10-Q 1 a06301810-q.htm 10-Q Document



 
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, 2018
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, 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
(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 July 31, 2018, there were 122,429,348 shares of the registrant's common stock outstanding, excluding 1,540,525 shares of unvested restricted stock.


1



PACWEST BANCORP
JUNE 30, 2018 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
 
FRBSF
Federal Reserve Bank of San Francisco
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
CET1
Common Equity Tier 1
 
OREO
Other Real Estate Owned
CMOs
Collateralized Mortgage Obligations
 
PD/LGD
Probability of Default/Loss Given Default
CRA
Community Reinvestment Act
 
PCI
Purchased Credit Impaired
CRI
Customer Relationship Intangible Assets
 
PRSUs
Performance-Based Restricted Stock Units
CUB
CU Bancorp (a company acquired on October 20, 2017)
 
S1AM
Square 1 Asset Management, Inc.
CU Bank
California United Bank (a wholly-owned subsidiary of CUB)
 
SBA
Small Business Administration
DBO
California Department of Business Oversight
 
SEC
Securities and Exchange Commission
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 municipal 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 income 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)
 
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
 
June 30,
 
December 31,
 
2018
 
2017
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
245,998

 
$
233,215

Interest-earning deposits in financial institutions
205,567

 
165,222

Total cash, cash equivalents, and restricted cash
451,565

 
398,437

Securities available-for-sale, at fair value
3,857,788

 
3,774,431

Federal Home Loan Bank stock, at cost
26,271

 
20,790

Total investment securities
3,884,059

 
3,795,221

Loans held for sale, at lower of cost or fair value

 
481,100

Gross loans and leases held for investment
16,947,502

 
17,032,221

Deferred fees, net
(62,310
)
 
(59,478
)
Allowance for loan and lease losses
(132,139
)
 
(139,456
)
Total loans and leases held for investment, net
16,753,053

 
16,833,287

Equipment leased to others under operating leases
266,576

 
284,631

Premises and equipment, net
34,513

 
31,852

Foreclosed assets, net
2,231

 
1,329

Deferred tax asset, net
25,551

 

Goodwill
2,548,670

 
2,548,670

Core deposit and customer relationship intangibles, net
67,693

 
79,626

Other assets
495,646

 
540,723

Total assets
$
24,529,557

 
$
24,994,876

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
8,126,153

 
$
8,508,044

Interest-bearing deposits
9,803,039

 
10,357,492

Total deposits
17,929,192

 
18,865,536

Borrowings
1,187,226

 
467,342

Subordinated debentures
451,878

 
462,437

Accrued interest payable and other liabilities
183,302

 
221,963

Total liabilities
19,751,598

 
20,017,278

 
 
 
 
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 June 30, 2018 and
 
 
 
December 31, 2017, 126,412,538 and 130,491,108 shares issued, respectively, including
 
 
 
1,545,867 and 1,436,120 shares of unvested restricted stock, respectively)
1,264

 
1,305

Additional paid-in capital
3,920,715

 
4,287,487

Retained earnings
951,346

 
723,471

Treasury stock, at cost (1,844,588 and 1,708,230 shares at June 30, 2018 and December 31, 2017)
(73,026
)
 
(65,836
)
Accumulated other comprehensive (loss) income, net
(22,340
)
 
31,171

Total stockholders' equity
4,777,959

 
4,977,598

Total liabilities and stockholders' equity
$
24,529,557

 
$
24,994,876

See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
260,300

 
$
251,085

 
$
234,618

 
$
511,385

 
$
458,796

Investment securities
27,730

 
26,138

 
24,689

 
53,868

 
47,728

Deposits in financial institutions
484

 
552

 
237

 
1,036

 
429

Total interest income
288,514

 
277,775

 
259,544

 
566,289

 
506,953

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
16,367

 
13,818

 
10,205

 
30,185

 
18,582

Borrowings
2,649

 
920

 
1,066

 
3,569

 
2,084

Subordinated debentures
7,166

 
6,537

 
5,800

 
13,703

 
11,362

Total interest expense
26,182

 
21,275

 
17,071

 
47,457

 
32,028

Net interest income
262,332

 
256,500

 
242,473

 
518,832

 
474,925

Provision for credit losses
17,500

 
4,000

 
11,499

 
21,500

 
36,227

Net interest income after provision for credit losses
244,832

 
252,500

 
230,974

 
497,332

 
438,698

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
4,265

 
4,174

 
3,510

 
8,439

 
7,268

Other commissions and fees
11,767

 
10,265

 
10,583

 
22,032

 
20,973

Leased equipment income
9,790

 
9,587

 
11,635

 
19,377

 
21,110

Gain on sale of loans and leases
106

 
4,569

 
649

 
4,675

 
1,361

Gain on sale of securities
253

 
6,311

 
1,651

 
6,564

 
1,552

Other income
13,457

 
3,653

 
7,254

 
17,110

 
18,132

Total noninterest income
39,638

 
38,559

 
35,282

 
78,197

 
70,396

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
69,913

 
71,023

 
65,288

 
140,936

 
130,168

Occupancy
13,575

 
13,223

 
11,811

 
26,798

 
23,419

Data processing
6,896

 
6,659

 
6,337

 
13,555

 
13,352

Other professional services
5,257

 
4,439

 
3,976

 
9,696

 
7,354

Insurance and assessments
5,330

 
5,727

 
4,856

 
11,057

 
9,647

Intangible asset amortization
5,587

 
6,346

 
3,065

 
11,933

 
6,129

Leased equipment depreciation
5,237

 
5,375

 
5,232

 
10,612

 
10,857

Foreclosed assets income, net
(61
)
 
(122
)
 
(157
)
 
(183
)
 
(14
)
Acquisition, integration and reorganization costs

 

 
1,700

 

 
2,200

Loan expense
3,058

 
2,271

 
3,884

 
5,329

 
7,271

Other expense
11,657

 
12,454

 
11,715

 
24,111

 
23,868

Total noninterest expense
126,449

 
127,395

 
117,707

 
253,844

 
234,251

Earnings before income taxes
158,021

 
163,664

 
148,549

 
321,685

 
274,843

Income tax expense
(42,286
)
 
(45,388
)
 
(54,902
)
 
(87,674
)
 
(102,528
)
Net earnings
$
115,735

 
$
118,276

 
$
93,647

 
$
234,011

 
$
172,315

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.92

 
$
0.93

 
$
0.77

 
$
1.85

 
$
1.42

Diluted
$
0.92

 
$
0.93

 
$
0.77

 
$
1.85

 
$
1.42

Dividends declared per share
$
0.60

 
$
0.50

 
$
0.50

 
$
1.10

 
$
1.00


See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Net earnings
$
115,735

 
$
118,276

 
$
93,647

 
$
234,011

 
$
172,315

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
Unrealized net holding (losses) gains on securities
 
 
 
 
 
 
 
 
 
available-for-sale arising during the period
(14,325
)
 
(62,669
)
 
30,340

 
(76,994
)
 
41,524

Income tax benefit (expense) related to net unrealized
 
 
 
 
 
 
 
 
 
holding (losses) gains arising during the period
4,102

 
17,931

 
(12,350
)
 
22,033

 
(16,857
)
Unrealized net holding (losses) gains on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
(10,223
)
 
(44,738
)
 
17,990

 
(54,961
)
 
24,667

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings (1)
(253
)
 
(6,311
)
 
(1,651
)
 
(6,564
)
 
(1,552
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
72

 
1,806

 
672

 
1,878

 
632

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(181
)
 
(4,505
)
 
(979
)
 
(4,686
)
 
(920
)
Other comprehensive (loss) income, net of tax
(10,404
)
 
(49,243
)
 
17,011

 
(59,647
)
 
23,747

Comprehensive income
$
105,331

 
$
69,033

 
$
110,658

 
$
174,364

 
$
196,062

___________________________________ 
(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.


6



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

 
Six Months Ended June 30, 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 effects of changes in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principles (1)

 

 

 
(6,136
)
 

 
6,136

 

Net earnings

 

 

 
234,011

 

 

 
234,011

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

 

 

 

 

 
(59,647
)
 
(59,647
)
Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
494,166

 
5

 
14,740

 

 

 

 
14,745

Restricted stock surrendered
(136,358
)
 

 

 

 
(7,190
)
 

 
(7,190
)
Common stock repurchased under
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Program
(4,572,736
)
 
(46
)
 
(241,771
)
 

 

 

 
(241,817
)
Cash dividends paid

 

 
(139,741
)
 

 

 

 
(139,741
)
Balance, June 30, 2018
124,567,950

 
$
1,264

 
$
3,920,715

 
$
951,346

 
$
(73,026
)
 
$
(22,340
)
 
$
4,777,959

________________________
(1)
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
 
Six Months Ended
 
June 30,
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
234,011

 
$
172,315

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,512

 
15,980

Amortization of net premiums on securities available-for-sale
14,164

 
20,227

Amortization of intangible assets
11,933

 
6,129

Provision for credit losses
21,500

 
36,227

Loss (gain) on sale of foreclosed assets
35

 
(282
)
Provision for losses on foreclosed assets
65

 
14

Gain on sale of loans and leases
(4,675
)
 
(1,361
)
Gain on sale of premises and equipment
(8
)
 
(565
)
Gain on sale of securities
(6,564
)
 
(1,552
)
Gain on BOLI death benefit
(387
)
 
(1,050
)
Unrealized loss (gain) on derivatives and foreign currencies, net
20

 
(253
)
Earned stock compensation
14,745

 
13,719

(Increase) decrease in deferred income taxes, net
(1,640
)
 
7,823

Decrease (increase) in other assets
53,534

 
(50,973
)
Decrease in accrued interest payable and other liabilities
(47,696
)
 
(31,195
)
Net cash provided by operating activities
306,549

 
185,203

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(95,306
)
 
(388,619
)
Proceeds from sales of loans and leases
643,261

 
83,798

Proceeds from maturities and paydowns of securities available-for-sale
157,806

 
217,399

Proceeds from sales of securities available-for-sale
368,775

 
86,018

Purchases of securities available-for-sale
(708,167
)
 
(532,849
)
Net purchases of Federal Home Loan Bank stock
(5,481
)
 
(189
)
Proceeds from sales of foreclosed assets
57

 
1,281

Purchases of premises and equipment, net
(7,332
)
 
(4,037
)
Proceeds from sales of premises and equipment
32

 
10,306

Proceeds from BOLI death benefit
313

 
2,478

Net decrease in equipment leased to others under operating leases
7,746

 
17,262

Net cash provided by (used in) investing activities
361,704

 
(507,152
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (decrease) increase in noninterest-bearing deposits
(379,436
)
 
44,996

Net (decrease) increase in interest-bearing deposits
(554,453
)
 
962,343

Net increase (decrease) in borrowings
719,884

 
(688,358
)
Net decrease in subordinated debentures
(12,372
)
 

Common stock repurchased and restricted stock surrendered
(249,007
)
 
(7,558
)
Cash dividends paid
(139,741
)
 
(121,664
)
Net cash (used in) provided by financing activities
(615,125
)
 
189,759

 
 
 
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
53,128

 
(132,190
)
Cash, cash equivalents, and restricted cash, beginning of period
398,437

 
419,670

Cash, cash equivalents, and restricted cash, end of period
$
451,565

 
$
287,480



See Notes to Condensed Consolidated Financial Statements.


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
June 30,
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
47,569

 
$
30,478

Cash paid for income taxes
23,273

 
118,878

Loans transferred to foreclosed assets
1,059

 
580

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 June 30, 2018, 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. Community Banking provides lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices. We offer additional products and services through our National Lending and Venture Banking groups. 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 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 29 acquisitions from May 1, 2000 through June 30, 2018. 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 3. Acquisitions, for more information about the CUB acquisition.
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, 2017 as filed with the Securities and Exchange Commission ("Form 10-K"). Updates to our significant accounting policies described below reflect the impact of the adoption of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”
Investment Securities
Our significant accounting policy for investment securities applied to both debt and equity securities in prior periods. Effective January 1, 2018, upon the adoption of ASUs 2016-01 and 2018-03, our significant accounting policy for investment securities applies only to debt securities.

10



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


Equity Investments
Investments in common or preferred stock that are not publicly traded and certain investments in limited partnerships are considered equity investments that do not have a readily determinable fair value. If we have the ability to significantly influence the operating and financial policies of the investee, the investment is accounted for pursuant to the equity method of accounting. This is generally presumed to exist when we own between 20% and 50% of a corporation, or when we own greater than 5% of a limited partnership or similarly structured entity. Our equity investment carrying values are included in other assets and our share of earnings and losses in equity method investees is included in "Noninterest income - other" on the condensed consolidated statements of earnings. Prior to January 1, 2018, if we did not have significant influence over the investee, the cost method was used to account for the equity interest.
Effective January 1, 2018 with the adoption of ASU 2016-01, our accounting treatment for equity investments differs for those with and without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value recorded in “Noninterest income - other.” For equity investments without readily determinable fair values we have elected the “measurement alternative,” and therefore carry these investments at cost, less impairment (if any), plus or minus changes in observable prices. On a quarterly basis, we review our equity investments without readily determinable fair values for impairment. We consider a number of qualitative factors such as whether there is a significant deterioration in earnings performance, credit rating, asset quality, or business prospects of the investee in determining if impairment exists. If the investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established when the impairment was recognized. Impairment as well as upward or downward adjustments resulting from observable price changes in orderly transactions for identical or similar investments are included in “Noninterest income - other.”
Realized gains or losses resulting from the sale of equity investments are calculated using the specific identification method and are included in "Noninterest income - other."
Comprehensive Income
Comprehensive income consists of net earnings and net unrealized gains (losses) on debt securities available‑for‑sale, net, and is presented in the consolidated statements of comprehensive income.
Accounting Standards Adopted in 2018
Effective January 1, 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 contained a number of changes which are applicable to the Company including the following: (1) requires equity investments to be measured at fair value with changes in fair value recognized in net income; (2) allows equity investments without readily determinable fair values to be measured at cost less impairment, if any, plus or minus changes in observable prices (referred to as the "measurement alternative"); and (3) changes certain presentation and disclosure requirements for financial instruments, including using the exit price notion when measuring the fair value of financial instruments (see Note 11. Fair Value Measurements). ASU 2018-03 also clarified certain aspects of the guidance issued in ASU 2016-01, including requiring a prospective transition approach for equity investments without readily determinable fair value in which the measurement alternative is applied.
ASU 2016-01 does not apply to investments accounted for using the equity method, investments in consolidated subsidiaries, FHLB stock, and investments in low income housing tax credit projects. Upon adoption of ASU 2016-01, the Company recorded a transition adjustment to reclassify $529,000 in net unrealized gains from accumulated other comprehensive income ("AOCI") to retained earnings. The ASU also eliminated the requirement to classify equity investments into different categories such as “Available-for-sale.” The adoption of this ASU may result in more earnings volatility as changes in fair value of certain equity investments will now be recorded in the statement of earnings as opposed to AOCI.

11



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


Effective January 1, 2018, the Company early-adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The TCJA required deferred tax assets and liabilities to be re-measured at its enactment date for the effect of the change in the federal corporate tax rate. This process resulted in "stranded tax effects" in AOCI for deferred tax asset or liabilities which were established with an offsetting amount in AOCI. ASU 2018-02 allows for a reclassification of the stranded tax effects resulting from the enactment of the TCJA from AOCI to retained earnings. The Company elected to reclassify its stranded tax effects of $6.665 million from AOCI to retained earnings effective January 1, 2018, while no other income tax effects related to the application of the TCJA were reclassified.
Effective January 1, 2018, the Company adopted ASU 2014-09, "Revenue Recognition (Topic 606): Revenue from Contracts with Customers." ASU 2014-09 supersedes Topic 605, "Revenue Recognition" and requires an entity to recognize revenue at an amount that reflects the consideration to which it expects to be entitled to in exchange for the transfer of promised goods or services to customers.
Substantially all of the Company's revenue is interest income on loans, investment securities, and deposits at other financial institutions which are specifically outside the scope of ASU 2014-09. ASU 2014-09 applies primarily to certain noninterest income items in the Company's condensed consolidated statement of earnings. The Company adopted ASU 2014-09 as of January 1, 2018 using the cumulative effect transition method, which resulted in no adjustment to retained earnings and no material impact on the Company's consolidated financial position, results of operations, or cash flows. The Company did make minor changes to accounting operations and internal controls as part of adopting this new standard. See Note 13. Revenue From Contracts With Customers for further details.
Effective January 1, 2018, the Company adopted ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." Upon adoption, the Company applied the retrospective transition method to each period presented. ASU 2016-15 addressed eight issues related to the statement of cash flows, the most relevant to the Company being the classification of proceeds from the settlement of BOLI policies. As the Company classified proceeds from the settlement of BOLI policies in the manner required by ASU 2016-15 in the prior periods presented, there was no change to the Company's consolidated financial position, results of operations, or cash flows for both current and prior periods upon adoption.
Effective January 1, 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." Upon adoption, the Company applied the retrospective transition method to each period presented. As the Company does not present restricted cash as a separate line in the statement of financial position, there is no change to the presentation of cash on the statement of cash flows. The nature and amount of our restricted cash is shown in Note 2. Restricted Cash Balances.
Effective January 1, 2018, the Company adopted ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions of assets or businesses. The Company had no acquisitions or purchases of components of a business in the first half of 2018, thus, the impact of adopting the new standard had no impact on the Company's consolidated financial position, results of operations, or cash flows.
Effective January 1, 2018, the Company adopted ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provided clarification of what constitutes a modification of a share-based payment award. The Company did not modify any share-based payment awards in the first half of 2018, thus, the impact of adopting the new standard had no impact on the Company's consolidated financial position, results of operations, or cash flows.




12



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


Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses (the 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.
The allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. During the second quarter of 2018, the Company changed its ALLL methodology due to the growth and increased complexity of the loan portfolio. The new ALLL methodology included three primary changes: the quantitative component now employs a probability of default/loss given default ("PD/LGD") methodology; the loan segmentation groups our loan portfolio into 21 loan segments with similar risk characteristics (as opposed to 34 loan segments used under the previous methodology); and the historical range of loan performance history (often referred to as the look-back period) was lengthened by one year. The methodology for assessing individually impaired loans did not change under the new ALLL methodology. The ALLL methodology used to derive qualitative adjustments based on other internal or external factors was updated to align with the new PD/LGD methodology being applied to estimate the quantitative general allowance for unimpaired loans. As a result, the composition of the ALLL changed as the quantitative component increased and the qualitative component decreased as the new quantitative methodology now encompasses more information, such as the longer look-back period, that previously required a qualitative adjustment as part of determining the total ALLL estimate. These changes in the ALLL methodology did not result in material changes to management's overall estimate of the ALLL.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. In our loan and allowance tables, we realigned our commercial loan portfolio classes and subclasses to better reflect and report our lending, especially in light of the fourth quarter of 2017 cash flow loan sale and the exiting of the origination operations related to general, technology, and healthcare cash flow loans. Prior to the realignment, our commercial portfolio classes were: (1) asset-based, (2) venture capital, (3) cash flow, and (4) equipment finance. After the realignment, our commercial portfolio classes are (1) asset-based (which includes equipment finance), (2) venture capital, and (3) other commercial (which includes retained cash flow). All of the loan and allowance tables, both current period and prior periods, reflect this realignment.
Prior to January 1, 2018, our credit quality disclosures were only for Non-PCI loans and leases. As our gross PCI loan portfolio reduced to less than 0.4% of total loans as of the end of 2017, beginning in 2018 the credit quality disclosures reflect our entire loan and lease portfolio. Accordingly, for the credit quality tables in Note 6. Loans and Leases, amounts related to the 2018 periods are for total loans and leases, while amounts related to the 2017 periods are for Non-PCI loans and leases only.

13



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 six months ended June 30, 2018 and year ended December 31, 2017 were $80.6 million and $77.6 million. As of June 30, 2018 and December 31, 2017, we pledged cash collateral for our derivative contracts of $2.5 million and $2.7 million.
NOTE 3.  ACQUISITIONS    
CUB Acquisition
On October 20, 2017, we completed the acquisition of CUB. As part of the acquisition, CU Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank.
We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio and $2.7 billion of core deposits. The CUB acquisition has been accounted for under the acquisition method of accounting. We acquired $3.5 billion of assets and assumed $2.8 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 provisional 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 application of the acquisition method of accounting resulted in goodwill of $374.7 million. All of the recognized goodwill is non-deductible for tax purposes.
NOTE 4.  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 aggregate amortization expense is expected to be $22.5 million for 2018. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $18.7 million for 2019, $14.6 million for 2020, $10.8 million for 2021, $7.5 million for 2022, and $1.4 million for 2023.

14



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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
119,497

 
$
119,497

 
$
64,187

 
$
119,497

 
$
64,187

Fully amortized portion

 

 

 

 

Balance, end of period
119,497

 
119,497

 
64,187

 
119,497

 
64,187

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(46,217
)
 
(39,871
)
 
(30,885
)
 
(39,871
)
 
(27,821
)
Amortization
(5,587
)
 
(6,346
)
 
(3,065
)
 
(11,933
)
 
(6,129
)
Fully amortized portion

 

 

 

 

Balance, end of period
(51,804
)
 
(46,217
)
 
(33,950
)
 
(51,804
)
 
(33,950
)
Net CDI and CRI, end of period
$
67,693

 
$
73,280

 
$
30,237

 
$
67,693

 
$
30,237

NOTE 5. 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:
 
June 30, 2018
 
December 31, 2017
 
 
 
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
$
263,915

 
$
2,466

 
$
(2,793
)
 
$
263,588

 
$
243,375

 
$
3,743

 
$
(844
)
 
$
246,274

Agency CMOs
562,970

 
348

 
(8,427
)
 
554,891

 
277,638

 
968

 
(2,897
)
 
275,709

Private label CMOs
101,082

 
2,857

 
(1,703
)
 
102,236

 
122,816

 
3,813

 
(642
)
 
125,987

Municipal securities
1,399,851

 
20,374

 
(8,133
)
 
1,412,092

 
1,627,707

 
53,700

 
(1,339
)
 
1,680,068

Agency commercial MBS
1,131,301

 

 
(34,085
)
 
1,097,216

 
1,169,969

 
2,758

 
(8,758
)
 
1,163,969

U.S. Treasury securities
262,558

 
373

 
(590
)
 
262,341

 

 

 

 

SBA securities
79,317

 

 
(1,966
)
 
77,351

 
160,214

 
695

 
(575
)
 
160,334

Asset-backed securities
71,095

 

 
(1,314
)
 
69,781

 
89,425

 
159

 
(874
)
 
88,710

Corporate debt securities
17,000

 
1,292

 

 
18,292

 
17,000

 
2,295

 

 
19,295

Collateralized loan obligations

 

 

 

 
6,960

 
55

 

 
7,015

Equity investments (1)

 

 

 

 
6,421

 
779

 
(130
)
 
7,070

Total
$
3,889,089

 
$
27,710

 
$
(59,011
)
 
$
3,857,788

 
$
3,721,525

 
$
68,965

 
$
(16,059
)
 
$
3,774,431

____________________________
(1) In connection with our adoption of ASU 2016-01 and ASU 2018-03 on January 1, 2018, we reclassified $7.1 million of equity investments from securities available-for-sale to other assets in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated.
As of June 30, 2018, securities available-for-sale with a fair value of $433.2 million were pledged as collateral for borrowings, public deposits, and other purposes as required by various statutes and agreements.

15



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


During the three months ended June 30, 2018, we sold $62.3 million of securities available-for-sale for a gross realized gain of $313,000 and a gross realized loss of $60,000. During the three months ended June 30, 2017, we sold $41.4 million of securities available-for-sale for a gross realized gain of $1.7 million and a gross realized loss of $76,000.
During the six months ended June 30, 2018, we sold $362.2 million of securities available-for-sale for a gross realized gain of $7.1 million and a gross realized loss of $575,000. During the six months ended June 30, 2017, we sold $84.5 million of securities available-for-sale for a gross realized gain of $1.9 million and a gross realized loss of $379,000.
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, 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
$
101,684

 
$
(1,697
)
 
$
29,300

 
$
(1,096
)
 
$
130,984

 
$
(2,793
)
Agency CMOs
464,725

 
(7,943
)
 
18,149

 
(484
)
 
482,874

 
(8,427
)
Private label CMOs
80,735

 
(1,672
)
 
4,172

 
(31
)
 
84,907

 
(1,703
)
Municipal securities
344,023

 
(6,238
)
 
30,188

 
(1,895
)
 
374,211

 
(8,133
)
Agency commercial MBS
1,021,518

 
(29,290
)
 
75,698

 
(4,795
)
 
1,097,216

 
(34,085
)
U.S. Treasury securities
147,739

 
(590
)
 

 

 
147,739

 
(590
)
SBA securities
63,348

 
(1,575
)
 
14,003

 
(391
)
 
77,351

 
(1,966
)
Asset-backed securities
46,299

 
(600
)
 
23,482

 
(714
)
 
69,781

 
(1,314
)
Total
$
2,270,071

 
$
(49,605
)
 
$
194,992

 
$
(9,406
)
 
$
2,465,063

 
$
(59,011
)
 
December 31, 2017
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
44,795

 
$
(311
)
 
$
26,010

 
$
(533
)
 
$
70,805

 
$
(844
)
Agency CMOs
163,014

 
(2,452
)
 
20,928

 
(445
)
 
183,942

 
(2,897
)
Private label CMOs
50,521

 
(500
)
 
5,035

 
(142
)
 
55,556

 
(642
)
Municipal securities
67,936

 
(365
)
 
32,326

 
(974
)
 
100,262

 
(1,339
)
Agency commercial MBS
579,373

 
(3,777
)
 
129,060

 
(4,981
)
 
708,433

 
(8,758
)
SBA securities
74,904

 
(575
)
 

 

 
74,904

 
(575
)
Asset-backed securities
45,198

 
(818
)
 
10,473

 
(56
)
 
55,671

 
(874
)
Equity investments (1)
1,039

 
(130
)
 

 

 
1,039

 
(130
)
Total
$
1,026,780

 
$
(8,928
)
 
$
223,832

 
$
(7,131
)
 
$
1,250,612

 
$
(16,059
)
____________________________
(1) In connection with our adoption of ASU 2016-01 and ASU 2018-03 on January 1, 2018, we reclassified $7.1 million of equity investments from securities available-for-sale to other assets in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated.

16



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


We reviewed the securities that were in an unrealized loss position at June 30, 2018, 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:
 
June 30, 2018
 
Amortized
 
Fair
Maturities
Cost
 
Value
 
(In thousands)
Due in one year or less
$
20,945

 
$
21,035

Due after one year through five years
594,720

 
589,860

Due after five years through ten years
997,539

 
971,186

Due after ten years
2,275,885

 
2,275,707

Total securities available-for-sale
$
3,889,089

 
$
3,857,788

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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Taxable interest
$
17,106

 
$
14,599

 
$
13,517

 
$
31,705

 
$
25,683

Non-taxable interest
10,276

 
11,107

 
10,750

 
21,383

 
21,131

Dividend income
348

 
432

 
422

 
780

 
914

Total interest income on investment securities
$
27,730

 
$
26,138

 
$
24,689

 
$
53,868

 
$
47,728


17



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


NOTE 6.  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.
Prior to January 1, 2018, our loan and lease portfolio consisted of Non-PCI loans and leases and PCI loans. Non-PCI loans and leases were those we originated or those we acquired that were not credit impaired at the dates of acquisition. PCI loans were 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. As our gross PCI loan portfolio represented less than 0.4% of total loans as of the end of 2017, beginning in 2018 the PCI loans were accounted for as Non-PCI loans. Accordingly, in the credit quality tables below under "Loans and leases held for investment," amounts related to the 2018 period are for total loans and leases, and amounts related to the 2017 period are for Non-PCI loans and leases.
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:
 
June 30, 2018
 
December 31, 2017
 
Total
 
Non-PCI
 
 
 
Total
 
Loans
 
Loans
 
PCI
 
Loans
 
and Leases
 
and Leases
 
Loans
 
and Leases
 
(In thousands)
Real estate mortgage
$
7,581,962

 
$
7,815,355

 
$
53,658

 
$
7,869,013

Real estate construction and land
1,896,969

 
1,611,287

 

 
1,611,287

Commercial
7,089,887

 
7,137,978

 
4,158

 
7,142,136

Consumer
378,684

 
409,551

 
234

 
409,785

Gross loans and leases held for investment
16,947,502

 
16,974,171

 
58,050

 
17,032,221

Deferred fees, net
(62,310
)
 
(59,464
)
 
(14
)
 
(59,478
)
Loans and leases held for investment,
 
 
 
 
 
 
 
net of deferred fees
16,885,192

 
16,914,707

 
58,036

 
16,972,743

Allowance for loan and lease losses
(132,139
)
 
(133,012
)
 
(6,444
)
 
(139,456
)
Total loans and leases held for
 
 
 
 
 
 
 
investment, net
$
16,753,053

 
$
16,781,695

 
$
51,592

 
$
16,833,287



18



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


The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated:
 
June 30, 2018
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
3,497

 
$
10,377

 
$
13,874

 
$
4,996,806

 
$
5,010,680

Residential
3,362

 
445

 
3,807

 
2,551,887

 
2,555,694

Total real estate mortgage
6,859

 
10,822

 
17,681

 
7,548,693

 
7,566,374

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
831,462

 
831,462

Residential
5,969

 

 
5,969

 
1,036,595

 
1,042,564

Total real estate construction and land
5,969

 

 
5,969

 
1,868,057

 
1,874,026

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based

 
662

 
662

 
3,183,638

 
3,184,300

Venture capital

 
1,534

 
1,534

 
2,006,671

 
2,008,205

Other commercial
2,363

 
3,876

 
6,239

 
1,867,368

 
1,873,607

Total commercial
2,363

 
6,072

 
8,435

 
7,057,677

 
7,066,112

Consumer
75

 
28

 
103

 
378,577

 
378,680

Total
$
15,266

 
$
16,922

 
$
32,188

 
$
16,853,004

 
$
16,885,192


 
December 31, 2017
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
29,070

 
$
9,107

 
$
38,177

 
$
5,323,310

 
$
5,361,487

Residential
6,999

 
2,022

 
9,021

 
2,428,483

 
2,437,504

Total real estate mortgage
36,069

 
11,129

 
47,198

 
7,751,793

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
769,075

 
769,075

Residential
2,081

 

 
2,081

 
820,073

 
822,154

Total real estate construction and land
2,081

 

 
2,081

 
1,589,148

 
1,591,229

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based
344

 
690

 
1,034

 
2,923,837

 
2,924,871

Venture capital
6,533

 
760

 
7,293

 
2,115,418

 
2,122,711

Other commercial
2,846

 
1,586

 
4,432

 
2,062,906

 
2,067,338

Total commercial
9,723

 
3,036

 
12,759

 
7,102,161

 
7,114,920

Consumer
562

 

 
562

 
409,005

 
409,567

Total (1)
$
48,435

 
$
14,165

 
$
62,600

 
$
16,852,107

 
$
16,914,707

________________________
(1)
Excludes loans held for sale carried at lower of cost or fair value and PCI loans.

19



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 loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated:  
 
June 30, 2018
 
December 31, 2017 (1)
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
33,105

 
$
4,977,575

 
$
5,010,680

 
$
65,563

 
$
5,295,924

 
$
5,361,487

Residential
3,527

 
2,552,167

 
2,555,694

 
3,350

 
2,434,154

 
2,437,504

Total real estate mortgage
36,632

 
7,529,742

 
7,566,374

 
68,913

 
7,730,078

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
831,462

 
831,462

 

 
769,075

 
769,075

Residential
10,450

 
1,032,114

 
1,042,564

 

 
822,154

 
822,154

Total real estate construction and land
10,450

 
1,863,576

 
1,874,026

 

 
1,591,229

 
1,591,229

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
29,677

 
3,154,623

 
3,184,300

 
33,553

 
2,891,318

 
2,924,871

Venture capital
27,940

 
1,980,265

 
2,008,205

 
29,424

 
2,093,287

 
2,122,711

Other commercial
8,782

 
1,864,825

 
1,873,607

 
23,874

 
2,043,464

 
2,067,338

Total commercial
66,399

 
6,999,713

 
7,066,112

 
86,851

 
7,028,069

 
7,114,920

Consumer
264

 
378,416

 
378,680

 
20

 
409,547

 
409,567

Total
$
113,745

 
$
16,771,447

 
$
16,885,192

 
$
155,784

 
$
16,758,923

 
$
16,914,707

________________________
(1)     Excludes loans held for sale carried at lower of cost or fair value and PCI loans.
At June 30, 2018, nonaccrual loans and leases totaled $113.7 million and included $16.9 million of loans and leases 90 or more days past due, $3.4 million of loans and leases 30 to 89 days past due, and $93.4 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $155.8 million at December 31, 2017, including $14.2 million of the loans and leases 90 or more days past due, $3.2 million of loans and leases 30 to 89 days past due, and $138.4 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of June 30, 2018, our ten largest loan relationships on nonaccrual status had an aggregate carrying value of $81.5 million and represented 71.6% of total nonaccrual loans and leases.

20



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


The following table presents the credit risk rating categories for loans and leases held for investment, net of deferred fees, by 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.
 
June 30, 2018
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
71,030

 
$
243,045

 
$
4,696,605

 
$
5,010,680

Residential
11,453

 
2,167

 
2,542,074

 
2,555,694

Total real estate mortgage
82,483

 
245,212

 
7,238,679

 
7,566,374

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
448

 
3,807

 
827,207

 
831,462

Residential
10,450

 
23,032

 
1,009,082

 
1,042,564

Total real estate construction and land
10,898

 
26,839

 
1,836,289

 
1,874,026

Commercial:
 
 
 
 
 
 
 
Asset-based
35,429

 
67,628

 
3,081,243

 
3,184,300

Venture capital
54,219

 
99,485

 
1,854,501

 
2,008,205

Other commercial
52,829

 
66,615

 
1,754,163

 
1,873,607

Total commercial
142,477

 
233,728

 
6,689,907

 
7,066,112

Consumer
434

 
1,069

 
377,177

 
378,680

Total
$
236,292

 
$
506,848

 
$
16,142,052

 
$
16,885,192


 
December 31, 2017 (1)
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
93,795

 
$
122,488

 
$
5,145,204

 
$
5,361,487

Residential
8,425

 
4,582

 
2,424,497

 
2,437,504

Total real estate mortgage
102,220

 
127,070

 
7,569,701

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
Commercial

 

 
769,075

 
769,075

Residential

 
619

 
821,535

 
822,154

Total real estate construction and land

 
619

 
1,590,610

 
1,591,229

Commercial:
 
 
 
 
 
 
 
Asset-based
51,000

 
37,256

 
2,836,615

 
2,924,871

Venture capital
49,671

 
114,210

 
1,958,830

 
2,122,711

Other commercial
75,251

 
21,883

 
1,970,204

 
2,067,338

Total commercial
175,922

 
173,349

 
6,765,649

 
7,114,920

Consumer
263

 
1,130

 
408,174

 
409,567

Total
$
278,405

 
$
302,168

 
$
16,334,134

 
$
16,914,707

________________________
(1)     Excludes loans held for sale carried at lower of cost or fair value and PCI loans.

21



PACWEST BANCORP AND SUBSIDIARIES
Notes to 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.
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 portfolio segment as of the dates indicated:
 
June 30, 2018
 
December 31, 2017 (1)
 
 
 
 
 
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
$
36,632

 
$
50,500

 
$
87,132

 
$
68,913

 
$
47,560

 
$
116,473

Real estate construction and land
10,450

 
5,549

 
15,999

 

 
5,690

 
5,690

Commercial
66,399

 
1,982

 
68,381

 
86,851

 
3,488

 
90,339

Consumer
264

 
117

 
381

 
20

 
100

 
120

Total
$
113,745

 
$
58,148

 
$
171,893

 
$
155,784

 
$
56,838

 
$
212,622

________________________
(1)     Excludes loans held for sale carried at lower of cost or fair value and PCI loans.


22



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 portfolio segment and class as of and for the dates indicated:
 
June 30, 2018
 
December 31, 2017 (1)
 
 
 
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
$
7,786

 
$
7,687

 
$
248

 
$
15,750

 
$
16,548

 
$
628

Residential
2,419

 
2,424

 
224

 
2,787

 
2,957

 
342

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Venture capital
26,181

 
27,429

 
7,120

 
16,565

 
17,203

 
4,267

Other commercial
1,360

 
1,360

 
1,360

 
20,404

 
29,951

 
8,368

Consumer

 

 

 
100

 
100

 
16

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
68,610

 
$
88,748

 
 
 
$
93,827

 
$
105,923

 
 
Residential
8,317

 
10,845

 
 
 
4,109

 
4,481

 
 
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,549

 
5,552

 
 
 
5,690

 
5,689

 
 
Residential
10,450

 
11,074

 
 
 

 

 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
29,677

 
56,650

 
 
 
33,553

 
54,911

 
 
Venture capital
2,800

 
28,496

 
 
 
14,534

 
40,029

 
 
Other commercial
8,363

 
28,392

 
 
 
5,283

 
9,351

 
 
Consumer
381

 
543

 
 
 
20

 
93

 
 
Total Loans and Leases With
 
 
 
 
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
87,132

 
$
109,704

 
$
472

 
$
116,473

 
$
129,909

 
$
970

Real estate construction and land
15,999

 
16,626

 

 
5,690

 
5,689

 

Commercial
68,381

 
142,327

 
8,480

 
90,339

 
151,445

 
12,635

Consumer
381

 
543

 

 
120

 
193

 
16

Total
$
171,893

 
$
269,200

 
$
8,952

 
$
212,622

 
$
287,236

 
$
13,621

________________________
(1)     Excludes loans held for sale carried at lower of cost or fair value and PCI loans.

23



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


 
Three Months Ended June 30,
 
2018
 
2017
 
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
$
7,786

 
$
103

 
$
17,591

 
$
214

Residential
2,419

 
21

 
3,253

 
14

Commercial:
 
 
 
 
 
 
 
Asset-based

 

 
202

 

Venture capital
18,449

 

 
11,400

 

Other commercial
688

 

 
34,065

 
34

Consumer

 

 
239

 
2

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
58,733

 
$
725

 
$
90,778

 
$
742

Residential
8,293

 
44

 
5,365

 
15

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,549

 
93

 
5,840

 
70

Residential
10,450

 

 

 

Commercial:
 
 
 
 
 
 
 
Asset-based
29,677

 

 
30,925

 

Venture capital
2,800

 

 
6,045

 

Other commercial
8,508

 
335

 
12,594

 
27

Consumer
355

 
2

 
120

 

Total Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
77,231

 
$
893

 
$
116,987

 
$
985

Real estate construction and land
15,999

 
93

 
5,840

 
70

Commercial
60,122

 
335

 
95,231

 
61

Consumer
355

 
2

 
359

 
2

Total
$
153,707

 
$
1,323

 
$
218,417

 
$
1,118

_________________________
(1)
For loans and leases reported as impaired at June 30, 2018 and 2017, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.










24



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


 
Six Months Ended June 30,
 
2018
 
2017
 
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
$
7,786

 
$
204

 
$
17,591

 
$
425

Residential
2,419

 
42

 
3,252

 
27

Commercial:
 
 
 
 
 
 
 
Asset-based

 

 
101

 

Venture capital
15,715

 

 
6,900

 

Other commercial
346

 

 
33,770

 
63

Consumer

 

 
213

 
4

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
55,214

 
$
1,378

 
$
89,107

 
$
1,289

Residential
8,277

 
88

 
5,334

 
29

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,549

 
184

 
5,840

 
140

Residential
5,254

 

 

 

Commercial:
 
 
 
 
 
 
 
Asset-based
29,677

 

 
30,756

 

Venture capital
2,645

 

 
4,276

 

Other commercial
7,946

 
1,377

 
9,488

 
44

Consumer
341

 
4

 
120

 

Total Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
73,696

 
$
1,712

 
$
115,284

 
$
1,770

Real estate construction and land
10,803

 
184

 
5,840

 
140

Commercial
56,329

 
1,377

 
85,291

 
107

Consumer
341

 
4

 
333

 
4

Total
$
141,169

 
$
3,277

 
$
206,748

 
$
2,021

_________________________
(1)
For loans and leases reported as impaired at June 30, 2018 and 2017, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.








25



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 portfolio segment and class for the periods indicated:
 
Three Months Ended June 30,
 
2018
 
2017
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number
 
Recorded
 
Recorded
 
Number
 
Recorded
 
Recorded
Troubled Debt Restructurings
of Loans
 
Investment
 
Investment
 
of Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
$

 
$

 
3

 
$
1,465

 
$
1,465

Residential
3

 
1,704

 
645

 
3

 
720

 
437

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 
1

 
362

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based

 

 

 
2

 
665

 
665

Venture capital
4

 
5,236

 
5,236

 
2

 
92

 
92

Other commercial
2

 
31

 
31

 
8

 
17,288

 
17,289

Consumer
1

 
27

 
27

 

 

 

Total
10

 
$
6,998

 
$
5,939

 
19

 
$
20,592

 
$
19,948

 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number
 
Recorded
 
Recorded
 
Number
 
Recorded
 
Recorded
Troubled Debt Restructurings
of Loans
 
Investment
 
Investment
 
of Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
$

 
$

 
4

 
$
1,529

 
$
1,465

Residential
3

 
1,704

 
645

 
5

 
762

 
479

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 
1

 
362

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based

 

 

 
2

 
665

 
665

Venture capital
4

 
5,236

 
5,236

 
5

 
13,157

 
13,157

Other commercial
4

 
11,814

 
11,814

 
12

 
18,007

 
18,008

Consumer
1

 
27

 
27

 
1

 
97

 
97

Total
12

 
$
18,781

 
$
17,722

 
30

 
$
34,579

 
$
33,871

In the three months ended June 30, 2018, there were no loans restructured in the preceding 12-month period which subsequently defaulted after being restructured. In the six months ended June 30, 2018, one other commercial loan of $2.1 million restructured in the preceding 12-month period defaulted after being restructured. In the three and six months ended June 30, 2017, there were no loans restructured in the preceding 12-month period which subsequently defaulted after being restructured.



26



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


Allowance for Loan and Lease Losses
The following tables present a summary of the activity in the allowance for loan and lease losses on loans and leases held for investment by portfolio segment for the periods indicated:
 
Three Months Ended June 30, 2018
 
 
 
Real Estate
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Total
 
(In thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
40,158

 
$
18,190

 
$
73,780

 
$
2,147

 
$
134,275

Charge-offs
(4,747
)
 

 
(13,425
)
 
(63
)
 
(18,235
)
Recoveries
120

 
17

 
912

 
50

 
1,099

Net (charge-offs) recoveries
(4,627
)
 
17

 
(12,513
)
 
(13
)
 
(17,136
)
Provision (negative provision)
9,936

 
8,003

 
(2,461
)
 
(478
)
 
15,000

Balance, end of period
$
45,467

 
$
26,210

 
$
58,806

 
$
1,656

 
$
132,139


 
Six Months Ended June 30, 2018
 
 
 
Real Estate
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Total
 
(In thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
40,051

 
$
13,055

 
$
84,022

 
$
2,328

 
$
139,456

Charge-offs
(7,345
)
 

 
(22,949
)
 
(94
)
 
(30,388
)
Recoveries
1,777

 
26

 
6,399

 
95

 
8,297

Net (charge-offs) recoveries
(5,568
)
 
26

 
(16,550
)
 
1

 
(22,091
)
Provision (negative provision)
10,984

 
13,129

 
(8,666
)
 
(673
)
 
14,774

Balance, end of period
$
45,467

 
$
26,210

 
$
58,806

 
$
1,656

 
$
132,139

 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
472

 
$

 
$
8,480

 
$

 
$
8,952

Collectively evaluated for impairment
$
44,995

 
$
26,210

 
$
50,326

 
$
1,656

 
$
123,187

 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
83,931

 
$
15,998

 
$
67,228

 
$

 
$
167,157

Collectively evaluated for impairment
7,482,443

 
1,858,028

 
6,998,884

 
378,680

 
16,718,035

Ending balance
$
7,566,374

 
$
1,874,026

 
$
7,066,112

 
$
378,680

 
$
16,885,192


27



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


 
Three Months Ended June 30, 2017
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan
 
 
 
 
 
 
 
 
 
 
 
 
 
and Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
35,368

 
$
10,476

 
$
102,134

 
$
1,848

 
$
149,826

 
$
11,481

 
$
161,307

Charge-offs
(142
)
 

 
(22,696
)
 
(113
)
 
(22,951
)
 
(3,459
)
 
(26,410
)
Recoveries
20

 
9

 
1,953

 
22

 
2,004

 
58

 
2,062

Net (charge-offs) recoveries
(122
)
 
9

 
(20,743
)
 
(91
)
 
(20,947
)
 
(3,401
)
 
(24,348
)
Provision (negative provision)
1,876

 
833

 
6,973

 
318

 
10,000

 
(1,001
)
 
8,999

Balance, end of period
$
37,122

 
$
11,318

 
$
88,364

 
$
2,075

 
$
138,879

 
$
7,079

 
$
145,958


 
Six Months Ended June 30, 2017
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
Construction
 
 
 
 
 
Total
 
Total
 
 
 
Mortgage
 
and Land
 
Commercial
 
Consumer
 
Non-PCI
 
PCI
 
Total
 
(In thousands)
Allowance for Loan
 
 
 
 
 
 
 
 
 
 
 
 
 
and Lease Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
37,765

 
$
10,045

 
$
93,853

 
$
2,092

 
$
143,755

 
$
13,483

 
$
157,238

Charge-offs
(1,686
)
 

 
(41,981
)
 
(212
)
 
(43,879
)
 
(5,689
)
 
(49,568
)
Recoveries
250

 
17

 
4,401

 
75

 
4,743

 
58

 
4,801

Net (charge-offs) recoveries
(1,436
)
 
17

 
(37,580
)
 
(137
)
 
(39,136
)
 
(5,631
)
 
(44,767
)
Provision (negative provision)
793

 
1,256

 
32,091

 
120

 
34,260

 
(773
)
 
33,487

Balance, end of period
$
37,122

 
$
11,318

 
$
88,364

 
$
2,075

 
$
138,879

 
$
7,079

 
$
145,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,415

 
$

 
$
11,564

 
$
333

 
$
13,312

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
35,707

 
$
11,318

 
$
76,800

 
$
1,742

 
$
125,567

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
7,079

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
117,441

 
$
5,840

 
$
104,008

 
$
485

 
$
227,774

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
5,954,357

 
1,157,500

 
7,733,659

 
397,741

 
15,243,257

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
72,426

 
 
Ending balance
$
6,071,798

 
$
1,163,340

 
$
7,837,667

 
$
398,226

 
$
15,471,031

 
$
72,426

 
$
15,543,457




28



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


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, reserve for unfunded loan commitments for the periods indicated:
 
Three Months Ended June 30, 2018
 
Allowance for
 
Reserve for
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
134,275

 
$
32,861

 
$
167,136

Charge-offs
(18,235
)
 

 
(18,235
)
Recoveries
1,099

 

 
1,099

Net charge-offs
(17,136
)
 

 
(17,136
)
Provision
15,000

 
2,500

 
17,500

Balance, end of period
$
132,139

 
$
35,361

 
$
167,500

 
Six Months Ended June 30, 2018
 
Allowance for
 
Reserve for
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
139,456

 
$
28,635

 
$
168,091

Charge-offs
(30,388
)
 

 
(30,388
)
Recoveries
8,297

 

 
8,297

Net charge-offs
(22,091
)
 

 
(22,091
)
Provision
14,774

 
6,726

 
21,500

Balance, end of period
$
132,139

 
$
35,361

 
$
167,500


 
Three Months Ended June 30, 2017
 
Non-PCI
 
 
 
 
 
Allowance for
 
Reserve for
 
 
 
PCI
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Allowance for
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
Loan Losses
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
149,826

 
$
17,763

 
$
167,589

 
$
11,481

 
$
179,070

Charge-offs
(22,951
)
 

 
(22,951
)
 
(3,459
)
 
(26,410
)
Recoveries
2,004

 

 
2,004

 
58

 
2,062

Net charge-offs
(20,947
)
 

 
(20,947
)
 
(3,401
)
 
(24,348
)
Provision (negative provision)
10,000

 
2,500

 
12,500

 
(1,001
)
 
11,499

Balance, end of period
$
138,879

 
$
20,263

 
$
159,142

 
$
7,079

 
$
166,221


29



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


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

 
$
17,523

 
$
161,278

 
$
13,483

 
$
174,761

Charge-offs
(43,879
)
 

 
(43,879
)
 
(5,689
)
 
(49,568
)
Recoveries
4,743

 

 
4,743

 
58

 
4,801

Net charge-offs
(39,136
)
 

 
(39,136
)
 
(5,631
)
 
(44,767
)
Provision (negative provision)
34,260

 
2,740

 
37,000

 
(773
)
 
36,227

Balance, end of period
$
138,879

 
$
20,263

 
$
159,142

 
$
7,079

 
$
166,221

NOTE 7.  FORECLOSED ASSETS
The following table summarizes foreclosed assets as of the dates indicated:
 
June 30,
 
December 31,
Property Type
2018
 
2017
 
(In thousands)
Construction and land development
$
219

 
$
219

Multi‑family
1,059

 

Commercial real estate

 
64

Single family residence
953

 
1,019

Total other real estate owned, net
2,231

 
1,302

Other foreclosed assets

 
27

Total foreclosed assets, net
$
2,231

 
$
1,329

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, 2017
$
1,329

Transfers to foreclosed assets from loans
1,059

Provision for losses
(65
)
Reductions related to sales
(92
)
Balance, June 30, 2018
$
2,231


30



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


NOTE 8.  OTHER ASSETS
The following table presents the detail of our other assets as of the dates indicated:
 
June 30,
 
December 31,
Other Assets
2018
 
2017
 
(In thousands)
Cash surrender value of BOLI
$
195,911

 
$
193,917

Interest receivable
81,816

 
82,935

Taxes receivable
37,022

 
98,998

CRA investments
54,474

 
49,432

Low income housing tax credit ("LIHTC") investments
48,468

 
39,235

Equity investments without readily determinable fair values
15,525

 
14,856

Equity investments with readily determinable fair values
4,569

 

Prepaid expenses
20,153

 
17,800

Other
37,708

 
43,550

Total other assets
$
495,646

 
$
540,723

The Company has purchased life insurance policies on certain employees and has also acquired life insurance policies through acquisitions. BOLI is recorded at the amount that can be realized under the insurance contract, which is the cash surrender value. The increase in the cash surrender value each period is recorded to "Noninterest income - other."
The Company makes various investments for CRA investment purposes including, but not limited to, CRA-related loan pool investments, CRA-related equity investments and investments in LIHTC partnerships. The loan pool and other CRA equity investments primarily consist of investments in partnerships which provide affordable housing and participations in loan pools which provide low-cost loans to low and moderate income applicants.
The Company invests as a limited partner in LIHTC partnerships that operate qualified affordable housing projects and generate tax benefits for investors, including federal low income housing tax credits. The partnerships are deemed to be VIEs because they do not have sufficient equity investment at risk and are structured with non-substantive voting rights. We are not the primary beneficiary of the VIEs and do not consolidate them. We amortize the investment in proportion to the allocated tax benefits using the proportional amortization method of accounting and record such benefits net of investment amortization in income tax expense.
Our equity investments without readily determinable fair values include investments in privately held companies and limited partnerships as well as investments in entities from which we issued trust preferred securities. On January 1, 2018, we adopted ASU 2016-01 and ASU 2018-03 which changed the way we account for equity investments without readily determinable fair values previously accounted for using the cost method. Upon adoption, we have elected to measure our equity investments without readily determinable fair values using the measurement alternative. The Company reclassified $1.2 million of equity securities without readily determinable fair values previously included in securities available-for-sale to other assets on our condensed consolidated balance sheet in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated. Carrying values of these investments are adjusted to fair value upon observable transactions for identical or similar investments of the same issuer. During the six months ended June 30, 2018, we sold a portion of one of our equity investments without a readily determinable fair value for an amount in excess of its basis, and consequently increased by $286,000 the remaining carrying value of this investment at June 30, 2018. Beginning January 1, 2018, unrealized and realized gains and losses on equity investments without readily determinable fair values are recorded in "Noninterest income - other."
Our equity investments with readily determinable fair values include investments in public companies and publicly-traded mutual funds. The Company reclassified $5.9 million of equity securities with readily determinable fair values previously included in securities available-for-sale to other assets on our condensed consolidated balance sheet in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated. Beginning January 1, 2018, unrealized and realized gains and losses on equity investments with readily determinable fair values are recorded in "Noninterest income - other."
The remaining other assets balance of $37.7 million at June 30, 2018 consists of, among other things, other receivables, equity warrants, and derivative assets.

31



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


NOTE 9. BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Average
 
 
 
Average
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
226

 
7.04
%
 
$
342

 
6.87
%
FHLB secured advances
945,000

 
2.08
%
 
332,000

 
1.41
%
FHLB unsecured overnight advance
146,000

 
1.97
%
 
135,000

 
1.34
%
AFX borrowings
96,000

 
2.10
%
 

 
%
Total borrowings
$
1,187,226

 
 
 
$
467,342

 
 
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 June 30, 2018, this debt had a weighted average remaining maturity of 1.3 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 June 30, 2018 of $3.5 billion, collateralized by a blanket lien on $5.0 billion of certain qualifying loans. As of June 30, 2018, the balance outstanding was a $945.0 million overnight advance. As of December 31, 2017, the balance outstanding was a $332.0 million overnight advance.
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of June 30, 2018, the Bank had secured borrowing capacity of $1.3 billion collateralized by liens covering $1.7 billion of certain qualifying loans. As of June 30, 2018 and December 31, 2017, there were no balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $146.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which $146.0 million was outstanding at June 30, 2018. At December 31, 2017, the balance outstanding was $135.0 million.
Federal Funds Arrangements with Commercial Banks. As of June 30, 2018, the Bank had unsecured lines of credit of $75.0 million with correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of June 30, 2018 and December 31, 2017, 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 June 30, 2018, the balance outstanding was $96.0 million, which consisted of a $95.0 million overnight borrowing and a $1.0 million one-month borrowing with a maturity date of July 30, 2018. As of December 31, 2017, there were no balances outstanding.

32



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


Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
Date
 
Maturity
 
Rate Index
Series
Amount
 
Rate
 
Amount
 
Rate
 
Issued
 
Date
 
(Quarterly Reset)
 
(Dollars in thousands)
 
 
 
 
 
 
Trust V
$
10,310

 
5.43
%
 
$
10,310

 
4.70
%
 
8/15/2003
 
9/17/2033
 
3 month LIBOR + 3.10
Trust VI
10,310

 
5.39
%
 
10,310

 
4.64
%
 
9/3/2003
 
9/15/2033
 
3 month LIBOR + 3.05
Trust CII
5,155

 
5.28
%
 
5,155

 
4.55
%
 
9/17/2003
 
9/17/2033
 
3 month LIBOR + 2.95
Trust VII
61,856

 
5.11
%
 
61,856

 
4.13
%
 
2/5/2004
 
4/23/2034
 
3 month LIBOR + 2.75
Trust CIII
20,619

 
4.03
%
 
20,619

 
3.28
%
 
8/15/2005
 
9/15/2035
 
3 month LIBOR + 1.69
Trust FCCI
16,495

 
3.94
%
 
16,495

 
3.19
%
 
1/25/2007
 
3/15/2037
 
3 month LIBOR + 1.60
Trust FCBI
10,310

 
3.89
%
 
10,310

 
3.14
%
 
9/30/2005
 
12/15/2035
 
3 month LIBOR + 1.55
Trust CS 2005-1
82,475

 
4.29
%
 
82,475

 
3.54
%
 
11/21/2005
 
12/15/2035
 
3 month LIBOR + 1.95
Trust CS 2005-2
128,866

 
4.31
%
 
128,866

 
3.33
%
 
12/14/2005
 
1/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-1
51,545

 
4.31
%
 
51,545

 
3.33
%
 
2/22/2006
 
4/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-2
51,550

 
4.31
%
 
51,550

 
3.33
%
 
9/27/2006
 
10/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-3 (1)
30,097

 
1.72
%
 
30,986

 
1.72
%
 
9/29/2006
 
10/30/2036
 
3 month EURIBOR + 2.05
Trust CS 2006-4
16,470

 
4.31
%
 
16,470

 
3.33
%
 
12/5/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2006-5
6,650

 
4.31
%
 
6,650

 
3.33
%
 
12/19/2006
 
1/30/2037
 
3 month LIBOR + 1.95
Trust CS 2007-2
39,177

 
4.31
%
 
39,177

 
3.33
%
 
6/13/2007
 
7/30/2037
 
3 month LIBOR + 1.95
Trust I (2)

 
%
 
6,186

 
3.64
%
 
12/10/2004
 
3/15/2035
 
3 month LIBOR + 2.05
Trust II (2)

 
%
 
3,093

 
3.34
%
 
12/23/2005
 
3/15/2036
 
3 month LIBOR + 1.75
Trust III (2)

 
%
 
3,093

 
3.44
%
 
6/30/2006
 
9/18/2036
 
3 month LIBOR + 1.85
Gross subordinated debentures
541,885

 
 
 
555,146

 
 
 
 
 
 
 
 
Unamortized discount (3)
(90,007
)
 
 
 
(92,709
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
451,878

 
 
 
$
462,437

 
 
 
 
 
 
 
 
___________________
(1)
Denomination is in Euros with a value of €25.8 million.
(2)
Acquired in the CUB acquisition on October 20, 2017 and redeemed in the first quarter of 2018.
(3)
Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.
Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations. Bank holding companies, such as PacWest, are required to notify the FRB prior to declaring and paying a dividend during any period in which quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements.

33



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


NOTE 10. COMMITMENTS AND CONTINGENCIES
Lending Commitments
The Company is a party to financial instruments with off‑balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The following table presents a summary of the financial instruments described above as of the dates indicated:
 
June 30,
 
December 31,
 
2018
 
2017
 
(In thousands)
Loan commitments to extend credit
$
6,429,587

 
$
6,234,061

Standby letters of credit
315,388

 
320,063

Total
$
6,744,975

 
$
6,554,124

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. The increase in loan commitments to extend credit is primarily a result of the continued growth of our real estate construction and venture capital portfolios.
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 June 30, 2018 and December 31, 2017, we had commitments to contribute capital to these entities totaling $87.2 million and $62.6 million. We also had commitments to contribute up to an additional $1.5 million and $2.5 million to private equity funds at June 30, 2018 and December 31, 2017.
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.

34



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, 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
 
June 30, 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
$
263,588

 
$

 
$
263,588

 
$

Agency CMOs
554,891

 

 
554,891

 

Private label CMOs
102,236

 

 
88,485

 
13,751

Municipal securities
1,412,092

 

 
1,412,092

 

Agency commercial MBS
1,097,216

 

 
1,097,216

 

U.S. Treasury securities
262,341

 
262,341

 

 

SBA securities
77,351

 

 
77,351

 

Asset-backed securities
69,781

 

 
36,948

 
32,833

Corporate debt securities
18,292

 

 
18,292

 

Total securities available-for-sale
3,857,788

 
262,341

 
3,548,863

 
46,584

Equity warrants
5,168

 

 

 
5,168

Other derivative assets
2,814

 

 
2,814

 

Equity investments with readily determinable fair values
4,569

 
4,569

 

 

Total recurring assets
$
3,870,339

 
$
266,910

 
$
3,551,677

 
$
51,752

Derivative liabilities
$
362

 
$

 
$
362

 
$


35



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


 
Fair Value Measurements as of
 
December 31, 2017
Measured on a Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Securities available‑for‑sale:
 
 
 
 
 
 
 
Residential MBS and CMOs:
 
 
 
 
 
 
 
Agency MBS
$
246,274

 
$

 
$
246,274

 
$

Agency CMOs
275,709

 

 
275,709

 

Private label CMOs
125,987

 

 
103,113

 
22,874

Municipal securities
1,680,068

 

 
1,680,068

 

Agency commercial MBS
1,163,969

 

 
1,163,969

 

SBA securities
160,334

 

 
160,334

 

Asset-backed securities
88,710

 

 
46,601

 
42,109

Corporate debt securities
19,295

 

 
19,295

 

Collateralized loan obligations
7,015

 

 
7,015

 

Equity investments (1)
7,070

 
5,922

 
1,148

 

Total securities available-for-sale
3,774,431

 
5,922

 
3,703,526

 
64,983

Equity warrants
5,161

 

 

 
5,161

Other derivative assets
1,873

 

 
1,873

 

Total recurring assets
$
3,781,465

 
$
5,922

 
$
3,705,399

 
$
70,144

Derivative liabilities
$
1,379

 
$

 
$
1,379

 
$

____________________________
(1) In connection with our adoption of ASU 2016-01 and ASU 2018-03 on January 1, 2018, we reclassified $7.1 million of equity investments from securities available-for-sale to other assets in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated.
During the six months ended June 30, 2018, there was a $48,000 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:
 
June 30, 2018
 
Private Label CMOs
 
Asset-Backed Securities
 
 
 
Weighted
 
 
 
Weighted
 
Range
 
Average
 
Range
 
Average
Unobservable Inputs
of Inputs
 
Input
 
of Inputs
 
Input
Voluntary annual prepayment speeds
4.9% - 48.1%
 
9.5%
 
5% - 15%
 
14.1%
Annual default rates
0.1% - 9%
 
2.4%
 
1% - 2%
 
1.9%
Loss severity rates
9.7% - 118.8%
 
48.0%
 
10% - 60%
 
55.7%
Discount rates
2.1% - 10.8%
 
6.3%
 
3.2% - 4.3%
 
3.6%



36



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:
 
June 30, 2018
 
Equity Warrants
 
Weighted
 
Average
Unobservable Inputs
Input
Volatility
16.5%
Risk-free interest rate
2.6%
Remaining life assumption (in years)
3.6
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, 2017
 
$
22,874

 
$
42,109

 
$
5,161

Total included in earnings
 
376

 
(21
)
 
1,474

Total included in other comprehensive income
 
(272
)
 
(239
)
 

Issuances
 

 

 
326

Sales
 

 

 
(1,745
)
Net settlements
 
(9,227
)
 
(9,016
)
 

Transfers to Level 1
 

 

 
(48
)
Balance, June 30, 2018
 
$
13,751

 
$
32,833

 
$
5,168

The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:
 
Fair Value Measurement as of
 
June 30, 2018
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired loans
$
76,321

 
$

 
$
15,862

 
$
60,459

OREO
953

 

 
953

 

Total non-recurring
$
77,274

 
$

 
$
16,815

 
$
60,459

 
Fair Value Measurement as of
 
December 31, 2017
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired Non‑PCI loans
$
61,095

 
$

 
$
5,143

 
$
55,952

Loans held for sale
483,563

 

 
483,563

 

Total non-recurring
$
544,658

 
$

 
$
488,706

 
$
55,952


37



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
 
Six Months Ended
Losses on Assets
June 30,
 
June 30,
Measured on a Non‑Recurring Basis
2018
 
2017
 
2018
 
2017
 
(In thousands)
Impaired loans (1)
$
12,076

 
$
9,435

 
$
15,994

 
$
17,250

Loans held for sale

 
7,198

 

 
7,198

OREO

 
14

 
65

 
14

Total losses
$
12,076

 
$
16,647

 
$
16,059

 
$
24,462

__________________________
(1)
Loss for 2018 period relates to total loans. Loss for 2017 period relates to Non-PCI loans.
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:
 
 
June 30, 2018
 
 
 
 
Valuation
 
Unobservable
 
 
 
Weighted
Asset
 
Fair Value
 
Technique
 
Inputs
 
Range
 
Average
 
 
(In thousands)
 
 
 
 
 
 
 
 
Impaired loans
 
$
19,980

 
Discounted cash flows
 
Discount rates
 
3.75% - 7.75%
 
6.82%
Impaired loans
 
27,282

 
Market approach
 
Adjustments for age and type of collateral
 
 
 
 
Impaired loans
 
8,927

 
Enterprise valuation with revenue multiple
 
Illiquidity discount
 
20%
 
20%
Impaired loans
 
4,270

 
Third party appraisals
 
No discounts
 
 
 
 
Total non-recurring Level 3
 
$
60,459

 
 
 
 
 
 
 
 
ASC Topic 825, “Financial Instruments,” (as amended by ASU 2016-01 and ASU 2018-03) requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
On January 1, 2018, we adopted ASU 2016-01 and ASU 2018-03 which requires the use of the exit price notion when measuring the fair values of financial instruments for disclosure purposes. Starting in the first quarter of 2018, we updated our methodology used to estimate fair values for our loan portfolios to conform to the new requirements.

38



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


The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
 
June 30, 2018
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
245,998

 
$
245,998

 
$
245,998

 
$

 
$

Interest‑earning deposits in financial institutions
205,567

 
205,567

 
205,567

 

 

Securities available‑for‑sale
3,857,788

 
3,857,788

 
262,341

 
3,548,863

 
46,584

Investment in FHLB stock
26,271

 
26,271

 

 
26,271

 

Loans and leases held for investment, net
16,753,053

 
16,438,905

 

 
15,862

 
16,423,043

Equity warrants
5,168

 
5,168

 

 

 
5,168

Other derivative assets
2,814

 
2,814

 

 
2,814

 

Equity investments with readily determinable fair values
4,569

 
4,569

 
4,569

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
15,586,238

 
15,586,238

 

 
15,586,238

 

Non-core non-maturity deposits
607,388

 
607,388

 

 
607,388

 

Time deposits
1,735,566

 
1,724,232

 

 
1,724,232

 

Borrowings
1,187,226

 
1,187,168

 
1,186,000

 
1,168

 

Subordinated debentures
451,878

 
435,641

 

 
435,641

 

Derivative liabilities
362

 
362

 

 
362

 


 
December 31, 2017
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
233,215

 
$
233,215

 
$
233,215

 
$

 
$

Interest‑earning deposits in financial institutions
165,222

 
165,222

 
165,222

 

 

Securities available‑for‑sale
3,774,431

 
3,774,431

 
5,922

 
3,703,526

 
64,983

Investment in FHLB stock
20,790

 
20,790

 

 
20,790

 

Loans held for sale
481,100

 
483,563

 

 
483,563

 

Loans and leases held for investment, net
16,833,287

 
17,023,098

 

 
5,143

 
17,017,955

Equity warrants
5,161

 
5,161

 

 

 
5,161

Other derivative assets
1,873

 
1,873

 

 
1,873

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
15,937,012

 
15,937,012

 

 
15,937,012

 

Non-core non-maturity deposits
863,202

 
863,202

 

 
863,202

 

Time deposits
2,065,322

 
2,055,104

 

 
2,055,104

 

Borrowings
467,342

 
467,342

 
467,000

 
342

 

Subordinated debentures
462,437

 
444,383

 

 
444,383

 

Derivative liabilities
1,379

 
1,379

 

 
1,379

 


39



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


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 12. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2017 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 June 30, 2018, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings
$
115,735

 
$
118,276

 
$
93,647

 
$
234,011

 
$
172,315

Less: Earnings allocated to unvested restricted stock(1)
(1,348
)
 
(1,115
)
 
(1,080
)
 
(2,469
)
 
(2,082
)
Net earnings allocated to common shares
$
114,387

 
$
117,161

 
$
92,567

 
$
231,542

 
$
170,233

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares and unvested restricted
 
 
 
 
 
 
 
 
 
stock outstanding
126,082

 
127,487

 
121,422

 
126,780

 
121,384

Less: Weighted-average unvested restricted stock
 
 
 
 
 
 
 
 
 
outstanding
(1,466
)
 
(1,413
)
 
(1,455
)
 
(1,439
)
 
(1,479
)
Weighted-average basic shares outstanding
124,616

 
126,074

 
119,967

 
125,341

 
119,905

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.92

 
$
0.93

 
$
0.77

 
$
1.85

 
$
1.42

 
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings allocated to common shares
$
114,387

 
$
117,161

 
$
92,567

 
$
231,542

 
$
170,233

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
124,616

 
126,074

 
119,967

 
125,341

 
119,905

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.92

 
$
0.93

 
$
0.77

 
$
1.85

 
$
1.42

________________________
(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.

40



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


NOTE 13. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted Topic 606 Revenue from Contracts with Customers effective as of January 1, 2018 and has applied the guidance to all contracts within the scope of Topic 606 as of that date. Revenue from contracts with customers in the scope of Topic 606 is measured based on the consideration specified in the contract with a customer, and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company's performance obligations are typically satisfied as services are rendered and payment is generally collected at the time services are rendered, or on a monthly, quarterly or annual basis. The Company had no material unsatisfied performance obligations as of June 30, 2018.
In certain cases, other parties are involved with providing products and services to our customers. If the Company is a principal in the transaction (providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its net fee or commission retained as revenue. Rebates, waivers, and reversals are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the rebate, waiver, or reversal is earned by the customer.
The Company has elected the following practical expedients: (1) we do not disclose information about remaining performance obligations that have original expected durations of one year or less; and (2) we do not adjust the consideration from customers for the effects of a significant financing component if at contract inception the period between when the Company transfers the goods or services and when the customer pays for that good or service will be one year or less.
Nature of Goods and Services
Substantially all of the Company's revenue, such as interest income on loans, investment securities, and interest-earning deposits in financial institutions, is specifically out-of-scope of Topic 606. For the revenue that is in-scope, the following is a description of principal activities, separated by the timing of revenue recognition, from which the Company generates its revenue from contracts with customers:
Revenue earned at a point in time. Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, and credit and debit card interchange fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Company is the principal in each of these contracts with the exception of credit and debit card interchange fees, in which case the Company is acting as the agent and records revenue net of expenses paid to the principal.
Revenue earned over time. The Company earns certain revenue from contracts with customers monthly. Examples of this type of revenue are deposit account service fees, investment management fees, merchant referral services, MasterCard marketing incentives and safe deposit box fees. Account service charges, management fees and referral fees are recognized on a monthly basis while any transaction-based revenue is recorded as the activity occurs. Revenue is primarily based on the number and type of transactions and is generally derived from transactional information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the customer.

41



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


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 June 30, 2018
 
Six Months Ended June 30, 2018
 
Total
 
Revenue from
 
Total
 
Revenue from
 
Recorded
 
Contracts with
 
Recorded
 
Contracts with
 
Revenue
 
Customers
 
Revenue
 
Customers
 
(In thousands)
Total interest income
$
288,514

 
$

 
$
566,289

 
$

Noninterest income:
 
 
 
 
 
 
 
   Service charges on deposit accounts
4,265

 
4,265

 
8,439

 
8,439

   Other commissions and fees
11,767

 
5,101

 
22,032

 
9,752

   Leased equipment income
9,790

 

 
19,377

 

   Gain on sale of loans
106

 

 
4,675

 

   Gain on sale of securities
253

 

 
6,564

 

   Other income
13,457

 
436

 
17,110

 
897

      Total noninterest income
39,638

 
9,802

 
78,197

 
19,088

Total revenue
$
328,152

 
$
9,802

 
$
644,486

 
$
19,088

The following table presents revenue from contracts with customers based on the timing of revenue recognition for the period indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2018
 
(In thousands)
Products and services transferred at a point in time
$
4,930

 
$
9,591

Products and services transferred over time
4,872

 
9,497

Total revenue from contracts with customers
$
9,802

 
$
19,088

Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
 
June 30, 2018
 
(In thousands)
Receivables, which are included in "Other assets"
$
1,653

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

Contract liabilities, which are included in "Interest payable and other liabilities"
$
686

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 six months ended June 30, 2018 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $65,000.

42



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. As of June 30, 2018, 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 June 30, 2018, there were 3,137,473 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 $6.9 million, $7.2 million, and $6.6 million for the three months ended June 30, 2018, March 31, 2018, and June 30, 2017, and $14.1 million and $13.1 million for the six months ended June 30, 2018 and June 30, 2017. 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 June 30, 2018 totaled $66.0 million.
Time-Based Restricted Stock Awards
At June 30, 2018, there were 1,545,867 shares of unvested TRSAs outstanding pursuant to the Company's 2003 and 2017 Stock Incentive Plans (the "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 June 30, 2018, there were 325,741 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.

43



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


NOTE 15.  RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which, among other things, requires lessees to recognize most leases on-balance sheet, which will result in an increase in their reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes Topic 840, Leases, and is effective for annual and interim periods in fiscal years beginning after December 15, 2018. There have been further amendments, including practical expedients, with the issuance of ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” in January 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases” in July 2018, and ASU 2018-11, "Leases (Topic 842): Targeted Improvements" in July 2018. The amendments in ASU 2018-11 provide an optional transition method when adopting Topic 842, which would allow companies to elect not to adjust their comparative period financial information and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, effectively applying the requirements of the new standard prospectively. The Company will adopt the standard effective January 1, 2019. The Company has reviewed its current lessee portfolio and is assessing the impact of the new standard on its financial statements, related disclosures, systems, and internal controls. The accounting changes are expected to relate primarily to its leased branches and office space which are currently accounted for as operating leases. The Company is on track with its implementation plan which includes a new software solution and procedures. The Company has not yet determined the quantitative effect ASU 2016-02 will have on its consolidated financial position and results of operations. For information on the Company's future minimum lease payments, refer to Note 8. Premises and Equipment, Net in our Annual Report on Form 10-K for the year ended December 31, 2017.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which significantly changes the way entities recognize credit losses and impairment of financial assets recorded at amortized cost. Currently, the credit loss and impairment model for loans and leases is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. Under the new current expected credit loss ("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 to estimate future credit losses will broaden the range of data to consider including, but not limited to, past and current events and conditions along with reasonable and supportable forecasts that affect expected collectability. The new standard will add new disclosure requirements and impact the Company’s process and internal controls over financial reporting.
The Company has established a multidisciplinary project team, developed an implementation plan, selected a software solution, completed the readiness assessment, and is engaged in the implementation phase of the project. The Company, with the assistance of a third party adviser, is working on: (1) developing a new expected loss model with supportable assumptions, (2) identifying data, reporting, and disclosure gaps, (3) assessing updates to accounting policies, and (4) documenting new processes and controls. ASU 2016-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with earlier adoption permitted. The Company plans to adopt this standard on January 1, 2020. Entities are required to use a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the adoption date. 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 ASU 2016-13 will have on its consolidated financial position and results of operations.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which intends to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. ASU 2017-04 instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit's fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. The Company does not expect ASU 2017-04 to have a material impact on its consolidated financial position or results of operations.

44



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


NOTE 16. SUBSEQUENT EVENTS
Common Stock Dividends
On August 1, 2018, 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 August 31, 2018 to stockholders of record at the close of business on August 20, 2018.
The Company has evaluated events that have occurred subsequent to June 30, 2018 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.


45



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 capital management, including reducing excess capital, intentions to expand the Bank’s lending business; net interest income, net interest margin, allowance for loan and lease losses, deposit growth, loan and lease portfolio growth and production, liquidity, profitability, goodwill and intangible assets, interest rate risk management, and effective tax rates. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:
our ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
our ability to compete effectively against other financial service providers in our markets;
the effect of the current low interest rate environment or impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios;
deterioration, weaker than expected improvement, a continued sluggish recovery, or other changes in the state of the economy or the markets in which we conduct business (including the levels of initial public offerings and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans;
changes in credit quality and the effect of credit quality on our provision for credit losses and allowance for loan and lease losses;
our ability to attract deposits and other sources of funding or liquidity;
the need to retain capital for strategic or regulatory reasons;
the impact of the Dodd-Frank Act on our business, business strategies and cost of operations;
compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases, asset 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 to capital requirements, and increased political and regulatory uncertainty;
the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
higher than anticipated increases in operating expenses;
lower than expected dividends paid from the Bank to the holding company;
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
the effectiveness of our risk management framework and quantitative models;
the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;

46


the impact on the value of our DTAs and on our net income or regulatory capital if corporate tax rates in the U.S. are reduced, or if other changes are made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and other documents filed or furnished by PacWest with the SEC.
All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
Overview
PacWest Bancorp is a bank holding company registered under the BHCA. Our principal business is to serve as the holding company for our Beverly Hills‑based wholly-owned banking subsidiary, Pacific Western Bank. References to “Pacific Western” or the “Bank” refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” “us,” or the “Company” refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to “PacWest” or to the “holding company,” we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
The Bank is focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. At June 30, 2018, 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. Community Banking provides lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices. We offer additional products and services through our National Lending and Venture Banking groups. 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 Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year-to-date basis in 2018, accounted for 86.9% of our net revenue (net interest income plus noninterest income).
At June 30, 2018, we had total assets of $24.5 billion, including $16.9 billion of total loans and leases, net of deferred fees, and $3.9 billion of securities available-for-sale, compared to $25.0 billion of total assets, including $17.5 billion of total loans and leases, net of deferred fees, and $3.8 billion of securities available-for-sale at December 31, 2017. The $465.3 million decrease in total assets since year-end was due primarily to a $568.7 million decrease in loans and leases, offset partially by an $83.4 million increase in securities available-for-sale. The decrease in loans and leases was driven mostly by payoffs and paydowns of $3.9 billion and sales of $638.6 million, including settlement of the loans held for sale at December 31, 2017, offset partially by new production of $2.0 billion and disbursements of $2.0 billion. The increase in securities available-for-sale was due mainly to purchases exceeding sales, principal paydowns, maturities, and other reductions.
At June 30, 2018, we had total liabilities of $19.8 billion, including total deposits of $17.9 billion and borrowings of $1.2 billion, compared to $20.0 billion of total liabilities, including $18.9 billion of total deposits and $467.3 million of borrowings at December 31, 2017. The $265.7 million decrease in total liabilities since year-end was due mainly to a $350.8 million decrease in core deposits, a $255.8 million decrease in non-core non-maturity deposits, and a $329.8 million decrease in time deposits, offset partially by a $719.9 million increase in borrowings, primarily short-term FHLB advances. At June 30, 2018, core deposits totaled $15.6 billion, or 87% of total deposits, and time deposits totaled $1.7 billion, or 10% of total deposits.

47



Recent Events
CUB Acquisition
On October 20, 2017, PacWest completed the acquisition of CUB in a transaction valued at $670.6 million. As part of the acquisition, CU Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank.
CU Bank was a commercial bank headquartered in Los Angeles, California with nine branches located in Los Angeles, Orange, Ventura and San Bernardino counties. We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio and $2.7 billion of core deposits.
We recorded the acquired assets and liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date which increased total assets by $3.5 billion. The application of the acquisition method of accounting resulted in goodwill of $374.7 million.
Loan Sales and Loans Held for Sale
In the fourth quarter of 2017, we sold $1.5 billion of cash flow loans and exited our National Lending group origination operations related to general, technology, and healthcare cash flow loans. As of December 31, 2017, $1.0 billion of the loans sold had settled, while $481.1 million were classified as held for sale. In connection with the loan sale and transfer of loans to held for sale, we recognized $2.2 million in charge-offs during the fourth quarter of 2017 to record the loans at the lower of cost or fair value. The loans held for sale at December 31, 2017 settled in the first quarter of 2018 and we recorded a gain of $1.3 million.
Federal Tax Reform
The TCJA was signed into law on December 22, 2017 and represents the first major overhaul of the United States federal income tax system in more than 30 years. The TCJA reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018. Other changes affecting us include immediate deductions for certain new investments instead of deductions for bonus depreciation expense over time, modification of the deduction for performance-based executive compensation and limiting the amount of FDIC insurance assessments that are deductible. We currently estimate that our 2018 effective tax rate will be approximately 28%.
Stock Repurchase Program
Our Stock Repurchase Program was initially authorized by PacWest's Board of Directors in October 2016 pursuant to which the Company could, until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. In November 2017, PacWest's Board of Directors amended the Stock Repurchase Program to reduce the authorized purchase amount to $150 million and extend the maturity date to December 31, 2018. On February 14, 2018, PacWest's Board of Directors amended the Stock Repurchase Program to increase the authorized purchase amount to $350 million and extend the maturity date to February 28, 2019.
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 second quarter of 2018, we repurchased 2,286,881 shares of common stock for a total amount of $122.0 million at an average price of $53.36. During the six months ended June 30, 2018, we repurchased 4,572,736 shares of common stock for a total amount of $241.8 million at an average price of $52.88. All shares repurchased under the Stock Repurchase Program were retired upon settlement. At June 30, 2018, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program was $174.7 million.

48


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 for 2018 and a 35% federal statutory tax rate for prior periods. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets.
Our primary interest‑earning assets are loans and investment securities, and our primary interest‑bearing liabilities are deposits. Contributing to our high net interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest‑bearing deposits.
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 branch network, and loans to security alarm monitoring companies. Our loan origination process emphasizes credit quality. We have a number of large credit relationships and individual commitments. Our commitment sizes vary by loan product and can reach up to $150 million. We price loans to preserve our interest spread and maintain our net interest margin. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified and nonperforming assets and net charge‑offs. We maintain an allowance for credit losses on loans and leases, which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off‑balance sheet credit exposure. Loans and leases which are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology which considers various credit performance measures such as historical and current net charge‑offs, the levels and trends of 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.
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.


49


The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, and other professional services. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio. We calculate the efficiency ratio by dividing noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), and acquisition, integration and reorganization costs) by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities and gain (loss) on sales of assets other than loans and leases).
The following table presents the calculation of our efficiency ratio for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Efficiency Ratio
2018
 
2018
 
2017
 
2018
 
2017
 
 
(Dollars in thousands)
Noninterest expense
$
126,449

 
$
127,395

 
$
117,707

 
$
253,844

 
$
234,251

Less:
Intangible asset amortization
5,587

 
6,346

 
3,065

 
11,933

 
6,129

 
Foreclosed assets income, net
(61
)
 
(122
)
 
(157
)
 
(183
)
 
(14
)
 
Acquisition, integration and reorganization costs

 

 
1,700

 

 
2,200

      Noninterest expense used for efficiency ratio
$
120,923

 
$
121,171

 
$
113,099

 
$
242,094

 
$
225,936

 
 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
264,798

 
$
258,472

 
$
247,322

 
$
523,270

 
$
484,557

Noninterest income
39,638

 
38,559

 
35,282

 
78,197

 
70,396

Net revenues
304,436

 
297,031

 
282,604

 
601,467

 
554,953

Less:
Gain on sale of securities
253

 
6,311

 
1,651

 
6,564

 
1,552

Net revenues used for efficiency ratio
$
304,183

 
$
290,720

 
$
280,953

 
$
594,903

 
$
553,401

 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio
39.8
%
 
41.7
%
 
40.3
%
 
40.7
%
 
40.8
%
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, 2017. The update below is for our critical accounting policy and estimate related to our allowance for loan and lease losses, the primary component of our allowance for credit losses on loans and leases held for investment.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. Our methodology to estimate the ALLL has three basic elements that include specific reserves for individually evaluated impaired loans, a quantitative general allowance for all other loans (including individually evaluated loans determined not to be impaired), and qualitative adjustments based on other factors which may be internal or external to the Company.

50


During the second quarter of 2018, we changed our methodology used to estimate the quantitative general allowance due to the growth and increased complexity of the loan portfolio.
The new ALLL methodology included three primary changes: the quantitative component now employs a probability of default/loss given default ("PD/LGD") methodology; the loan segmentation groups our loan portfolio into 21 loan segments with similar risk characteristics (as opposed to 34 loan segments used under the previous methodology); and the historical range of loan performance history (often referred to as the look-back period) was lengthened by one year.
The new PD/LGD methodology estimates the likelihood of loans defaulting based on the historical degree that similar loans defaulted, and it estimates the degree of credit loss based on the historical average degree of loss experienced for these similar loans. The reduced number of loan segments provides greater statistical validity by having more default and loss histories within each segment for the quantitative general allowance estimation. The historical range of loan performance information (often referred to as the look-back period) was extended to consider loan performance back to January 1, 2009, a change from January 1, 2010 under the historical loss migration methodology. Extending this look-back period includes more historical loan performance information. The loss emergence period was unchanged as we continue to use seven quarters.
Our methodology to estimate specific reserves for individually evaluated impaired loans did not change. Our methodology to derive qualitative adjustments based on other internal or external factors was updated to align with the new PD/LGD methodology being applied to estimate the quantitative general allowance for unimpaired loans. As a result, the composition of the ALLL changed as the quantitative component increased and the qualitative component decreased as the new quantitative methodology now encompasses more information, such as the longer look-back period, that previously required a qualitative adjustment as part of determining the total ALLL estimate. These changes in the ALLL methodology did not result in material changes to management's overall estimate of the ALLL.

 









51



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
 
Six Months Ended
 
 
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Return on Average Tangible Equity
2018
 
2018
 
2017
 
2018
 
2017
 
 
 
(Dollars in thousands)
Net earnings
 
$
115,735

 
$
118,276

 
$
93,647

 
$
234,011

 
$
172,315

 
 
 
 
 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
4,832,480

 
$
4,901,207

 
$
4,545,276

 
$
4,866,654

 
$
4,524,591

Less:
Average intangible assets
 
2,619,351

 
2,625,593

 
2,205,814

 
2,622,455

 
2,207,454

Average tangible common equity
 
$
2,213,129

 
$
2,275,614

 
$
2,339,462

 
$
2,244,199

 
$
2,317,137

 
 
 
 
 
 
 
 
 
 
 
 
Return on average equity (1)
 
9.61
%
 
9.79
%
 
8.26
%
 
9.70
%
 
7.68
%
Return on average tangible equity (2)
 
20.98
%
 
21.08
%
 
16.06
%
 
21.03
%
 
15.00
%
___________________________________
(1)
Annualized net earnings divided by average stockholders' equity.
(2)
Annualized net earnings divided by average tangible common equity.

Tangible Common Equity Ratio/
June 30,
 
December 31,
Tangible Book Value Per Share
2018
 
2017
 
(Dollars in thousands, except per share data)
Stockholders’ equity
$
4,777,959

 
$
4,977,598

Less: Intangible assets
2,616,363

 
2,628,296

Tangible common equity
$
2,161,596

 
$
2,349,302

 
 
 
 
Total assets
$
24,529,557

 
$
24,994,876

Less: Intangible assets
2,616,363

 
2,628,296

Tangible assets
$
21,913,194

 
$
22,366,580

 
 
 
 
Equity to assets ratio
19.48
%
 
19.91
%
Tangible common equity ratio (1)
9.86
%
 
10.50
%
Book value per share
$
38.36

 
$
38.65

Tangible book value per share (2)
$
17.35

 
$
18.24

Shares outstanding
124,567,950

 
128,782,878

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


52


Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Earnings Summary:
 
 
 
 
 
 
 
 
 
Net interest income
$
262,332

 
$
256,500

 
$
242,473

 
$
518,832

 
$
474,925

Provision for credit losses
(17,500
)
 
(4,000
)
 
(11,499
)
 
(21,500
)
 
(36,227
)
Noninterest income
39,638

 
38,559

 
35,282

 
78,197

 
70,396

Noninterest expense
(126,449
)
 
(127,395
)
 
(117,707
)
 
(253,844
)
 
(234,251
)
Earnings before income taxes
158,021

 
163,664

 
148,549

 
321,685

 
274,843

Income tax expense
(42,286
)
 
(45,388
)
 
(54,902
)
 
(87,674
)
 
(102,528
)
Net earnings
$
115,735

 
$
118,276

 
$
93,647

 
$
234,011

 
$
172,315

 
 
 
 
 
 
 
 
 
 
Performance Measures:
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.92

 
$
0.93

 
$
0.77

 
$
1.85

 
$
1.42

Annualized return on:
 
 
 
 
 
 
 
 
 
Average assets
1.93
%
 
1.99
%
 
1.71
%
 
1.96
%
 
1.59
%
Average tangible equity (1)(2)
20.98
%
 
21.08
%
 
16.06
%
 
21.03
%
 
15.00
%
Net interest margin (tax equivalent)
5.18
%
 
5.11
%
 
5.21
%
 
5.15
%
 
5.19
%
Efficiency ratio
39.8
%
 
41.7
%
 
40.3
%
 
40.7
%
 
40.8
%
_____________________________
(1)
Calculation reduces average stockholder's equity by average intangible assets.
(2)
See "- Non-GAAP Measurements."
Second Quarter of 2018 Compared to First Quarter of 2018
Net earnings for the second quarter of 2018 were $115.7 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 $2.5 million decrease in net earnings from the prior quarter was due primarily to a higher provision for credit losses, offset partially by higher net interest income and higher noninterest income. The provision for credit losses increased by $13.5 million in the second quarter of 2018 compared to the first quarter of 2018 due mainly to higher net charge-offs (as the first quarter of 2018 benefited from higher than normal recoveries of $7.2 million) and the impact of downgraded loans. Net interest income increased by $5.8 million in the second quarter of 2018 due mostly to a higher yield on average loans and leases and one more day in the current quarter, offset partially by higher interest expense on deposits and borrowings. Noninterest income increased by $1.1 million in the second quarter of 2018 compared to the first quarter of 2018 due mainly to increases in all income categories except for the gain on sale of securities and the gain on sale of loans and leases, as sale activities were minimal in the second quarter.

53


Second Quarter of 2018 Compared to Second Quarter of 2017
Net earnings for the second quarter of 2018 were $115.7 million, or $0.92 per diluted share, compared to net earnings for the second quarter of 2017 of $93.6 million, or $0.77 per diluted share. The $22.1 million increase in net earnings was due mainly to higher net interest income of $19.9 million, higher noninterest income of $4.4 million, and lower income tax expense of $12.6 million, offset partially by higher noninterest expense of $8.7 million and a higher provision for credit losses of $6.0 million. The increase in net interest income was due mostly to a higher balance of average interest-earning assets and a higher yield on average loans and leases, offset partially by a lower yield on average investment securities and higher interest expense. The increase in noninterest income was due primarily to higher gains on early lease terminations of $6.8 million. The decrease in income tax expense was due mainly to the TCJA which reduced our effective tax rate to 26.8% for the second quarter of 2018 from 37.0% for the second quarter of 2017. The increase in noninterest expense was due mostly to higher compensation expense of $4.6 million related to inclusion of the CUB operations since its October 2017 acquisition, and higher intangible asset amortization of $2.5 million attributable primarily to the intangible assets added from the CUB acquisition. The increase in the provision for credit losses was due mainly to the second quarter of 2017 benefiting from a reduction in substandard and special mention loans that occurred during that quarter.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Net earnings for the six months ended June 30, 2018 were $234.0 million, or $1.85 per diluted share, compared to net earnings for the six months ended June 30, 2017 of $172.3 million, or $1.42 per diluted share. The $61.7 million increase in net earnings was due primarily to higher net interest income of $43.9 million, lower income tax expense of $14.9 million, a lower provision for credit losses of $14.7 million, and higher noninterest income of $7.8 million, offset partially by higher noninterest expense of $19.6 million. The increase in net interest income was due mainly to a higher balance of average interest-earning assets and a higher yield on average loans and leases, offset partially by a lower yield on average investment securities and higher interest expense. The decrease in income tax expense was due primarily to the TCJA which reduced our effective tax rate to 27.3% for the six months ended June 30, 2018 from 37.3% for the six months ended June 30, 2017. The decrease in the provision for credit losses was due mainly to lower specific provisions for impaired loans for the six months ended June 30, 2018, attributable mostly to the exit of cash flow lending at the end of 2017. The increase in noninterest income was due mostly to a higher gain on sale of securities of $5.0 million and a higher gain on sale of loans and leases of $3.3 million. The increase in noninterest expense was due mainly to higher compensation expense of $10.8 million related to inclusion of the CUB operations since its October 2017 acquisition, and higher intangible asset amortization of $5.8 million attributable primarily to the intangible assets added from the CUB acquisition.

54


Net Interest Income
Net interest income is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities. The following table summarizes the distribution of average assets, liabilities and stockholders’ equity, as well as interest income and yields earned on average interest‑earning assets and interest expense and rates paid on average interest‑bearing liabilities, presented on a tax equivalent basis, for the periods indicated:
 
Three Months Ended
 
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
 
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)
$
16,576,361

$
260,529

6.30
%
 
$
16,682,124

$
251,260

6.11
%
 
$
15,497,921

$
234,618

6.07
%
Investment securities (3)
3,803,590

29,967

3.16
%
 
3,682,138

27,935

3.08
%
 
3,436,785

29,538

3.45
%
Deposits in financial institutions
112,170

484

1.73
%
 
150,674

552

1.49
%
 
96,087

237

0.99
%
Total interest‑earning assets (4)
20,492,121

290,980

5.70
%
 
20,514,936

279,747

5.53
%
 
19,030,793

264,393

5.57
%
Other assets
3,507,516

 
 
 
3,556,212

 
 
 
2,905,809

 
 
Total assets
$
23,999,637

 
 
 
$
24,071,148

 
 
 
$
21,936,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
2,243,767

3,932

0.70
%
 
$
2,311,988

3,050

0.54
%
 
$
1,709,699

1,697

0.40
%
Money market deposits
5,013,119

8,072

0.65
%
 
5,038,119

6,812

0.55
%
 
4,907,865

4,993

0.41
%
Savings deposits
656,310

245

0.15
%
 
685,173

258

0.15
%
 
708,389

296

0.17
%
Time deposits
1,790,415

4,118

0.92
%
 
1,923,963

3,698

0.78
%
 
2,366,399

3,219

0.55
%
Total interest‑bearing deposits
9,703,611

16,367

0.68
%
 
9,959,243

13,818

0.56
%
 
9,692,352

10,205

0.42
%
Borrowings
549,665

2,649

1.93
%
 
239,293

920

1.56
%
 
457,774

1,066

0.93
%
Subordinated debentures
451,973

7,166

6.36
%
 
461,648

6,537

5.74
%
 
443,756

5,800

5.24
%
Total interest‑bearing liabilities
10,705,249

26,182

0.98
%
 
10,660,184

21,275

0.81
%
 
10,593,882

17,071

0.65
%
Noninterest‑bearing demand deposits
8,253,413

 
 
 
8,311,104

 
 
 
6,646,349

 
 
Other liabilities
208,495

 
 
 
198,653

 
 
 
151,095

 
 
Total liabilities
19,167,157

 
 
 
19,169,941

 
 
 
17,391,326

 
 
Stockholders’ equity
4,832,480

 
 
 
4,901,207

 
 
 
4,545,276

 
 
Total liabilities and
 
 
 
 
 
 
 
 
 
 
 
stockholders' equity
$
23,999,637

 
 
 
$
24,071,148

 
 
 
$
21,936,602

 
 
Net interest income (4)
 
$
264,798

 
 
 
$
258,472

 
 
 
$
247,322

 
Net interest rate spread (4)
 
 
4.72
%
 
 
 
4.72
%
 
 
 
4.92
%
Net interest margin (4)
 
 
5.18
%
 
 
 
5.11
%
 
 
 
5.21
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (5)
$
17,957,024

$
16,367

0.37
%
 
$
18,270,347

$
13,818

0.31
%
 
$
16,338,701

$
10,205

0.25
%
Funding sources (6)
$
18,958,662

$
26,182

0.55
%
 
$
18,971,288

$
21,275

0.45
%
 
$
17,240,231

$
17,071

0.40
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees. Starting with the third quarter of 2017, includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)
Includes discount accretion on acquired loans of $8.7 million, $7.6 million, and $7.5 million for the three months ended June 30, 2018, March 31, 2018, and June 30, 2017, respectively.
(3)
Includes tax-equivalent adjustments of $2.1 million, $1.8 million, and $4.8 million for the three months ended June 30, 2018, March 31, 2018, and June 30, 2017, respectively, related to tax-exempt interest on municipal securities. The federal statutory tax rate utilized was 21% for the 2018 periods and 35% for the 2017 period.
(4)
Tax equivalent.
(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 deposits divided by average total deposits.
(6)
Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.

55


 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
 
Interest
Yields
 
 
Interest
Yields
 
Average
Income/
and
 
Average
Income/
and
 
Balance
Expense
Rates
 
Balance
Expense
Rates
 
(Dollars in thousands)
ASSETS:
 
 
 
 
 
 
 
Loans and leases (1)(2)
$
16,628,951

$
511,789

6.21
%
 
$
15,398,037

$
458,796

6.01
%
Investment securities (3)
3,745,870

57,902

3.12
%
 
3,347,612

57,360

3.46
%
Deposits in financial institutions
131,315

1,036

1.59
%
 
98,406

429

0.88
%
Total interest‑earning assets (4)
20,506,136

570,727

5.61
%
 
18,844,055

516,585

5.53
%
Other assets
3,529,059

 
 
 
2,947,817

 
 
Total assets
$
24,035,195

 
 
 
$
21,791,872

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Interest checking deposits
$
2,277,689

6,982

0.62
%
 
$
1,608,133

2,864

0.36
%
Money market deposits
5,025,550

14,884

0.60
%
 
4,887,406

9,403

0.39
%
Savings deposits
670,662

503

0.15
%
 
709,951

594

0.17
%
Time deposits
1,856,820

7,816

0.85
%
 
2,306,804

5,721

0.50
%
Total interest‑bearing deposits
9,830,721

30,185

0.62
%
 
9,512,294

18,582

0.39
%
Borrowings
395,336

3,569

1.82
%
 
526,954

2,084

0.80
%
Subordinated debentures
456,784

13,703

6.05
%
 
442,645

11,362

5.18
%
Total interest‑bearing liabilities
10,682,841

47,457

0.90
%
 
10,481,893

32,028

0.62
%
Noninterest‑bearing demand deposits
8,282,099

 
 
 
6,620,988

 
 
Other liabilities
203,601

 
 
 
164,400

 
 
Total liabilities
19,168,541

 
 
 
17,267,281

 
 
Stockholders’ equity
4,866,654

 
 
 
4,524,591

 
 
Total liabilities and
 
 
 
 
 
 
 
stockholders' equity
$
24,035,195

 
 
 
$
21,791,872

 
 
Net interest income (4)
 
$
523,270

 
 
 
$
484,557

 
Net interest rate spread (4)
 
 
4.71
%
 
 
 
4.91
%
Net interest margin (4)
 
 
5.15
%
 
 
 
5.19
%
 
 
 
 
 
 
 
 
Total deposits (5)
$
18,112,820

$
30,185

0.34
%
 
$
16,133,282

$
18,582

0.23
%
Funding sources (6)
$
18,964,940

$
47,457

0.50
%
 
$
17,102,881

$
32,028

0.38
%
_____________________
(1)
Includes nonaccrual loans and leases and loan fees. Starting with the third quarter of 2017, includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)
Includes discount accretion on acquired loans of $16.3 million and $13.9 million for the six months ended June 30, 2018 and 2017, respectively.
(3)
Includes tax-equivalent adjustments of $3.9 million and $9.6 million for the six months ended June 30, 2018 and 2017, respectively, related to tax-exempt income on municipal securities. The federal statutory tax rate utilized was 21% for the 2018 period and 35% for the 2017 period.
(4)
Tax equivalent.
(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 deposits divided by average total deposits.
(6)
Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.

56


Second Quarter of 2018 Compared to First Quarter of 2018
Net interest income increased by $5.8 million to $262.3 million for the second quarter of 2018 compared to $256.5 million for the first quarter of 2018 due mainly to a higher yield on average loans and leases and one additional day in the second quarter, offset partially by higher interest expense. The tax equivalent yield on average loans and leases was 6.30% for the second quarter of 2018 compared to 6.11% for the first quarter of 2018. The increase in the yield on average loans and leases was due principally to higher coupon interest (15 basis points) and higher recapture of nonaccrual interest (four basis points).
The tax equivalent NIM was 5.18% for the second quarter of 2018 compared to 5.11% for the first quarter of 2018. The increase in the tax equivalent NIM was due mainly to the higher yield on average loans and leases resulting from higher loan coupon interest and higher recapture of nonaccrual interest, offset partially by an increase of six basis points in the cost of average total deposits. The taxable equivalent adjustment for tax-exempt interest income on municipal securities contributed four points to the tax equivalent NIM for both the second quarter and first quarter of 2018.
The cost of average total deposits increased to 0.37% for the second quarter of 2018 from 0.31% for the first quarter of 2018 due to higher rates paid for non-core non-maturity deposits and pricing adjustments for select customers in light of recent market rate increases and the competitive market environment.
Second Quarter of 2018 Compared to Second Quarter of 2017
Net interest income increased by $19.9 million to $262.3 million for the second quarter of 2018 compared to $242.5 million for the second quarter of 2017 due mainly to a higher balance of average interest-earning assets and a higher yield on average loans and leases, offset partially by a lower yield on average investment securities and higher interest expense. The yield on average loans and leases was 6.30% for the second quarter of 2018 compared to 6.07% for the same quarter of 2017. The increase in the yield on average loans and leases was due mainly to repricing of variable-rate loans attributable to the two increases in market interest rates during the first half of 2018 and three increases in market interest rates during 2017.
The tax equivalent NIM was 5.18% for the second quarter of 2018 compared to 5.21% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to a higher cost of average interest-bearing liabilities, a lower yield on average investment securities, and a decrease of six basis points resulting from a smaller tax equivalent adjustment due to the lower statutory federal tax rate, offset partially by the increase in the yield on average loans and leases as described above. Tax-exempt interest income on municipal securities contributed four basis points to the tax equivalent NIM for the second quarter of 2018 and 10 basis points for the second quarter of 2017.
The cost of average total deposits increased to 0.37% for the second quarter of 2018 from 0.25% for the second quarter of 2017 due mainly to higher costs of non-core non-maturity deposits and brokered time deposits.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Net interest income increased by $43.9 million to $518.8 million for the six months ended June 30, 2018 compared to $474.9 million for the six months ended June 30, 2017 due mainly to a higher balance of average interest-earning assets and a higher yield on average loans and leases, offset partially by a lower yield on average investment securities and higher interest expense. The yield on average loans and leases was 6.21% for the six months ended June 30, 2018 compared to 6.01% for the same period in 2017. The increase in the yield on average loans and leases was due mainly to repricing of variable-rate loans attributable to the two increases in market interest rates during the first half of 2018 and three increases in market interest rates during 2017.
The tax equivalent NIM for the six months ended June 30, 2018 was 5.15% compared to 5.19% for the same period last year. The decrease in the tax equivalent NIM was due mostly to a higher cost of average interest-bearing liabilities, a lower yield on average investment securities, and a decrease of six basis points resulting from a smaller tax equivalent adjustment due to the lower statutory federal tax rate, offset partially by the increase in the yield on average loans and leases as described above. Tax-exempt interest income on municipal securities contributed four basis points to the tax equivalent NIM for the six months ended June 30, 2018 and 10 basis points for the for the six months ended June 30, 2017.
The cost of average total deposits increased to 0.34% for the six months ended June 30, 2018 from 0.23% for the six months ended June 30, 2017 due mainly to higher costs of non-core non-maturity deposits and brokered time deposits.

57


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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
 
 
 
 
Addition to (reduction in) allowance for
 
 
 
 
 
 
 
 
 
loan and lease losses
$
15,000

 
$
(226
)
 
$
8,999

 
$
14,774

 
$
33,487

Addition to reserve for unfunded loan commitments
2,500

 
4,226

 
2,500

 
6,726

 
2,740

Total provision for credit losses
$
17,500

 
$
4,000

 
$
11,499

 
$
21,500

 
$
36,227

 
 
 
 
 
 
 
 
 
 
Credit Quality Metrics (1):
 
 
 
 
 
 
 
 
 
Net charge‑offs on loans and leases held for
 
 
 
 
 
 
 
 
 
investment (2)
$
17,136

 
$
4,955

 
$
20,947

 
$
22,091

 
$
39,136

Annualized net charge‑offs to average loans and leases
0.41
%
 
0.12
%
 
0.54
%
 
0.27
%
 
0.52
%
At period end:
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases held for investment (3)
$
113,745

 
$
103,725

 
$
172,576

 
 
 
 
Performing TDRs held for investment
58,148

 
60,173

 
55,910

 
 
 
 
Total impaired loans and leases
$
171,893

 
$
163,898

 
$
228,486

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Classified loans and leases (3)
$
236,292

 
$
208,042

 
$
339,977

 
 
 
 
Allowance for credit losses
$
167,500

 
$
167,136

 
$
159,142

 
 
 
 
Allowance for credit losses to loans and leases
 
 
 
 
 
 
 
 
 
held for investment
0.99
%
 
1.02
%
 
1.03
%
 
 
 
 
Allowance for credit losses to nonaccrual
 
 
 
 
 
 
 
 
 
loans and leases held for investment
147.3
%
 
161.1
%
 
92.2
%
 
 
 
 
______________________
(1)
Amounts and ratios related to 2018 periods are for total loans and leases. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases.
(2)
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.
(3)
Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017.
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, and the loan portfolio's current composition and credit performance trends. As noted in " - Critical Accounting Policies and Estimates - Allowance for Loan and Lease Losses," we changed our ALLL methodology in the second quarter of 2018. See that section for details regarding this change.

58


We recorded a provision for credit losses of $17.5 million in the second quarter of 2018, $4.0 million in the first quarter of 2018, and $11.5 million in the second quarter of 2017. The provision for credit losses was $21.5 million for the six months ended June 30, 2018 compared to $36.2 million for the six months ended June 30, 2017. The increase in the provision for credit losses for the second quarter of 2018 compared to the first quarter of 2018 was due mainly to higher net charge-offs (as the first quarter of 2018 benefited from higher than normal recoveries of $7.2 million) and the impact of downgraded loans. The increase in the provision for credit losses for the second quarter of 2018 compared to the second quarter of 2017 was due mostly to the second quarter of 2017 benefiting from a reduction in substandard and special mention loans that occurred during that quarter. The decrease in the provision for credit losses for the first six months of 2018 compared to the same period last year was due primarily to lower specific provisions for impaired loans for the first six months of 2018, attributable mostly to the exit of cash flow lending at the end of 2017.
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.

59


Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Noninterest Income
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Service charges on deposit accounts
$
4,265

 
$
4,174

 
$
3,510

 
$
8,439

 
$
7,268

Other commissions and fees
11,767

 
10,265

 
10,583

 
22,032

 
20,973

Leased equipment income
9,790

 
9,587

 
11,635

 
19,377

 
21,110

Gain on sale of loans and leases
106

 
4,569

 
649

 
4,675

 
1,361

Gain on sale of securities
253

 
6,311

 
1,651

 
6,564

 
1,552

Other income:
 
 
 
 
 
 
 
 
 
Dividends and gains on equity investments
1,992

 
251

 
1,587

 
2,243

 
2,932

Warrant income
1,225

 
248

 
815

 
1,473

 
970

Other
10,240

 
3,154

 
4,852

 
13,394

 
14,230

Total noninterest income
$
39,638

 
$
38,559

 
$
35,282

 
$
78,197

 
$
70,396

Second Quarter of 2018 Compared to First Quarter of 2018
Noninterest income increased by $1.1 million to $39.6 million for the second quarter of 2018 compared to $38.6 million for the first quarter of 2018 due mainly to increases in all income categories except for the gain on sale of securities and the gain on sale of loans and leases, as sale activities were minimal in the second quarter. The $7.1 million increase in other income for the second quarter of 2018 was attributable primarily to $7.5 million of gains on early lease terminations.
Second Quarter of 2018 Compared to Second Quarter of 2017
Noninterest income increased by $4.4 million to $39.6 million for the second quarter of 2018 compared to $35.3 million for the second quarter of 2017 due mainly to higher other income of $5.4 million attributable primarily to a $6.8 million increase in gain on early lease terminations, offset partially by a lower foreign currency translation net gain of $1.1 million.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Noninterest income increased by $7.8 million to $78.2 million for the six months ended June 30, 2018 compared to $70.4 million for the six months ended June 30, 2017 due mostly to a higher gain on sale of securities of $5.0 million and a higher gain on sale of loans and leases of $3.3 million. The increase in gain on sale of securities was attributable to a net gain of $6.6 million on sales of $362.2 million of securities during the six months ended June 30, 2018 compared to a net gain of $1.6 million on sales of $84.5 million of securities during the six months ended June 30, 2017. The securities sold in 2018 include $299.9 million that were sold for a gain of $6.3 million in the first quarter of 2018 primarily for reinvestment in higher quality liquid assets, yield, and credit risk purposes. The increase in gain on sale of loans was attributable to a net gain of $4.7 million on sales of $638.6 million of loans and leases during the six months ended June 30, 2018 compared to a net gain of $1.4 million on sales of $82.4 million of loans and leases during the six months ended June 30, 2017. The loans and leases sold in 2018 include sales in the first quarter of 2018 of our largest nonaccrual loan for a $2.4 million gain and the settlement of our December 31, 2017 loans held for sale of $481.1 million for a $1.3 million gain.

60


Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Noninterest Expense
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Compensation
$
69,913

 
$
71,023

 
$
65,288

 
$
140,936

 
$
130,168

Occupancy
13,575

 
13,223

 
11,811

 
26,798

 
23,419

Data processing
6,896

 
6,659

 
6,337

 
13,555

 
13,352

Other professional services
5,257

 
4,439

 
3,976

 
9,696

 
7,354

Insurance and assessments
5,330

 
5,727

 
4,856

 
11,057

 
9,647

Intangible asset amortization
5,587

 
6,346

 
3,065

 
11,933

 
6,129

Leased equipment depreciation
5,237

 
5,375

 
5,232

 
10,612

 
10,857

Foreclosed assets income, net
(61
)
 
(122
)
 
(157
)
 
(183
)
 
(14
)
Acquisition, integration and reorganization costs

 

 
1,700

 

 
2,200

Loan expense
3,058

 
2,271

 
3,884

 
5,329

 
7,271

Other
11,657

 
12,454

 
11,715

 
24,111

 
23,868

Total noninterest expense
$
126,449

 
$
127,395

 
$
117,707

 
$
253,844

 
$
234,251

Second Quarter of 2018 Compared to First Quarter of 2018
Noninterest expense decreased by $0.9 million to $126.4 million for the second quarter of 2018 compared to $127.4 million for the first quarter of 2018 due mainly to a $1.1 million decrease in compensation expense attributable primarily to lower payroll taxes.
Second Quarter of 2018 Compared to Second Quarter of 2017
Noninterest expense increased by $8.7 million to $126.4 million for the second quarter of 2018 compared to $117.7 million for the second quarter of 2017 due mostly to higher compensation expense of $4.6 million and higher occupancy expense of $1.8 million related to inclusion of the CUB operations since its October 2017 acquisition, and higher intangible asset amortization of $2.5 million attributable primarily to the intangible assets added from the CUB acquisition.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Noninterest expense increased by $19.6 million to $253.8 million for the six months ended June 30, 2018 compared to $234.3 million for the six months ended of 2017 due mostly to higher compensation expense of $10.8 million and higher occupancy expense of $3.4 million related to inclusion of the CUB operations since its October 2017 acquisition, and higher intangible asset amortization of $5.8 million attributable primarily to the intangible assets added from the CUB acquisition.
Income Taxes
The effective tax rate for the second quarter of 2018 was 26.8% compared to 27.7% for the first quarter of 2018 and 37.0% for the second quarter of 2017. The effective tax rate was 27.3% and 37.3% for the six months ended June 30, 2018 and 2017. The effective tax rate for the six months ended June 30, 2018, compared to that for the same period in 2017 was lower due to the enactment of the TCJA, which reduced the federal statutory corporate tax rate to 21% effective January 1, 2018 from 35% in 2017. The Company recorded the effects of the TCJA in its financial statements as of December 31, 2017. There were no changes recorded as of the second quarter of 2018 and the Company considers its accounting for the effects of the TCJA to be materially complete. However, the legislation remains subject to potential amendments, technical corrections and further guidance at both the federal and state levels. The Company's blended statutory tax rate for federal and state is 28.6%. The estimated effective tax rate for the full year 2018 is approximately 28%.




61



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:
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
Fair
 
% of
 
Duration
 
Fair
 
% of
 
Duration
 
Fair
 
% of
 
Duration
Security Type
Value
 
Total
 
(in years)
 
Value
 
Total
 
(in years)
 
Value
 
Total
 
(in years)
 
(Dollars in thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
263,588

 
7
%
 
3.2

 
$
251,776

 
7
%
 
3.3

 
$
246,274

 
7
%
 
3.0

Agency CMOs
554,891

 
14
%
 
5.0

 
545,945

 
14
%
 
4.8

 
275,709

 
7
%
 
6.8

Private label CMOs
102,236

 
3
%
 
4.8

 
116,245

 
3
%
 
4.3

 
125,987

 
3
%
 
5.1

Municipal securities
1,412,092

 
37
%
 
7.3

 
1,403,586

 
37
%
 
7.6

 
1,680,068

 
45
%
 
7.3

Agency commercial MBS
1,097,216

 
28
%
 
5.2

 
1,089,494

 
29
%
 
5.4

 
1,163,969

 
31
%
 
5.4

U.S. Treasury securities
262,341

 
7
%
 
3.6

 
148,582

 
4
%
 
3.7

 

 
%
 

SBA securities
77,351

 
2
%
 
3.4

 
148,264

 
4
%
 
2.1

 
160,334

 
4
%
 
2.0

Asset-backed securities
69,781

 
2
%
 
2.2

 
79,734

 
2
%
 
2.2

 
88,710

 
2
%
 
3.0

Corporate debt securities
18,292

 
%
 
11.3

 
18,360

 
%
 
11.3

 
19,295

 
1
%
 
11.8

Collateralized loan obligations

 
%
 

 

 
%
 

 
7,015

 
%
 
0.3

Equity investments (1)

 
%
 

 

 
%
 

 
7,070

 
%
 

Total securities available-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for-sale
$
3,857,788

 
100
%
 
5.6

 
$
3,801,986

 
100
%
 
5.7

 
$
3,774,431

 
100
%
 
6.0

____________________________
(1) In connection with our adoption of ASU 2016-01 and ASU 2018-03 on January 1, 2018, we reclassified $7.1 million of equity investments from securities available-for-sale to other assets in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated.
The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
 
June 30, 2018
 
Fair
 
% of
Municipal Securities by State
Value
 
Total
 
(Dollars in thousands)
 California
$
292,008

 
21
%
 New York
145,059

 
10
%
 Washington
144,772

 
10
%
 Texas
85,600

 
6
%
 Ohio
80,346

 
6
%
 Utah
64,484

 
5
%
 Oregon
62,856

 
5
%
 District of Columbia
61,210

 
4
%
 Florida
53,437

 
4
%
 Massachusetts
48,551

 
3
%
Total of ten largest states
1,038,323

 
74
%
All other states
373,769

 
26
%
Total municipal securities
$
1,412,092

 
100
%

62



Loans and Leases Held for Investment
The following table presents the composition of our total loans and leases held for investment as of the dates indicated:
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Healthcare real estate
$
611,029

 
4
%
 
$
687,876

 
4
%
 
$
843,653

 
5
%
Hospitality
552,589

 
3
%
 
551,621

 
3
%
 
695,043

 
4
%
SBA program
541,911

 
3
%
 
543,413

 
3
%
 
551,606

 
3
%
Other commercial real estate
3,305,151

 
20
%
 
3,250,096

 
21
%
 
3,295,438

 
20
%
Total commercial real estate
5,010,680

 
30
%
 
5,033,006

 
31
%
 
5,385,740

 
32
%
Income producing residential
2,413,760

 
14
%
 
2,266,820

 
14
%
 
2,245,058

 
13
%
Other residential real estate
141,935

 
1
%
 
254,417

 
1
%
 
221,836

 
1
%
Total residential real estate
2,555,695

 
15
%
 
2,521,237

 
15
%
 
2,466,894

 
14
%
Total real estate mortgage
7,566,375

 
45
%
 
7,554,243

 
46
%
 
7,852,634

 
46
%
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
831,462

 
5
%
 
789,892

 
5
%
 
769,075

 
5
%
Residential
1,042,564

 
6
%
 
887,110

 
5
%
 
822,154

 
5
%
Total real estate construction and land
1,874,026

 
11
%
 
1,677,002

 
10
%
 
1,591,229

 
10
%
Total real estate
9,440,401

 
56
%
 
9,231,245

 
56
%
 
9,443,863

 
56
%
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Lender finance & timeshare
1,820,856

 
11
%
 
1,638,036

 
10
%
 
1,609,937

 
9
%
Equipment finance
663,365

 
4
%
 
646,252

 
4
%
 
656,995

 
4
%
Other asset-based
400,007

 
2
%
 
383,929

 
2
%
 
425,354

 
3
%
Premium finance
300,072

 
2
%
 
289,673

 
2
%
 
232,664

 
1
%
Total asset-based
3,184,300

 
19
%
 
2,957,890

 
18
%
 
2,924,950

 
17
%
Expansion stage
1,009,700

 
6
%
 
1,076,788

 
7
%
 
953,199

 
6
%
Equity fund loans
551,366

 
3
%
 
409,270

 
2
%
 
471,163

 
3
%
Early stage
291,875

 
2
%
 
262,904

 
2
%
 
443,370

 
3
%
Late stage
155,264

 
1
%
 
171,681

 
1
%
 
255,003

 
1
%
Total venture capital
2,008,205

 
12
%
 
1,920,643

 
12
%
 
2,122,735

 
13
%
Secured business loans
686,945

 
4
%
 
704,864

 
4
%
 
743,824

 
4
%
Security monitoring
576,823

 
3
%
 
576,378

 
4
%
 
573,066

 
3
%
Other lending
475,443

 
3
%
 
480,593

 
3
%
 
475,584

 
3
%
Cash flow
134,396

 
1
%
 
185,755

 
1
%
 
278,920

 
2
%
Total other commercial
1,873,607

 
11
%
 
1,947,590

 
12
%
 
2,071,394

 
12
%
Total commercial
7,066,112

 
42
%
 
6,826,123

 
42
%
 
7,119,079

 
42
%
Consumer
378,679

 
2
%
 
397,917

 
2
%
 
409,801

 
2
%
Total loans and leases held for investment,
 
 
 
 
 
 
 
 
 
 
 
net of deferred fees (1)
$
16,885,192

 
100
%
 
$
16,455,285

 
100
%
 
$
16,972,743

 
100
%
 
_____________________________________
(1)
Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017.
  

63



The following table presents the geographic composition of our real estate loans held for investment by the top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
 
 
% of
 
 
 
% of
Real Estate Loans by State
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
California
$
5,398,862

 
57
%
 
$
5,206,633

 
55
%
New York
664,687

 
7
%
 
697,012

 
7
%
Florida
489,100

 
5
%
 
505,043

 
5
%
Texas
317,238

 
3
%
 
343,799

 
4
%
Arizona
273,164

 
3
%
 
263,621

 
3
%
Illinois
240,417

 
3
%
 
163,662

 
3
%
Virginia
208,208

 
2
%
 
233,654

 
2
%
Washington
206,552

 
2
%
 
208,358

 
2
%
Oregon
193,779

 
2
%
 
152,849

 
2
%
Pennsylvania
172,803

 
2
%
 
224,669

 
2
%
Total of 10 largest states
8,164,810

 
86
%
 
7,999,300

 
85
%
All other states
1,275,591

 
14
%
 
1,444,563

 
15
%
Total real estate loans held for investment
$
9,440,401

 
100
%
 
$
9,443,863

 
100
%
The following table presents a roll forward of the loan and lease portfolio held for investment for the periods indicated:
 
Three Months Ended
 
Six Months Ended
Loans and Leases Held for Investment Roll Forward (1)
June 30, 2018
 
June 30, 2018
 
(Dollars in thousands)
Balance, beginning of period
$
16,455,285

 
$
16,972,743

New production
1,256,559

 
2,001,477

Existing loans and leases:
 
 
 
Payoffs
(1,154,400
)
 
(2,085,373
)
Paydowns
(829,119
)
 
(1,765,121
)
Disbursements
1,203,940

 
1,951,316

Sales
(27,779
)
 
(158,403
)
Transfers to foreclosed assets
(1,059
)
 
(1,059
)
Charge-offs
(18,235
)
 
(30,388
)
Balance, end of period
$
16,885,192

 
$
16,885,192

 
 
 
 
Weighted average rate on new production (2)
5.00
%
 
5.13
%
_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
The weighted average rate on new production presents contractual rates and does not include amortized fees. Amortized fees added approximately 31 basis points to loan yields in 2018.



64



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, and the loan portfolio's current composition and credit performance trends. As noted in " - Critical Accounting Policies and Estimates - Allowance for Loan and Lease Losses," we changed our methodology for calculating the ALLL in the second quarter of 2018. See that section for details regarding this change.
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.

65



We estimate the reserve for unfunded commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for unfunded 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 classified as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: Loans and leases classified as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
Substandard: Loans and leases classified as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
Doubtful: Loans and leases classified as "doubtful" have all the weaknesses of those classified as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 6. Loans and Leases, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
Management believes the allowance for credit losses is appropriate for the known and inherent risks in our 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:
 
June 30,
 
March 31,
 
December 31,
 
June 30,
Allowance for Credit Losses Data (1)
2018
 
2018
 
2017
 
2017
 
(Dollars in thousands)
Allowance for loan and lease losses
$
132,139

 
$
134,275

 
$
133,012

 
$
138,879

Reserve for unfunded loan commitments
35,361

 
32,861

 
28,635

 
20,263

Total allowance for credit losses
$
167,500

 
$
167,136

 
$
161,647

 
$
159,142

 
 
 
 
 
 
 
 
Allowance for credit losses to loans and leases held for investment
0.99
%
 
1.02
%
 
0.96
%
 
1.03
%
Allowance for credit losses to nonaccrual loans and leases held for investment
147.3
%
 
161.1
%
 
103.8
%
 
92.2
%
____________________________________________
(1)
Amounts and ratios related to 2018 periods are for total loans and leases. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases.





66



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
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Allowance for Credit Losses Roll Forward (1)
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Balance, beginning of period (2)
$
167,136

 
$
168,091

 
$
167,589

 
$
168,091

 
$
161,278

Provision for credit losses:
 
 
 
 
 
 
 
 
 
Addition to (reduction in) allowance for
 
 
 
 
 
 
 
 
 
loan and lease losses
15,000

 
(226
)
 
10,000

 
14,774

 
34,260

Addition to reserve for unfunded loan commitments
2,500

 
4,226

 
2,500

 
6,726

 
2,740

Total provision for credit losses
17,500

 
4,000

 
12,500

 
21,500

 
37,000

Loans and leases charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
(4,747
)
 
(2,597
)
 
(142
)
 
(7,344
)
 
(1,686
)
Real estate construction and land

 

 

 

 

Commercial
(13,424
)
 
(9,525
)
 
(22,696
)
 
(22,949
)
 
(41,981
)
Consumer
(64
)
 
(31
)
 
(113
)
 
(95
)
 
(212
)
Total loans and leases charged off
(18,235
)
 
(12,153
)
 
(22,951
)
 
(30,388
)
 
(43,879
)
Recoveries on loans charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
119

 
1,657

 
20

 
1,776

 
250

Real estate construction and land
18

 
9

 
9

 
27

 
17

Commercial
912

 
5,487

 
1,953

 
6,399

 
4,401

Consumer
50

 
45

 
22

 
95

 
75

Total recoveries on loans charged off
1,099

 
7,198

 
2,004

 
8,297

 
4,743

Net charge-offs
(17,136
)
 
(4,955
)
 
(20,947
)
 
(22,091
)
 
(39,136
)
Balance, end of period
$
167,500

 
$
167,136

 
$
159,142

 
$
167,500

 
$
159,142

 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average loans and leases
0.41
%
 
0.12
%
 
0.54
%
 
0.27
%
 
0.52
%
_________________________________________
(1)
Amounts and ratio related to 2018 periods are for total loans and leases. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases.
(2) 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 and six months ended June 30, 2018.



67



The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Allowance for Credit Losses Charge-offs (1)
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Healthcare real estate
$

 
$

 
$

 
$

 
$

Hospitality

 

 

 

 
692

SBA program
111

 
2,015

 
124

 
2,126

 
954

Other commercial real estate
4,492

 
521

 

 
5,013

 
22

Total commercial real estate
4,603

 
2,536

 
124

 
7,139

 
1,668

Income producing residential
144

 

 

 
144

 

Other residential real estate

 
61

 
18

 
61

 
18

Total residential real estate
144

 
61

 
18

 
205

 
18

Total real estate mortgage
4,747

 
2,597

 
142

 
7,344

 
1,686

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 

 

Residential

 

 

 

 

Total real estate construction and land

 

 

 

 

Commercial:
 
 
 
 
 
 
 
 
 
Lender finance & timeshare

 
8

 

 
8

 

Equipment finance
2,934

 

 
19

 
2,934

 
19

Other asset-based

 
360

 

 
360

 

Premium finance

 

 

 

 

Total asset-based
2,934

 
368

 
19

 
3,302

 
19

Expansion stage
2,195

 
2,474

 
4,546

 
4,669

 
6,045

Early stage
3,888

 
(167
)
 
6,434

 
3,721

 
10,712

Equity fund loans

 

 

 

 

Late stage

 

 

 

 

Total venture capital
6,083

 
2,307

 
10,980

 
8,390

 
16,757

Security monitoring

 

 

 

 

Secured business loans
88

 
465

 
99

 
553

 
498

Other lending
78

 
686

 
280

 
764

 
926

Cash flow
4,241

 
5,699

 
11,318

 
9,940

 
23,781

Total other commercial
4,407

 
6,850

 
11,697

 
11,257

 
25,205

Total commercial
13,424

 
9,525

 
22,696

 
22,949

 
41,981

Consumer
64

 
31

 
113

 
95

 
212

Total charge-offs
$
18,235

 
$
12,153

 
$
22,951

 
$
30,388

 
$
43,879

_______________________________________________
(1) Charge-offs related to 2018 periods are for total loans and leases. Charge-offs related to 2017 periods are for Non-PCI loans and leases.

Gross charge-offs were $18.2 million for the second quarter of 2018 and included $6.1 million for venture capital loans, $4.6 million for commercial real estate mortgage loans, $4.4 million for other commercial loans, and $2.9 million for asset-based loans. Four loans accounted for $14.2 million or 78 percent of the gross charge-offs for the second quarter of 2018. This compares to gross charge-offs of $12.2 million for the first quarter of 2018 which included $6.9 million for other commercial loans, $2.5 million for commercial real estate mortgage loans, and $2.3 million for venture capital loans.


68



The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
Allowance for Credit Losses Recoveries (1)
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Healthcare real estate
$

 
$

 
$

 
$

 
$

Hospitality

 

 

 

 

SBA program
19

 
256

 
19

 
275

 
31

Other commercial real estate

 
162

 

 
162

 

Total commercial real estate
19

 
418

 
19

 
437

 
31

Income producing residential

 
1,208

 

 
1,208

 

Other residential real estate
100

 
31

 
1

 
131

 
219

Total residential real estate
100

 
1,239

 
1

 
1,339

 
219

Total real estate mortgage
119

 
1,657

 
20

 
1,776

 
250

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial
11

 
9

 
9

 
20

 
17

Residential
7

 

 

 
7

 

Total real estate construction and land
18

 
9

 
9

 
27

 
17

Commercial:
 
 
 
 
 
 
 
 
 
Lender finance & timeshare
1

 

 

 
1

 

Equipment finance

 
90

 
15

 
90

 
1,985

Other asset-based
69

 
50

 

 
119

 

Premium finance

 

 

 

 

Total asset-based
70

 
140

 
15

 
210

 
1,985

Expansion stage
(9
)
 
4,420

 
287

 
4,411

 
493

Early stage
65

 
216

 
964

 
281

 
964

Equity fund loans

 

 

 

 

Late stage

 

 

 

 

Total venture capital
56

 
4,636

 
1,251

 
4,692

 
1,457

Security monitoring

 

 

 

 

Secured business loans
241

 
152

 
420

 
393

 
559

Other lending
545

 
559

 
267

 
1,104

 
400

Cash flow

 

 

 

 

Total other commercial
786

 
711

 
687

 
1,497

 
959

Total commercial
912

 
5,487

 
1,953

 
6,399

 
4,401

Consumer
50

 
45

 
22

 
95

 
75

Total recoveries
$
1,099

 
$
7,198

 
$
2,004

 
$
8,297

 
$
4,743

___________________________________________
(1)
Recoveries related to 2018 periods are for total loans and leases. Recoveries related to 2017 periods are for Non-PCI loans and leases.

69



Deposits
The following table presents the balance of each major category of deposits as of the dates indicated:
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
 
 
% of
 
 
 
% of
 
 
 
% of
Deposit Category
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
8,126,153

 
45
%
 
$
8,232,140

 
46
%
 
$
8,508,044

 
45
%
Interest checking deposits
2,184,785

 
12
%
 
2,076,152

 
11
%
 
2,226,885

 
12
%
Money market deposits
4,631,658

 
26
%
 
4,676,734

 
26
%
 
4,511,730

 
24
%
Savings deposits
643,642

 
4
%
 
676,503

 
4
%
 
690,353

 
4
%
Total core deposits
15,586,238

 
87
%
 
15,661,529

 
87
%
 
15,937,012

 
85
%
Non-core non-maturity deposits
607,388

 
3
%
 
585,399

 
3
%
 
863,202

 
4
%
Total non-maturity deposits
16,193,626

 
90
%
 
16,246,928

 
90
%
 
16,800,214

 
89
%
Time deposits $250,000 and under
1,394,117

 
8
%
 
1,482,118

 
8
%
 
1,709,980

 
9
%
Time deposits over $250,000
341,449

 
2
%
 
349,742

 
2
%
 
355,342

 
2
%
Total time deposits
1,735,566

 
10
%
 
1,831,860

 
10
%
 
2,065,322

 
11
%
Total deposits
$
17,929,192

 
100
%
 
$
18,078,788

 
100
%
 
$
18,865,536

 
100
%
Total deposits decreased by $149.6 million during the second quarter to $17.9 billion, due mainly to a decrease in core deposits of $75.3 million and a decrease in time deposits of $96.3 million, offset partially by an increase in non-core non-maturity deposits of $22.0 million. At June 30, 2018, core deposits totaled $15.6 billion, or 87% of total deposits, including $8.1 billion of noninterest-bearing demand deposits, or 45% of total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
 
Time Deposits
 
$250,000
 
Over
 
 
June 30, 2018
and Under
 
$250,000
 
Total
 
(In thousands)
Maturities:
 
 
 
 
 
Due in three months or less
$
490,564

 
$
184,022

 
$
674,586

Due in over three months through six months
436,715

 
99,031

 
535,746

Due in over six months through twelve months
365,342

 
40,315

 
405,657

Due in over 12 months through 24 months
73,850

 
14,643

 
88,493

Due in over 24 months
27,646

 
3,438

 
31,084

Total
$
1,394,117

 
$
341,449

 
$
1,735,566

Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through S1AM, our registered investment adviser subsidiary, and third-party money market sweep products. S1AM provides customized investment advisory and asset management solutions. At June 30, 2018, total off-balance sheet client investment funds were $2.4 billion, of which $1.7 billion was managed by S1AM. At December 31, 2017, total off-balance sheet client investment funds were $2.1 billion, of which $1.7 billion was managed by S1AM.

70



Nonperforming Assets, Performing TDRs, and Classified Loans and Leases
The following table presents nonperforming assets, performing TDRs, and classified loans and leases information as of the dates indicated:
 
June 30,
 
March 31,
 
December 31,
 
June 30,
 
2018
 
2018
 
2017
 
2017
 
(Dollars in thousands)
Nonaccrual loans and leases held for investment (1)(2)
$
113,745

 
$
103,725

 
157,545

 
$
174,556

Accruing loans contractually past due 90 days or more

 
500

 

 

Foreclosed assets, net
2,231

 
1,236

 
1,329

 
13,278

Total nonperforming assets
$
115,976

 
$
105,461

 
$
158,874

 
$
187,834

 
 
 
 
 
 
 
 
Performing TDRs held for investment (3)
$
58,148

 
$
60,173

 
$
56,838

 
$
55,910

Classified loans and leases held for investment (2)(3)
$
236,292

 
$
208,042

 
$
278,045

 
$
339,977

Nonaccrual loans and leases held for investment to
 
 
 
 
 
 
 
loans and leases held for investment
0.67
%
 
0.63
%
 
0.93
%
 
1.12
%
Nonperforming assets to loans and leases held for investment
 
 
 
 
 
 
 
and foreclosed assets, net
0.69
%
 
0.64
%
 
0.94
%
 
1.21
%
Classified loans and leases held for investment
 
 
 
 
 
 
 
to loans and leases held for investment (2)
1.40
%
 
1.26
%
 
1.65
%
 
2.20
%
_______________________________________ 
(1)
Amounts are for total loans and leases.
(2)
Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017 and June 30, 2017.
(3)
Amounts and ratios related to 2018 periods are for total loans and leases. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases.
Nonperforming assets include nonaccrual loans and leases held for investment and foreclosed assets and totaled $116.0 million at June 30, 2018 compared to $105.5 million at March 31, 2018. The ratio of nonperforming assets to loans and leases held for investment and foreclosed assets increased to 0.69% at June 30, 2018 from 0.64% at March 31, 2018.
Nonaccrual Loans and Leases Held for Investment
During the second quarter of 2018, nonaccrual loan and leases held for investment increased by $10.0 million to $113.7 million at June 30, 2018 due mainly to nonaccrual additions of $52.3 million, offset partially by $18.1 million in charge-offs and $24.2 million in principal payments and other reductions. The increase in nonaccrual loans and leases by loan category was attributable to a $14.0 million increase in nonaccrual commercial real estate mortgage loans and a $10.5 million increase in nonaccrual residential construction loans, offset partially by a $15.7 million decrease in other commercial loans. As of June 30, 2018, the Company's ten largest loan relationships on nonaccrual status had an aggregate carrying value of $81.5 million and represented 71.6% of total nonaccrual loans and leases.





71



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 portfolio segment and class as of the dates indicated:
 
Nonaccrual Loans and Leases
 
Accruing and
 
June 30, 2018
 
March 31, 2018
 
30 - 89 Days Past Due
 
 
 
% of
 
 
 
% of
 
June 30,
 
March 31,
 
 
 
Loan
 
 
 
Loan
 
2018
 
2018
 
Amount
 
Category
 
Amount
 
Category
 
Amount
 
Amount
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
33,105

 
0.7
%
 
$
19,116

 
0.4
%
 
$
2,620

 
$
23,505

Residential
3,527

 
0.1
%
 
5,225

 
0.2
%
 
2,983

 
708

Total real estate mortgage
36,632

 
0.5
%
 
24,341

 
0.3
%
 
5,603

 
24,213

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential
10,450

 
1.0
%
 

 
%
 
5,969

 
2,605

Total real estate construction and land
10,450

 
0.6
%
 

 
%
 
5,969

 
2,605

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
29,677

 
0.9
%
 
32,838

 
1.1
%
 

 

Venture capital
27,940

 
1.4
%
 
21,861

 
1.1
%
 

 

Other commercial
8,782

 
0.5
%
 
24,434

 
1.3
%
 
230

 
663

Total commercial
66,399

 
0.9
%
 
79,133

 
1.2
%
 
230

 
663

Consumer
264

 
0.1
%
 
251

 
0.1
%
 
75

 
1,000

Total held for investment
$
113,745

 
0.7
%
 
$
103,725

 
0.6
%
 
$
11,877

 
$
28,481


Foreclosed Assets
The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:
 
June 30,
 
March 31,
 
December 31,
 
June 30,
Property Type
2018
 
2018
 
2017
 
2017
 
(In thousands)
Construction and land development
$
219

 
$
219

 
$
219

 
$
11,443

Multi-family
1,059

 

 

 

Commercial real estate

 
64

 
64

 
65

Single family residence
953

 
953

 
1,019

 
1,018

Total OREO, net
2,231

 
1,236

 
1,302

 
12,526

Other foreclosed assets

 

 
27

 
752

Total foreclosed assets
$
2,231

 
$
1,236

 
$
1,329

 
$
13,278

During the second quarter of 2018, foreclosed assets increased by $1.0 million to $2.2 million at June 30, 2018 due primarily to additions of $1.1 million, offset partially by reductions related to sales of $0.1 million.

72



Performing TDRs Held for Investment
During the second quarter of 2018, performing TDRs held for investment decreased by $2.0 million to $58.1 million at June 30, 2018 due mainly to $2.0 million in payoffs and other reductions. At June 30, 2018, the composition of our performing TDRS included $50.5 million in real estate mortgage loans, $5.5 million in real estate construction and land loans, $2.0 million in commercial loans, and $0.1 million in consumer loans that were accruing interest under the terms of the restructurings.
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 as of the dates indicated:
 
June 30,
 
March 31,
 
December 31,
 
June 30,
 
2018
 
2018
 
2017
 
2017
 
(In thousands)
Pass
$
16,142,052

 
$
15,832,127

 
$
16,334,134

 
$
14,848,167

Special mention
506,848

 
415,116

 
302,168

 
282,887

Classified
236,292

 
208,042

 
278,405

 
339,977

Total loans and leases held for investment, net of deferred fees (1)(2)
$
16,885,192

 
$
16,455,285

 
$
16,914,707

 
$
15,471,031

______________________________________
(1) Amounts related to 2018 periods are for total loans and leases. Amounts related to 2017 periods are for Non-PCI loans and leases.
(2) Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017 and June 30, 2017.
During the second quarter of 2018, classified loans and leases held for investment increased by $28.3 million to $236.3 million at June 30, 2018 as loans newly graded classified exceeded the amount of loans that were classified at March 31, 2018 that had paid down, paid off, charged off, or otherwise migrated out of the classified category. The increase in classified loans and leases by loan category was attributable to a $26.4 million increase in classified commercial real estate mortgage loans, a $22.9 million increase in classified venture capital loans, and a $10.5 million increase in classified residential construction loans, offset partially by a $16.0 million decrease in classified other commercial loans and a $14.5 million decrease in classified asset-based loans.
During the second quarter of 2018, special mention loans and leases increased by $91.7 million to $506.8 million at June 30, 2018 as loans newly graded special mention exceeded the amount of loans that were special mention at March 31, 2018 that had paid down, paid off, or otherwise migrated out of the special mention category. The increase in special mention loans and leases by loan category was attributable to an $84.5 million increase in special mention commercial real estate mortgage loans, a $22.9 million increase in special mention other commercial loans, and a $12.7 million increase in special mention asset-based loans, offset partially by a $24.8 million decrease in special mention venture capital loans.

73



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 June 30, 2018, 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 June 30, 2018, such disallowed amounts were $81,000 for the Company and $42,000 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 requires all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At June 30, 2018, the Company and Bank were in compliance with the capital conservation buffer requirement. The capital conservation buffer will increase by 0.625% each year through 2019, at which point, the common equity tier 1, tier 1 and total capital ratio minimums inclusive of the capital conservation buffer will be 7.0%, 8.5% and 10.5%, respectively.
The following table presents a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
 
 
 
Minimum Required
 
 
 
 
 
Plus Capital
 
 
 
Plus Capital
 
 
 
For Capital
 
Conservation
 
For Well
 
Conservation
 
 
 
Adequacy
 
Buffer
 
Capitalized
 
Buffer Fully
 
Actual
 
Purposes
 
Phase-In (1)
 
Requirement
 
Phased-In
June 30, 2018
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.33%
 
4.00%
 
4.000%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
10.61%
 
4.50%
 
6.375%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
10.61%
 
6.00%
 
7.875%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
13.51%
 
8.00%
 
9.875%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.11%
 
4.00%
 
4.000%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
11.40%
 
4.50%
 
6.375%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
11.40%
 
6.00%
 
7.875%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
12.21%
 
8.00%
 
9.875%
 
10.00%
 
10.50%

74



 
 
 
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, 2017
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.66%
 
4.00%
 
4.000%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
10.91%
 
4.50%
 
5.750%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
10.91%
 
6.00%
 
7.250%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
13.75%
 
8.00%
 
9.250%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
11.75%
 
4.00%
 
4.000%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
11.91%
 
4.50%
 
5.750%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
11.91%
 
6.00%
 
7.250%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
12.69%
 
8.00%
 
9.250%
 
10.00%
 
10.50%
_______________________________________ 
(1)
Ratios for June 30, 2018 reflect the minimum required plus capital conservation buffer phase-in for 2018; ratios for December 31, 2017 reflect the minimum required plus capital conservation buffer phase-in for 2017. The capital conservation buffer increases by 0.625% each year through 2019.
Subordinated Debentures
We issued or assumed through mergers subordinated debentures to trusts that were established by us or entities we previously acquired, which, in turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $451.9 million at June 30, 2018. At June 30, 2018, none of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $438.3 million were included in Tier II capital.
During the first quarter of 2018, we redeemed $12.4 million of subordinated debentures assumed in connection with the CUB acquisition.
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.

75



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 as of June 30, 2018 of $3.5 billion, collateralized by a blanket lien on $5.0 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $1.3 billion as of June 30, 2018 collateralized by liens on $1.7 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 $146.0 million with the FHLB and $75.0 million with correspondent banks. As of June 30, 2018, there was a $146.0 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 June 30, 2018, the Bank had $96.0 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:
 
June 30,
 
March 31,
 
December 31,
Primary Liquidity - On-Balance Sheet
2018
 
2018
 
2017
 
(Dollars in thousands)
Cash and due from banks
$
245,998

 
$
235,061

 
$
233,215

Interest-earning deposits in financial institutions
205,567

 
312,735

 
165,222

Securities available-for-sale
3,857,788

 
3,801,986

 
3,774,431

Less: pledged securities
(433,160
)
 
(433,337
)
 
(449,187
)
Total primary liquidity
$
3,876,193

 
$
3,916,445

 
$
3,723,681

 
 
 
 
 
 
Ratio of primary liquidity to total deposits
21.6
%
 
21.7
%
 
19.7
%

Secondary Liquidity - Off-Balance Sheet
June 30,
 
March 31,
 
December 31,
Available Secured Borrowing Capacity
2018
 
2018
 
2017
 
(In thousands)
Secured borrowing capacity with the FHLB
$
3,504,393

 
$
3,919,613

 
$
3,789,949

Less: secured advances outstanding
(945,000
)
 
(340,000
)
 
(332,000
)
Net secured borrowing capacity with the FHLB
2,559,393

 
3,579,613

 
3,457,949

Secured borrowing capacity with the FRBSF
1,253,347

 
1,670,180

 
1,766,188

Total secondary liquidity
$
3,812,740

 
$
5,249,793

 
$
5,224,137


76



The Company's primary liquidity decreased by $40.3 million during the three months ended June 30, 2018 due primarily to a $107.2 million decrease in interest-earning deposits in financial institutions, offset partially by a $55.8 million increase in securities available-for-sale and a $10.9 million increase in cash and due from banks. The Company's secondary liquidity decreased by $1.4 billion during the second quarter of 2018 due to a $605.0 million increase in the amount borrowed from the secured borrowing line with the FHLB, a $415.2 million decrease in the borrowing capacity on the secured borrowing line with the FHLB, and a $416.8 million decrease in the borrowing capacity on the secured credit line with the FRBSF. The decrease in the borrowing capacity at the FHLB in the second quarter was primarily due to the semi-annual collateral review process following the acquisition of CUB, while the decrease in the borrowing capacity at the FRBSF was primarily due to a reduction of loan collateral resulting from loans sold in late 2017.
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 June 30, 2018, core deposits totaled $15.6 billion and represented 87% of the Company's total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.
Our deposit balances may decrease if interest rates increase significantly or if corporate customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk as deposit balances may fluctuate, the Bank maintains adequate levels of available off-balance sheet liquidity.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At June 30, 2018, brokered deposits totaled $1.2 billion, consisting of $576.5 million of brokered time deposits, $579.6 million of non-maturity brokered accounts, and $5.1 million of other brokered deposits. At December 31, 2017, brokered deposits totaled $1.6 billion, consisting of $732.2 million of brokered time deposits, $835.6 million of non-maturity brokered accounts, and $7.5 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), Coverage and Crisis Coverage Ratios (measurements of liquid assets to expected short-term liquidity required for the loan and deposit portfolios under normal and stressed conditions), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. As of June 30, 2018, we were in compliance with all of our established liquidity guidelines.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends.
Dividends paid by California state-chartered banks are regulated by the FDIC and the DBO under their general supervisory authority as it relates to a bank’s capital requirements. A state bank may declare a dividend without the approval of the DBO and the FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. During the three and six months ended June 30, 2018, PacWest received $181.0 million and $449.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $645.0 million at June 30, 2018, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At June 30, 2018, PacWest had $225.8 million in cash and due from banks, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months, including any stock repurchases pursuant to the Company's Stock Repurchase Program, which terminates on February 28, 2019. See "- Recent Events - Stock Repurchase Program" for additional information.

77



Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
 
June 30, 2018
 
Due
 
Due in
 
Due in
 
Due
 
 
 
Within
 
One to
 
Three to
 
After
 
 
 
One Year
 
Three Years
 
Five Years
 
Five Years
 
Total
 
(In thousands)
Time deposits (1)
$
1,615,989

 
$
10,610

 
$
18,967

 
$

 
$
1,645,566

Short-term borrowings
1,187,000

 

 

 

 
1,187,000

Long-term debt obligations (1)
167

 
59

 

 
541,885

 
542,111

Contractual interest (2)
7,051

 
991

 
494

 

 
8,536

Operating lease obligations
33,306

 
57,254

 
38,002

 
29,036

 
157,598

Other contractual obligations
45,024

 
48,946

 
10,621

 
38,054

 
142,645

Total
$
2,888,537

 
$
117,860

 
$
68,084

 
$
608,975

 
$
3,683,456

_______________________________________ 
(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, 2017. 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. At June 30, 2018, our loan commitments, including standby letters of credit, totaled $6.7 billion. The commitments, a portion of which result in funded loans, increase our profitability through net interest income when drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "- Liquidity - Liquidity Management," have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments, see Note 10. Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

78



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, 2017, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.
Market Risk - Foreign Currency Exchange
We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps to hedge exposures to loans and debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar, and the cross currency swaps that hedge those exposures. As of June 30, 2018, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $45.1 million and $30.1 million, and the U.S. Dollar notional amounts of cross currency swaps outstanding to hedge these foreign currency exposures were $48.0 million and $29.2 million. We recognized foreign currency translation net gains of $0.1 million and $0.3 million for the six months ended June 30, 2018 and 2017.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our IRR position on at least a quarterly basis using two methods: (i) NII simulation analysis; and (ii) MVE modeling. The Executive ALM Committee and the Board Asset/Liability Management Committee review the results of these analyses quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of equity and/or net interest income outside our pre‑established limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.
We evaluated the results of our NII simulation model and MVE model prepared as of June 30, 2018, the results of which are presented below. Our NII simulation indicates that our balance sheet is asset-sensitive, while our MVE model indicates that our balance sheet had a slightly liability-sensitive profile. An asset-sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated net interest income and market value of equity, while a liability-sensitive profile would suggest that these amounts would decrease.
Net Interest Income Simulation
We used a NII simulation model to measure the estimated changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of June 30, 2018. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth in either our total interest‑sensitive assets or liabilities over the next 12 months, therefore the results reflect an interest rate shock to a static balance sheet.
This analysis calculates the difference between net interest income forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at June 30, 2018. In order to arrive at the base case, we extend our balance sheet at June 30, 2018 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of June 30, 2018. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.

79



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 June 30, 2018 assumes interest-bearing deposits reprice at 46% 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
June 30, 2018
(Tax Equivalent)
 
From Base
 
(Tax Equivalent)
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
Interest Rate Scenario:
 
 
 
 
 
 
 
Up 300 basis points
$
1,126.9

 
10.6%
 
5.35%
 
0.52%
Up 200 basis points
$
1,093.4

 
7.3%
 
5.19%
 
0.36%
Up 100 basis points
$
1,058.5

 
3.9%
 
5.02%
 
0.19%
BASE CASE
$
1,018.8

 
 
4.83%
 
Down 100 basis points
$
976.1

 
(4.2)%
 
4.63%
 
(0.20)%
Down 200 basis points
$
932.4

 
(8.5)%
 
4.42%
 
(0.41)%
Down 300 basis points
$
912.8

 
(10.4)%
 
4.33%
 
(0.50)%
Total base case year 1 tax equivalent NII was $1.02 billion at June 30, 2018 compared to $1.03 billion at March 31, 2018. The $8.5 million decrease in year 1 tax equivalent NII was attributable to higher interest expense from increased borrowings required to fund asset growth during the second quarter of 2018.
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 NII increases by 2.1%, and in the “Bull Steepener” scenario, Year 1 NII decreases by 3.4%.
Of the $16.9 billion of total loans in the portfolio, $10.8 billion have variable interest rate terms (excluding hybrid loans discussed below). At June 30, 2018, $10.6 billion of these variable-rate loans have a loan rate higher than their floor rate, which allows them to reprice at their next reprice date upon a change in their index. Approximately 56% of the total variable-rate loans have a LIBOR index rate. Of the $189 million of loans with rates below their floor rates at June 30, 2018, $87 million (46.2%) will rise above their floor rates with a 100 basis point increase in market rates.
Additionally, approximately $2.8 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 $283 million, $577 million, and $851 million in the next one, two, and three years.

80



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 June 30, 2018.
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
June 30, 2018
of Equity
 
From Base
 
From Base
 
Assets
 
to Book Value
 
(Dollars in millions)
 
 
 
 
 
 
Interest Rate Scenario:
 
 
 
 
 
 
 
 
 
Up 300 basis points
$
5,956.1

 
$
(50.1
)
 
(0.8
)%
 
24.3
%
 
124.7
%
Up 200 basis points
$
5,977.7

 
$
(28.5
)
 
(0.5
)%
 
24.4
%
 
125.1
%
Up 100 basis points
$
5,993.2

 
$
(13.0
)
 
(0.2
)%
 
24.4
%
 
125.4
%
BASE CASE
$
6,006.2

 
$

 
 %
 
24.5
%
 
125.7
%
Down 100 basis points
$
5,999.7

 
$
(6.5
)
 
(0.1
)%
 
24.5
%
 
125.6
%
Down 200 basis points
$
5,979.9

 
$
(26.3
)
 
(0.4
)%
 
24.4
%
 
125.2
%
Down 300 basis points
$
5,812.8

 
$
(193.4
)
 
(3.2
)%
 
23.7
%
 
121.7
%
Total base case projected market value of equity was $6.0 billion at June 30, 2018 compared to $6.3 billion at March 31, 2018. The projected market value of equity decreased by $245 million while our overall MVE sensitivity profile has remained relatively unchanged. The decrease in base case market value of equity was due primarily to: (1) a $223 million decrease in the mark-to-market adjustment for loans and leases resulting from higher credit spreads used for the loan value calculation, and (2) a $90 million decrease in the book value of stockholders' equity due mainly to $122.0 million of stock repurchases under the Stock Repurchase Program, offset partially by (3) a $68 million decrease in the mark-to-market adjustment for total deposits due to the overall increase in the level of market interest rates at June 30, 2018.
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.

81



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, 2017. 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 second quarter of 2018:
 
 
 
 
 
Total Number of
 
Maximum Dollar
 
 
 
 
 
Shares Purchased
 
Value of Shares
 
 
 
 
 
as Part of
 
That May Yet
 
 
 
Average
 
Publicly
 
Be Purchased
 
Total Number of
 
Price Paid
 
Announced
 
Under the
Purchase Dates
Shares Purchased (1)
 
Per Share
 
Program (2)
 
Program (2)
 
 
 
 
 
 
 
(In thousands)

April 1, 2018 - April 30, 2018
63

 
$
50.98

 

 
$
296,727

May 1, 2018 - May 31, 2018
1,004,873

 
$
53.80

 
923,764

 
$
246,993

June 1, 2018 - June 30, 2018
1,363,117

 
$
53.03

 
1,363,117

 
$
174,703

Total
2,368,053

 
$
53.36

 
2,286,881

 
 
__________________________
(1)
Includes shares repurchased pursuant to net settlement by employees and directors 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)
Our Stock Repurchase Program was initially authorized by PacWest's Board of Directors in October 2016 pursuant to which the Company could, until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. On November 15, 2017 PacWest's Board of Directors amended the Stock Repurchase Program to reduce the authorized purchase amount to $150 million and extend the maturity date to December 31, 2018. On February 14, 2018, PacWest's Board of Directors amended the Stock Repurchase Program to increase the authorized purchase amount to $350 million and extend the maturity date to February 28, 2019. All shares repurchased under the Stock Repurchase Program were retired upon settlement.

82



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
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (ii) the Condensed Consolidated Statements of Earnings for the three months ended June 30, 2018, March 31, 2018, December 31, 2017, and six months ended June 30, 2018 and 2017, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2018, March 31, 2018, December 31, 2017, and six months ended June 30, 2018 and 2017, (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2018, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017, and (vi) the Notes to Condensed Consolidated Financial Statements (Filed herewith).



83



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:
August 7, 2018
/s/ Bart R. Olson
 
 
Bart R. Olson
 
 
Executive Vice President and Chief Accounting Officer

84