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EX-32.2 - EXHIBIT 32.2 - PACWEST BANCORPa09301710-qexhibit322.htm
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EX-31.2 - EXHIBIT 31.2 - PACWEST BANCORPa09301710-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - PACWEST BANCORPa09301710-qexhibit311.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 September 30, 2017
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
 
33-0885320
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
 
o Accelerated filer
 
 
 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
 
 
 
 
 
o Emerging growth company
 
 
 
o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of October 27, 2017, there were 128,935,736 shares of the registrant's common stock outstanding, excluding 1,364,336 shares of unvested restricted stock.


1



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


2


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


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
$
337,965

Interest-earning deposits in financial institutions
122,439

 
81,705

Total cash and cash equivalents
270,018

 
419,670

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

 
3,223,830

Federal Home Loan Bank stock, at cost
17,250

 
21,870

Total investment securities
3,549,480

 
3,245,700

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

 
15,520,537

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

 
15,298,716

Equipment leased to others under operating leases
233,866

 
229,905

Premises and equipment, net
28,910

 
38,594

Foreclosed assets, net
11,630

 
12,976

Deferred tax asset, net
65,321

 
94,112

Goodwill
2,173,949

 
2,173,949

Core deposit and customer relationship intangibles, net
27,188

 
36,366

Other assets
351,659

 
319,779

Total assets
$
22,242,932

 
$
21,869,767

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

 
$
6,659,016

Interest-bearing deposits
9,861,371

 
9,211,595

Total deposits
16,773,245

 
15,870,611

Borrowings
250,399

 
905,812

Subordinated debentures
448,126

 
440,744

Accrued interest payable and other liabilities
160,494

 
173,545

Total liabilities
17,632,264

 
17,390,712

 
 
 
 
Commitments and contingencies (Note 7)


 


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

 

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

 
1,228

Additional paid-in capital
4,000,543

 
4,162,132

Retained earnings
639,434

 
366,073

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

 
5,982

Total stockholders' equity
4,610,668

 
4,479,055

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

 
$
21,869,767

See Notes to Condensed Consolidated Financial Statements.

4



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

 
$
234,618

 
$
225,370

 
$
694,462

 
$
686,071

Investment securities
24,762

 
24,689

 
22,187

 
72,490

 
67,154

Deposits in financial institutions
538

 
237

 
298

 
967

 
914

Total interest income
260,966

 
259,544

 
247,855

 
767,919

 
754,139

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
13,071

 
10,205

 
7,247

 
31,653

 
24,143

Borrowings
188

 
1,066

 
695

 
2,272

 
1,628

Subordinated debentures
6,017

 
5,800

 
5,278

 
17,379

 
15,382

Total interest expense
19,276

 
17,071

 
13,220

 
51,304

 
41,153

Net interest income
241,690

 
242,473

 
234,635

 
716,615

 
712,986

Provision for credit losses
15,119

 
11,499

 
8,471

 
51,346

 
42,514

Net interest income after provision for credit losses
226,571

 
230,974

 
226,164

 
665,269

 
670,472

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,465

 
3,510

 
3,488

 
10,733

 
10,977

Other commissions and fees
9,944

 
10,583

 
12,528

 
30,917

 
35,090

Leased equipment income
8,332

 
11,635

 
8,538

 
29,442

 
25,305

Gain on sale of loans and leases
2,848

 
649

 
157

 
4,209

 
790

Gain on sale of securities
1,236

 
1,651

 
382

 
2,788

 
8,970

FDIC loss sharing expense, net

 

 

 

 
(8,917
)
Other income
5,557

 
7,254

 
1,827

 
23,689

 
11,365

Total noninterest income
31,382

 
35,282

 
26,920

 
101,778

 
83,580

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
64,413

 
65,288

 
62,661

 
194,581

 
185,900

Occupancy
12,729

 
11,811

 
12,010

 
36,148

 
36,835

Data processing
6,459

 
6,337

 
6,234

 
19,811

 
17,782

Other professional services
4,213

 
3,976

 
4,625

 
11,567

 
11,598

Insurance and assessments
4,702

 
4,856

 
4,324

 
14,349

 
14,240

Intangible asset amortization
3,049

 
3,065

 
4,224

 
9,178

 
13,341

Leased equipment depreciation
4,862

 
5,232

 
5,298

 
15,719

 
15,608

Foreclosed assets expense (income), net
2,191

 
(157
)
 
(248
)
 
2,177

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

 
1,700

 

 
3,650

 
200

Loan expense
3,421

 
3,884

 
1,931

 
10,692

 
6,231

Other expense
11,053

 
11,715

 
9,651

 
34,921

 
30,556

Total noninterest expense
118,542

 
117,707

 
110,710

 
352,793

 
331,479

Earnings before income taxes
139,411

 
148,549

 
142,374

 
414,254

 
422,573

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

 
$
93,647

 
$
93,895

 
$
273,781

 
$
266,519

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

Diluted
$
0.84

 
$
0.77

 
$
0.77

 
$
2.26

 
$
2.19

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50

 
$
1.50

 
$
1.50


See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 
$
93,647

 
$
93,895

 
$
273,781

 
$
266,519

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

 
30,340

 
(15,954
)
 
49,336

 
83,653

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

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

 
17,990

 
(9,445
)
 
29,281

 
49,542

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

 
672

 
156

 
1,138

 
3,673

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

 
17,011

 
(9,671
)
 
27,631

 
44,245

Comprehensive income
$
105,350

 
$
110,658

 
$
84,224

 
$
301,412

 
$
310,764

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

See Notes to Condensed Consolidated Financial Statements.


6



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

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

 
$
1,228

 
$
4,162,132

 
$
366,073

 
$
(56,360
)
 
$
5,982

 
$
4,479,055

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 
711

 
(420
)
 

 

 
291

Net earnings

 

 

 
273,781

 

 

 
273,781

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

 

 

 

 

 
27,631

 
27,631

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

 
3

 
20,195

 

 

 

 
20,198

Restricted stock surrendered
(153,738
)
 

 

 

 
(7,793
)
 

 
(7,793
)
Cash dividends paid

 

 
(182,495
)
 

 

 

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

 
$
1,231

 
$
4,000,543

 
$
639,434

 
$
(64,153
)
 
$
33,613

 
$
4,610,668

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




See Notes to Condensed Consolidated Financial Statements.



7



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

 
$
266,519

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

 
24,761

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

 
28,012

Amortization of intangible assets
9,178

 
13,341

Provision for credit losses
51,346

 
42,514

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

 

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

 
17,275

Loss on sale of PWEF leasing unit

 
720

Tax effect included in stockholders' equity of restricted stock vesting

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

 
74,946

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

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

 
429,953

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

 
106,109

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

 
184,644

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

 
392,841

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

 
324

Proceeds from sales of foreclosed assets
1,455

 
7,973

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

 
24

Proceeds from sale of PWEF leasing unit

 
138,955

Proceeds from BOLI death benefit
2,478

 
3,238

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

 
352,784

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

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

 
4,226

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

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

Cash and cash equivalents, beginning of period
419,670

 
396,486

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

 
$
540,365



See Notes to Condensed Consolidated Financial Statements.


8



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

 
$
41,392

Cash paid for income taxes
146,321

 
82,721

Loans transferred to foreclosed assets
580

 
129

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

 

  

See Notes to Condensed Consolidated Financial Statements.


9



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


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



10



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


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

11



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


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

 
$
64,187

 
$
76,513

 
$
64,187

 
$
95,524

Fully amortized portion
(2,190
)
 

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

 

 

 

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

 
64,187

 
73,702

 
61,997

 
73,702

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

 

 
2,811

 
2,190

 
20,122

Reduction due to sale of PWEF leasing unit

 

 

 

 
1,363

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

 
$
30,237

 
$
39,542

 
$
27,188

 
$
39,542

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

 
$
4,569

 
$
(2,385
)
 
$
377,541

 
$
499,185

 
$
6,222

 
$
(2,964
)
 
$
502,443

Agency CMOs
175,429

 
1,655

 
(1,134
)
 
175,950

 
145,258

 
1,528

 
(497
)
 
146,289

Private label CMOs
131,149

 
4,001

 
(600
)
 
134,550

 
122,707

 
4,199

 
(1,437
)
 
125,469

Municipal securities
1,501,196

 
49,362

 
(1,408
)
 
1,549,150

 
1,447,064

 
15,406

 
(6,011
)
 
1,456,459

Agency commercial MBS
996,963

 
5,764

 
(6,813
)
 
995,914

 
555,552

 
1,798

 
(9,658
)
 
547,692

Corporate debt securities
17,000

 
2,125

 

 
19,125

 
47,100

 
680

 
(271
)
 
47,509

Collateralized loan obligations
19,119

 
66

 
(9
)
 
19,176

 
155,440

 
1,685

 
(238
)
 
156,887

SBA securities
166,949

 
1,363

 
(284
)
 
168,028

 
179,085

 
510

 
(750
)
 
178,845

Asset-backed and other securities
92,345

 
804

 
(353
)
 
92,796

 
62,264

 
358

 
(385
)
 
62,237

Total
$
3,475,507

 
$
69,709

 
$
(12,986
)
 
$
3,532,230

 
$
3,213,655

 
$
32,386

 
$
(22,211
)
 
$
3,223,830

As of September 30, 2017, securities available-for-sale with a fair value of $339.8 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended September 30, 2017, we sold $98.3 million of securities available-for-sale for a gross realized gain of $1.3 million and a gross realized loss of $0.1 million. During the three months ended September 30, 2016, we sold $39.1 million of securities available-for-sale for a gross realized gain of $1.0 million and a gross realized loss of $0.6 million.

12



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


During the nine months ended September 30, 2017, we sold $182.7 million of securities available-for-sale for a gross realized gain of $3.3 million and a gross realized loss of $0.5 million. During the nine months ended September 30, 2016, we sold $383.9 million of securities available-for-sale for a gross realized gain of $10.6 million and a gross realized loss of $1.6 million.
Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
September 30, 2017
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
52,840

 
$
(271
)
 
$
127,695

 
$
(2,114
)
 
$
180,535

 
$
(2,385
)
Agency CMOs
55,606

 
(891
)
 
18,436

 
(243
)
 
74,042

 
(1,134
)
Private label CMOs
45,494

 
(386
)
 
18,080

 
(214
)
 
63,574

 
(600
)
Municipal securities
78,784

 
(329
)
 
29,203

 
(1,079
)
 
107,987

 
(1,408
)
Agency commercial MBS
338,883

 
(2,920
)
 
106,766

 
(3,893
)
 
445,649

 
(6,813
)
Collateralized loan obligations
7,162

 
(9
)
 

 

 
7,162

 
(9
)
SBA securities
42,963

 
(284
)
 

 

 
42,963

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

 
(295
)
 
8,162

 
(58
)
 
47,885

 
(353
)
Total
$
661,455

 
$
(5,385
)
 
$
308,342

 
$
(7,601
)
 
$
969,797

 
$
(12,986
)

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

 
$
(1,691
)
 
$
122,902

 
$
(1,273
)
 
$
272,183

 
$
(2,964
)
Agency CMOs
44,111

 
(416
)
 
25,316

 
(81
)
 
69,427

 
(497
)
Private label CMOs
49,067

 
(906
)
 
30,155

 
(531
)
 
79,222

 
(1,437
)
Municipal securities
644,424

 
(6,011
)
 

 

 
644,424

 
(6,011
)
Agency commercial MBS
349,550

 
(9,658
)
 

 

 
349,550

 
(9,658
)
Corporate debt securities
29,829

 
(271
)
 

 

 
29,829

 
(271
)
Collateralized loan obligations
12,450

 
(37
)
 
39,231

 
(201
)
 
51,681

 
(238
)
SBA securities
69,293

 
(407
)
 
39,024

 
(343
)
 
108,317

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

 
(309
)
 
7,851

 
(76
)
 
26,064

 
(385
)
Total
$
1,366,218

 
$
(19,706
)
 
$
264,479

 
$
(2,505
)
 
$
1,630,697

 
$
(22,211
)

13



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


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

 
$
18,352

Due after one year through five years
326,552

 
331,164

Due after five years through ten years
962,429

 
969,431

Due after ten years
2,168,647

 
2,213,283

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

 
$
3,532,230

Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Taxable interest
$
13,576

 
$
13,515

 
$
11,446

 
$
39,257

 
$
34,248

Non-taxable interest
10,795

 
10,750

 
10,333

 
31,926

 
31,562

Dividend income
391

 
424

 
408

 
1,307

 
1,344

Total interest income on investment securities
$
24,762

 
$
24,689

 
$
22,187

 
$
72,490

 
$
67,154


14



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


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

 
$
58,077

 
$
6,205,055

 
$
5,635,675

 
$
92,793

 
$
5,728,468

Real estate construction and land
1,266,791

 

 
1,266,791

 
975,032

 
2,409

 
977,441

Commercial
7,894,115

 
4,194

 
7,898,309

 
8,426,236

 
12,994

 
8,439,230

Consumer
385,892

 
238

 
386,130

 
375,149

 
249

 
375,398

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

 
62,509

 
15,756,285

 
15,412,092

 
108,445

 
15,520,537

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

 
62,494

 
15,690,517

 
15,347,530

 
108,424

 
15,455,954

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

 
$
55,658

 
$
15,530,911

 
$
15,203,775

 
$
94,941

 
$
15,298,716


15



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


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

 
$
3,664

 
$
5,349

 
$
4,306,899

 
$
4,312,248

Residential
282

 
1,740

 
2,022

 
1,816,926

 
1,818,948

Total real estate mortgage
1,967

 
5,404

 
7,371

 
6,123,825

 
6,131,196

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
680,949

 
680,949

Residential

 

 

 
568,273

 
568,273

Total real estate construction and land

 

 

 
1,249,222

 
1,249,222

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
140

 
1,484

 
1,624

 
2,728,771

 
2,730,395

Asset-based

 

 

 
2,577,390

 
2,577,390

Venture capital
3,142

 
948

 
4,090

 
1,955,345

 
1,959,435

Equipment finance

 
690

 
690

 
593,782

 
594,472

Total commercial
3,282

 
3,122

 
6,404

 
7,855,288

 
7,861,692

Consumer
286

 
272

 
558

 
385,355

 
385,913

Total
$
5,535

 
$
8,798

 
$
14,333

 
$
15,613,690

 
$
15,628,023


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

 
$
3,303

 
$
11,893

 
$
4,341,740

 
$
4,353,633

Residential
5,694

 
1,999

 
7,693

 
1,256,630

 
1,264,323

Total real estate mortgage
14,284

 
5,302

 
19,586

 
5,598,370

 
5,617,956

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
578,838

 
578,838

Residential
364

 

 
364

 
383,637

 
384,001

Total real estate construction and land
364

 

 
364

 
962,475

 
962,839

Commercial:
 
 
 
 
 
 
 
 
 
Cash flow
191

 
1,821

 
2,012

 
3,105,380

 
3,107,392

Asset-based
1,500

 
2

 
1,502

 
2,607,543

 
2,609,045

Venture capital
13,589

 
5,769

 
19,358

 
1,963,798

 
1,983,156

Equipment finance
1,417

 
3,051

 
4,468

 
687,499

 
691,967

Total commercial
16,697

 
10,643

 
27,340

 
8,364,220

 
8,391,560

Consumer
224

 

 
224

 
374,951

 
375,175

Total
$
31,569

 
$
15,945

 
$
47,514

 
$
15,300,016

 
$
15,347,530



16



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


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

 
$
4,249,152

 
$
4,312,248

 
$
62,454

 
$
4,291,179

 
$
4,353,633

Residential
3,186

 
1,815,762

 
1,818,948

 
6,881

 
1,257,442

 
1,264,323

Total real estate mortgage
66,282

 
6,064,914

 
6,131,196

 
69,335

 
5,548,621

 
5,617,956

Real estate construction and land: