intangible Assets
Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Our intangible assets with definite lives are core deposit intangibles ("CDI") and customer relationship intangibles ("CRI").
Goodwill and other intangible assets deemed to have indefinite lives generated from business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in “Noninterest expense” in the condensed consolidated statements of earnings.
CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of June 30, 2016 is 5.8 years. The aggregate CDI and CRI amortization expense is expected to be $16.5 million for 2016. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $11.5 million for 2017, $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, and $3.0 million for 2021.
The following table presents the changes in the carrying amount of goodwill for the period indicated:    
 
Goodwill
 
(In thousands)
Balance, December 31, 2015
$
2,176,291

Reduction due to sale of PWEF leasing unit
(500
)
Balance, June 30, 2016
$
2,175,791

Through the sale of the PWEF leasing unit, $0.5 million of goodwill was allocated to this business group; such goodwill reduction is included in the $0.7 million loss on sale of the PWEF leasing unit and included in "Other income" in the condensed consolidated statement of earnings.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
93,824

 
$
95,524

 
$
53,090

 
$
95,524

 
$
53,090

Fully amortized portion
(17,311
)
 

 

 
(17,311
)
 

Reduction due to sale of PWEF leasing unit

 
(1,700
)
 

 
(1,700
)
 

Balance, end of period
76,513

 
93,824

 
53,090

 
76,513

 
53,090

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(45,687
)
 
(42,304
)
 
(37,387
)
 
(42,304
)
 
(35,886
)
Amortization
(4,371
)
 
(4,746
)
 
(1,502
)
 
(9,117
)
 
(3,003
)
Fully amortized portion
17,311

 

 

 
17,311

 

Reduction due to sale of PWEF leasing unit

 
1,363

 

 
1,363

 

Balance, end of period
(32,747
)
 
(45,687
)
 
(38,889
)
 
(32,747
)
 
(38,889
)
Net CDI and CRI, end of period
$
43,766

 
$
48,137

 
$
14,201

 
$
43,766

 
$
14,201


10


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


Note 4. Investment Securities     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and carrying values of securities available-for-sale as of the dates indicated:
 
June 30, 2016
 
December 31, 2015
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type:
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
pass-through securities
$
509,895

 
$
11,108

 
$
(484
)
 
$
520,519

 
$
660,069

 
$
11,517

 
$
(3,746
)
 
$
667,840

Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
161,207

 
4,158

 
(154
)
 
165,211

 
193,148

 
2,633

 
(1,026
)
 
194,755

Private label collateralized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
144,935

 
5,385

 
(751
)
 
149,569

 
140,065

 
5,837

 
(1,106
)
 
144,796

Municipal securities
1,449,194

 
104,093

 
(1
)
 
1,553,286

 
1,508,968

 
39,435

 
(1,072
)
 
1,547,331

Government agency and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
government-sponsored enterprise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
securities
449,096

 
15,584

 
(281
)
 
464,399

 
392,729

 
1,509

 
(2,797
)
 
391,441

Corporate debt securities
47,218

 
935

 
(1,426
)
 
46,727

 
49,047

 
327

 
(950
)
 
48,424

Collateralized loan obligations
155,309

 
376

 
(1,798
)
 
153,887

 
133,192

 
128

 
(1,131
)
 
132,189

SBA securities
195,621

 
1,977

 
(297
)
 
197,301

 
211,946

 
41

 
(830
)
 
211,157

US Treasury securities

 

 

 

 
70,196

 

 
(816
)
 
69,380

Government-sponsored enterprise debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
securities

 

 

 

 
36,302

 
611

 

 
36,913

Asset-backed and other securities
96,910

 
439

 
(702
)
 
96,647

 
116,723

 
119

 
(1,631
)
 
115,211

Total
$
3,209,385

 
$
144,055

 
$
(5,894
)
 
$
3,347,546

 
$
3,512,385

 
$
62,157

 
$
(15,105
)
 
$
3,559,437

As of June 30, 2016, securities available‑for‑sale with a carrying value of $442.9 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended June 30, 2016, we sold $9.9 million of primarily municipal securities for a gross realized gain of $0.6 million and a gross realized loss of $0.1 million. During the three months ended June 30, 2015, we sold $14.8 million of municipal securities for a gross realized gain of $0.1 million and a gross realized loss of $0.3 million.
During the six months ended June 30, 2016, we sold $344.8 million of various securities, primarily government agency and government-sponsored enterprise ("GSE") pass-through securities and collateralized mortgage obligations, U.S. Treasury securities and GSE debt securities, for a gross realized gain of $9.5 million and a gross realized loss of $0.9 million. During the six months ended June 30, 2015, we sold $156.5 million of government agency and GSE pass-through securities, corporate debt securities, and municipal securities for a gross realized gain of $3.8 million and a gross realized loss of $0.7 million.

11


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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
June 30, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass-through
 
 
 
 
 
 
 
 
 
 
 
securities
$
142,069

 
$
(465
)
 
$
4,618

 
$
(19
)
 
$
146,687

 
$
(484
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
31,379

 
(154
)
 

 

 
31,379

 
(154
)
Private label collateralized mortgage
 
 
 
 
 
 
 
 
 
 
 
obligations
49,862

 
(534
)
 
3,058

 
(217
)
 
52,920

 
(751
)
Municipal securities
7,465

 
(1
)
 

 

 
7,465

 
(1
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise commercial
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
43,039

 
(281
)
 

 

 
43,039

 
(281
)
Corporate debt securities
28,792

 
(1,426
)
 

 

 
28,792

 
(1,426
)
Collateralized loan obligations
58,145

 
(685
)
 
53,825

 
(1,113
)
 
111,970

 
(1,798
)
SBA securities
53,519

 
(297
)
 

 

 
53,519

 
(297
)
Asset-backed and other securities
41,628

 
(170
)
 
20,993

 
(532
)
 
62,621

 
(702
)
     Total
$
455,898

 
$
(4,013
)
 
$
82,494

 
$
(1,881
)
 
$
538,392

 
$
(5,894
)

12


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


 
December 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type:
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise pass-through
 
 
 
 
 
 
 
 
 
 
 
securities
$
352,042

 
$
(3,480
)
 
$
9,342

 
$
(266
)
 
$
361,384

 
$
(3,746
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise collateralized
 
 
 
 
 
 
 
 
 
 
 
mortgage obligations
117,786

 
(1,026
)
 

 

 
117,786

 
(1,026
)
Private label collateralized mortgage
 
 
 
 
 
 
 
 
 
 
 
obligations
93,533

 
(1,000
)
 
1,638

 
(106
)
 
95,171

 
(1,106
)
Municipal securities
126,892

 
(1,061
)
 
531

 
(11
)
 
127,423

 
(1,072
)
Government agency and government-
 
 
 
 
 
 
 
 
 
 
 
sponsored enterprise commercial
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
236,098

 
(2,156
)
 
14,230

 
(641
)
 
250,328

 
(2,797
)
US Treasury securities
69,380

 
(816
)
 

 

 
69,380

 
(816
)
Corporate debt securities
29,379

 
(950
)
 

 

 
29,379

 
(950
)
Collateralized loan obligations
100,993

 
(1,131
)
 

 

 
100,993

 
(1,131
)
SBA securities
179,942

 
(830
)
 

 

 
179,942

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

 
(1,182
)
 
16,091

 
(449
)
 
87,710

 
(1,631
)
Total
$
1,377,664

 
$
(13,632
)
 
$
41,832

 
$
(1,473
)
 
$
1,419,496

 
$
(15,105
)
We reviewed the securities that were in a loss position at June 30, 2016, and concluded their unrealized losses were not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Such unrealized losses were a result of the level of market interest rates and pricing changes caused by shifting supply and demand dynamics relative to the types of securities. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we occasionally sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our available-for-sale securities portfolio based on amortized cost and carrying value as of the date indicated:
 
June 30, 2016
 
Amortized
 
Fair
Maturity:
Cost
 
Value
 
(In thousands)
Due in one year or less
$
14,761

 
$
14,834

Due after one year through five years
230,982

 
235,996

Due after five years through ten years
713,952

 
736,838

Due after ten years
2,249,690

 
2,359,878

Total securities available-for-sale
$
3,209,385

 
$
3,347,546

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

13


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


Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2016
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Taxable interest
$
11,406

 
$
11,396

 
$
7,577

 
$
22,802

 
$
15,050

Non-taxable interest
10,503

 
10,726

 
4,808

 
21,229

 
8,702

Dividend income
511

 
425

 
2,185

 
936

 
3,013

Total interest income on investment securities
$
22,420

 
$
22,547

 
$
14,570

 
$
44,967

 
$
26,765

Note 5.  Loans and Leases
The Company’s loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that all contractually required payments would be collected, are referred to collectively as non-purchased credit impaired loans, or "Non-PCI loans." Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was deemed probable that we would be unable to collect all contractually required payments, are referred to as purchased credit impaired loans, or "PCI loans".
Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums are recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income on an accelerated basis when the related loans are paid off or sold.
PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality". For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:
 
June 30, 2016
 
December 31, 2015
 
Non-PCI
 
 
 
 
 
Non-PCI
 
 
 
 
 
Loans
 
PCI
 
 
 
Loans
 
PCI
 
 
 
and Leases
 
Loans
 
Total
 
and Leases
 
Loans
 
Total
 
(In thousands)
Real estate mortgage
$
5,581,646

 
$
120,633

 
$
5,702,279

 
$
5,706,903

 
$
168,725

 
$
5,875,628

Real estate construction and land
706,493

 
2,700

 
709,193

 
534,307

 
2,656

 
536,963

Commercial
8,065,687

 
13,311

 
8,078,998

 
7,977,067

 
17,415

 
7,994,482

Consumer
212,599

 
257

 
212,856

 
120,793

 
299

 
121,092

Total gross loans and leases
14,566,425

 
136,901

 
14,703,326

 
14,339,070

 
189,095

 
14,528,165

Deferred fees, net
(61,845
)
 
(21
)
 
(61,866
)
 
(49,861
)
 
(50
)
 
(49,911
)
Total loans and leases, net of deferred fees
14,504,580

 
136,880

 
14,641,460

 
14,289,209

 
189,045

 
14,478,254

Allowance for loan and lease losses
(132,000
)
 
(11,289
)
 
(143,289
)
 
(105,534
)
 
(9,577
)
 
(115,111
)
Total net loans and leases
$
14,372,580

 
$
125,591

 
$
14,498,171

 
$
14,183,675

 
$
179,468

 
$
14,363,143




14


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


Non‑Purchased Credit Impaired (Non‑PCI) Loans and Leases
The following tables present an aging analysis of our Non‑PCI loans and leases by portfolio segment and class as of the dates indicated:
 
June 30, 2016
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
5,400

 
$
14,244

 
$
19,644

 
$
4,446,762

 
$
4,466,406

Residential
442

 
1,896

 
2,338

 
1,094,636

 
1,096,974

Total real estate mortgage
5,842

 
16,140

 
21,982

 
5,541,398

 
5,563,380

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
414,466

 
414,466

Residential

 

 

 
281,767

 
281,767

Total real estate construction and land

 

 

 
696,233

 
696,233

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
458

 
1,852

 
2,310

 
3,039,552

 
3,041,862

Asset-based

 

 

 
2,682,264

 
2,682,264

Venture capital
3,548

 

 
3,548

 
1,657,719

 
1,661,267

Equipment finance
41,361

 
2,509

 
43,870

 
603,070

 
646,940

Total commercial
45,367

 
4,361

 
49,728

 
7,982,605

 
8,032,333

Consumer

 
4

 
4

 
212,630

 
212,634

Total Non-PCI loans and leases
$
51,209

 
$
20,505

 
$
71,714

 
$
14,432,866

 
$
14,504,580


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

 
$
13,075

 
$
17,022

 
$
4,534,936

 
$
4,551,958

Residential
3,391

 
905

 
4,296

 
1,131,809

 
1,136,105

Total real estate mortgage
7,338

 
13,980

 
21,318

 
5,666,745

 
5,688,063

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
343,360

 
343,360

Residential

 

 

 
184,360

 
184,360

Total real estate construction and land

 

 

 
527,720

 
527,720

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
2,048

 
1,427

 
3,475

 
3,058,793

 
3,062,268

Asset-based
1

 

 
1

 
2,547,532

 
2,547,533

Venture capital
250

 
700

 
950